Federal Deductibility of State and Local Taxes Page: 4 of 15
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Federal Deductibility of State and Local Taxes
The interplay between the federal and state and local tax systems through the federal deductibility
of state and local taxes is the focus of this report. Generally, individual taxpayers who itemize
deductions are allowed to deduct real and personal property taxes, and general sales taxes or state
and local income taxes from federal taxable income. Taxpayers must choose between sales taxes
or income taxes; they cannot deduct both. In 2004, Congress modified the deductibility of state
and local taxes-adding the sales tax deduction option for 2004 and 2005-and the 109t
Congress extended the sales tax deduction option for 2006 and 2007.
In the 110th Congress, 11 bills have been introduced that would make the sales tax deduction
permanent: H.R. 60, H.R. 411, H.R. 2734, H.R. 3592, H.R. 3906, H.R. 4086, H.R. 5242, H.R.
5744, S. 143, S. 180, and S. 2233. Four bills, H.R. 3680, H.R. 3970, H.R. 6049 (the version that
passed in the House on May 21, 2008), and S. 3335 would extend the sales tax deduction option
for one year. S. 2886 and H.R. 7060, which passed the House on September 26, 2008, would both
extend the sales tax deduction option for two years, through 2009. The Senate-amended version
of H.R. 6049, which was approved in the Senate on September 23, 2008, includes a two-year
extension of the sales tax deduction.
The recent housing crisis has generated interest in Congress to modify the deduction for real
property taxes. H.R. 3221, (P.L. 110-289), the Housing and Economic Recovery Act of 2008,
signed by the President on July 30, 2008, includes a provision that allows non-itemizers to deduct
up to $500 ($1,000 for joint filers) of property taxes paid. The special deduction is available for
the 2008 tax year under the legislation. H.R. 7060 includes a one-year extension of the recently
enacted above-the-line property tax deduction for non-itemizers.
The tax savings from the property tax deduction under current law, which will be realized in
spring 2009 when taxpayers file 2008 returns, will likely benefit taxpayers that do not have other
potentially deductible expenses that are high enough to merit itemizing. Taxpayers with no
mortgage (or low mortgage debt) in states with relatively low state and local tax burdens would
likely benefit the most from this new tax provision.
The President's Advisory Panel on Federal Tax Reform (the tax reform panel) recommended
repealing the deduction for all state and local taxes as part of a more comprehensive base
broadening plan. The President's FY2009 budget proposal does not include an extension of the
sales tax deduction option. This report addresses the potential impact of changing the status of
federal deductibility on state and local government tax systems, individual taxpayers, and the
The deduction from federal income for state and local taxes paid dates from the inception of the
current income tax under the Revenue Act of 1913.1 A provision in that act allowed the deduction
for "all national, State, county, school and municipal taxes paid within the year, not including
1 The 16th Amendment allowed for the taxation of income without regard to apportionment among the states. With the
new constitutional authority, Congress passed The Revenue Act of 1913, initiating the current federal income tax.
Congressional Research Service
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Federal Deductibility of State and Local Taxes, report, September 30, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc815796/m1/4/: accessed July 23, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.