Congress May Extend Sales Tax Deduction This Week

If the House of Representatives and the Senate do not extend the sales tax deduction during the final days of the lame duck session, residents of the seven states that do not levy personal income tax, who itemize their deductions, will see an increase in federal tax owed for 2006. The two-year sales tax deduction provision of the 2004 Jobs Creation Act expired earlier this year, along with other popular tax breaks.

The popularity of the breaks is the reason they have not been extended, the Associated Press Reports, because both parties sought to draft “extender bills” that were tied to other, less popular measures, like the repeal of the estate tax and an increase in the federal minimum wage.

Residents of Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are affected. Taxpayers in other states have long been allowed to deduct the state income tax, and the sales tax deduction provision was designed in the interest of fairness.

Legislative aides say it is possible that an “extenders” bill can be passed, as long as it is not combined with other measures. “We expect that the sales tax deduction and several other tax extenders will get done next week,” Matt Lehigh, a spokesman for Senator Bill Frist, told the AP. Proposed bills will probably cover two years, he said, 2007 and retroactive to 2006.

Taxpayers in Tennessee will lose $205 million in deductions, or $305 per return, according to federal figures supplied to Tennesseean.com by U.S. Representative Jim Cooper (D – TN). The Texas controller’s office says that Texans will pay $310 more this year without the deduction, according to DFW.com. And Washingtonians may have to pay as much as $500 more, HeraldNet.com of Everett, Washington, says.

Other popular tax breaks that many in Congress would like to extend are the Research and Development tax credit, which gives businesses a 20 percent credit for new activities. “There are some expenditures by the U.S. government that should really be called investments," William Archey, head of the American Electronics Association, said recently, the AP reports. "The R&D tax credit is unequivocally an investment.”

Other popular measures that may be extended include provisions that allow employers to claim a tax credit of up to $3,500 for the first year worked by an employee who had been receiving public assistance for an extended time, the $250 deduction for personal costs incurred by teachers to supply their classrooms and the deduction for college tuition and fees.

Even if the tax breaks are extended, the Internal Revenue Service (IRS) instructions have already been printed for 2006, HeraldNet.com says, without the sales tax deduction. Representative Cooper anticipates problems if Congress waits until January to extend the tax breaks. “While it’s theoretically possible for us to extend this next year, people start filing their taxes pretty soon after the start of the year. Then it would get horribly complicated, because it would have to be retroactive . . . countless people would have to re-file their taxes, which would be a huge pain,” he told Tennesseean.com.

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