SEPT. 7, 2012 -- Looks like state politicians have avoided including a huge pot of money whenever they’ve talked about comprehensive tax reform over the years.
This pot is not something you might normally think about, but it has significance. It’s the income tax deduction for interest on home mortgages.
Right now when people do their taxes, homeowners are able to deduct their mortgage interest payments from their overall income, which results in an adjusted gross income.
Federal income taxes are based on that adjusted income. And because states like South Carolina tie their tax system to the adjusted federal income, homeowners don’t pay state income taxes on income used to pay mortgage interest either.
But what if they did? How much untaxed mortgage interest is out there if the state decided to decouple the mortgage interest deduction from the federal return?
A lot. According to the IRS, the state isn’t taxing mortgage interest deductions worth just under $4.6 billion. (See: http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2)
The disparity has left some wondering whether it’s fair for homeowners to get this hidden state tax break, compared to renters who don’t get any tax break for where they live. As one critic contends, doesn’t this mortgage break just mean that every homeowner in South Carolina with a mortgage really is living in “subsidized housing?”
Odious but necessary
One bill that got a lot attention this past legislative session, though not enough votes to pass, was the Angel Investment Act, which provided a substantial, if not complete, personal income tax credit for South Carolinians investing in state companies.
The criticism, and what may have ultimately doomed the bill for this year, was that only the very wealthy were allowed to invest and receive the income tax credits and further backing from state government.
What about the middle class family which had saved dimes, cut coupons, and amassed some money and entrepreneurial spirit, demanded the critics? Why can’t they take part? For them, it was a matter of fairness.
So, how is it fair for homeowners to receive the largest tax deduction in the state, whilst the Average Joe frying fish at the local Captain D’s pays rent with no tax benefit?
It’s not, according to Sue Berkowitz, an attorney and director for the S.C. Appleseed Legal Justice Center, which advocates on the behalf of the working classes.
“We all live in subsidized housing,” said Berkowitz, who said that many homeowners factor the tax savings into their home purchases to make it more affordable than just renting.
Berkowitz, who admitted to also taking a mortgage interest deduction herself, said that the current situation is an unfair as someone paying the same amount of sales tax on a $5,000 car in South Carolina as someone purchasing an $80,000 car, because auto sales taxes are capped in this state.
State Sen. Thomas Alexander (R-Walhalla), a member of his chamber’s Finance Committee, said the mortgage interest deduction was put in place by the federal government to encourage homeownership and help those trying to attain “that piece of the American dream.”
Homeownership has long been touted as a means to a more stable society, and has been largely accepted as a boon, according to Alexander.
Alexander said that government, whether on the state or federal levels, shouldn’t benefit on interest payments made on homes.
House Rep. Brian White (R-Anderson), the chair of the Ways and Means Committee, said that Berkowitz missed the point about sales tax on cars, in that the property taxes leveled annually on that $80,000 vehicle goes to support local interests.
State Sen. Larry Grooms (R-Bonneau), a gubernatorial candidate two years ago, said that he’s got the answer: do away with state income tax altogether.
Grooms, sponsor of the S.C. Fair Tax bill, said that by doing away with income taxes and shifting to “consumption” taxes, like sales and excise taxes, it does away with the fairness issue completely, when it comes to discussing the benefit some taxpayers receive from deducting mortgage interest.
“The solution is to increase wealth, not tax the elements that create wealth,” said Grooms, who added he would refile the bill before January.
Grooms agreed with Alexander that any attempt to do away with the mortgage interest deduction has a better chance if it’s tackled first on the federal level.
Crystal ball: According to Burnie Maybank, the state’s former head of the Department of Revenue and primary author of the Taxation Realignment Commission (TRAC) report, home ownership deductions are -- and will probably remain -- “sacred.” If he’s right, and he usually is, then South Carolina still has more than a good day’s work coming up with a tax code with a widened base and lower rates that is fair for all paying in, as well as fair for those receiving services and the benefits of government. Still, the first item on legislators’ agendas, especially during an election year, is to just talk about the problem. And tax reform has to come to mean more in this state than tax cuts.
Bill Davis is editor of Statehouse Report. He can be reached at: firstname.lastname@example.org.