House Passes Gas Tax Legislation, Removes Provision Taxing Short Sale Mortgage Debt

The North Carolina House last week approved legislation that would reduce the state gas tax to 36 cents from the current 37.5 cents, beginning April 1 and continuing through the end of 2015. The bill also removed a provision opposed by the North Carolina Association of Realtors® (NCAR), which would have made mortgage debt forgiven in a short sale subject to state income tax.

SB 20, ‘IRC Update/Motor Fuel Tax Changes’, originally decoupled the state from the federal tax exemption for mortgage debt forgiveness, which would have exposed North Carolina homeowners to state income tax when their lender agreed to a short sale on their primary residence. Since forgiven mortgage debt is treated as income by the IRS and the North Carolina Department of Revenue, this provision would have made it impossible for many homeowners to negotiate a short sale, because of the thousands of dollars in income tax that would come due as a result.

Senator Joel Ford (D-Charlotte) attempted to remove the provision during Senate deliberations earlier this month, but his amendment failed and the chamber approved the bill in its original form. But when the House Finance Committee, chaired by Representative Bill Brawley (R-Matthews), took up SB 20 this week, they introduced substitute legislation that eliminated the provision, while also including a less complicated formula for stabilizing state gas tax revenue for much-needed infrastructure investments.

Under the current gas tax formula, which is indexed to oil prices, North Carolina could see a loss of more than $1 billion in funding for roads, bridges and other critical transportation needs — as the tax is set to drop by as much as 6 cents a gallon by July. House leaders admitted that SB 20, as approved today, is only a stop-gap measure, and that a long-term funding solution is still needed.

The bill was approved on its third reading by a 72-42 margin, and now goes back to the Senate, where it will likely end up in a conference committee to resolve differences between the two chambers.

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