From: Luke Bell Sent: Tuesday, June 04, 2013 4:19 PM To: Luke Bell Subject: Final 2013

Legislative Update

All Following one of the longest and most divisive legislative sessions in recent memory, the Kansas Legislature finally adjourned +at 3:30 AM on Sunday morning. As I warned you earlier this year, the final outcome was not a clear-cut victory for Kansas home owners and we had to accept some compromises in order to retain the mortgage interest and property tax deductions. However, I am happy to report that the Governor was ultimately unsuccessful in singling out and completely eliminating the mortgage interest and property tax deductions for middle-class Kansas home owners. On a positive note, the association was successful in passing major legislation after over 20 years of discussions to protect private property owners from the abuses of the historic environs review requirements. However, the good news on this issue is tempered by the Governors extremely misguided and disappointing veto of the states regulations on home inspectors. Since the Governor vetoed an extension of these common-sense and reasonable regulations for home inspectors, Kansas home buyers will lose these important consumer protections on +July 1, 2013. I am going to briefly explain the final status of our major issues below. You will also find a complete list of all bills being tracked by KAR during this session in the attached spreadsheet. If you have any questions, please email me back or give me a call on my cell phone at (785)633-6649. Thanks! Defending Home Ownership and the Mortgage Interest and Property Tax Deductions Throughout the last three weeks of the session, the negotiations between the House, Senate and Governors office over the budget and tax plans were at a complete standstill. Although we had beaten back this effort earlier in the session, the Governors office and certain members of Senate leadership (namely Senate Majority Leader Terry Bruce) made another attempt during these negotiations to completely eliminate the mortgage interest and property tax deductions. If they had been successful in this late maneuver, the mortgage interest and property tax deductions would have been completely eliminated by 2018. Thankfully, House leadership and other members of the Senate held firm in their support of our position on this issue. The result is a tax plan (HB 2059) that is far superior and better for taxpayers than the plan offered by Governor Brownback at the beginning of the session. Based on my analysis of the final tax plan, the average Kansas home owner who claims itemized deductions on their state income taxes will receive an average annual state income tax cut of $608 over the six-year time period of the reductions from 2013 to 2018. Over this six-year period, the final tax plan will reduce their total state income and sales tax burden by $4,257. In contrast, the Governors tax plan (defeated by the Legislature) would have resulted in a higher income tax burden on home owners who claim the mortgage interest and property

tax deductions on their state income taxes. In 2013 alone, the compromise tax plan will save the average taxpayer over $300 compared to the Governors tax plan. Over the next six years, the compromise tax plan will save the average itemizer over $1,220 compared to the Governors plan. You will recall that we offered a good faith compromise to the Legislature to reduce the value of all itemized deductions over time in proportion to future reductions in state income tax rates. As a result, the value of state itemized deductions would only be reduced if and when state income tax rates are actually cut by the Legislature. This is essentially the framework for the final compromise plan adopted by the Legislature. The final tax plan will reduce all itemized deductions (with the exception of the charitable contribution deduction that will remain permanently at 100%) by 30% in 2013, 35% in 2014, 40% in 2015, 45% in 2016, 50% in 2017 and 50% in 2018. After 2018, the amount of itemized deductions that can be claimed by a Kansas state income taxpayer on their state income tax return will stay at 50% permanently. These reductions in the value of itemized deductions are roughly in proportion to the future reduction in state income tax rates under this tax plan. Moreover, the final tax plan reduces state marginal income tax rates in phases from 2013 to 2018. The top state marginal income tax rate (married filing jointly and income exceeding $30,000) will be reduced in phases from 6.45% in 2012 to 3.9% in 2018. Over this time period, this will be a roughly 40% reduction in the top income tax rate. The bottom state marginal income tax rate (married filing jointly and income below $30,000) will be reduced in phases from 3.5% in 2012 to 2.3% in 2018. This is a 35% reduction for the bottom tax rate over this time period. In addition, the final tax plan contains a march to zero mechanism that will automatically reduce state marginal income tax rates after 2018 in all years that state revenue growth exceeds 2% over the previous year. In effect, this will limit future growth in state general fund spending to no more than 2% annually. For example, if state revenue grows by 3% in 2019 over 2018 tax revenues, then the additional revenue growth above 1% will be automatically devoted to further reductions in state marginal income tax rates. Right now, a rough estimate is that the state income tax could be completely eliminated by 2025. Finally, the final tax plan rolls back the standard deductions to $5,000 for single taxpayers and $7,500 for married filing jointly taxpayers. The standard deduction had been poised to increase to $9,000 for both categories under last years tax bill. Based on my analysis of the final tax plan, the average Kansas state income taxpayer claiming itemized deductions will receive an average annual state income and sales tax cut of $608 over the six-year time frame from 2013 to 2018. Protecting Private Property Rights through Historic Preservation Reform On a bright spot, our legislation (HB 2249) to protect private property rights by eliminating the burdensome historic environs review requirements passed the Legislature and was signed by the Governor. You will recall that Kansas is the only state in the nation that prohibits property owners from making any exterior improvements to their properties without going through a special review process when they are located within the environs area of a

historic property (500 feet in the city and 1,000 feet in the county). In spite of the lies and distortions spread about the bill by our opponents on this issue, the Legislature agreed with our position that private property rights should be protected from these onerous requirements. As a result, these burdensome requirements will be repealed statewide on +July 1, 2013. Local governments can still protect historic properties actually listed on the state or national historic register and they can also establish historic districts to protect areas that have an extraordinarily high concentration of historic buildings. However, we have eliminated this burden on private property owners that has been on the books since the late 1970s. Protecting Home Buyers by Regulating the Home Inspection Industry Unfortunately, we were very disappointed with the decision by Governor Brownback to veto the commonsense and reasonable legislation (SB 37) that would permanently extend the states protection of home buyers through the regulation of the home inspection industry. Since 2008, the state has required that all home inspectors pass initial certification requirements, complete annual continuing education and maintain financial responsibility for errors and omissions in order to ensure that they are qualified to serve home buyers during the home buying process. Although a vocal minority of home inspectors oppose these regulations, the overwhelming majority of active home inspectors support these commonsense, reasonable and minimally burdensome regulations to protect consumers. Since the Governor chose to veto the bill for political reasons, the states home buyers will no longer be protected by the important consumer protections provided by the regulation of home inspectors. We are studying our options to see if these regulations can be revived in future legislative sessions, but home inspectors operating in Kansas will essentially be unregulated again starting on +July 1, 2013. Pushing for Property Tax Reform for Kansas Farmers, Home Owners and Small Businesses KAR continues to push for property tax reform to alleviate the crushing property tax burden on Kansas farmers, home owners and small businesses. Since 1997, this property tax burden has more than doubled and is growing at a rate 12 times faster than population growth and 3.5 times faster than inflation. If the Kansas Legislature does nothing to slow the growth of this property tax burden, then total personal and real property taxes are expected to increase by another 171% to nearly $6.7 billion annually by 2021. Thankfully, the Kansas House seized the mantle of property tax reform by passing the Kansas Property Tax Transparency Act (HB 2047), which would help make local governments more accountable and transparent by making them annually vote to accept additional property tax revenues generated from assessed valuation increases rather than

automatically increasing property taxes from assessed valuation growth as in past years. This legislation does nothing to restrict the right of local governments to increase property taxes, but will just ensure that citizens have more information on whether their property tax valuations (and thus property taxes) have increased each year. Over time, we believe this bill will help put more pressure on local governments to hold down annual increases in the property tax burden. HB 2047 passed the House on a narrow vote earlier this session and is currently pending in the Taxation Conference Committee. Unfortunately, we were unable to get this legislation through the Senate during the 2013 Legislative Session. As a result, we will be coming back to work on this issue during the 2014 Legislative Session. Luke Bell Vice President of Governmental Affairs Kansas Association of REALTORS 3644 SW Burlingame Rd. Topeka, KS 66611