income tax deduction for state sales taxes
On April 16, the U.S. House of Representatives passed H.R. 622, a bill designed to make the federal income tax deduction for state sales taxes permanent. If you itemize deductions on your annual Form 1040, you are probably familiar with this provision of the tax code. Basically, you are allowed to deduct several types of state and local taxes from your federal taxable income. This includes any “general sales tax” or “compensating use tax.” The amount of the deduction is based either on your actual receipts showing the sales tax you paid, or an estimate based on a table published by the Internal Revenue Service.
The sales tax deduction, however, automatically expired on December 31, 2014. This means as the law currently stands, you will not be allowed to deduct sales taxes paid in 2015 on your 2016 returns. H.R. 622 would reinstate the sales tax deduction without setting a new automatic expiration date, thus making the deduction “permanent.”
Tax fairness or a deficit increase?
The sales tax deduction is elective; that is, you may deduct either your state income tax or sales tax, but not both. Nine states do not collect their own income tax, notably Florida and Texas. This means if you live in one of those states, you are out of luck if Congress does not extend or make permanent the sales tax deduction. Consequently, supporters of H.R. 622 argue their bill is about simple fairness: There is no reason to place taxpayers in states without an income tax at a disadvantage.
But opponents of H.R. 622 argued fairness may come at too high a price. Democratic members of the House Ways & Means Committee argued in a dissenting report the permanent extension of the sales tax deduction “would add more than $224 billion to the deficit.” The Democrats said there should at least be a “revenue offset” to compensate for the projected loss of revenue. They also complained the Republican majority failed to consider extending other tax deductions and credits supported by Democratic members.
Still, 34 Democrats joined all but one Republican in approving H.R. 622, which passed by a vote of 272 – 152. The bill must still be approved by the Senate and signed into law by President Barack Obama.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info