If Washington residents want to deduct state and local sales taxes next year, they must also subsidize NASCAR and Kentucky thoroughbreds. It’s the classic congressional deal where principled policy is packaged with horse apples to disguise the smell.
Washington is among eight states that must rely on Congress to periodically grant a tax deduction that residents of the other 42 states never have to sweat. To build the necessary political support, this extension is bundled with about 50 other tax breaks of varying merits, and the entire package gets an up-or-down vote.
And so it goes this year, as the Senate opened floor debate this week for “tax extenders” that expired in December but can still be revived retroactively.
To be clear, we have strongly supported the sales tax deduction every time it’s come up for a vote. But as a matter of fairness, it should be made permanent, not held back as a sweetener for dubious deductions.
In states that have an income tax, residents can deduct the total on their federal returns. In states that don’t, residents can deduct state and local sales taxes, as long as Congress adopts periodic extensions of this break, that is. For 18 years, people in the non-income-tax states were out of luck, because Congress dropped the sales tax deduction as part of the 1986 overhaul of the federal tax code. Congress revived the break in 2004, but made it subject to regular review.
It’s been extended ever since, thanks to the advocacy of representatives and senators in the eight states without an income tax. U.S. Sen. Maria Cantwell has fought the battle continually and has sought a permanent deduction. But she and her colleagues are outnumbered.
Instead, Congress lumps this with other breaks, such as a giveaway to Puerto Rico rum makers, to woo more votes and, perhaps, even some campaign contributions. This deal-making cripples chances for substantive tax reform.
If the sales tax deduction alone were to pass, it would cost the Treasury about $16 billion annually. But the tax extender package has two-year price tag of $85 billion, with no provision to cut spending or raise revenue to cover the cost. That’s a big bite for budget hawks. On the other hand, if Congress voted on the state income tax deduction every year, it would have to justify forgoing $240 billion.
Tax extenders are popular with Congress because the costs are invisible in budgetary forecasts. Long-term outlooks assume tax breaks will expire, but some have been renewed over and over – to nobody’s surprise. Extenders are the way to hand out favors now that earmarks have been shamed.
The notion that tax breaks are sacrosanct is familiar to budget writers in Olympia, where ending a deduction requires a two-thirds majority (thanks to a ballot initiative), while spending cuts need only majority support. As a result, even the shakiest deductions are safe.
The sensible approach to budgeting would be to weigh each deduction on the merits. The sales tax deduction passes the test. Congress should make it permanent, and rein in the horse trading.
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