For more on the background, why the House passed the bill and the policy considerations, please see my post at SalesTaxSupport.com, reproduced here:
Since 2004, there has
been a temporary provision to allow individuals to take an itemized deduction
for either state income tax or state sales tax. This works well for individuals
in states without an income tax. On April 16, 2015, the House passed H.R. 622, State and Local Sales Tax Deduction
Fairness Act of 2015, to make this provision permanent (vote 272-152). The Joint Committee on Taxation estimates
the cost of H.R. 622 at $42 billion over ten years or about $4 billion per year
(JCX-41-15; 2/11/15). If the state tax deduction were
not an AMT preference item, the cost would be higher. And, bear in mind, that
only about one-third of individuals itemize, and most states do have an income
tax which is likely to be larger than the sales tax someone pays.
Per House Report 114-51 accompanying H.R. 622, the rationale for
permanence is (1) to provide certainty to individuals and (2) provide parity
with individuals deducting state income tax. Arguments against the bill include
the cost, lack of any revenue offset, and not looking at all of the expired
provisions together.
The House Report notes
that tax reform may eliminate all itemized deductions for state taxes, but the
majority believes that until then, there should be parity for all itemizers
regarding state tax deductions.
So, for ten years,
there has been a choice of which tax to deduct (although without certainty
regarding the sales tax). What about the years dating back to the Tax Reform
Act of 1986, when the sales tax deduction was stripped from the Code? The
reasons why TRA'86 repealed a deduction for sales tax while leaving the
itemized deduction for state income taxes include the following (per pages
46-48 of the TRA'86 Bluebook):
·
Sales tax mostly ties
to personal purchases so it allowed a deduction for personal expenditures.
·
The sales tax
deduction was a small portion of the total state tax deduction. Per 1984 data,
only one-fourth of sales tax was deducted in contrast to over half of state
income taxes.
·
Substantial
recordkeeping was required for the sales tax deduction if the sales tax table
was not used.
Is there any
justification for allowing individuals a deduction for state taxes? Yes and
no. One justification is the ability to pay concept. State taxes
represent income not available for paying federal income taxes. An opposing
view is that state taxes provide personal benefits so should not be
deductible. [For more on the tax policy related to the state tax
deduction, see Nellen, Goodbye State Tax
Deduction, AICPA Tax
Insider, 5/8/08.]
Some points missing
from the discussion on what to do with the option of deducting sales tax:
·
These deductions are
likely to be repealed as part of comprehensive tax reform to help pay for lower
rates and repeal of the AMT. Congress making the sales tax permanent allows for
more revenue to be raised, although if extended without a revenue offset, the
revenue is questionable.
·
Repeal of the state
tax deduction will make the law simpler. For example, Section 164(c)(5) to be
made permanent by H.R. 622 is 638 words long!
·
Why no focus on the
property tax deduction? Why not repeal it or cut it back? While there is
an ability to pay argument supporting it, the current deduction is too broad.
For example, if someone lives in a very expensive home or has multiple homes,
all other taxpayers subsidize that decision (regarding the property taxes paid)
- why? For an extreme example, note Mitt Romney's $214,000 of real estate taxes
on his 2011 return, and no mortgage interest deduction.
So, what do you think? Should the provision to allow a sales
tax deduction in lieu of a state income tax deduction (for those who itemize)
be made permanent?
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