One of American taxpayers most cherished deductions the interest paid on their home mortgage is on the chopping block in Topeka, and its pushed Kansas into a growing national debate over the century-old benefit.
By KEVIN COLLISON
The Kansas City Star
To the approximately 300 real estate professionals from around Kansas who gathered in the Capitol building to lobby lawmakers Wednesday, Gov. Sam Brownbacks proposed elimination of the mortgage interest deduction was downright un-American.
Theres been a home-buyer interest deduction in place in the tax code going back to 1913, said Cindy Cunningham, a Realtor from Shawnee. Thats why were shocked the governor would choose to go after that.
Cunningham and others in the housing industry believe eliminating the deduction would hurt middle-class taxpayers and could stall a market thats reviving after being hammered by the recession.
Our biggest issue about the mortgage interest deduction being taken away is its a linchpin for the recovery of the real estate industry, said Brenda Oliver, president of the Kansas City Regional Association of Realtors.
Critics say the tax break provides far more benefit to wealthy home buyers who dont really need the help, allowing them to purchase more expensive homes and deduct the resulting larger interest payments.
As for promoting ownership, they point to Canada, which offers no mortgage interest deduction, and has a slightly higher home ownership rate than the U.S., about 70 percent versus 66 percent.
In 2010, a bipartisan deficit commission appointed by President Barack Obama suggested reducing the amount of mortgage principal eligible for the interest deduction from $1 million to $500,000, eliminating it entirely for second homes and turning the deduction into a tax credit with a cap on the amount.
Those recommendations, like many others the commission offered, didnt go anywhere, but it demonstrated the mortgage interest deduction issue was no longer a sacred cow.
Policymakers and people generally are now more open to eliminating deductions rather than raising tax rates, said Emily Washington, a policy research manager at the Mercatus Center at George Mason University in Virginia.
Brownback has made cutting income taxes the key to his plan to stimulate business in Kansas.
Last year, the Legislature approved his plan to reduce the top income tax rate from 6.45 percent to 4.9 percent, but balked at eliminating the deductions sought by the governor, including mortgage interest.
Now, Brownback has revived the proposal.
His ultimate goal is to eliminate the Kansas income tax and create a fairer and flat tax policy, according to his press aide Sherriene Jones-Sontag.
Gov. Brownback has clearly stated his priorities for the state are to create jobs, grow the economy, protect core services and reduce the size of government, she said. The two-year budget and tax plan he submitted will accomplish all of these goals.
Leaders of what was called the Kansas Realtors Rally for the American Dream event in Topeka say they agree with the governors goal of eliminating the state income tax. They just dont want homeowners to be the patsy.
No state has taken away the mortgage deduction and we dont want to be the first, said Jeff Carson, director of government affairs in Kansas for the Kansas City Realtors Association.
The big thing for us is we support a zero income tax state, but we dont want to shift the burden to Kansas homeowners to pay for it.
The Kansas Association of Realtors estimated 344,000 state residents are benefiting from the mortgage interest deduction and that eliminating it would cost the average homeowner $472 per year.
State revenue department officials however, believe the average deduction is closer to $300 annually.
The value, of course, depends on the cost of the home. For someone in the top tax bracket with a $240,000 mortgage, the mortgage interest deduction is about $588 annually. It drops to $368 for a $150,000 mortgage and $245 for a $100,000 mortgage.
Chris Kuehl of Armada Corporate Intelligence said economists have always considered the mortgage interest deduction a regressive tax.
It rewards people who buy bigger than smaller houses, he said. One consideration has been not eliminating it, but ratcheting it People with modest homes would get the full deduction and there would be less deduction as the price goes up.
But with the housing recovery still fragile, the economist doesnt believe this would be a good time to eliminate the deduction.
Walt Clements, the director of the Lewis White Real Estate Center at the University of Missouri-Kansas City, shares Kuehls caution.
He noted that while the value of a typical deduction may not seem like much, it might be a tipping point for someone already worried about the wisdom of buying a house after witnessing the recent collapse.
Clements also is concerned that if states like Kansas are successful in repealing the mortgage interest deduction, Washington might try to do the same.
Realtors are relatively confident a compromise will be reached by the end of the legislative session that will preserve the interest deduction.
A Kansas Senate committee already has scrapped Brownbacks proposal to eliminate the deduction on property taxes this week, although the proposal to eliminate the mortgage interest deduction survived.
One outcome that would be considered a win for the housing industry is if all deductions, not just the ones benefiting homeowners, were gradually phased out in sync with the proposed elimination of the income tax, said Luke Bell, vice president of government affairs for the Kansas Association of Realtors.
We believe at the end of the day there will be a compromise that will phase out all individual income tax credits and deductions as the income tax comes down, he said.
They have to be explicitly tied together.
To reach Kevin Collison, call 816-234-4289 or send email to firstname.lastname@example.org. Follow him on Twitter @kckansascity.