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. This bill proposes a Personal Income Tax decreasing modification equal to the lesser of $4,000 or the amount of interest paid on a mortgage or deed of trust on a personal residence. The bill also indicates the decreasing modification would apply for taxable years beginning after December 31, 2010 (i.e., tax years 2011 and later). Since many tax returns for tax year 2011 will have been filed before the bill is passed, the retroactive application to tax year 2011 will require the filing of amended returns and the processing of additional refunds. 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. Based upon the above interpretations, passage of this bill would reduce General Revenue Fund collections by roughly $122.4 million in Fiscal Year 2013 and by $55 million to $68 million each year thereafter. The reduction in Fiscal Year 2013 collections would be attributable to roughly $48.5 million in refunds attributable to refunds for amended tax year 2011 returns, roughly $51.3 million attributable to refunds and reduced estimated payments pertaining to tax year 2012, and roughly $22.6 million attributable to adjusted estimated payments for tax year 2013. 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. Since passage of this bill would result in the processing of more than 100,000 additional refunds in Fiscal Year 2013, additional costs to the State Tax Department attributable to processing the additional refunds would be significant. Additionally, if there is a desire to audit some taxpayers who claim this modification, there would be additional annual administrative costs for the State Tax Department that could be significant depending on the desired audit coverage.

Fiscal Note Detail

Effect of Proposal	Fiscal Year
Effect of Proposal	2012 Increase/Decrease (use"-")	2013 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	-122,400,000	-68,000,000

Explanation of above estimates (including long-range effect):

This bill proposes a Personal Income Tax decreasing modification equal to the lesser of $4,000 or the amount of interest paid on a mortgage or deed of trust on a personal residence. The bill also indicates the decreasing modification would apply for taxable years beginning after December 31, 2010 (i.e., tax years 2011 and later). Since many tax returns for tax year 2011 will have been filed before the bill is passed, the retroactive application to tax year 2011 will require the filing of amended returns and the processing of additional refunds. 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. Based upon the above interpretations, passage of this bill would reduce General Revenue Fund collections by roughly $122.4 million in Fiscal Year 2013 and by $55 million to $68 million each year thereafter. The reduction in Fiscal Year 2013 collections would be attributable to roughly $48.5 million in refunds attributable to refunds for amended tax year 2011 returns, roughly $51.3 million attributable to refunds and reduced estimated payments pertaining to tax year 2012, and roughly $22.6 million attributable to adjusted estimated payments for tax year 2013. 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. 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 2009 indicate a federal deduction of $993 million for roughly 114,465 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 $34.5 million cost estimate for itemizers. Since passage of this bill would result in the processing of more than 100,000 additional refunds in Fiscal Year 2013, additional costs to the State Tax Department attributable to processing the additional refunds would be significant. The additional refunds would increase the number of Personal Income Tax refunds processed by the State Tax Department in Fiscal Year 2013 by roughly 20 percent. Additionally, if there is a desire to audit some taxpayers who claim this modification, there would be additional annual administrative costs for the State Tax Department that could be significant depending on the desired audit coverage.

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. The bill title states the bill relates to the allowance of mortgage or deed of trust interest paid on a personal residence as a deduction for personal Income tax purposes. However, the bill itself allows a taxpayer a decreasing modification that reduces federal adjusted gross income by “the amount of mortgage interest paid on a mortgage or deed of trust on a personal residence, subject to a limit of no more than $4,000 per year.” This appears to be a defect in the title. 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