Eight states with the greatest percentage of tax filers who claimed a deduction for sales taxes in the 2012 tax year would likely be most affected, if Congress fails to extend the deduction, according to an analysis by The Pew Charitable Trusts.
The deductions for state and local income and sales taxes expired at the end of 2013, along with other key annually expiring tax provisions.
Washington led the eight states, with the highest claim rate (the percentage of tax filers claiming the deduction), at 27.7%, beating the U.S. average level by 20.4%. The other states with high claim rates were: Nevada at 21.7%; Texas at 19.7%; Florida at 19.7%; Tennessee at 18.4%, Wyoming, at 17.4%; South Dakota at 15.3%; and Arizona at 8.4%. Of these states, only Arizona has an income tax.
On a national basis, the average deduction per tax filer was $113. For the eight states, the average deduction was: $602 in Washington; $404 in Tennessee; $376 for Texas; $332 for Nevada; $279 for Florida; $224 for South Dakota; $221 for Wyoming; and $139 for Arizona.
Pew focused on the federal tax deduction of state sales taxes because, "It is a clear example of how federal tax policy has a varied impact across the states," said Kasia O'Neill Murray, who manages Pew's work on tax policy.
The continued expiration of the sales tax deduction would have the greatest impact on states with low or no income taxes, since taxpayers can only deduct either sales or income taxes.
"This is a good illustration of how policy decisions at the federal level often have state-level implications," said Murray. "Knowing which areas of the country would end up paying more or less in federal taxes can give policymakers a more complete picture of the impact of federal action or inaction on taxes."
The federal deduction of state sales taxes was available from 2005 through 2013, if a tax filer chose the itemized method to have either that or state income tax or state deducted. These tax deductions lower the tax liability for individuals who claim them and create additional disposable income for them, Pew said. Higher disposable income general boosts economic activity.
On the other hand, lower federal tax collections lead to higher budget deficits or reduced spending, which can nave an offsetting negative economic activity nationally .
The Pew analysis mentioned in a footnote that six states - Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon - allow residents to deduce federal income taxes from their state income tax returns. Eliminating or reducing federal deductions generally - including those for state and local taxes - would increase federal taxes, Pew said.
"Higher federal taxes would result in larger deductions on the state tax returns in these six states and thereby reduce state revenue," the group said.
The research shows that the elimination of these deductions -- if they are not reinstated, for example -- could affect states' decisions about their own tax policies, including the level and mix of taxes they use to finance spending priorities," Pew said.
