1/28/2013
MEMORANDUM
• INTRODUCTION: The federal tax code allows taxpayers who itemize to make a deduction
for certain state, local and foreign taxes (see: 26 USC § 164). Historically, this has included a
deduction specifically for state/local income taxes.
• Since taxpayers residing in states without a state income tax cannot benefit from this provision,
in 2004 Congress added a temporary alternative option whereby taxpayers could instead elect
for a deduction based on state/local general sales taxes (Source: Congressional Research
Service).1
• Only seven states including Florida have no income tax at all and are thus most impacted by
the expiration of the state/local sales tax deduction. The others are: Alaska, Nevada, South
Dakota, Texas, Washington and Wyoming (Source: Tax Foundation).
• SIGNIFICANCE: For tax year 2010 (the latest year available), approximately 1.9 million
returns (20% of the state’s 9.6 million total returns) deducted an average of $1,383 through the
state/local sales tax deduction (Source: Internal Revenue Service).2 Nearly 700,000 of the
returns with the deduction had adjusted gross income of less than $50,000.
• MOVING FORWARD: The deduction for state/local sales taxes actually expired at the start
of tax year 2012. However, it was extended for 2012 and 2013 as part of the fiscal cliff
negotiations at the last minute.
1
The ability to deduct certain state/local sales taxes had previously existed at various times since 1932, but was
ultimately repealed by the Tax Reform Act of 1986. After being reinstated in 2004 as an alternative to the state/local
income tax deduction, it was extended by various pieces of legislation through the 2011 tax year.
2
Note that a deduction lowers taxable income, but does not represent a direct reduction of taxes owed.
• The expiration of the state/local sales tax deduction would create an unfair disadvantage for
filers in states with no state income tax. The federal government should make the deduction
permanent to avoid arbitrarily punishing millions of taxpayers if it were to expire.