The sales tax deduction that Washingtonians have come to expect on their federal returns expires with the 2009 tax year, but Congress can still adopt a one-year extension that can be applied to the current year retroactively. This is the likelier, albeit messier, outcome. What would be better is a permanent solution, so that the seven states without an income tax can be treated fairly without waging an annual battle.
The U.S. House of Representatives adopted a host of “tax extenders,” including the sales tax deduction, in early December. But the U.S. Senate, with health care and other issues at the forefront, didn’t get around to scheduling a vote.
It took nearly 20 years for the delegations from Washington, Texas, Nevada, Tennessee, Wyoming, South Dakota and Florida to defeat the unfairness that was introduced into the tax code in 1986 when the deductibility of sales tax on federal forms was eliminated. State income tax remains deductible, which punishes states without such a tax.
The seven states achieved a breakthrough in 2004, but the deductibility of sales tax has only been granted on a year-to-year basis. While the inequity is obvious, members of Congress from the other 43 states have no incentive to offer a permanent solution, because it means less government revenue overall. The extension has been granted three times since 2004.
One of the hold-ups this year is the budgeting principle known as “pay-go.” Congress must pay for the deductions by either cutting spending or raising funds by a corresponding amount. This budget discipline is laudable, because it ends the irresponsible practice of increasing government spending by merely adding to the deficit.
To pay for this year’s extension, the House bill would change the tax treatment of private equity managers. Currently, they are taxed at the capital gains rate of 15 percent, rather than the income tax rate, which can reach nearly 40 percent.
We’re not enthusiastic about raising taxes on potential jobs producers, but the state stands to gain more with the sales tax deduction. The state’s Economic and Revenue Forecast Council claims that the estimated $500 million in deductions for Washingtonians supports 2,000 to 3,000 jobs and that the average taxpayer who itemizes deductions would get back more than $500.
The state desperately needs whatever stimulative dollars it can secure.
Beyond this bill, Congress ought to find a way to permanently enshrine the sales tax deduction for the same reason it does temporarily. It’s fair.