July 01, 2004
CPPP criticizes sales tax writeoff

The Center for Public Policy Priorities is criticizing a recently-passed bill that would allow the state of Texas and other states with no income tax to deduct sales taxes from their federal income tax.


Deductibility is merely a political sleight-of-hand to facilitate a shift in tax burden from those making more to those making less," said Scott McCown, executive director of the Center for Public Policy Priorities, which promotes public policies for poor and middle-income Texans.

"Texas taxpayers are being offered a pig in a poke," he added.

Gov. Rick Perry and other state leaders applauded the tax break when it was approved last month by the U.S. House as part of a $155 billion tax restructuring package, even though the break would be available for only the next two years.

The Senate's version of the bill doesn't include a similar provision, and it may take congressional negotiators a few months to draft a compromise.

Perry said it was only fair to give Texans the right to deduct sales taxes from their federal taxes, since people in most other states can deduct their state income taxes.

McCown fears that a new federal tax deduction would increase the likelihood of the Legislature raising the sales tax, either in a special legislative session or in the regular session, which convenes in January.

He and his group believe a state personal income tax would be a fairer, more productive way to raise additional money for education and other state needs.

An income tax faces widespread opposition in the Legislature.

State Comptroller Carole Keeton Strayhorn has estimated that the average Texas family itemizing its federal income tax returns would save $310 a year if the proposal became law.

[...]

The Center for Public Policy Priorities said that, according to the Internal Revenue Service, 22.6 percent of Texas taxpayers itemized their federal tax deductions in 2001, the most recent data available.

More than 80 percent of taxpayers with adjusted gross incomes of more than $150,000 itemized, compared with only 5 percent of those with adjusted gross incomes of less than $30,000, the center reported.


That doesn't really tell you a whole lot, does it? Read the CPPP's analysis to see why this new law would not benefit most people in Texas. Note that they specifically dispute Comptroller Strayhorn's claim about an "average" benefit of $310 per household.

UPDATE: Carlos Guerra writes about this as well. Via The Stakeholder.

UPDATE: Mathwiz points out in the comments that I made the same mistake about Strayhorn's average-benefit contention that the CPPP toom pains to point out. Let me just quote them:


Some people have claimed that the proposed deduction would save Texans more than $300 per household. This is a misstatement of the comptrollerís estimate that itemizing households could save $310 in 2004, if the deduction were allowed. http://www.window.state.tx.us/specialrpt/deduction04/ The average Texas household, which would continue to opt for the standard deduction, would save absolutely nothing.

Sorry about that.

UPDATE: See the comments for some further clarifications from Dick Lavine of the CPPP.

Posted by Charles Kuffner on July 01, 2004 to Show Business for Ugly People | TrackBack
Comments

If it passes, it would eliminate one objection to shifting our tax burden away from property taxes and more toward sales taxes, as was discussed during the recent special session on school finance.

However, if sales taxes are more regressive than property taxes, as seems likely, then such a shift would still make Texas' tax structure more regressive overall, so it still sounds like a bad idea to me.

An unmentioned side effect of making sales taxes deductible is that it'd make them even more regressive, since the higher your tax bracket, the lower your net sales tax rate! A fairer approach would be to provide an income tax credit of, say, 10% of sales taxes paid. But don't expect such an idea to emerge from the DeLay-controlled House any time soon.

Incidentally, Strayhorn claims that "An average Texas family that itemizes tax deductions would see an extra $310 each year...." [Emphasis added.] CPPP doesn't "dispute" that; they merely emphasize the important point that most Texas families don't fall into that category.

I still have one question about the House-passed provision: does it apply to all states, or only to those states with no state or local income taxes? If the latter, it would seem to discriminate against those states with low income taxes, since they'd be better off whether they raised their income tax and eliminated their sales tax or vice versa.

Posted by: Mathwiz on July 1, 2004 3:58 PM

Incidentally, Strayhorn claims that "An average Texas family that itemizes tax deductions would see an extra $310 each year...." [Emphasis added.] CPPP doesn't "dispute" that; they merely emphasize the important point that most Texas families don't fall into that category.

Correction noted. Thanks!

I still have one question about the House-passed provision: does it apply to all states, or only to those states with no state or local income taxes?

Only to states with no state income tax. I believe that covers a half-dozen or so states, and I believe reps from each of those states favored this bill.

Posted by: Charles Kuffner on July 1, 2004 4:28 PM

This is fascinating. The two things that occur to me immediately are

1) Isn't the accounting going to be terrible for tracking your sales tax during the year? Surely you would need to keep a receipt for every taxable purchase and add them all up to achieve the Strayhorn savings. Since the only people who are likely to do that are the ones with accountants, it doesn't seem like people are really going to see any significant savings in those years in which they don't buy a car or some other big-ticket item.

2) When we lived in Austin sales tax was, IIRC, 8.25%. Now we live in PA and sales tax is (Hmmm, I don't know, but I have a receipt) $0.33 on $4.65, which is 7.09%. So with rounding, I suppose it is either 7% or 7.25%, but we have state and municipal income tax as well. Somehow we don't seem to be saving much in sales tax over TX, but are apparently excluded from a sales tax writeoff. Since only about 5 states don't have income tax, this proposal seems a little out of whack.

Posted by: David on July 1, 2004 4:34 PM

1) The provision would allow taxpayers to choose whether to deduct state sales taxes or state income taxes from their federal taxable income. Because the income tax would almost always be the greater deduction in states that levy income taxes, the proposal is designed particularly to benefit taxpayers who itemize deductions in the seven states that do not have income taxes, but do have sales taxes -- and to gain support for the corporate tax bill from members of Congress from those states. Those states are Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

2) The deduction would be calculated from a table prepared by the IRS. The old deduction, which was repealed in 1986, also allowed you to save your receipts to prove a higher amount, but the new proposal does not permit this.

For a detailed analysis, go the the Center on Budget and Policy Priorities: http://www.cbpp.org/6-8-04tax.htm

Posted by: Dick Lavine on July 1, 2004 5:22 PM

To hell with income tax! Every communist, Marxist, socialist, IRS agents, and supporters of income tax should buy a copy of Karl Marx's Communist Manifesto and shove it up their buttocks! The income tax must be abolished NOW! The federal government officials have used income tax to oppress fellow Americans, suppress dissent, eliminate their opponents, establish poverty, and destroy our freedoms and our property. Ever since income tax was "legalized" by 16th Amendment, Democrats and Republicans in Washington D.C. have engaged in racketeering, extortion, robbery, fraud, and grand theft against we the people.

Every Americans should boycott income taxes once and for all. We should dump income tax forms into the ocean. Also, we should never report how much money we earn to government officials; it is none of the government official's business anyway!! And we should never sign any paper that forces us to report our earnings! Finally, every American should send a strong message to IRS agents, Democrats, Republican socialists, and Marxists by desecrating the British "Union Jack" flag and Soviet "Sickle and Hammer" flag and burning the portraits of King George III, Ho Chi Minh, Josef Stalin, Vladimir Lenin, and Karl Marx on every April 15 and July 4.

Any IRS agents who want to violate our life, liberty, and property should go to Britain and kiss Charles the First's buttocks and kiss King George III's buttocks.

Posted by: Nikolai Helamov on November 4, 2004 3:50 PM

I heard there was some kind of sign up sheet to do away with income tax. They would just apply it to what we buy and we would get what our total income is. Is this true and if so, where can I sgn this?

Posted by: Matt on November 7, 2005 12:13 AM