Tax bill includes deduction cap
By PETER HIRSCHFELD
Vermont Press Bureau | April 26,2013
MONTPELIER — The Senate Finance Committee put the finishing touches on a tax bill Thursday that includes new caps on the home mortgage interest deduction.
As committee members touted the “fairness and equity” that guided their deliberations, real estate agents warned the move could have a chilling effect on a housing market still on the rebound and ding middle-class homeowners who have come to rely on the annual exemption.
The $12,000 mortgage interest cap would account for the lion’s share of a $10 million revenue package that would also:
Set minimum tax liability for people who make more than $125,000 a year.
Impose a 4 percent excise tax on monthly satellite television bills above $50.
Revoke the sales tax exemption on bottled water.
Eliminate the higher-education tax credit for people making more than $150,000 annually.
Sen. Tim Ashe, a Democrat-Progressive from Chittenden County, has spent much of his first year as chairman of the Finance Committee examining scores of exemptions built into the tax code. Vermont gives away more than $1 billion annually in forgone revenues, and Ashe says some of those “tax expenditures” may not be yielding sufficient returns.
Specifically, he homed in on a mortgage interest deduction that can be used by wealthy residents of Vermont to write off, for instance, expenses associated with vacation homes in the Bahamas. The miscellaneous tax bill that won a 6-0 vote in Ashe’s committee contains a provision that would cap the mortgage interest deduction at $12,000.
“We believe the lion’s share of homeowners in this state would not suffer under such a plan,” Ashe said Thursday. “And what it really does is gets the state and other taxpayers out of the business of subsidizing very large homes owned predominantly by people with the resources to pay for them.”
An analysis prepared by the Legislature’s Joint Fiscal Office shows that the proposal would affect more than 16,000 filers from across the earning spectrum, and, combined with the “minimum tax,” bring in about $7.4 million annually.
Middle-class homeowners wouldn’t be immune from the effects of the proposal. Nearly 5,000 filers making between $25,000 and $100,000 annually would see their taxes rise by an average of about $150 per year, according to the JFO analysis.
But the impact would be concentrated at the top of the income ladder, where nearly 2,500 filers making more than $200,000 would supply half of the new revenue. The proposal would increase annual tax bills on mortgage holders making more than $300,000 and $1 million per year by an average of about $1,800. Approximately 100 filers with incomes over $1 million would see average annual increases in their tax bill of $10,570.
The proposal would affect fewer than 15 percent of the state’s nearly 125,000 mortgage holders.
“Some homeowners receive tremendous benefit, and some receive none,” Ashe said. “For us it’s a fairness issue.”
Christopher MacDonald, government affairs director for Vermont Realtors, said capping the mortgage interest deduction could deal a blow to the housing market. Even with the record-low interest rates, MacDonald said, people with less-than-ideal credit ratings are still seeing rates in the 4.3 percent range, meaning that people taking out mortgages as low as $240,000 could run up against the cap.
“If you’re looking at family looking for a starter home who have worked for years to come up with that down payment and they see they’re going to reach the cap, maybe they would look at less expensive homes,” MacDonald said.
He said his trade group is also worried about the impact on existing homeowners. Of the 16,700 mortgage holders that would be affected, one-third have household incomes of less than $100,000.
“We already have a property tax increase go through … and it’s kind of hitting these homeowners twice in one year,” MacDonald said.
Realtors have a powerful ally in Gov. Peter Shumlin, who said that after passing an increase in the gas tax especially, lawmakers need to steer clear of any other broad-based tax hikes. Shumlin has said taxes on sales, meals and income would come under the broad-based umbrella. The mortgage interest deduction would put upward pressure on income tax bills.
“I just don’t have very many Vermonters that come up to me and say, ‘Hey, governor, we understand you have to raise the gas tax, but could you please raise every other single broad-based tax before you go home?’” Shumlin said during a news conference Thursday. “I’m just not getting that out there.”
Ashe said the mortgage interest cap would affect fewer than 5 percent of all Vermont tax filers, a figure he said seems to defy the “broad-based” label Shumlin has attached to the proposal.
And Ashe said his committee’s proposal would have the effect of relieving pressure on the 95 percent of taxpayers who won’t be hit by the cap.
“On the one hand we can say it’s increasing the tax burden for some Vermonters,” Ashe said. “But on the other, you can say it relieves tax pressure on all the other Vermont taxpayers.”
The revenue bill coming out of Senate Finance this week will raise an estimated $10 million next year — less than half what the House version would generate. The lower figure will work only because the Senate Appropriations Committee plan to pare down the spending plan the House approved this year.
Sen. Jane Kitchel, Appropriations chairwoman, said her committee will vote out the budget Monday.
The “minimum tax” component of the Senate plan would enforce at least a 3 percent effective tax rate for any filer with an adjusted gross income of more than $125,000 per year.
“Some wealthy Vermonters do pay very, very high taxes, but one of the dilemmas we’re facing is there are other very wealthy Vermonters who pay an extremely low percentage of their income in taxes,” Ashe said. “So we’re trying to create a fairness standard.”
The Senate tax bill also would raise $1.2 million by revoking the sales tax exemption on bottled water and generate $1.4 million with a 4 percent excise tax on satellite television services (the first $50 on a monthly bill would be exempt).
The committee also included a small tax on “break-open” gambling tickets, to be assessed only on sales from which proceeds do not flow to military service organizations. That provision would raise $400,000 annually, though the committee has directed the money into the education fund.
In approving its revenue package, the Senate panel has rejected most of what came down from the House last month. The House plan would revoke the sales tax exemption on soda, candy, dietary supplements and items of clothing costing more than $110. The House plan also would impose a one-year hike in the meals tax.
The House too looked at the issue of income tax deductions and used a $12,500 cap on itemized deductions to raise more than $30 million in fiscal year 2015.
The Senate proposal raises less than the House’s but expedites the implementation of the deduction by a year, so it generates revenue in time for the fiscal year 2014 budget.