Topeka State tax deductions for mortgage interest and real estate taxes, worth hundreds of dollars a year to each eligible Kansas household, may be eliminated to help fill the budget hole created by gaps in the state income tax.
Officials of Gov. Sam Brownback’s administration argue that the deductions benefit the wealthy and will be less beneficial as the state reduces income taxes. But the Kansas Realtors Association says the mortgage interest deduction is a middle-class tax break, and eliminating it could cripple the housing market.
Approximately 345,000 Kansans, out of 1.4 million tax filers, claim the mortgage interest deduction each year. The average amount of tax relief per homeowner is $433, according to the Realtors Association. Mortgage debt of $100,000 at 5 percent interest will yield a $245 state income tax benefit, assuming the homeowner pays the highest income tax rate of 4.9 percent.
Approximately 383,000 Kansans deduct real estate taxes on their income taxes, receiving an average benefit of $136 per homeowner.
The Brownback administration says the deductions help more affluent people who itemize deductions on their taxes. But the Realtors Association, citing IRS figures, said nearly 93 percent of Kansans who claim the mortgage interest deduction earn less than $200,000 per year, and 65 percent earn less than $100,000 per year.
Luke Bell, a spokesman for the Realtors Association, said elimination of the deductions would increase the tax burden on homeowners and serve as a disincentive to prospective new homebuyers, which could send the housing market into a tailspin.
Brownback needs the revenue from eliminating the deductions to balance the budget and accomplish his goal of cutting the state’s lowest tax bracket to 1.9 percent from 3 percent and the upper bracket to 3.5 percent from 4.9 percent by 2017, and eventually getting rid of the income tax altogether.
Brownback also has proposed keeping a 0.6 cent per dollar state sales tax increase that was supposed to expire July 1. That would produce another $262 million, available for state spending or reducing income tax rates.
Kansas Department of Revenue Secretary Nick Jordan said reducing state income taxes is “your best economic growth strategy,” and he said governors in several other states, such as Louisiana, Oklahoma and Nebraska, are following Kansas’ lead.
For those who advocate for progressive tax structures, Brownback’s policies make things worse. Kansas takes a “much larger” share of taxes from middle- and low-income families than from wealthy families, according to a recent report by the Kansas Center for Economic Growth and the Institute on Taxation and Economic Policy.
“Many wealthy people who benefit from these tax breaks won’t put that money back into the economies of Kansas communities,” said Annie McKay, executive director of the Kansas Center for Economic Growth. “The resulting loss in revenues will make it impossible to maintain our education system, our roads and bridges or our quality of life — that hurts our chances to attract and grow businesses.”
Based on Brownback’s first round of tax cuts, annual state revenue in the next fiscal year, which starts July 1, will decrease by $700 million, to $5.5 billion from $6.2 billion.
The study said that for the poorest 20 percent of non-elderly Kansans, state and local taxes take up 10.3 percent of their income. For the wealthiest 1 percent, that figure is 3.9 percent. Only 13 states have a larger disparity in tax burden.
Last year, Brownback and conservative legislators collapsed the three-bracket system for individual state income taxes into two lower rates, exempted 191,000 business owners from income taxes, and increased the standard deduction for single heads of households to $9,000 from $4,500, while increasing the standard deduction for married taxpayers filing jointly to $9,000 from $6,000.
But the package also repealed many credits aimed at helping low-income Kansans, such as the food sales tax rebate, child and dependent care expenses, child day care expenses and disabled access expenditures. In addition, renters are no longer eligible to participate in the homestead property tax refund.
Revenue Secretary Jordan, however, emphasized that many homeowners will eventually see reductions in their overall state taxes through the lowering of income tax rates. At a recent meeting of the Senate Assessment and Taxation Committee, Jordan promised more data as the members started studying the governor’s plan.
Committee Chair Les Donovan, R-Wichita, said the committee will work on Brownback’s proposal, Senate Bill 7, this week. “There are a lot of moving numbers in this mix,” he said.