FISCAL NOTE
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Neither Program nor Fund
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to permit deed of trust or mortgage interest paid on taxpayers’ personal residence to be used as a deduction for personal income tax purposes up to $4,000 per year.
According to our interpretation of this proposal, this modification would be available to both those who claim itemized deductions for federal income tax purposes as well as non-itemizers. If the provisions of the bill applied to both itemizers and non-itemizers, General Revenue Fund collections would be reduced by approximately $50.3 million per year beginning in Fiscal Year 2012. If the provisions of this bill were applied to just itemizers, then its cost would be roughly $30.2 million per year. Although this bill contains language to limit the deduction to $4,000 per year, there is no provision to prohibit the carryover of home mortgage interest in excess of $4,000 to another tax year. This bill would become effective for the 2011 tax year.
If there is a desire to audit some taxpayers who claim this modification, then additional administrative costs for the State Tax Department would be roughly $250,000 per year. Otherwise, passage of this bill would result in minimal additional administrative costs for the State Tax Department.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2011
Increase/Decrease
(use"-") |
2012
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
0 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
0 |
0 |
| 2. Estimated Total Revenues |
0 |
-50,300,000 |
-63,000,000 |
Explanation of above estimates (including long-range effect):
This bill provides for a home mortgage interest modification at a cost of roughly $50.3 million per year. Although the home mortgage interest modification is subject to a maximum of $4,000 per year, there is no provision to prohibit the carryover home mortgage interest in excess of $4,000 to another tax year. This program would begin in 2011 and most revenue loss in the first year would occur during the Tax Year 2011 filing season in January to April of 2012. The mortgage interest modification appears to be available to both itemizers (i.e., those who claim itemized deductions on the federal return) and non-itemizers. Federal data for 2008 indicate a federal deduction of $1,060 million for roughly 119,484 itemizers. Relaxed credit checks for periods prior to the “Great Recession” likely resulted in a substantial increase in the available deduction. Based upon available mortgage loan data, a little over half of all mortgage interest is deducted on the federal tax return. Note that less than 20 percent of West Virginia taxpayers itemize deductions on their federal tax return. A mortgage interest deduction for all mortgage interest of all taxpayers increases the cost of such a modification by roughly 1.7 times the $30.2 million cost estimate for itemizers.
The State Tax Department would incur additional administrative costs due to passage of this bill only if this new modification becomes subject to audit. If all mortgage interest modifications are accepted as filed, then additional administrative costs to the Department would be minimal.
Memorandum
The stated purpose of this bill is to permit deed of trust or mortgage interest paid on taxpayers’ personal residence to be used as a deduction for personal income tax purposes up to $4,000 per year.
Although this bill contains language to limit the deduction to $4,000 per year, there is no provision to prohibit the carryover of home mortgage interest in excess of $4,000 to another tax year. As written, the bill uses the phrase “personal residence” without providing a definition. Absent a definition, the phrase could possibly be interpreted to apply to more than one personal residence. Additionally, the terms “interest,” “mortgage,” and “deed of trust” are not defined. Also, some further clarification as to what type of loans and lenders are permissible for the “interest” decreasing modification is needed. As written, personal loans between related parties may qualify.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov