Under current Kansas law, Kansas income tax filers may only itemized deductions on state tax filings if they itemize on their federal return. Due to the doubling of the federal standard deduction, very few Kansas taxpayers will benefit from the itemized deductions currently provided in Kansas tax law. HB 2761 would provide that starting in tax year 2018 and thereafter, an individual may itemize deductions in Kansas tax filings regardless of whether or not an individual’s federal taxable income allows itemized deductions.
An Income Tax Increase is On the Line
Earlier this session, federal tax reform was estimated to result in $140 million more dollars flowing into the state in income taxes in FY ‘18, with an estimated $90 million due to the majority Kansans not being able to take advantage of the Kansas itemized deductions – charitable, mortgage interest, property taxes, medical expenses. Therefore, it is important that this legislation passes so Kansas property owners may retain these favorable tax provisions. Failure to act in response to federal tax reform by the Legislature would amount to a $90 million-dollar income tax increase on Kansas itemizers.
Further, HB 2761 would allow an estimated 89,000 additional Kansas taxpayers to itemize in Kansas. This has been estimated to be $34.5 million in additional tax relief for Kansans. However, there is a significant swing if the Kansas Legislature does not decouple from the federal itemized deductions. According to the National Association of REALTORS®, by doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership. Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers. This means that many more Kansans will pay additional income taxes than previously due to losing the ability to deduct property taxes and mortgage interest on their Kansas returns.
Value of Homeowner Tax Relief
KAR testifed in support of this legislation and laid out the case that homeownership, being preferred, deserves continued, preferential tax treatment. Kansas tax policy should encourage homeownership, and these deductions provide meaningful tax relief:
- Nearly 250,000 Kansans took the Mortgage Interest Deduction (MID) in 2015
- Over 300,000 claimed the Property Tax Deduction (PTD) in 2015
- Of the 729,000 owners occupied houses in 2016, 60% had a mortgage
Therefore, it is important that Kansas homeowners continue to be able to claim these deductions regardless of whether they qualify to itemize federally.
State Could Look to Homeowners for Additional Revenue
HB 2761 must pass in order to preserve these deductions for most Kansas taxpayers. If the Legislature does nothing, Kansas is $140 million richer in state income tax revenue, which will bolster state revenues. This becomes a critical point because there are several items before the Legislature that require additional revenue – school finance (needing somewhere between $0 to $600 million in funding) as well as social services, roads, public pensions, prisons, etc.
Your Action May be Needed in the Future
The Kansas Legislature has consistently preserved the MID and PTD deductions and as recently as 2017, put both on a path to full restoration. KAR will pursue passage of HB 2761 and it may require a Call For Action (CFA). Timing will be critical. Ultimately, we expect any resolution on this issue may be in a large tax package that passes at the end of the Session. We’ll need to be in a position to put our grassroots efforts to work if needed.
