June 04, 2004
Making the sales tax deductible

According to the Star-Telegram, legislation is in place to allow residents of states with no state income tax to deduct sales taxes from their federal income tax.

[Tom] DeLay, R-Sugar Land, said in an interview with the Star-Telegram that the breakthrough in long-running negotiations will be announced today as a provision in a major corporate tax bill.

DeLay said he had been trying to restore the sales tax deduction in states that have no state income tax since Congress eliminated the deduction in the sweeping 1986 tax overhaul. The other states with no state income tax are Tennessee, South Dakota, Nevada, Florida, Washington and Wyoming. Residents of other states can deduct their state income tax on their federal returns; they would be able to choose to deduct sales taxes instead.

"It's a matter of fairness," DeLay said.

The deductibility provision would be retroactive to Jan. 1, meaning it would take effect for this tax year.

"It's pretty assured it's going to happen," said DeLay. "This is a major piece of legislation that happens to include sales tax deductibility."

There is no major opposition yet to the tax deduction provision, but supporters expect some resistance from lawmakers who are concerned about the estimated $21.6 billion it would cost over the next 10 years.

The House Ways and Means Committee is expected to approve the corporate tax bill next week, and DeLay expects it to clear the full House by mid-June. He is confident the Senate will accept the sales-tax provision.

The prospect of restoring the deduction has gained momentum from the combined push of DeLay and other key lawmakers in both parties from other states without income taxes, most notably Senate Majority Leader Bill Frist of Tennessee, Senate Minority Leader Tom Daschle of South Dakota and Senate Democratic Whip Harry Reid of Nevada.

Moreover, President Bush is a former Texas governor, and DeLay said the White House is "all for it."

Sen. Kay Bailey Hutchison, R-Texas, also has been working on the issue. Last year she introduced a separate bill to restore the deduction.

The provision would allow U.S. taxpayers who itemize deductions on their federal returns to deduct state and local sales taxes. Taxpayers who pay state income tax could choose to deduct that instead.

Before 1986, all taxpayers who itemized could deduct state income taxes and sales taxes.

Texans pay $14 billion a year in the 6.25 percent state sales tax and up to an additional 2 percent local sales tax. The deduction would save Texans an estimated $921 million a year in federal taxes, according to the Congressional Research Service.

The deductibility provision will cost the Treasury $21.6 billion over 10 years, according to the Joint Committee on Taxation.

The Internal Revenue Service would develop a chart with estimates of sales taxes paid by taxpayers in different income brackets. Before 1986, the IRS developed those charts and taxpayers could use them or save all their sales-tax receipts.

Obviously, this is going to benefit me. Unfortunately, I don't think it'll do much for lower-income folks, for whom the sales tax is their greatest tax burden. How many households near the poverty line itemize their taxes? I also fear that with this law on the books, there'll be even more incentive to push sales taxes for state funds instead of less regressive measures.

I should note that this is something Rep. Martin Frost has been pushing, though of course since this story was primarily based on an interview with DeLay he doesn't get mentioned here. Frost has been bashing Pete Sessions for not supporting the measure even though he's listed as a cosponsor. The political gain for Frost is undeniable, but you can count me among those who are "concerned" about the cost. $21 billion over ten years is fairly small potatoes all things considered, but I'd much rather defer adding to our already insane deficits until we can get a government in place that has a modicum of fiscal responsibility about it. And you know, with a war going on and all, I just feel there are higher priorities than handing out more tax breaks to people who don't necessarily need them.

And of course, as this involves Tom DeLay, those three little Latin words must make an appearance:

DeLay said he has coordinated with Texas Gov. Rick Perry and Lt. Gov. David Dewhurst, both Republicans. "The governor calls me once every two weeks," DeLay said. "Every time I was down in Texas during redistricting I would hear about the sales tax deduction. I wanted to talk about redistricting, and they wanted to talk about the sales tax."

DeLay made clear that there was "no quid pro quo" between last year's redistricting battle and the sales-tax issue but said he also felt strongly that the deduction had to be restored.

As I recall, when questioned about his involvement in redistricting last year, DeLay claimed to be just another concerned citizen who wanted to make sure his viewpoint was being heard by the Legislature. I suppose that's not really operational any more. Via Lasso.

Posted by Charles Kuffner on June 04, 2004 to National news | TrackBack

Retroactive to January 1, eh? I hope you all saved all your receipts of all your taxable purchases since the year started.

And isn't it ironic, in this day and age of seeking ever-higher "sin taxes," that this would allow people to deduct the sales tax paid on a carton of cigs or a 12-pack of beer?

Posted by: Tim on June 4, 2004 4:37 PM

Wonder how long it's going to take them to ram through the "fair tax."

McCaul (the GOP candidate in Doggett's old district) drank the kool-aid.

Posted by: jelyon on June 5, 2004 12:16 AM

but you can count me among those who are "concerned" about the cost. $21 billion over ten years is fairly small potatoes all things considered, but I'd much rather defer adding to our already insane deficits until we can get a government in place that has a modicum of fiscal responsibility about it.

Am I mistaken in my recollection that you've previously cheered federally deductible state taxes (property and potentially income) as smart public policy for the state?

Now, it's a question of fiscal responsibility?

Oh, yeah. Tom Delay's involved. Never mind.

I will have to watch to see if this argument makes its way into Rick Casey's column Monday, though. :)

Posted by: kevin whited on June 5, 2004 8:38 AM

I'm confused about his assertion that this will make things "fair". I pay state income tax, city income tax, AND sales tax. So when I deduct my state income tax, it still has me paying more taxes that aren't deductible than someone in a non-income tax state. I would understand "fair" if the states with income tax had no sales tax, and therefore this would actually balance things out. (Though I have my doubts that state income tax is as high as sales tax, so I actually suspect this would put those deducting their sales tax further ahead.) Not that I begrudge my friends in non-income tax states this deduction on that basis. I'm just not sure the word "fair" is a, well, fair way to assess the situation.

And I gotta agree with you on the sentiment of putting less energy into finding more ways to sink our country into further debt right now. It's starting to get scary.

Posted by: Amy on June 5, 2004 11:52 AM

I have a question: How many of the lower 20% income bracket itemize? How many of the next 20%? I can't readily find that information, but I can't imagine that many do.

This is one of those moves meant to look fair but isn't. It does nothing to alleviate the regressive tax burden.

Posted by: Tx Bubba on June 6, 2004 3:19 PM