Sales tax deduction becomes permanent

WASHINGTON – Congress finally made a tax break permanent Wednesday that helps residents of states without an income tax by enabling them to deduct state and local sales taxes on federal returns.

The issue has been a rallying cry of “tax equity” for some lawmakers, especially Senate Majority Leader Harry Reid, D-Nev., who included the provision in the federal budget conference report for fiscal 2010, which the Senate approved Wednesday 53-43 and the House passed 233-193.

Washington, Florida, Nevada, Texas 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 bill passed largely along party lines, with Republicans opposed to it for excessive spending.

Congress in 2004 approved the provision allowing taxpayers who itemize to deduct either their state income tax or their state and local sales tax expenses, but it has been extended on a one- or two-year basis ever since. It was scheduled to expire after the 2009 tax year. (Deduction of sales taxes was eliminated in the Tax Reform Act of 1986.)

Reid’s amendment creates a deficit-neutral reserve fund that would offset the cost to the U.S. Treasury by cutting other, unspecified programs.

The annual cost to the federal government from the deduction is about $3 billion a year.