Newspaper column: Sales tax deduction won’t level playing field that is badly titled

Nevada’s Sen. Dean Heller is pushing a bill that would make permanent the federal income tax deductions for state and local sales taxes.

Currently the state and local incomes taxes are deductible but sales taxes have been added as deductibles a year at a time, making it difficult to plan ahead, as reported in this week’s newspaper column, available online at The Ely Times and the Elko Daily Free Press. Heller argued his bill would help level an uneven playing field by ensuring states like Nevada are afforded the same treatment in the federal tax code as states with an income tax. Nevada is one of nine states with no state income tax.

Dean Heller

The bill addresses a very real problem, but with an inadequate solution.

It is a fairness issue, but not one about the kind of local taxes allowed to be deducted, but rather the amount. The deduction of state and local taxes of any kind amounts to a subsidy for high-wage, high-tax states, which happen to be mostly Democrat-controlled.

Seven states claim 90 percent of the deductions for state and local taxes — income, sales, property, etc. They are New York, New Jersey, California, Pennsylvania, Maryland, Illinois and Massachusetts, according to the Tax Policy Center. Because there is no cap on these deductions most of the tax savings goes to the highest wage earners.

Using 2010 statistical data from the IRS, I found Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return, and almost half of those returns reported earnings in excess of $100,000. Nevadans who filed for the state and local sales tax deduction claimed only $1,430 per return.

Instead of permanently keeping the sales tax deduction, Heller would better serve his constituents by introducing a bill eliminating the deduction for all state and local taxes while lowering the federal income tax rate a commensurate point or two for everyone, including those who don’t qualify for itemized deductions. That would be fair — perhaps, next to impossible to pass, but fair.

Read the entire column at the Ely or Elko websites.

5 comments on “Newspaper column: Sales tax deduction won’t level playing field that is badly titled

  1. Mike Kalil says:

    If you get to take a large state income tax deduction on Schedule A, that means you made a big state income tax payment. You’re much better off living in a state with no income tax than getting a big federal deduction because your overall tax burden is much higher due to state taxes.

  2. True, Mike, but the person living in low-tax state then bears a disproportionate share of the federal tax burden.

  3. Rincon says:

    Eliminating federal deductions on state income taxes may allow double taxation, but I subscribe to the KISS principle (keep it simple stupid). If everyone pays a double tax, then it’s not terribly unfair. As a matter of fact, this article points out that NOT charging a double tax can be unfair. If we didn’t pay the double tax, then we’d just pay a higher percentage anyway.

  4. Mike Kalil says:

    True. Your choice of state of residency affects your proportionate share of the federal tax burden, just like many other choices affect it. For instance, if I choose not to give $500 to Goodwill, I’m going to bear a higher proportionate share of the federal tax burden than an all-other-things-being-equal-taxpayer who takes a charitable contribution deduction. If I choose not to register a vehicle, I lose a personal property tax deduction.

    So one could thus argue that my state of residency isn’t a personal choice, to say I’m required to live in a certain locale for employment or something else. The tax code is riddled with such inequitable treatment of circumstances that could be beyond one’s control.

    For instance, imagine two taxpayers who can afford $1,000 a month housing expense. One has capital for a down payment on a home and pays a $1,000 monthly house payment, and likely reaps the most valuable deduction he can receive; the other doesn’t and pays $1,000 per month in rent and receives no deduction.

    When surveying the Internal Revenue Code for inequities, the state income tax deduction is small potatoes, but I’d certainly make hay of it if I had to run for office in Nevada or one of the other 8 without state income taxes.

    Again, if it’s about fairness, it makes no sense to segregate federal tax burden from overall tax burden. A family that makes $100,000 and pays $3,000 in state taxes and gets a $750 federal tax reduction for it is much worse off than a Nevada family making $100,000, and paying no state income tax, even if the sales tax deduction were eliminated for Nevada filers.

  5. […] The current hodge-podge of tax deductions and exemptions and breaks and dodges is entirely unfair and inequitable. […]

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