Kansas Gov. Brownback's tax plan ends mortgage deduction

The Kansas City StarJanuary 13, 2012 

TOPEKA — Gov. Sam Brownback on Thursday proposed a money-saving $14 billion budget for 2012-13 that he said would be a boon for Kansas businesses and taxpayers.

And since it’s 4 percent less than the current spending plan, it would leave some money in the bank — $465 million.

“If we didn’t learn in this last crisis that an ending balance was important, then we weren’t paying attention,” said Steve Anderson, the state’s budget director. “The budget’s all about fiscal stability, the tax plan is all about economic prosperity, and the two are married.”

A day earlier, Brownback unveiled a sweeping remake of the state’s tax code, slashing rates but also eliminating deductions many Kansans rely on to lower their tax bills. Home mortgage interest payments and contributions to charities, for example, would no longer be deductible.

Low-income Kansans also would lose the earned income tax credit that provides a tax refund even when they don’t owe taxes.

Brownback’s proposed business tax changes would leave more money in the hands of owners with the expectation that they would reinvest in Kansas companies, benefiting the local economy and ultimately the state’s tax collections.

“This is one of the avenues that we can have a direct and powerful impact, a meaningful increase in the pocketbook of every Kansan across the state,” Lt. Gov. Jeff Colyer told lawmakers during a joint meeting of tax committees from the Senate and House.

Critics, however, are complaining that the measures, if adopted, could hurt children, the poor and homeowners.

Statehouse Democrats already have targeted Brownback’s plans to eliminate the home mortgage interest deduction. They have cautioned about the prospects of less affluent Kansans picking up the costs of running government.

“We need tax fairness,” said House Minority Leader Paul Davis of Lawrence. “If we’re going to be shifting the burden of funding government from wealthy taxpayers, corporations and businesses onto working Kansans, that is wrong.”

Ends mortgage break

Under Brownback’s proposal, Kansas taxpayers would see lower tax rates.

The tax plan, developed with the help of conservative economist Arthur Laffer, moves the state from three individual income tax brackets to two. Laffer, the architect of President Ronald Reagan’s supply side economic policies, is expected to be in the Capitol next week to discuss Brownback’s plan.

It would reduce the upper-level tax bracket to 4.9 percent for taxpayers earning more than $15,000 individually and $30,000 for a married couple filing jointly. The current rate for anyone earning more than $15,000 ranges from 6.25 percent to 6.45 percent.

The lowest tax bracket for taxpayers making less than $15,000 would drop to 3 percent from 3.5 percent.

But the governor’s plan, which is billed as “revenue neutral,” relies on eliminating roughly two dozen tax breaks, including the deductions for home interest mortgage and charitable contributions.

The home interest deduction saves taxpayers on average $389 a year, while the charitable contribution donation saves an average of $243 a year.

The administration argues that deductions will mean less as the income tax decreases.

State officials also said only about a quarter of Kansas taxpayers itemize deductions, including about 159,000 taxpayers in Johnson and Wyandotte counties. The others claim the standard deduction.

Brownback’s proposal to end the deduction of mortgage interest is generating concern from homeowners and the housing industry.

The tax savings are greatest in the first years after taking out a loan and often figure into how much home a buyer can afford.

“One of the things you count on when you buy a home is you have that tax advantage,” said Bar Kaelter, who is still moving into the Leawood home he and his wife bought this month.

Kaelter wondered how much the lost tax deduction would hurt the homebuying ability of low-income Kansans. Housing markets already suffer from too few buyers.

The weak housing market also has been a central concern of the Federal Reserve in its efforts to boost the slow economic recovery. Fed policies have slashed mortgage rates to historic lows, but area lenders said home prices continue to slide under the weight of too many foreclosed homes in search of buyers.

Eliminating the deduction could hurt Kansas’ economy too, said Sara Corless of the Home Builders Association of Greater Kansas City.

Homebuilders are ready to discuss a state tax policy that “promotes growth and recognizes homeownership as the key to our state’s economy,” Corless said. “Mortgage interest deduction is certainly a cornerstone of homeownership, and it strengthens communities and it puts people to work.”

Cuts tax credits

Kansans also would lose the earned income tax credit, which largely benefits the working poor by providing a refundable tax credit.

The proposal is drawing fire, even though the administration points out it would offset the loss by doubling the standard deduction for the head of a household to $9,000.

Critics contend that eliminating the earned income tax credit would hurt children because it helps parents pay for housing, utilities and food.

“Elimination of the earned income tax credit would have a devastating impact on Kansas children and families,” Kansas Action for Children president Shannon Cotsoradis said in a statement Thursday. “Gov. Brownback made a commitment to reduce childhood poverty. Doing away with the (tax credit) flies in the face of that.”

Studies estimate that if the tax credit were eliminated, an additional 4,000 children would fall into poverty, the group said.

The Brownback administration said it intends to help the neediest people. It proposes using part of the money gained by eliminating the credit — about $60 million — to fund other social programs and match federal aid for the poor.

The administration argued there is abuse of the earned income tax program and has circulated a list of a half dozen national instances of fraud to make its case, contending its approach is a better way to get money into hands of the people who need it the most.

“We’re going to provide more efficient, more accountable and more targeted benefits to the low-income people of the state,” said Revenue Secretary Nick Jordan.

Many businesses would owe no state taxes under the governor’s plan.

Brownback proposes eliminating taxes on the income of 191,000 small businesses owned by sole proprietors, companies organized as S corporations and small groups that form limited liability corporations.

Kansas doesn’t tax these businesses directly. It allows them to pass their profits directly to their owners. The owners then pay individual income taxes on the earnings. Businesses that are incorporated pay taxes directly.

Brownback said eliminating taxes on pass-through businesses would attract new business and investment to the state, boosting the economy and ultimately state tax coffers.

The tax cut would clearly help the owners of these businesses.

“It’s huge. This is a huge deal to them,” said Kent Eckles of the Kansas Chamber of Commerce.

Eckles said the owners would be able to reinvest their tax savings into the businesses. They also could invest the money in other ventures or spend it in other ways. He said the low-tax business environment would help Kansas’ economy by attracting business and investment.

“Businesses go where the tax climate is favorable. It isn’t favorable in Kansas,” Eckles said.

A tax incentive for small businesses is a good idea, but eliminating the tax on their income may be too much, said Bernie Koch, executive director of the Kansas Economic Progress Council, a group made up of chambers of commerce, businesses, trade groups and others.

“It could be a substantial hit on the state general fund in a year,” Koch said.

Koch said the council has previously opposed eliminating individual income taxes for similar reasons.

To read more, visit www.kansascity.com.

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