Anyone in North Carolina who wins a write-down on their mortgage could end up owing the state thousands of dollars in extra income taxes under a Republican-backed proposal that cleared the state Senate last week.
Mortgage debts forgiven by the lender are not counted as taxable income for federal purposes, thanks to a 2007 law that has been renewed multiple times since the Great Recession. The law protects mortgage borrowers who have gotten their mortgages shrunk thanks to various legal settlements with banks over various abuses such as the robosigning scandal. Without it, the debt forgiveness that is supposed to compensate harm done to consumers would morph into a burden, incurring higher income tax payments.
If North Carolina’s conservative majority is successful in breaking with the federal tax code’s approach to forgiven mortgage debts, roughly 4,000 people in the state would be hurt to some degree. North Carolina has dropped heavier tax bills on these homeowners before. The state reimposed taxes on canceled mortgage debt in 2013 after exempting it for years in the wake of the financial crisis. It was one of 7 states that taxed forgiven mortgage debts as income at that time, according to the Charlotte Observer. The bill now facing the House would apply that tax again for the 2014 filing year.
At a state income tax rate of 5.8 percent for individuals, someone who got a $20,000 reduction on their mortgage would suddenly owe another $1,160 in state taxes for the year. And the numbers involved in mortgage debt relief are often much larger than that. In 2013 alone, the half-million Americans who used the federal exemption for mortgage debt relief saved $58 billion on their taxes, or an average per-person savings of $116,000.
Bean counters predict the move will bring in $14 million in state tax revenue, according to a The State editorial opposing the measure. “These are people that have lost their homes,” state Sen. Tamara Barringer, the lone GOP vote against the bill in the Senate, told the newspaper’s board. “Are we going to tax them when they’re trying to get back on their feet?”
The proposal is among several changes attached to a broader tax measure that would lower the state’s gas tax by 2.5 cents. Another provision of the bill would end the state income tax deduction for tuition expenses — essentially a tax hike on college students.
Recent tax overhauls in the state cast an even dimmer light on the moves to extract more revenue from struggling homeowners and people working on college degrees. After conservatives swept state elections in 2010 with the financial backing of wealthy retail titan Art Pope, they eliminated a key tax credit for the working poor. The same law that raised taxes on low-income workers also lowered them for the wealthiest in the state by replacing the previous two-tiered income tax system with a flat 5.8 percent income tax rate for all earners. The result of the tax code tinkering was a $10,000 tax cut for people who earn over a million dollars a year, paid for with a tax hike on the bottom 80 percent of North Carolina’s income distribution.
Those moves have all gotten approval from Gov. Pat McCrory (R) despite his campaign pledge to oppose all tax increases, something many of the lawmakers who voted for these moves also swore during campaign season.