Tax deduction limited - A proposed deduction for sales tax on federal income taxes would apply to people who itemize their deductions. Only one-third of Washington residents do so.

MATTHEW DALY THE ASSOCIATED PRESS
The Olympian

7/12/04

WASHINGTON -- Only one-third of Washington state taxpayers would benefit from a congressional proposal that allows them to deduct sales taxes their federal taxes, according to a study by a Washington, D.C.-based policy group.

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Those who benefit from the plan tend to be high-income earners, the study by the Center on Budget and Policy Priorities said.
The sales tax deduction, contained in a $155 billion tax bill the House passed last month, only benefits tax filers who itemize their federal taxes rather than take a standard deduction.

In Washington, about 34.7 percent of taxpayers itemized in 2001, the study said. Those numbers dropped to 29.9 percent of those who earned below $100,000, and 17.8 percent of those who earned below $50,000. By contrast, more than 90 percent of filers with incomes over $200,000 itemized.

Figures for other states with no income tax -- including Texas, Florida, Nevada, South Dakota, Tennessee and Wyoming -- were similar, the report said.

The net result of the proposal is "to greatly reduce the taxes paid by upper-income taxpayers," the report said, "and to increase the extent to which moderate and middle-income taxpayers shoulder the responsibility for paying for public services."

Rep. George Nethercutt, who has made the sales-tax plan a centerpiece of his campaign for U.S. Senate, called the study flawed. Nethercutt, a Republican, cited a study by the Congressional Research Service indicating that the plan could save Washington state residents as much as $500 million a year. Families who itemize could save an average of $519 to $575 per year, Nethercutt said.

"That's money that would be left in Washington state by those who itemize, and they would have that money to spend or invest or save," he said. "The bottom line is this is going to help job creation and keep money in Washington state that otherwise wouldn't be there. That's why it's so darned important."

Sen. Patty Murray, D-Wash., called sales tax deductibility a step toward tax fairness for the state.

"Unfortunately, as this report details, it's not a cure-all to our economic woes," she said.

Murray accused the Bush administration of "a preoccupation with tax cuts for the rich rather than meaningful tax relief for working people." While supporting the sales tax plan, Murray called on Congress to "put more focus on creating quality, well-paying jobs, providing relief from skyrocketing health care costs, and creating a better climate for businesses in Washington state."

Nethercutt called the study misleading -- even if taken at face value -- because it refers to previous years' tax returns.

"It's a static analysis. Taxpayers are dynamic," he said, predicting that the number of people who itemize would sharply increase if the sales tax plan is approved.

"It may end up being closer to 50 percent or 60 percent. Who knows?" he said.

Nethercutt is so confident of the plan's benefits he has included a special link on his campaign Web site that allows taxpayers to plug in their personal information and estimate what their savings, if any, would be.

The standard federal tax deduction for a married couple filing jointly this year was $9,700; the figure was $7,150 for heads of household and $4,850 for single people. Taxpayers who itemize are generally those who have deductible expenses that add up to more than the standard deduction. The largest deductible expenses tend to be mortgage income payments, property taxes and medical expenses.

Residents of Washington and others states without an income tax were able to deduct sales taxes for many years, but lost that right in 1986 as part of a massive overhaul of federal tax laws.

Despite inclusion of sales tax deductibility, Washington state's House delegation split along party lines for the June 17 vote. All three Republicans voted for it as major tax relief and a blow for tax fairness. All six Democrats voted no, because the provision is for only two years and because the legislation included other tax policies they oppose.

Rep. Brian Baird, D-Wash., who has made deductibility a signature issue for his three terms in Congress, called the GOP bill inadequate.

"I voted against this bill as a way to signal to the Republicans that we need to make this deduction permanent and protect American jobs," he said.

The Senate has passed a similar bill without the sales tax provision. A conference committee will try to resolve differences.