- NC Policy Watch - http://ncpolicywatch.com -

North Carolina’s tax shift continues

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State lawmakers are targeting cash-strapped homeowners as they continue to pursue tax changes that would shift even more of the tax load to low- and middle-income taxpayers, while preserving tax benefits that have largely flowed to the wealthy and profitable corporations.

Legislation approved by the state Senate (Senate Bill 20 [2]) would require homeowners to pay state income tax on mortgage debt forgiven by lenders. Meanwhile, financial institutions that provide such consumer relief are allowed to deduct the expense as a tax write-off.

The proposal would undermine a key element of North Carolina’s recovery from the nationwide housing crisis that fueled the Great Recession. In the wake of the crisis, a number of financial institutions [3]  agreed to  settlements [4] that provide consumers relief [5] for unaffordable mortgages. This often meant reducing the amount of principal debt they owed on their mortgages to make them more affordable and lessen the likelihood of foreclosure. Furthermore, the 49-state National Mortgage Settlement [6] encourages mortgage servicers to provide such relief to distressed borrowers affected by the housing crisis.

The goal of these settlements is to ensure that homeowners who were preyed upon by unethical lenders do not fall into the financial tailspin that foreclosure often creates. The tax change proposed by the Senate would require cash-strapped homeowners who have already suffered from the disastrous housing crisis and economic downturn to report this debt forgiveness as income, even though no actual cash is provided to the homeowners.

This could deter families from accepting bank offers to modify their mortgage loans because they cannot afford to pay taxes on the amount of relief they get. Distressed homeowners seeking to stabilize their finances and rebuild in the wake of the housing crisis would face a major setback.

Moreover, housing is an important part of North Carolina’s overall economy. A healthy housing market is key to the state’s ongoing economic recovery. The financial and foreclosure crises cost trillions of dollars in household and financial wealth [7], wreaking havoc on state finances. Preventing foreclosures and helping families stay in their homes benefits everyone, as stable neighborhoods help sustain home values, promote safe and vibrant communities, and build wealth.

The slow economic recovery remains very uneven, with all of the income gains since 2009 captured by the top 1 percent of income earners. Asking low- and middle-income families struggling to stay in their homes to carry a heavier tax load is unfair. Especially since the revenue would be used to plug a state revenue shortfall created by income tax cuts that further benefited the top 1 percent.

Rather than punish homeowners still suffering from the housing crisis and economic downturn, lawmakers should look to other opportunities to ensure the state’s tax system is able to support our schools, health care and other core public services. For instance, the state’s tax code is full of costly special tax breaks that warrant closer examination. Policymakers need to determine whether these tax breaks do the state any good or should be eliminated. State lawmakers should roll up their sleeves, dig into the state’s tax code, and truly pursue meaningful tax reform.