Taxpayers who itemize state taxes on their federal taxes could find themselves out of luck if those deductions fall victim to congressional budget talks. Without congressional action, which appears unlikely, those deductions will expire at the end of the year.
That means fewer deductions and higher federal taxes for residents in states that rely more on sales taxes than income taxes for revenue, according to a new analysis from the Pew Charitable Trusts.
Filers can claim deductions on either state income taxes or sales taxes; states that have the highest proportions of filers who claim sales tax deductions are generally states with low income taxes. Income tax deductions won’t expire at the end of the year.
In Washington state, which has a high sales tax but no income tax, nearly three in ten filers claim a sales tax deduction. The average filer claims more than $600 in deductions. More than 20 percent of all tax filers in Nevada and Texas claim sales tax deductions; so do more than 15 percent of filers in Florida, Tennessee, Wyoming and South Dakota.
All seven of those states have no state income tax. Without the sales tax deductions, tax filers in those states wouldn’t be able to take advantage of federal itemizations.
About 11 million filers claimed $17 billion in state and local sales tax deductions in 2011, according to Pew’s analysis of Internal Revenue Service statistics.
“Federal and state tax policy is really closely intertwined,” said Anne Stauffer, the director of Pew’s Fiscal Federalism Initiative and an author of the report. Though the expiration will only have a $17 billion impact — a relative drop in the bucket in terms of national gross domestic product — “it’s pretty concentrated in terms of impact.”
The end of the sales tax deduction, unlike other deductions, which have no sunset clause, is a relic of past budget battles. The sales tax deduction was repealed in 1986 but reinstated in 2004; ever since, it has been a part of tax extension deals. But with Congress only in session through this week, yet another last-minute extension doesn’t seem to be in the cards.