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 residences 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 $51.3 million per year beginning in Fiscal Year 2014. If the provisions of this bill were applied to just itemizers, then its cost would be roughly $30.8 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 2013 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
Effect of Proposal	2013 Increase/Decrease (use"-")	2014 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	0	0

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

This bill provides for a home mortgage interest modification at a cost of roughly $51.3 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 2013 and most revenue loss in the first year would occur during the Tax Year 2013 filing season in January to April of 2014. 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 2010 indicate a federal deduction of $956 million for roughly 117,496 itemizers. 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 $30.8 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 residences to be used as a deduction for personal income tax purposes up to $4,000 per year. The bill title refers to the proposed change as a “deduction,” while the actual proposed revision is placed in a section entitled “Modifications reducing federal adjusted gross income.” This would appear to be a defect in the title. As written, the bill uses the phrase “personal residence” while the stated purpose uses the phrase “personal residences.” Since the bill does not provide a definition for “personal residence” or “personal residences,” the decreasing modification 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. 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.

Person submitting Fiscal Note: Mark B. Muchow
Email Address: Roger.D.Cox@wv.gov