In Arizona, which has had the second highest foreclosure rate in the nation for the past three years, an economist in the Revenue Department stumbled across a confusing trend: income tax liability jumped in 2010 even as joblessness remained high.
"My first thought was: taxable income, why would that be up if people are losing jobs and unemployed?" said Karen Jacobs, a senior economist in the department. She discovered that the value of all itemized deductions, including that for mortgage interest, was down 20 percent.
One Arizona resident, Stephen Buckman, said he saw the effect of losing his home when he figured out his 2011 taxes. Buckman was working in commercial real estate in Phoenix when the market collapsed. His work dried up as the value of his townhouse plunged 75 percent from $196,000 when he bought it in 2006 to less than $50,000. It was foreclosed in December 2010.
"I was shocked about how much I owed," Buckman, 38, said in a telephone interview about his 2011 tax bill. He owed an additional $1,500, which he attributes to the loss of his mortgage interest deduction. Buckman now rents a townhouse in Tempe, where he is working on his Ph.D. in geography at Arizona State University. "That was a deduction I couldn't take, so I owed a lot more money than I usually owe."
Unanticipated State Revenue
Arizona Governor Jan Brewer's budget director, John Arnold, said fewer deductions led to about $170 million in unanticipated revenue for fiscal year 2011. Arizona closed its budget year in June with a balance of $3.2 million, compared with a $332 million deficit that had been forecast, according to a report by the Joint Legislative Budget Committee.
"We're in a budget crisis and an extra $170 million shows up," Arnold said, noting that the state's total tax revenue fell $3 billion from 2007 to 2010. "We understand that is the result of people losing their homes. If I could say it was the result of people refinancing, we'd be all smiles."
A detailed breakdown of 2010 deductions isn't available. The number of Arizona returns on which the tax break was claimed for 2009 fell 8 percent from the peak in 2007, dropping below the 2004 level, Jacobs said. The amount of the write-offs plunged 26 percent, from $13.5 billion to $9.96 billion. Jacobs estimates that this led to $55 million to $65 million a year in revenue for the state.
Other states are seeing similar trends in tax collections, especially those where foreclosures have been high.
In California, which had the third-highest foreclosure rate in the U.S. last year, the number of filers taking the deduction for mortgage interest fell 9 percent while the value of the deductions fell almost 20 percent from 2007 to 2009, according to data from the Franchise Tax Board.