Washington State Sales Tax Deduction Dropped Again from U.S. Senate Bill

Dropped from the US Senate Bill passed last Thursday to reduce the alternative minimum tax that would have affected millions of taxpayers, was a provision that allows Washington State taxpayers to deduct their sales tax from their Federal income tax. Washington taxpayers will still be able to deduct 2007 sales taxes but not their 2008 sales taxes, because the current deduction will expire this year.

“As the senators wrangled over the AMT on Thursday, they dropped a provision that would allow residents of Washington and seven other states to continue deducting their sales taxes from their federal income tax.
Without that provision, residents will be able to deduct sales taxes when they file their 2007 federal income taxes in April. But then the tax deduction would expire.
Sens. Patty Murray and Maria Cantwell, both Democrats, and Rep. Brian Baird, D-Vancouver, had been pushing bills to make the sales-tax deduction permanent, or at least extend it two more years.
Lawmakers from Washington and the seven other states with sales-tax deductions will try to pass a quick fix later this month or in January, a spokeswoman for Cantwell said.”

We’re not talking peanuts here. An analysis released by Senator Cantwell’s and Representative Brian Baird’s office notes that:

“The Congressional Research Service estimates that Washington state taxpayers who itemize and who claim the sales tax deduction will realize tax savings of more than $557 million.[iv] In 2005, 37 percent of the nearly three million tax filers in Washington state chose to itemize, and 83 percent of those itemizers claimed the state sales tax deduction.[v] That year, the $2 billion that Washington state taxpayers claimed in tax deductions translated into $557 million in tax savings that went right into the pockets of Washington state residents. Congressional Research Service estimates indicate that each Washington state taxpayer who used the state sales tax deduction saved an average of $600 in 2005.”

The fact is that states which have a state income tax can deduct this on their Federal income tax. Washington state has no income tax. As Cantwell’s office notes:

“In most states, taxpayers who claim itemized deductions on their federal income tax returns can claim a deduction for state income taxes paid. The purpose of this deduction is to prevent the double taxation of funds that are used to finance state services. However, from 1986 until 2004, residents of eight states that have no income tax but which finance their state services using a sales tax, were denied a Federal deduction for these state taxes. In 2004, Congress passed legislation to temporarily restore the deduction for state and local sales tax, thus restoring parity in the federal Income tax code for residents in those states without an income tax. Unless legislation is passed to extend this deduction, it will expire at the end of 2007.” …
“Without the state sales tax deduction, non-income tax states would be able to deduct only 36.6 percent of the state and local taxes they pay, all of which comes from property taxes. States with an income tax, by comparison, would be able to deduct 56.1 percent.[vi] This means that taxpayers who file in states with an income tax can expect to save substantially more than those who reside in the states without state income taxes. In 2004, Deductions from state and local income tax claimed on federal income tax forms totaled $202.3 billion.[vii] “

If Cantwell, Murray, Baird and the rest of the Congressional delegation are not successful in re-enacting the state sales tax deduction on Federal income tax returns for next year, the overall tax burden on Washington taxpayers will go up.

Of course this would increase citizen pressure for tax reform in Washington state. A state income tax coupled with a reduction in sales taxes and property taxes would both produce a less regressive state tax system and also allow for the ability of Washington State taxpayers to deduct their state income tax from their Federal income tax.

A state income tax is a fairer tax than sales taxes and property taxes which you have to pay whether you are working or not, whether you are retired or not and whether you have any income or not. But you only pay an income tax if you have income.

see also: Washington State Income Tax Makes Sense