As Gov. Sam Brownback pushes toward his goal of eliminating state income taxes in Kansas, he is recommending a couple of tax measures that will offset the loss of state revenue from lower income tax rates but may be a hard blow for low- and middle-income people in the state.
During his State of the State address last week, Brownback said he wanted to continue to phase out income taxes but would maintain the state sales tax at 6.3 cents on the dollar instead of allowing it to drop to 5.7 cents as it is scheduled to do in July. What he didn’t mention in his address to the Legislature is that he also is recommending the elimination of the mortgage interest deduction on Kansas income tax, a move that would take about $162 million out of the pockets of Kansas property owners and move it to the state treasury.
The sales tax is a regressive tax because it disproportionately affects lower income Kansans who spend a higher percentage of their income on the necessities of life, including groceries. Although Kansas lawmakers have considered the idea of exempting food from state sales tax, as most states do, they say the state simply can’t afford to lose that income. The impact of the food sales tax on low-income Kansans is even higher now because the state eliminated the food sales tax rebate program last year.
Although Brownback said last week that the mortgage interest deduction “is largely used by upper income taxpayers,” statistics distributed by the Kansas Association of Realtors dispute that contention. According to federal income tax data, 65 percent of taxpayers who claim a mortgage interest deduction earn less than $100,000 per year; 91 percent earn less than $200,000 per year. That includes a lot of middle-class people. According to the Realtors, about 315,000 Kansans currently claim an average state mortgage interest deduction of about $516 per year.
The Realtors group is particularly interested in the impact that eliminating the deduction will have on property values and home sales, which already are declining in many areas. Another factor to consider is that landlords also can claim the mortgage interest deduction on their rental properties. If they decide to compensate for that loss by raising their rents, the impact will trickle down to their tenants — many of whom likely are low-income.
If the governor succeeds in his goal to completely eliminate state income tax, the mortgage interest deduction, of course, no longer will be an issue. Doing away with income tax, however, will have a profound impact on the traditional “three-legged stool” of state tax revenue, which seeks to distribute the tax burden among three tax categories: sales, property and income. Upsetting that three-tax balance is bound to produce winners and losers. State lawmakers need to make sure low- and middle-income taxpayers in Kansas aren’t carrying too much of the load.