By Billy House
Media General News Service
Media General News Service
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WASHINGTON A special tax break that saves Tennesseans as much as $400 million a year is up for renewal again when the U.S. Senate reconvenes next week.
Set to expire Dec. 31, the law allows residents of Tennessee and six other states without income taxes to deduct state and local sales tax from their federal taxable income.
The law should be made permanent, not just renewed through 2008, argues Sen. Mel Martinez, R-Fla., who with Sens. Bob Corker and Lamar Alexander, R-Tenn., are among sponsors of a bill to do that.
Others say making the law permanent is unlikely to happen.
“When you look at this history of this deduction -- it has existed, was repealed in the 1980s, then restored again (in 2004),” says Chris Kinnan, a spokesman for Washington-based Freedom Works, a group that advocates lower taxes.
A two-year renewal is expected, but even if lawmakers fail to renew it, Tennesseans filing their taxes next spring will not be affected. That’s because the existing law remains in place throughout the 2007 tax year.
Along with Tennessee, the special break lowers federal tax bills for some residents in six other states that also don’t have income taxes -- Florida, Nevada, Texas, Washington, South Dakota and Wyoming.
Before the sales tax deduction was reenacted in 2004, these states argued that they were treated unfairly by the federal tax code, since citizens in most other states could deduct state and local income taxes.
Numbers for how much in actual tax savings Tennesseans realized in 2005 (the latest year for which comprehensive figures are compiled) from the sales-tax deduction were not available from either the Internal Revenue Service or the U.S. Department of the Treasury.
But the IRS reports that 574,393 Tennesseans took the sales tax deduction in 2005 and were able to reduce their adjusted gross incomes for tax purposes by more than $1.2 billion.
By lowering their adjusted gross incomes in this way, these taxpayers were allowed to pay the government less – and in some cases help move themselves into lower tax brackets.
Rough estimates put the actual tax savings for Tennesseans at about a third of the amount they were able to reduce the adjusted gross incomes by, or about $400 million.
But spokesmen for both the IRS and Treasury emphasize that it is difficult to precisely determine, because amount a taxpayer may deduct is set by formula, and that other deductions also affect how much tax each taxpayer ultimately pays.
For all seven states, IRS figures show that 11.1 million taxpayers claimed the state and local sales tax deduction in 2005, allowing a reduction of $17 billion altogether from what their reported gross incomes would otherwise be.
In recent years, this special tax deduction has been used as a political bargaining chip, inserted to help get other legislative initiatives passed.
But Martinez, Corker and Alexander are among a few senators who have been pushing to make it permanent, introducing a bill in January to do so.
“This is a matter of fairness. Most states have an income tax; Florida has a more progressive tax structure. Floridians deserve the same treatment when it comes to deductibility,” said Martinez.
But the Center on Budget and Policy Priorities, which studies the impact of government policies on the poor, noted in a 2004 study that the sales tax deduction is available only to taxpayers who itemize rather than use the standard deduction. These tend to be higher-income taxpayers.
In Tennessee, only 686,807 of the state’s 2.6 million taxpayers filed itemized returns in 2005. And even fewer (574,393) took the sales tax deduction.
That means nearly four-fifths of Tennessee’s federal taxpayers in 2005 saved nothing under this tax break.
This year, the language to renew the bill through 2008 is just one of several tax breaks expiring at year’s-end wrapped up into one bill.
The House has already passed the measure, which included more than $80 in new tax revenues to offset the cuts so that the federal deficit doesn’t grow.
But in the Senate, the measure was blocked by Republicans before lawmakers adjourned this month.
A spokeswoman for Senate Finance Chairman Max Baucus, D-Montana, said the senator hopes to work with other lawmakers to complete quick action on a compromise he’s proposed so that all the expiring tax provisions get extended.
Reporter Billy House can be reached at 202 662-7673 or at bhouse@mediageneral.com.
Set to expire Dec. 31, the law allows residents of Tennessee and six other states without income taxes to deduct state and local sales tax from their federal taxable income.
The law should be made permanent, not just renewed through 2008, argues Sen. Mel Martinez, R-Fla., who with Sens. Bob Corker and Lamar Alexander, R-Tenn., are among sponsors of a bill to do that.
Others say making the law permanent is unlikely to happen.
“When you look at this history of this deduction -- it has existed, was repealed in the 1980s, then restored again (in 2004),” says Chris Kinnan, a spokesman for Washington-based Freedom Works, a group that advocates lower taxes.
A two-year renewal is expected, but even if lawmakers fail to renew it, Tennesseans filing their taxes next spring will not be affected. That’s because the existing law remains in place throughout the 2007 tax year.
Along with Tennessee, the special break lowers federal tax bills for some residents in six other states that also don’t have income taxes -- Florida, Nevada, Texas, Washington, South Dakota and Wyoming.
Before the sales tax deduction was reenacted in 2004, these states argued that they were treated unfairly by the federal tax code, since citizens in most other states could deduct state and local income taxes.
Numbers for how much in actual tax savings Tennesseans realized in 2005 (the latest year for which comprehensive figures are compiled) from the sales-tax deduction were not available from either the Internal Revenue Service or the U.S. Department of the Treasury.
But the IRS reports that 574,393 Tennesseans took the sales tax deduction in 2005 and were able to reduce their adjusted gross incomes for tax purposes by more than $1.2 billion.
By lowering their adjusted gross incomes in this way, these taxpayers were allowed to pay the government less – and in some cases help move themselves into lower tax brackets.
Rough estimates put the actual tax savings for Tennesseans at about a third of the amount they were able to reduce the adjusted gross incomes by, or about $400 million.
But spokesmen for both the IRS and Treasury emphasize that it is difficult to precisely determine, because amount a taxpayer may deduct is set by formula, and that other deductions also affect how much tax each taxpayer ultimately pays.
For all seven states, IRS figures show that 11.1 million taxpayers claimed the state and local sales tax deduction in 2005, allowing a reduction of $17 billion altogether from what their reported gross incomes would otherwise be.
In recent years, this special tax deduction has been used as a political bargaining chip, inserted to help get other legislative initiatives passed.
But Martinez, Corker and Alexander are among a few senators who have been pushing to make it permanent, introducing a bill in January to do so.
“This is a matter of fairness. Most states have an income tax; Florida has a more progressive tax structure. Floridians deserve the same treatment when it comes to deductibility,” said Martinez.
But the Center on Budget and Policy Priorities, which studies the impact of government policies on the poor, noted in a 2004 study that the sales tax deduction is available only to taxpayers who itemize rather than use the standard deduction. These tend to be higher-income taxpayers.
In Tennessee, only 686,807 of the state’s 2.6 million taxpayers filed itemized returns in 2005. And even fewer (574,393) took the sales tax deduction.
That means nearly four-fifths of Tennessee’s federal taxpayers in 2005 saved nothing under this tax break.
This year, the language to renew the bill through 2008 is just one of several tax breaks expiring at year’s-end wrapped up into one bill.
The House has already passed the measure, which included more than $80 in new tax revenues to offset the cuts so that the federal deficit doesn’t grow.
But in the Senate, the measure was blocked by Republicans before lawmakers adjourned this month.
A spokeswoman for Senate Finance Chairman Max Baucus, D-Montana, said the senator hopes to work with other lawmakers to complete quick action on a compromise he’s proposed so that all the expiring tax provisions get extended.
Reporter Billy House can be reached at 202 662-7673 or at bhouse@mediageneral.com.