Extension of sales tax deduction in limbo

WASHINGTON – Congress is rapidly running out of time to extend a tax break that has saved residents of eight states – including Washington – billions of dollars on their federal returns, says the chairman of the Senate Finance Committee.

The Internal Revenue Service needs to submit this year’s tax forms to the printers by Oct. 15. Congress is set to adjourn in roughly two weeks and, at the moment, there isn’t even a bill moving forward that would again allow the residents of the eight states to deduct what they pay in state and local sales taxes on their federal returns.

The tax break expired at the beginning of 2006. If Congress does act to extend the sales tax deduction, it would be retroactive to cover the entire year.

Overall, the staff of the Senate Finance Committee found that 8.6 million taxpayers in Alaska, Nevada, Florida, South Dakota, Tennessee, Texas, Washington and Wyoming claimed the state and local sales tax deduction in 2004.

After checking with the IRS, Sen. Chuck Grassley, R-Iowa, chairman of the finance committee, said in a memo that a legislative delay would cause “hardship, tax compliance problems and confusion” for taxpayers.

“The tax code is complicated enough,” Grassley said. “Millions of American families and individual taxpayers have a right to expect us to act carefully and not unduly complicate their lives.”

But even as Grassley and others sought to ratchet up the pressure, Senate Republican leaders last week twice rebuffed Democratic efforts to bring to a vote a measure that would extend the sales tax deduction, along with a deduction for college tuition and a research-and-development tax credit for business.

“The state sales tax deduction is a simple matter of tax fairness,” said Sen. Maria Cantwell, D-Wash. “An overwhelming majority of the Senate is on record in favor of these measures and they should be passed without delay on their own merits, not tangled up in other controversial legislation that threatens passage.”

Senate Majority Leader Bill Frist, R-Tenn., continued to insist publicly that the sales tax deduction and other so-called tax extenders will remain part of a massive money package that would cut the estate tax and raise the minimum wage. The measure also includes a $900 million tax break for Washington state-based Weyerhaeuser and other large timber companies.

Republicans hoped that by including the sales tax deduction and timber tax break they could pick up support from Cantwell and Washington’s other senator, Democrat Patty Murray. But just before the August recess, the tax bill was defeated, with Murray and Cantwell voting against it.

The deal breaker for the two Washington senators was a provision that could have cost more than 100,000 waiters, waitresses and other tip-earners millions of dollars in earnings.

While Frist is reportedly negotiating with other senators about whether to let a separate tax-extenders bill come to the floor in the next two weeks, the legislative agenda is already crowded with issues ranging from immigration to how the United States will treat prisoners in the war on terror.

Democrats remained critical.

“Instead of holding such important tax provisions hostage to ill-fated estate-tax giveaways to multimillionaires, Republicans should join Democrats to pass these measures today,” said Senate Minority Leader Harry Reid of Nevada.

In the House of Representatives, Rep. Bill Thomas, R-Calif., chairman of the tax-writing Ways and Means Committee, has said he won’t be stampeded by IRS bureaucrats and the Oct. 15 deadline and that he still hoped to move an estate-tax package that would include the tax-extenders.

Rep. Brian Baird, D-Wash., who’s been working on the sales tax deduction since he was first elected in 1998, said he, too, thought the IRS could “deal with” congressional renewal of the sales tax deduction even if it came after Oct. 15. Congress may return after the November election.

“They could use last year’s forms and last year’s schedules,” he said. “I don’t know that we are out of time.”

Even so, Baird said he was becoming frustrated by Republican refusals to pass a simple tax-extenders package that included the sales tax deduction.

“The average taxpayer is thinking, ‘Quit screwing around,’ ” Baird said. “This political posturing and gamesmanship is hurting the public.”

For years, residents of the eight states that have only a sales tax were able to deduct their state and local sales taxes from their federal tax bills. But when Congress simplified the tax code in 1986, it dropped the sales tax deduction. Residents of states that have an income tax were allowed to continue deducting it on their federal returns.

Congress reinstated the sales tax deduction in 2004, but for only two years.