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$4 Billion Tax Hike Set to Shake Down States with No Income Tax
This content is provided by the Americans for Tax Reform Foundation.
Taxpayers who itemize their federal income tax returns have the choice to deduct either state and local income tax or state and local sales tax from their gross income. The amount of the sales tax deduction is determined by a taxpayer’s receipts from that taxable year, or else by an IRS table that dictates “standard” sales tax deductions.
The deduction for state and local sales tax is set to expire at the end of calendar year 2012. The deduction for state and local income tax will remain in place.
The state and local sales tax deduction is particularly valuable to residents of the seven states which do not levy an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), for residents of the two states which levy a limited income tax (Tennessee and New Hampshire), and for taxpayers who make large purchases in a given taxable year.
Twenty-seven percent of Washington returns, for example, deduct sales tax from their federal income tax, a move that saved Washingtonians $1.8 million in 2009, for an average deduction of $2,100. Overall, 7% of all federal income tax returns claimed the sales tax deduction, for over $15 billion in tax relief — an average deduction of $1,500.
This is substantial tax relief, and its elimination would result in a massive tax hike on the shoulders of a relatively small number of taxpayers. It would disproportionately punish taxpayers who dwell in states with no income tax and who also itemize their deductions.
Although itemization is used most frequently by higher-income households, 67.3% of middle-income taxpayers (those with AGI between $50,000 and $100,000) itemize their deductions. The tax hike resulting from elimination of the sales tax deduction, then, will cut across all income levels to hit the middle class.
If Congress allows the sales tax deduction to expire, it will allow a geographically arbitrary, $4 billion tax hike on its constituents.
10 Year Cost to Taxpayers
Department of the Treasury: $4.1 billion