WASHINGTON – The Senate fulfilled a dream for taxpayers in several states without income taxes by making permanent the sales tax deductions on their federal income tax.
Senate Majority Leader Harry Reid, D-Nev., led the effort on the Senate floor with an amendment to the federal budget bill for fiscal 2010. The amendment, which passed by voice vote and still must be agreed to by the House, makes good on the reinstitution of the deduction for taxpayers who itemize by then-House Majority Leader Tom DeLay, R-Texas, in 2004. The deduction has been extended on a piecemeal basis ever since.
Florida, Nevada, Texas, Washington and Wyoming don’t collect income taxes, and Alaska levies neither income nor sales taxes. In Tennessee, income taxes are limited to interest and dividend income.
The provision – which allows taxpayers who itemize to deduct either their state income tax or their state and local sales tax expenses – is currently scheduled to expire after the 2009 tax year. Reid’s amendment would create a deficit-neutral reserve fund that would offset the cost to the U.S. Treasury by cutting other programs.
“Every little bit helps when people are trying to stay in their homes and put food on the table for their families,” Reid said when he introduced the amendment. “This sales tax deduction is vital to many Nevadans, especially because they cannot deduct a state income tax on their federal return like residents of many other states.”
Reid worked with Sen. Kay Bailey Hutchison, R-Texas, who had an amendment as well. Hutchison’s didn’t include a reserve fund, but simply made permanent the state and local sales tax deduction.
“This is an important one because it is a matter of equity,” Hutchison said as she withdrew her amendment in support of Reid’s.
Rep. Kevin Brady, R-Texas, a member of the House Ways and Means Committee who’s been a leader on the issue in the House, said that the annual cost to the federal government from the deduction is about $3 billion a year.
The sales tax deduction was part of the federal tax system until the 1986 Tax Reform Act. As Reid said on the Senate floor, “It took us 22 years before fairness was restored and the deduction was reinstated in 2004.”