Weekly Column of U.S. Senator Lamar Alexander November 4, 2007

“Tax Fairness for Tennessee”

Posted on November 4, 2007

Last week, I joined with several of my fellow Senators in introducing legislation to make the state and local sales tax deduction permanent. As a former Governor, I know states and cities have many different ways to raise revenues to support the services they provide. States usually provide about half the funding for elementary and secondary education. They are the principal funders of community colleges and universities. They pay for a good part of the roads and all the prisons. So most States have pretty big bills to pay, and they have a variety of taxes to raise the money to pay for those bills. Some states levy an income tax. Some use a sales tax. Some use a combination of the two. In Tennessee, we have had a pretty good debate about this issue, and we have decided we don't want an income tax. I looked at the options myself when I was Governor in the mid-1980s and considered an income tax for Tennessee but decided it would be the wrong thing to do, to put a tax on work. We have done pretty well with low taxes and without an income tax. Americans who pay state and local income taxes are able to claim a deduction for those amounts on their federal income tax returns, and, before 1986, taxpayers also had the ability to claim a deduction on their state and local sales taxes. But this deduction for state and local sales taxes was repealed in 1986. Congress temporarily reinstated that state and local sales tax deduction for 2004 and 2005 and then extended it again for 2006 and 2007. I was a part of the effort in the U.S. Senate to do that. It was a bipartisan effort. So taxpayers today who itemize on their federal income tax returns can deduct either state and local sales taxes or state income taxes. Yet, unless Congress takes further action, this sales tax deduction will expire at the end of December of this year. This is not about cutting taxes; this is about tax fairness. It is not fair for states without income taxes to subsidize tax deductions for states with income taxes. Why is it our business in Washington, DC, to prefer an income tax instead of a sales tax in the various states? Nine States, including Tennessee, do not impose a state income tax. They are Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming -- states from across the country, some big states, some middle-size states, some of our smallest states. These states shouldn't be treated differently. If Congress doesn't act, they will be by the end of December 2007. I spoke on the Senate floor this week to urge my colleagues to make permanent the deduction for state and local sales tax. At the very least, we need to temporarily extend the deduction, as we have done in the last two Congresses, before it expires on December 31 so that taxpayers in those nine states are not forced to pay an unfair share of taxes. We are talking about large amounts of money. Nearly 600,000 Tennesseans itemized their taxes and claimed their state and local sales tax deduction last year. This benefit put an average of $400 in the pockets of hard-working Tennesseans. Therefore, losing this deduction would cost Tennesseans nearly a quarter of a billion dollars right out of their pockets each year. Extending the state and local sales tax deduction is the fair thing to do, and it is the right thing to do.