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Stam’s Transit Gambit

Yesterday in the House Finance Committee, Minority Leader Paul “Skip” Stam tried derailing the Transit Bill H148 by referring to sales tax as an inefficient tax. He claimed that sales tax was not deductible from Federal taxes, as property tax is, and that the effect was to send 15 cents of every dollar in sales tax to the Federal Government. He exchanged words with Rep Deborah Ross, a sponsor of the bill and did not offer an amendment in committee but promised to introduce one on the House floor when the bill is considered. Mr Stam should check with the IRS first.

According to the Internal Revenue Service Topic 503 – Deductible Taxes:

There are four types of deductible nonbusiness taxes:

  • State, local and foreign income taxes;
  • Real estate taxes;
  • Personal property taxes; and
  • State and local sales taxes.
  • It is a conservative mantra at the local level that sales tax is better than property tax because everybody pays sales tax. Now we are to believe that property tax is better than sales tax because sales tax is supposedly not deductible on Federal tax returns. The various criticisms are intended to erode taxation anywhere for any reason. In this case the reasoning is wrong.

    Generally, sales taxes are not deductible on Schedule A. However, for Tax Years 2005, 2006, 2007, 2008, and 2009 if you file a Form 1040 and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (you can’t claim both). If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount. If you didn’t save all your receipts, you can choose to claim a standard amount for state and local sales taxes. Its easy if you use the Sales Tax Deduction Calculator on IRS.gov for either year (refer to Publication 600 and Form 1040 Instructions).

    Update: For taxpayers using the Standard Deduction, there is an additional property tax deduction. However, the maximum additional deduction is $1,000 for married, filing jointly ($500 for singles). As the average property tax bill in Wake County is about $2,000, an increase would not be deductible. Regardless of the merits of property tax versus sales tax as a funding mechanism for transit or other transportation, the federal deductibility argument is a spurious one.

    2 Comments

    1. Gerry

      April 17, 2009 at 1:04 pm

      Greg, I am sorry to disagree with your math but

      1) An increase in property tax IS deductible for those who itemize. The $1,000 per couple deduction cap is only for those who do NOT itemize their taxes. There is no automatic deductibility for either income tax or sales tax for those who do not itemize.

      2) While it is true that sales taxes are deductible, for most North Carolinians who have enough deductions to actually itemize (to do this you have to have itemized deductions above the standard deduction) the amount they pay in NC income tax is FAR higher than the amount of sales tax they pay. Since they have to choose to itemize either sales tax or income tax, but not both, most will choose the income tax.

      3) The only people in North Carolina who likely pay more sales tax than income tax and actually itemize are those who made a giant purchase this year, like maybe a yacht.

      4) Most taxpayers do not itemize at all, they take the standard deduction, so the entire discussion on both sides may not be relevant.

    2. gregflynn

      April 17, 2009 at 8:58 pm

      64% of NC filers do not itemize. That’s a group for whom sales V. property tax increase is moot.

      For those who do itemize, a property tax increase would be deductible. I have not disputed that. For this group, sales tax is deductible though, as a practical matter, only to the extent that it exceeds state income tax. (I’m not aware of a local income tax in NC). I have not disputed that either. There is a marginal benefit to electing to use the sales tax deduction in that state income tax refunds are not taxed when the sales tax deduction is used.

      Sales tax on certain assets or improvements to assets would be considered “deductible” to the extent that they reduce future capital gains. Sales tax is also deductible as part of business expenses. It’s safe to say the issue of sales tax deductibility is more complex than it appears.