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.