Republican reconciliation bill should index capital gains to inflation

Senate Republicans have coalesced around a skinny reconciliation bill to fund the Department of Homeland Security. But House Republicans should take advantage of their governing majority to pass a broader and more impactful budget package that builds on last year’s historic tax cuts. Doing so would give them another clear, pro-growth victory to take to voters before Election Day.

Republicans’ top tax priority should be indexing capital gains to inflation. This long-overdue reform would fix a quirk in the tax code that unfairly requires small businesses, farmers, homeowners, investors, and ordinary Americans to pay capital gains taxes on phantom gains driven solely by inflation.

In 1986, President Reagan indexed income tax brackets to inflation. Since then, workers no longer have to worry about being pushed into a higher tax bracket simply because their wages kept pace with rising prices.

Unfortunately, capital gains were left behind. As a result, Americans face large tax bills when they sell assets, even when the real, inflation-adjusted value hasn’t meaningfully increased.

Bidenflation made this problem worse. Inflation increased 21 percent over his term. That translates into significant paper gains that are taxed as if they were real income — about $200,000 on a $1 million small business, $100,000 on a $500,000 home, or $50,000 on a $250,000 retirement account.

Tax bills on these nominal gains are unfair. According to the Tax Foundation, one-third of capital gains are attributable purely to inflation.

Small businesses are among the hardest hit. Entrepreneurs who spend decades building a company often find that a meaningful share of their tax bill is driven not by actual growth, but by inflation. Same story for farmers.

But everyday folks are also impacted. According to IRS data, three-quarters of households reporting capital gains earn under $200,000 annually. Homeowners who have benefited from the surge in housing prices often face a falsely inflated tax bill when they sell.

Correcting this injustice would go a long way to fixing the retirement savings crisis, immediately increasing the value of brokerage accounts and real estate.

No wonder polling shows strong bipartisan support for reducing taxes on inflationary gains and ensuring Americans are taxed only on real values.

Indexing capital gains to inflation would also have meaningful economic benefits. It would unlock capital currently trapped by tax penalties, encouraging businesses, homeowners, and investors to sell, reinvest, and allocate resources more efficiently. It would help normalize markets, including small business transfers and housing sales, by reducing distortions that discourage transactions.

The downstream effects would be significant: more housing supply for younger buyers, more small business formation, and more capital flowing into productive investments. Notably, this activity would likely increase tax revenue — the opposite of what critics claim — by generating additional taxable events.

Republicans have a unique opportunity to deliver this tax victory through reconciliation. While the Treasury Department could act through regulation, such a move would likely face legal challenges and be reversed by the next Democrat administration. Legislation is the more stable and lasting solution.

By ending the tax on phantom gains, House Republicans can help small businesses and ordinary Americans preserve their assets while turbocharging the economy. Passing this popular, common-sense reform is the natural next step for Republicans after last year’s Working Families Tax Cut and would improve their prospects in the November election.

Alfredo Ortiz is CEO of Job Creators Network, author of “The Real Race Revolutionaries,” and co-host of the Main Street Matters podcast.