Senate passes state sales tax deduction

WASHINGTON – Congress gave final approval Monday to legislation that could save Washington residents roughly $500 annually on their federal tax returns by making state sales taxes deductible again after 18 years.

The sales tax provision was included in a $140 billion corporate tax bill that passed the Senate 69-17. The House passed the measure late last week. Even though the White House has expressed some misgivings about the cost of the overall legislation, Senate sponsors say they expect President Bush to sign it.

Washington state’s two Democratic senators said the tax break for residents of Washington and six other states were long overdue.

“For years, the federal government has unfairly penalized all of us who pay taxes in Washington state,” said Sen. Patty Murray, D-Wash., after the Senate voted. “Today, we’ve righted that injustice.”

Murray, along with the state’s other senator, Maria Cantwell, said the tax break should also provide a boost to the state’s economy.

“This relief will grant tax fairness to Washington state families and is a shot in the arm to our local economy,” said Cantwell.

Cantwell’s office said the Washington state Economic and Revenue Forecast Council has estimated the new deduction could pump enough money into the state’s economy to create 2,000 to 3,000 additional jobs.

Washington taxpayers should potentially save up to $541 million annually on their federal taxes, or an average of between $519 and $575 per itemized tax return. Under the legislation, taxpayers could use a standard table provided by the Internal Revenue Service to calculate how much sales tax they can deduct, or save their receipts and file an itemized return.

The tax break is temporary, lasting only two years. But backers said they would work to make it permanent.

Under current law, taxpayers can deduct the state income tax they paid when filing federal returns. But when Congress simplified the federal tax code in 1986, it dropped the deduction for state sales taxes.

Seven states — Washington, Texas, Tennessee, South Dakota, Florida, Nevada and Wyoming — rely solely on sales taxes. Taxpayers in states with both a sales tax and an income tax can now decide which they want to deduct.

“People said this would never happen,” said Rep. Brian Baird, D-Wash., one of the leaders in the House to restore state sales tax deductions. “Well it did. On April 15 when people fill out their federal tax forms, they won’t have to put zero on the line for state tax deductions.”

Baird said that while $500 might not sound like a lot, “it’s a month’s worth of groceries, it’s a couple of semesters of college textbooks, it can make a difference when people are struggling to pay their heating bills or for their prescription drugs.”

Washington Rep. George Nethercutt, the Republican challenging Murray in the November election, said restoring sales tax deductions was long overdue.

“We are returning fairness to the tax code for Washingtonians after 18 years of inequity,” Nethercutt.

Baird said the corporate tax bill provided an opportunity for backers of sales tax deductions to attach their provision to must-pass legislation.

“Things lined up for us this time,” he said.

The tax bill originally began as more modest legislation, designed to end a $5 billion annual subsidy for U.S. exports the European Union had challenged before the World Trade Organization. The WTO eventually ruled the export tax break was illegal under international trading rules and allowed the Europeans to impose punitive tariffs. The Europeans slapped tariffs on 1,600 U.S. exports. The tariffs have reached 12 percent and can grow 1 percentage point a month.

Both Boeing and Microsoft had benefited from the export tax break, each saving about $200 million annually. The corporate tax measure helps partially cushion Boeing and Microsoft from the removal of the export tax break.

Backers of the legislation said it would not add to the federal deficit because an equal amount of money is raised by eliminating tax shelters, increasing some customs fees and eliminating previous tax breaks.