Congress Moves On New Sales Tax Deduction

With House passage this week of a budget, lawmakers have now laid the groundwork to make permanent a tax deduction that has saved Washington state residents $500 million annually on their federal taxes.

The lawmakers still will have to find a way to replace the yearly loss of roughly $2 billion in federal revenue if residents in Washington and six other states are allowed to continue deducting state and local sales taxes on their federal returns.

"That's not going to be easy," said Rep. Brian Baird, D-Wash., who has championed the sales tax deduction since first being elected 10 years ago.

But Baird said actually getting the deduction in the budget could help avoid the end-of-session, "perils of Pauline" legislative wrangling that has marked the issue over the past several years.

The Senate version of the budget includes similar language when it comes to the sale tax deduction. Sen. Maria Cantwell, D-Wash., who was instrumental in inserting the sales tax deduction into the budget along with Sen. Kay Bailey Hutchison, R-Texas, said the action shows the Finance Committee that the Senate is serious about extending the deduction.

"This is a clear signal that this deduction is a priority for Congress this year," Cantwell said.

Neither the House nor the Senate budget are binding, but instead offer a financial blueprint for the fiscal year starting Oct. 1.

Both the Senate Finance Committee and the House Ways and Means Committee will have to go along with the sales tax deduction extension. Baird compared the congressional budgets to household budgets some people draw up at the beginning of every year.

"If it's not in the budget, your wife could complain it can't be done," Baird said. "This is the first step."

Currently, residents of seven states with just a sales tax can deduct what they paid on their federal returns. Washington is one of the seven states with just a sales tax, along with Texas, Florida, Nevada, South Dakota, Tennessee and Wyoming.

The current deduction expires at the end of 2007.

The deduction had been eliminated more than 20 years ago when Congress adopted a number of reforms intended to simplify the tax code. The reforms allowed residents of states with income taxes to deduct their state income taxes on their federal returns. But residents of states with just sales taxes weren't given a tax break.

In 2004, Congress agreed to restore the sales tax deduction, but only for two years. It was renewed for the 2006 tax season, but only at the last minute after tax forms already had been printed.

In 2004 and 2006, the sales tax deduction was used as a bargaining chip as leaders sought to round up votes for major tax packages or other items as the congressional sessions wound down. It has been lumped in with research and development tax deductions, college tuition tax deductions and even raising the minimum wage.

"It would be nice not to have to wait until the last minute to get this done," said Baird. "This should give us some breathing room."

The budgets don't actually make the sales tax deduction permanent, but they extend it for 10 years, which is the life of the budget.

"It's as close to permanent as you can get," said Baird.

Baird said the congressional move toward pay-as-you-go _ or PAYGO _ financing, under which every new tax break has to be tied to a way to recover lost federal revenue so as not to add to the deficit, could complicate things this year.

"It's not going to be easy in the PAYGO world," said Baird, adding he didn't yet have an "offset" in mind to cover the cost of the sales tax deduction.

Cantwell said that given the cost of the sales tax deduction to the U.S. Treasury, she wasn't sure how long Congress would extend it for.

"These are tough economic times," she said. "But I think this deduction is an investment back in the state economy."

Story courtesy of Scripps-Howard News Service.