Posted on February 27, 2003
WASHINGTON — U.S. Senators Bill Frist (R-TN) and Lamar Alexander (R-TN) today announced their support for legislation that would allow Tennesseans to deduct the state sales tax they pay from their federal tax returns. Both Senators are cosponsors of the bill. "Ensuring fairness in our tax system is the primary reason we're introducing this legislation today," said Frist. "Tennesseans should not be unfairly penalized at tax time simply because Tennessee does not have a state income tax on wages. This bill would fix that inequity in the tax code so that all taxpayers are treated equally." "I am pleased to co-sponsor this piece of legislation," said Alexander. "I strongly support giving Tennesseans the right to deduct their sales tax payments from their federal income tax bill. This is a matter of simple fairness since citizens in other states are allowed to deduct their state income tax payments." Under current law, individuals are 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 are placed at a disadvantage simply because these states choose to raise revenue primarily through a sales tax instead of an income tax. Approximately 20 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 allow taxpayers to deduct either their state sales taxes or their state income taxes on their federal tax returns, but not both. This would restore equity for residents of the states that do not have a state income tax on wages. The legislation was introduced by Senators Kay Bailey Hutchison (R-TX) and Maria Cantwell (D-WA).