Alexander, Frist Hail Legislation Making State Sales Tax Deductibility Permanent

Posted on January 24, 2005

WASHINGTON - U.S. Senators Bill Frist (R-TN) and Lamar Alexander (R-TN) today joined Senator Kay Bailey Hutchison (R-TX) in introducing a bill to make the state sales tax deduction permanent. "State sales tax deductibility is an issue of fairness for all Tennesseans," said Frist. "Since arriving in the Senate, I've been determined to restore equity and fairness to America's tax code. This legislation builds off our success in the 108th Congress, and would rightly provide nearly one-quarter of Tennesseans with significant tax savings. I'm proud to be a co-sponsor of this bill, and look forward to making the current law permanent, so Tennessee's families have the certainty they need to plan their financial futures." "Making state sales taxes deductible will put an average of $470 in the pockets of nearly 600,000 Tennesseans who itemize their taxes this year," said Alexander. "Doing so permanently makes good economic sense, it's just good common sense, and it's the fair thing to do. Nationwide, state and local sales tax collections account for about a quarter of total state tax revenue, which is about the same as property taxes and income taxes. The major difference is that people who pay state and local sales taxes can't deduct them from their federal income tax like those who pay property and income taxes can." The bill was introduced today in addition to a list of the GOP's "Top Ten" bills that will be addressed in the 109th Congress. Senators Frist and Alexander are co-sponsors of this legislation, which makes permanent a law passed in the 108th Congress making Tennessee's state sales tax deductible for 2004 and 2005. Before the passage of last year's legislation, individuals were only permitted to deduct state income and property taxes on their federal tax returns. Seven states — Alaska, Texas, Florida, Wyoming, Washington, South Dakota, and Nevada — do not have a state income tax. Two states — Tennessee and New Hampshire — only impose an income tax on interest and dividends, but not wages. Therefore, residents of these states who itemize were placed at a disadvantage simply because these states choose to raise revenue primarily through a sales tax instead of an income tax. Approximately 25 percent of Tennessee taxpayers itemize. Prior to 1986, individuals were permitted to deduct all state and local taxes on their federal tax returns. However, when Congress enacted the 1986 Tax Reform Act, the deduction for state sales taxes was eliminated in exchange for significantly lower federal tax rates. The state income tax deduction was retained at that time. The bill would make permanent the ability for taxpayers to deduct either their state sales taxes or their state income taxes on their federal tax returns. This would restore equity for residents of the states that do not have a state income tax on wages. The two-year extension that is now law means that one-quarter of Tennesseans filing their taxes for 2004 will see an additional $470 in tax savings.