Texans may soon take another hit to the pocketbook.
Inaction by leaders in Washington before the end of 2013 left undone the renewal of a measure that lets Texans — and those in other states with no income tax — deduct state and local sales taxes on their federal income tax forms.
“They fumbled on this one,” said Peter Locke, a finance professor at TCU in Fort Worth. “Of course, they can get back to it whenever they want … and I wouldn’t be surprised if they do address it.”
The deduction began years ago to give Texans and others who don’t pay income taxes some parity with taxpayers in other states who can deduct state and local income taxes.
As it stands, Texans may deduct sales taxes from their 2013 federal income taxes, which are due in April. But without any changes, those same taxes will not be deductible in the future.
Without the deduction, Texans and others will face higher federal tax bills next year, according to a report by the Pew Charitable Trusts.
In 2011, Texas was among the top states claiming federal deductions for state and local sales taxes, behind only Washington state and Nevada, claiming 20.2 percent, according to a Pew analysis of IRS statistics from that year.
On average, that’s a $383 deduction per filer in Texas that will disappear unless Congress retroactively reinstates the sales tax deduction.
“Between the drama associated with the federal government shutdown and other partisan bickering during the fall, Congress simply had neither the time or the energy to get around to renewing the state and local sales tax deduction along with over 50 other tax deductions,” said Mark P. Jones, a political science professor at Rice University in Houston.
“It is quite likely that Congress will restore this deduction in 2014,” he said. “However, if Congress fails to renew the sales tax exemption during the course of the year, virtually all of the millions of Texans who itemize deductions on their federal income tax return will find themselves subjected to a de facto tax increase when they file their 2014 returns in 2015.”
Effects felt next year
The sales tax measure is a steady force in Texas, geared toward giving taxpayers in no-income-tax states a more level playing field with residents of income-tax states who deduct those taxes.
It has the biggest impact on residents who make larger purchases, such as cars or boats, because they can deduct the total sales tax paid on those items.
Nationwide, about 11 million filers claimed $17 billion in state and local sales tax deductions in 2011, according to the Pew analysis.
Texans who use the long form and itemize their deductions have been able to deduct sales taxes from their federal income tax bill since 2004.
Former U.S. Sen. Kay Bailey Hutchison, a Texas Republican who left office in 2013, helped spearhead the change, saying residents here should get similar benefits to those in states with income taxes.
States that will be affected are Texas, Florida, Nevada, South Dakota, Tennessee, Washington state and Wyoming.
Many times, lawmakers let tax breaks expire, only to renew them later.
“The failure to either renew or explicitly reject the renewal of these deductions is just one more example of how our dysfunctional federal government adversely affects citizens and businesses alike, making it difficult for both to make sensible decisions regarding their financial decisions, be it a purchase of a big-ticket item by a consumer or an investment by a business,” Jones said.
Work in progress
Congressional observers say the House and Senate tax-writing committees are still working on reform packages. But it remains to be seen when those packages will be finished and whether lawmakers will extend the deduction as they have in the past.
“It should be up to one of our Texas senators and House members to bring this up, or from one of the other states with no state income tax, which is deductible,” said Allan Saxe, an associate political science professor at the University of Texas at Arlington.
“Congress should have addressed this much earlier to allow for tax planning, and there are many other tax issues that were allowed to expire and should be addressed when Congress returns.
“They usually make this retroactive,” he said. “It is not a good way to handle such important issues on the part of Congress.”
U.S. Rep. Marc Veasey, D-Fort Worth, is among those wanting elected officials to address the oversight.
“I hope that Congress will work together to set up a tax package before April that includes this deduction and is based on principles that strengthen the middle class and working families, as well as promotes economic growth and job creation,” he said.
FEDERAL DEDUCTION FOR STATE AND LOCAL SALES TAXES PAID
Top 10 states, by claim rate and average per-filer deduction, in 2011State
Average deduction per filer
Washington * 28.8% Washington * $604Nevada * 23.0% Tennessee * $424Texas * 20.2% Texas * $383Florida * 19.4% Nevada * $342Tennessee * 19.2% Florida * $271Wyoming * 18.8% Wyoming * $243South Dakota * 15.9% South Dakota * $229Arizona 8.6% Arizona $139Alaska * 7.4% Kansas $101New Jersey 7.1% California $91U.S. average
* State has limited or no income tax.
Source: Pew analysis of IRS statistics of income for the 2011 tax year