Cantwell: Time to End ‘Game’ over Extending State Sales Tax Deduction

Nearly 850,000 Washingtonians Benefit from Deduction, which Provides Tax Fairness to Residents of States without a State Income Tax U.S. Chamber of Commerce: ‘Absolutely Essential that We Extend this Provision’ ***VIDEO AVAILABLE***

WASHINGTON, D.C. – Today, during a Senate Finance Committee hearing, U.S. Senator Maria Cantwell (D-WA) called for Congress to extend the state and local sales tax deduction, which provides tax fairness to Washingtonians and residents of seven other states without an income tax. The deduction expired at the end of 2011 leaving Washingtonians without predictability for the current tax year. Cantwell has led the effort each year to extend the deduction, and she has consistently introduced legislation to make the deduction permanent.

“I’m offended when someone thinks that the sales tax deduction which is about equity for states like Washington, and Florida, and South Dakota and others is somehow special. It’s not special. It was in the tax code for decades,” Cantwell said at today’s hearing. Click here to watch a video of Cantwell speaking at today’s hearing. “And yet every year we have to play this game about whether or not we are going to have the equity that other states have.”

The federal income tax deduction for state and local sales taxes is available for 2011 tax returns but its extension remains unclear for future tax years. This means that as of January 1, 2012, residents in states without a state income tax don’t know if they’ll be able to claim the state sales tax deduction for 2012 qualifying spending.

Cantwell called for an extension of the deduction in order to provide certainty for Washington state residents who are planning their annual budgets. She said of the deduction: “It’s up in the air! So if that’s the case are you going to buy an automobile? Are you going to buy those appliances you thought you were going to buy? Are you going to make those expenditures?”

During the hearing, Caroline L. Harris, Chief Tax Counsel and Director of Tax Policy at the U.S. Chamber of Commerce, testified in support of extending the state and local sales tax deduction. “It is absolutely essential that we extend this provision because it does bring parity between states such as yours that rely on a sales tax for their revenue base as opposed to those who rely on an income tax,” Harris said to Cantwell.

For 2009, the most recent year of published IRS data, nearly 850,000 Washingtonians took advantage of the deduction and reduced their taxable income by over $1.8 billion. The value of the deduction varies depending on individual filing status and tax rate, but the $1.8 billion in deductions translated into $500 million or more staying in the Washington state economy instead of going to the U.S. Treasury. Taxpayers in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming also benefit from this deduction.

The itemized deduction allows taxpayers in states without a state income tax to deduct the state sales taxes they pay in 2011 on their upcoming federal income tax returns. Cantwell fought for and secured an extension of the sales tax deduction in December 2010 – which expired at the end of 2011 – and has consistently argued for a permanent extension to ensure tax fairness and avoid the uncertainty of temporary extensions.

For nearly two decades, Washington taxpayers were penalized because the federal tax code did not allow deduction of state and local sales taxes. That disparity ended in 2004 when Senator Cantwell successfully restored the deduction. For the first time since 1986, taxpayers in Washington and other states that have no state income tax were able to deduct sales taxes from their federal income tax. But the extension was never made permanent, requiring repeated approval by Congress.

Full quality video and audio of Senator Cantwell remarks at today’s hearing available upon request.