Senate Bill Aims To Make State Sales Tax Deduction Permanent

by Mike Godfrey, Tax-News.com, Washington

29 October 2007

US Senators Lamar Alexander (R-TN) and Bob Corker (R-TN) have joined Sen. Kay Bailey Hutchison (R-TX) in reintroducing a bill to make the state sales tax deduction permanent.

“This is a simple matter of tax fairness and common sense,” explained Corker. “Tennessee is fortunate not to have a state income tax, but Tennesseans should not be penalized for this on their federal tax returns. Making the state sales tax deduction permanent keeps more money in the pockets of hard-working families and it’s the right thing to do.”

Alexander and Corker said that losing this deduction – which is set to expire at the end of this year if Congress does not act – would cost Tennesseans more than $200 million.

Tennesseans don’t pay a state income tax on wages. In order to be treated fairly with other states whose residents are allowed to deduct their state income taxes from their federal income taxes, Alexander and Corker said Tennesseans should be able to deduct their sales tax payments.

Nationwide, state, and local sales tax collections account for about a quarter of total state tax revenue, which is about the same as property taxes and income taxes. But the current provision allowing Americans to deduct state and local sales taxes from their federal income tax return is not permanent.

Under the leadership of Senator Alexander and Senator Bill Frist (R-TN), Congress passed a tax relief bill in 2004 permitting the sales tax deduction for two years. Congress extended the deduction for another two years in 2005.

Tennessee is not the only state that would be unfairly impacted by the expiration of the sales tax deduction. Seven states – Alaska, Texas, Florida, Wyoming, Washington, South Dakota, and Nevada – do not have a state income tax. Two states – Tennessee and New Hampshire – only impose an income tax on interest and dividends, but not wages.

On January 4, 2007, the first day of the 110th Congress, Alexander and Corker joined Hutchison in introducing legislation to provide a permanent state sales tax deduction. The Senators reintroduced this bill on October 25, in the hope of getting quicker action on the Senate floor.

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