Sales Tax Deduction Expires After 2011

Phuc Dang at Merriman Blog wrote about 3 expiring tax provisions. Andy at Saving to Invest included a few more expiring tax provisions. Jim Blankenship at Getting Your Financial Ducks In a Row included yet a few more. All of them mentioned the sales tax deduction in the list.

The sales tax deduction is primarily for people living in states that don’t have an income tax. They can deduct the state and local sales tax on their federal income tax return. People in other states can use it too but because they can’t deduct both the state and local income tax and the sales tax, they usually end up just deducting the state and local income tax but not the sales tax.

Unless Congress extends the sales tax deduction, 2011 will be the last year this deduction is available.

The sales tax deduction came into law in 2004 as part of the American Jobs Creation Act of 2004, right before President Bush was elected to a second term. Originally it was going to be effective for only two years: 2004 and 2005.

It was extended for two more years — 2006 and 2007 — by Tax Relief and Health Care Act of 2006, passed by the Republican congress before Republicans lost the majority in both the House and the Senate.

It was extended a second time for two more years — 2008 and 2009 — by Emergency Economic Stabilization Act of 2008, commonly known as the $700 billion bailout.

Finally it was extended a third time for two more years — 2010 and 2011 — by Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, commonly known as the Bush tax cut extension. This is the compromise President Obama reached with Congress last year to extend the Bush tax cuts through the end of 2012, but the sales tax deduction was only extended to the end of 2011.

Should the sales tax deduction be extended again? I don’t think so.

The sales tax deduction was enacted in a different environment. It was supposed to be temporary, yet it was extended again and again to no end. It’s like when you had a big bonus, you signed up for premium cable channels for two years — fine, it’s OK to splurge when you had money. Now you don’t have the bonus any more but you don’t want to let go the premium cable channels. Why?

From a fairness point of view, the sales tax deduction makes no sense either. People living in states with an income tax also pay sales tax. The sales tax rates in those states aren’t necessarily lower. They don’t get to deduct both income tax and sales tax. People who don’t pay a state income tax are already better off. Why should they get an extra deduction other people don’t have?

If maintaining the sales tax deduction is meant to be an economic stimulus, why limit the stimulus to only a handful of states? Stimulus should be applied where it’s needed the most, not by whether the state has an income tax or not.

Let the sales tax deduction expire. Temporary means temporary. It has already lingered way past its time.

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Comments

  1. Aaron L says

    Making sales tax deductible also subsidizes consumerism. I would prefer taxes on consumption to taxes on income.

    I’ve always thought it would be a great short-term stimulus to announce a VAT a few years in advance. Perhaps the expiry of the sales tax deduction will have a similar effect, although on a much, much smaller scale.

  2. Cookie says

    The comment forgets one thing. How about those states, and there are some, like Oregon, which has an income tax, but no sales tax. The residents of those states can have a deduction which I, as a resident of Washington, cannot have. Does this seem “fair”.. If we cannot have a deduction of a tax we pay and residents of states like Oregon can, I think that we should eliminate the deductions for both income and sales tax. The elimination of the sales tax deduction came about the same time that the elimination of the deduction for interest on credit cards. Those of us in non income tax states lobbied long and hard to get “fair” tax treatment when compared to states like Oregon.

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