Seven States Win Federal Tax-Break Extension

Taxpayers in seven states without income taxes are poised to keep a break on their federal tax bill, thanks to the outgoing Republican-controlled Congress.

A tax package that Congress approved just before wrapping up Dec. 9 would allow citizens in Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming to continue to deduct sales taxes from their federal taxable income. The sales-tax deduction is intended to assure equal treatment with citizens in 41 states who can deduct state and local income taxes when they compute their federal tax liability.

President Bush is expected to sign the bill.

The tax break for the seven states expired Dec. 31, 2005, but the extension would be retroactive to cover 2006. The provision expires at the end of 2007, but some budget experts speculate that, like other tax cuts, this one would be routinely extended.

Nine states impose no income taxes, but Alaska and New Hampshire also have no state sales taxes so are unaffected.

Internal Revenue Service figures show 8.6 million taxpayers claimed the state and local sales-tax deduction in 2004, according to U.S. Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee. In a September memo, Grassley said a delay in extending the break would have caused “hardship, tax-compliance problems and confusion” for millions of taxpayers.

Technically, the measure allows taxpayers in all states to choose between deducting state sales taxes or state income taxes on their federal returns. But a person typically pays more in income taxes than sales taxes, so the sales-tax deduction is little used outside of states without income taxes.

The exact amount of sales taxes a taxpayer can deduct is determined by a formula from the IRS.

The Center on Budget and Policy Priorities , a group that studies policies affecting the poor, said the sales-tax deduction largely helps only taxpayers who itemize their federal tax returns. This group tends to be financially well-off, the center said.

In 2004, only 8 percent of Texas taxpayers with incomes under $50,000 claimed the deduction, compared with 66 percent of taxpayers with incomes above $100,000. Among those who do claim it, the credit is more valuable to the higher-income taxpayers as well.

National Taxpayers Union spokesman Pete Sepp praised the action. “Our position on the sales-tax deduction is that residents in states whose leaders have been wise enough to avoid a state-level income tax shouldn’t have to suffer under the federal tax code,” he said.

As part of the same sweeping legislation, Congress also voted to allow four Gulf Coast states to begin receiving royalties from oil companies drilling off their coasts. Alabama, Louisiana, Mississippi and Texas stand to gain millions of dollars from the arrangement, which opens up 8 million more acres for new off-shore drilling.

Louisiana Gov. Kathleen Blanco (D), whose state still is rebuilding from Hurricane Katrina in 2005, said in a statement that the revenue “will provide the foundation of financial support we need to ultimately complete what will be the largest public works project in our nation’s history.”

In September, Louisiana voters passed a constitutional amendment ensuring that the state’s share of the funds would go toward preserving its coastline and building levees.