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WASHINGTON (AP) -- Renewing a sales tax deduction available to residents of South Dakota and eight other states could get harder as Democrats try to cut federal government spending, lawmakers said.
Taxpayers in states without an income tax can deduct what they paid in state or local sales taxes on federal income tax returns filed this year and next.
But Congress would have to renew the exemption for taxpayers to be able to deduct sales taxes beyond 2008.
“The cost to extend it is not large, but overall the Democrats have made a pretty hefty amount of campaign promises ... and they are going to have to find a way to pay for it. I’m worried that we’ll lose some very family-friendly tax relief like the sales tax deduction to pay for this,” said Rep. Kevin Brady, R-Texas, a member of the tax-writing House Ways and Means Committee.
Sen. Patty Murray, a Washington state Democrat, acknowledged that the sales tax is vulnerable, but said she would fight to make it permanent.
But Texas Democratic Rep. Lloyd Doggett, also a House Ways and Means member, said the sales tax deduction “has in no way been targeted for elimination.”
Lawmakers from Texas and other affected states, unsuccessful in earlier attempts to make the tax deduction permanent, say they will try again this year. Besides Texas and Washington, those states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
House Democrats last week passed a spending rule, known as pay-as-you-go, that requires tax cuts to have corresponding cuts in government spending or tax increases elsewhere to pay for them.
House Speaker Nancy Pelosi, D-Calif., said Democrats are not going to start with repealing tax cuts to cut deficit spending, but they are not off the table for people making over $500,000 a year.
Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, said the House pay-as-you-go rules make it harder to enact any kinds of tax breaks, including the sales tax deduction.
But because the deduction is not permanent, he said, lawmakers don’t count on the revenue that would be spent on future sales tax deductions.
“If they did something like eliminate the state and local income tax deduction, then they would get rid of the sales tax deduction as well,” Burman said. But because Ways and Means Chairman Charles Rangel, D-N.Y., and Pelosi live in high tax states, he doubted those exemptions would disappear.
The Senate has not adopted spending rules like those of the House, but Sen. Kay Bailey Hutchison, R-Texas, said Republicans plan to offer their own pay-as-you-go spending proposal. Sen. John Cornyn, R-Texas, said allowing the deduction to expire would amount to a tax increase and “would not be fair to Texans.”
Hutchison and Sen. Maria Cantwell, D-Wash., have each introduced separate bills to make the sales tax deduction permanent. Brady is a co-sponsor on a similar House bill, sponsored by Rep. Brian Baird, D-Wash.
Opponents of the sales tax exemption say it largely benefits higher income taxpayers.