11.17.07

Cantwell, Baird Release New Report on Economic Impact of State Sales Tax Deduction, Remind Washingtonians to Save Receipts

Nearly One Million Washingtonians Claimed $2 Billion in Deductions on 2005 Returns; Lawmakers Vow to Deliver Permanent Tax Fairness for the State

VANCOUVER, WA – Saturday, U.S. Senator Maria Cantwell (D-WA) and U.S. Congressman Brian Baird (D-WA-03) released a new report on the economic impact of the state sales tax deduction and reminded Washington state taxpayers to save receipts as they shop for the holidays if they plan to itemize deductions on their federal tax return. At Vancouver Ford, Cantwell and Baird were joined by John Creedun, President of Vancouver Ford and Rustin Brewer, Vancouver CPA. The lawmakers also vowed to continue to fight to make this important tax cut permanent.


"This is about tax fairness for Washington state’s working families and building a stronger economy," said Cantwell, a member of the Senate Finance Committee. "It doesn’t matter if you’re buying something for the holidays that’s big, like a car, or small, like a DVD, this tax deduction means you don’t have to worry about getting taxed twice. In 2005, nearly one million Washington families and individuals claimed nearly $2 billion in deductions and got almost $600 million right back in their pockets. That’s an average of $600 each. This is money back in your pocket. It’s money that you deserve from a tax cut that’s fair to our state. Congressman Baird and I are going to keep fighting to make this deduction permanent. "

"Ensuring that Washingtonians get tax fairness makes sense for hard-working families, and makes sense for our local economy," said Congressman Baird. "Last year alone, Washingtonians used the state sales tax deduction to save hundreds of millions of dollars. Money that then went toward college tuition, home improvement projects, and to help the economy thrive. I want to thank Senator Cantwell for her leadership on this issue; and I know she and I will continue working with our colleagues to make sales tax deduction permanent."

The report, compiled by Cantwell’s office, showed thatthe state sales tax deduction stimulates Washington’s economic growth. An estimated 2,000 to 3,000 jobs are created in the state by the deduction and, in 2008, the direct impact of the deduction on the state’s economy will be $570 million. The state sales tax deduction increases economic growth by drawing in new businesses, creating new jobs, and keeping more money in the state. According to the Congressional Research Service, the estimated loss to state residents that would result from the expiration of this deduction totals $488 million to $541 million per year.
In most states, taxpayers can deduct state income taxes from their total federally taxable income. Until the Tax Reform Act of 1986, a taxpayer in Washington state, as well as the other sales tax states of Texas, Florida, Wyoming, South Dakota, Nevada, and Tennessee and Alaska were able to take a federal tax deduction for state and or local sales taxes; however, the 1986 Act eliminated the ability to deduct state and local sales taxes in lieu of state and local income taxes. In 2004, Cantwell and Baird worked with a bipartisan coalition to pass a two-year deduction and repeated their victory in 2006. The current extension is effective for 2006 and 2007 returns only. Unless Congress acts again, it will expire with the 2007 filing. Unlike the sales tax deduction, the deduction for state and local income taxes does not sunset. The lawmakers have fought continuously since 2004 to make the deduction permanent. As her first action as a new member of the Senate Finance Committee in January, Cantwell introduced stand-alone legislation to make the state sales tax deduction a permanent feature of the U.S. tax code.


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November 2007
The Impact of the Deduction of Washington State Sales Tax from Federal Income Tax
Prepared by the Office of Senator Maria Cantwell


OVERVIEW


In most states, taxpayers who claim itemized deductions on their federal income tax returns can claim a deduction for state income taxes paid. The purpose of this deduction is to prevent the double taxation of funds that are used to finance state services. However, from 1986 until 2004, residents of eight states that have no income tax but which finance their state services using a sales tax, were denied a Federal deduction for these state taxes. In 2004, Congress passed legislation to temporarily restore the deduction for state and local sales tax, thus restoring parity in the federal income tax code for residents in those states without an income tax. Unless legislation is passed to extend this deduction, it will expire at the end of 2007.


With the rising costs of health care, gas prices, and college education, Washington’s middle class is increasingly struggling to get by. Nationally, premiums have risen almost twice as fast as wages from the last year, and are up by almost 80 percent (78%) since 2001. [i] In the same period, gas prices have nearly doubled, up to $3.25 per gallon in Washington state, and $3.11 per gallon nationally[ii]. The cost of a college education, increasingly important in today’s society, has risen by nearly 50 percent.[iii] With the rising cost of these necessary expenses, maintaining equity in the federal tax code will have a significant impact on the lives of everyday Washington state residents.
In addition to aiding taxpayers and providing tax parity with the 43 states that have state income tax, the state sales tax deduction increases economic growth in the state of Washington by drawing in new businesses, creating new jobs, and keeping more money in the state.


FINDINGS

Effects on the Washington State Taxpayer

The Congressional Research Service estimates that Washington state taxpayers who itemize and who claim the sales tax deduction will realize tax savings of more than $557 million.[iv] In 2005, 37 percent of the nearly three million tax filers in Washington state chose to itemize, and 83 percent of those itemizers claimed the state sales tax deduction.[v] That year, the $2 billion that Washington state taxpayers claimed in tax deductions translated into $557 million in tax savings that went right into the pockets of Washington state residents. Congressional Research Service estimates indicate that each Washington state taxpayers who used the state sales tax deduction saved an average of $600 in 2005.

Comparison to Other States

Without the state sales tax deduction, non-income tax states would be able to deduct only 36.6 percent of the state and local taxes they pay, all of which comes from property taxes. States with an income tax, by comparison, would be able to deduct 56.1 percent.[vi] This means that taxpayers who file in states with an income tax can expect to save substantially more than those who reside in the states without state income taxes. In 2004, Deductions from state and local income tax claimed on federal income tax forms totaled $202.3 billion.[vii]


Economic Growth

The sales tax deduction also has a stimulating effect on the Washington state economy. An estimated 2,000 to 3,000 jobs are created by the presence of the deduction. The Washington State Department of Revenue estimates that the impact on the state economy for 2008 would be $570 million. This number reflects importation of goods, household spending, and increased individual savings due to concerns about the economy.


According to the September 2007 Washington Economic and Revenue Forecast, taxable sales (sales subject to the 6.5 percent state retail sales tax) totaled almost $26.4 billion in the first quarter of 2007, the most recent quarter available. This was 7.9 percent higher than the year-ago level. Taxable sales increased 7.2 percent in the fourth quarter of 2006 and 8.8 percent in the third quarter. Taxable sales in the state of Washington have now increased on a year-over-year basis for nineteen consecutive quarters. Thanks to stronger consumer spending and revenue growth than what was anticipated, Washington state coffers benefited from more tax payments than what had been expected in the June forecast.

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