Renewing the Federal Sales Tax Deduction

Today, during a Senate Finance Committee hearing, U.S. Senator Maria Cantwell called for legislation to 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 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.

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 Sen. Cantwell successfully restored the deduction. But the extension was never made permanent.

Click here to watch a video of Sen. Cantwell speaking at today’s hearing.

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.

Sen. Cantwell called for an extension of the deduction in order to provide certainty for Washington state residents who are planning their 2012 annual budgets. Taxpayers in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming also benefit from this deduction.

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 . . . that rely on a sales tax for their revenue base as opposed to those who rely on an income tax.”.