New bill would allow for deduction of state taxes

WASHINGTON – People could deduct either state sales or income taxes from their federal income tax under wide-ranging legislation overhauling corporate levies that House Republicans introduced on Friday.

The core of the $34 billion, 10-year measure is a revamping of corporate tax laws in an effort to end tariffs European countries have slapped on U.S. goods in a trade dispute.

But in a hunt for votes by the bill’s author, House Ways and Means Committee Chairman Bill Thomas, R-Calif., the measure mushroomed into an array of legislative prizes. Included was everything from a $10 billion bailout for tobacco farmers to provisions helping producers of bows and arrows, sonar fishing gear, and tackle boxes.

People can currently deduct state income taxes from their federal taxes, but not state sales taxes. But for 2004 and 2005 – at a cost to the U.S. Treasury of $3.6 billion – the bill would let taxpayers deduct whichever local levy is higher.

While that could help residents everywhere, it would be most beneficial in Florida, Nevada, South Dakota, Texas, Washington and Wyoming, which have sales taxes but no income taxes. In addition, Tennesseans pay a sales tax but only owe state income taxes on the dividends and interest they earn.

Taxpayers would choose between using figures from an Internal Revenue Service table of average sales tax deductions, or providing their actual sales tax receipts.

House Majority Leader Tom DeLay, R-Texas, was a driving force in inserting the sales tax provision into the bill. Thomas is hoping the language will attract votes from lawmakers of both parties from those states.

“This bill is an opportunity to pile on the momentum for economic growth, and I am proud to support it,” DeLay said in a statement.

Rep. Kevin Brady, R-Texas, who has pushed for deductability of state sales taxes for years, said the provision would save Texas taxpayers $921 million.

Not to be outdone, Rep. Martin Frost, D-Texas, who faces a tough re-election battle, said he supported the sales tax deduction and accused DeLay of dragging his feet.

“I am glad the majority leader has finally decided to follow the will of the people,” Frost said.

He also said that as DeLay and other GOP leaders fight to make President Bush’s tax cuts permanent, “it strikes me as odd that DeLay and his followers would only want a temporary tax cut for Texans.” The sales tax provision would cover only two years.

The Ways and Means panel plans to vote on the legislation next week, with debate by the full House a week later.

The Senate approved a $170 billion version of the bill last month. It lacked the provision on state sales taxes.