A Sales Tax Deduction Would Largely Benefit High-income Taxpayers and Carry a High Cost

Publication Date: July 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Iris J. Lav

Research Area: Banking and finance

Keywords: Tax code; Fiscal future; Economic projections; Federal budget

Type: Report

Abstract:

The House passed version of the corporate FISC/ETI tax bill includes a provision that would enable residents of states without income taxes to take a deduction for sales taxes paid. This would partially restore a tax break that was eliminated in the 1986 tax reform act under President Reagan.

The House provision would allow taxpayers in all states to choose whether to deduct state sales taxes or state income taxes from their federal taxable income. Because the income tax would almost always be the greater deduction in states that levy income taxes, the proposal is designed particularly to benefit taxpayers who itemize deductions in the seven states that do not have broad-based income taxes but do levy sales taxes — and to gain support for the corporate tax bill from members of Congress from those states. Those states are Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

This proposal is costly and would exacerbate a number of inequities in federal and states taxes.