Restoration of the IRS Sales Tax Deduction
Should be One of Texas' Main Priorities in CongressThe current discriminatory treatment of Texas taxpayers is taking $701 million out of Texans' pockets and costing our state more than 16,000 jobs.
--Carole Keeton Rylander
Currently, the citizens of Texas and eight other states are discriminated against because they cannot take any tax deduction comparable to the state and local income tax deductions enjoyed by the citizens of 41 other states and the District of Columbia. In an attempt to alleviate this disparity, Comptroller Rylander proposes to restore much of the federal sales and motor vehicle sales tax deductions that citizens of Texas were last able to itemize on their federal income tax returns for the 1986 tax year.
The Comptroller's plan would grant taxpayers in all states the option of deducting either their state and local sales and motor vehicle sales taxes or their state and local individual income taxes on their Form 1040. While such an option would not fully restore the original deduction, which allowed deductions for sales as well as income taxes, it would go a long way to restoring fundamental equity for taxpayers in those states that do not impose income taxes on their residents, and at minimal cost to the federal budget.
Citizens in Nine States Are Denied
Fair and Equitable Tax Treatment
Because They Have No State Income Tax
Alaska New Hampshire* Texas Florida South Dakota Washington Nevada Tennessee* Wyoming * Certain interest and dividend income is taxed.
Source: Carole Keeton Rylander, Texas Comptroller of Public Accounts.
There is already legislation before Congress that closely tracks the Comptroller's plan. Last year, Representative Brian Baird (D-Washington) introduced H.R. 322, and Sen. Fred Thompson (R-Tennessee) introduced a similar bill, S. 291, in the Senate. Both bills would grant taxpayers in all states the option of itemizing a deduction for either their sales (including motor vehicle sales) taxes or income taxes paid, but not for both. Both bills would limit the deduction to a specific amount prescribed in a table (individualized for each state) providing deductible amounts by family size and income group.
Taxpayers, however, would not have the option of deducting actual taxes paid, as they had in 1986 and before. The main difference between the bills is that H.R. 322 refers to state sales taxes, while S. 291 refers to state and local sales taxes. The Senate version also would allow the deduction against the Alternative Minimum Tax. H.R. 322 boasts among its 58 co-sponsors 18 Texans; S. 291 is co-sponsored by both Texas senators.
Sponsors and Co-sponsors of Proposed Federal Legislation that Would Partially Restore the Sales Tax Deduction for Federal Income Tax Purposes
Thompson, Fred (R-Tennessee)
Nine Co-Sponsors, Including Both Texas Senators: Gramm, Phil (R) Hutchison, Kay Bailey (R)
Baird, Brian (D-Washington)
58 Co-Sponsors, Including 18 of Texas' 30 Representatives: Barton, Joe (R) Hall, Ralph (D) Paul, Ron (R) Bentsen, Ken (D) Hinojosa, Ruben (D) Reyes, Silvestre (D) Edwards, Chet (D) Jackson-Lee, Sheila (D) Rodriguez, Ciro (D) Frost, Martin (D) Johnson, Eddie Bernice (D) Sandlin, Max (D) Gonzalez, Charles A. (D) Lampson, Nick (D) Sessions, Pete (R) Green, Gene (D) Ortiz, Solomon (D) Turner, Jim (D) Source: Congressional bill summaries. (Number and identity of co-sponsors is subject to change.)
Texans lost their sales tax deductions in the last-minute deal-making behind the Tax Reform Act of 1986. Before passage of the Tax Reform Act of 1986 (TRA86), all individuals were allowed to take separate income tax deductions for their payments of state and local sales taxes and motor vehicle sales taxes. For the sales tax, they were allowed to deduct either the actual amount paid, or they could use an optional sales tax table that provided deductible amounts for each state (based on its rate and base) by income group and family size. For example, a family of four with an income of $33,000 was allowed to deduct $306 in state sales taxes in Texas, but $508 in Tennessee; and in both instances, taxpayers were allowed to include an additional amount for local taxes paid.
TRA86 was designed to simplify the federal income tax by eliminating many deductions, exemptions and credits while increasing personal exemptions and standard deductions and lowering and compressing tax rates. The deduction of state and local sales taxes was one of the last (and most contentious) items considered by the Senate, but the final efforts to restore at least some vestige of the deduction, led in part by Sen. Phil Gramm, ultimately failed. The argument put forth by members from the states that retained their state and local income tax deduction was that the losses attributable to the repeal of the sales tax deduction would be more than made up for by the increased personal exemption, and that the sales tax deduction only benefited the rich, because lower-income groups are less likely to itemize.
The Comptroller's plan could be put in place for less than 1 percent of the costs of existing state and local tax deductions. The March 26, 2001 cost estimate provided by the Joint Committee on Taxation estimated that H.R. 322 would decrease federal receipts by $23.1 billion over the 10-year period 2002-2011. The annual costs were expected to average $2.0 billion for the first three years, rising incrementally thereafter. Putting the federal cost in perspective, the 1999 cost for the current deduction for state and local income and property taxes was $268.9 billion. As such, reinstatement would produce an increased cost to the federal government of 0.8 percent.
The Comptroller's plan could be put in place with virtually no increase in complexity. Although the sales tax deductions were eliminated in part for reasons of tax simplification,
the proposed legislation before Congress would add only one more line to Schedule A, for those taxpayers electing to itemize on their Form 1040. Even if actual taxes paid were allowed to be deducted, there would be an addition of only two lines: one for general sales taxes paid, and one for motor vehicle sales taxes paid.
Potential Federal Tax Deductions for Texas Families
Tax Year 2002
Adjusted Gross Income Family Size 1 2 3 4 5 6+ $0 to $16,560 $303 $332 $353 $365 $377 $395 $16,560 to $24,840 $380 $419 $446 $464 $479 $500 $24,840 to $33,120 $485 $533 $566 $590 $608 $635 $33,120 to $41,400 $581 $641 $677 $707 $728 $761 $41,400 to $49,680 $668 $740 $782 $815 $842 $878 $49,680 to $57,960 $755 $833 $881 $917 $947 $988 $57,960 to $66,240 $836 $923 $976 $1,015 $1,048 $1,096 $66,240 to $74,520 $914 $1,006 $1,066 $1,111 $1,147 $1,198 $74,520 to $82,800 $988 $1,090 $1,138 $1,204 $1,243 $1,297 $82,800 to $99,360 $1,099 $1,213 $1,282 $1,336 $1,381 $1,441 $99,360 to $115,920 $1,237 $1,366 $1,447 $1,507 $1,555 $1,623 $115,920 to $132,480 $1,372 $1,513 $1,603 $1,668 $1,722 $1,800 $132,480 to $149,040 $1,498 $1,653 $1,752 $1,824 $1,884 $1,968 $149,040 to $165,600 $1,623 $1,791 $1,896 $1,977 $2,040 $2,130 $165,600 or more $1,743 $1,923 $2,037 $2,115 $2,190 $2,288 Source: Carole Keeton Rylander, Texas Comptroller of Public Accounts.
Equity and fairness demand that tax discrimination against Texans be eliminated. Reinstatement of the deduction for sales taxes would eliminate the fundamental disparity created by TRA86, when citizens in states with a personal income tax were permitted to deduct such taxes, but citizens in states without an income tax had no corresponding deduction. The net effect of this disparity is that Texans, as well as the citizens of the eight other states without a general individual income tax pay a greater percentage of taxes to the federal government than do citizens living in their neighboring states with income taxes. In other words, the federal tax law currently treats the same individual differently solely on the basis of residence. Providing individuals in all states the choice to deduct one or the other of their sales or income taxes would restore equity and fairness for all U.S. citizens at minimal cost.
The Comptroller's plan would put more money in Texans' pockets. As with everything else in the IRS Code, the devil is in the details, and even subtle differences in proposed legislation can have major revenue implications, making any revenue estimates of the ultimate legislation difficult. Assuming that the federal legislation fairly and accurately portrayed Texans' sales tax and motor vehicle sales tax payments, restoration of the sales tax deduction could be expected to save Texans--in the aggregate--on the order of $568.7 million (if only state sales taxes were exempted) to $701.3 million (if state and local sales taxes were exempted) in the 2002 Tax Year. The corresponding average savings per itemizing Texas household would be $231 and $284.
While the deduction only would go to taxpayers who itemized their deductions, more Texans at lower income levels would find it to their benefit to itemize. Right now, only one in five tax returns filed by Texans itemizes deductions, compared to almost one in three nationwide. The chief reason for this is that citizens of 41 states and the District of Columbia enjoy a deduction that is not available to Texans. Restoration of the deduction for sales taxes paid would go a long way towards bringing Texas closer to the national average. In other words, the availability of the deduction would benefit not only those who currently itemize, but an additional number of slightly lower-income households that would find it to their benefit to itemize.
The Comptroller's plan would create more jobs, economic growth, and state tax receipts with absolutely no state tax or spending increase. Keeping as much as $701.3 million in the hands of Texas taxpayers would provide a significant boost to the state economy. Assuming that the legislation passed this year and that the deduction could be taken on income taxes filed in 2003 for the 2002 Tax Year, the tax savings could be expected to generate 16,180 new Texas jobs, $590 million in new Texas investment, and $874 million in increased Texas Gross State Product in 2003. The increased economic activity in turn could be expected to boost general revenue by $66.5 million in the three-year period 2003-05. Most of this revenue would come from increased sales and motor vehicle sales tax collections.
The Comptroller's plan promises a win-win situation for all Texans, even those who do not itemize. To the extent that keeping more Texas income in Texas, where it belongs, instead of sending it off to Washington, all Texans would benefit from the increased employment opportunities and investment. In fact, it is difficult to find a downside for Texas to the reinstatement of the sales tax deduction. The Comptroller's plan would be a straight-up win for the state, a victory for tax equity among the states, and it would provide a desirable, welcome boost to restoring statewide economic and revenue growth.
- Legislation tracking the Comptroller's plan would cost the federal government somewhere between $2.0 to $2.5 billion per year--less than 1 percent of the $268.9 billion 1999 deduction for state and local income and property taxes.
- Texans would save as much as $701 million, or $284 per itemizing household on their 2002 taxes.
- The estimated tax savings would be expected to generate 16,180 new Texas jobs, $590 million in new Texas investment, and $874 million in increased Gross State Product in 2003.
- The increased economic activity could be expected to boost 2003-04 general revenue-related state tax receipts for the three-year period 2003-05 by $66.5 million.
- Assuming that the federal legislation fairly and accurately portrayed Texans' sales tax and motor vehicle sales tax payments, a family of four with an income of $60,000 would be able to deduct an additional $1,015 to calculate taxable income, and a single mother of one with a total income of $35,000 could deduct an additional $641.
- The current system discriminates against Texans and the citizens of other states that have opted to finance their budgets without personal income taxes. The Comptroller's plan is necessary to restore fairness and equity in the treatment of those state taxpayers who currently do not benefit from the tax deductions enjoyed by the citizens of the other 41 states and the District of Columbia.