New Zealand First Leader Winston Peters says there is no compelling reason nor any mandate for a capital gains tax.
But Green Party co-leader James Shaw, who has said that the Government wasn't worthy of re-election if it didn't implement a CGT, has pledged ongoing support to Labour for future tax reform.
Prime Minister Jacinda Ardern has ruled out a capital gains tax after failing to secure the support of NZ First.
She said the Government would pursue other measures - such as making sure multinationals pay their fair share of tax - to make the tax system fairer, but for certainty's sake she said a CGT was now off the table for as long as she is Prime Minister.
Peters, who has opposed a CGT in the past, said in a statement that the decision provided certainty to taxpayers and businesses.
"There is already an effective capital gains tax through the Bright Line test brought in by the last National Government and New Zealand First's view is that there is neither a compelling rationale nor mandate to institute a comprehensive capital gains tax regime," Peters said.
In a statement today, Shaw said the Green Party had long supported a capital gains tax "as a way to level the playing field for hard working New Zealanders who have struggled to get ahead".
"Taxing income from capital the same way we tax income from work would reduce the wealth gap, fix the housing crisis and build a more productive, high-wage economy.
"We're particularly disappointed that the Tax Working Group's unanimous recommendation to implement a capital gains tax on investment properties isn't going ahead.
"Generations of New Zealanders locked out of the property ladder shouldn't be left in an unfair position for life."
He said the Greens would continue to work with Labour to improve the tax system. His statement did not refer to New Zealand First.
Peters welcomed the Government's announcement that it would pick up other recommendations from the Tax Working Group.
"We welcome the announcement that the coalition government will be urgently exploring options with the Inland Revenue Commissioner, in concert with central and local government, for taxing vacant land held by land bankers and reviewing the current rules for taxing land speculators," Peters said.
"Tightening these rules was a priority for New Zealand First.
"Current tax policy, rigorously enforced by an Inland Revenue Department properly resourced will by itself 1) improve the administration of existing tax policy, and 2) target those multinationals not paying their fair share of tax."
Peters and Shaw are both expected to address media soon.
National Party leader Simon Bridges, who will talk to media at 3pm, said on Twitter that National's opposition had forced the backdown.
"National's relentless opposition to the CGT forced this result. NZ First would have let this go through to the keeper if we hadn't embarrassed the Govt out of it.
"The CGT debate wasted millions of taxpayer dollars and over 18 months weakened our economy by scaring businesses owners, investors and mum & dads out of getting ahead.
"Jacinda Ardern still says a Capital Gains Tax would make a difference & the tax system is unfair. Ambiguous reforms are still coming. New Zealanders can't trust Labour on tax."
Ardern said National's opposition had not impacted on the Government's decision. She added that the Tax Working Group had cost $1.6m to date, and was expected to come under $2m in total.