Politics & Government

Once again, Washington state lawmakers battle to extend sales tax deduction

WASHINGTON -- They're known as tax extenders, and in the arcane world of the Internal Revenue Service code they include renewing tax breaks for everything from motorsports entertainment complexes to rum distillers in Puerto Rico and the U.S. Virgin Islands.

To residents of Washington and six others states, they're all about being able to continue deducting state and local sales taxes on their federal returns. By some estimates, the deduction saves Washington's taxpayers between $350 million and $500 million annually.

But currently, the sales tax deduction has to be renewed every year. This year is no exception, as Congress again wrangles over the extenders amid tax policy politics, with chairman counting votes, fiscal conservatives screaming about how to pay for them and taxpayers waiting anxiously as another tax season approaches.

"It's outrageous we have to come to them cup in hand every year," said Rep. Brian Baird, D-Wash., who has spent his 11 years in Congress trying to permanently restore the sales tax deduction. "The four sweetest words in the English language are not, 'Honey I love you,' but 'I have the votes.'"

Last week, a $50 billion extenders tax bill remained bottled up in the Senate after supporters fell 10 votes short of the 60 needed to cut off debate. Even as the sales tax deduction and other tax breaks are set to expire at the end of the year, it could be next year before Congress acts on extending them.

And to those in charge of writing the tax laws on Capitol Hill, what's known as "extenders fatigue" has set in.

"Tax reform is already overdue," said Rep. Charlie Rangel, D-N.Y., chairman of the House Ways and Means Committee. "If we looking to simplify the tax code, promote equity and fairness and provide meaningful relief to middle-class families, we must have a serious discussion about making the state and local sales tax deduction permanent."

Baird has reintroduced legislation in the House that would do that; Sen. Maria Cantwell, D-Wash., has introduced a similar bill in the House.

However, Baird is skeptical his bill will pass anytime soon. He believes broader tax reform may be the only way to solve the problem.

"The problem with the permanent bill is where do you get the revenue?" he said. "Given the current fiscal situation, it's not a high probability."

Cantwell also believes it will take awhile, until the sales tax deduction becomes "ingrained" in the federal budget.

As the story goes, former Senate Finance Committee Chairman Bob Packwood, R-Ore., scratched out the outline of the last major overhaul of the federal tax laws on the back of a cocktail napkin in 1986. Among other things, it eliminated the state and local sales tax deduction. Packwood represented a state that does not have a state sales tax. The argument was that the deduction was a bookkeeping nightmare as taxpayers had to keep receipts for a year. The idea was to simplify the tax code.

Only seven states -- Washington, Texas, Florida, Tennessee, Nevada, South Dakota and Wyoming -- rely strictly on state sales taxes. The other states have income taxes, which have been deductible on federal returns all along.

In 2004, Baird and others were able to convince Congress to restore the sales tax deduction, but only a year at a time. He had some help. President Bush was from Texas, Vice President Cheney was from Wyoming, Bush's brother was governor of Florida, Senate Republican leader Bill Frist was from Tennessee and the Senate Democratic leaders included Tom Daschle of South Dakota and Harry Reid from Nevada.

Many of them are gone or will be gone next year.

"If we couldn't make it permanent back then, we will have even a harder time now," said Baird.

The sales tax deduction costs the federal Treasury about $2 billion in revenue each year, a number tax writers and lawmakers seem willing to swallow. But budget numbers are generally figured over 10 years, and the $20 billion loss in federal revenue causes budget hawks near apoplexy.

"In the end, it's the same amount," said James Horney, director of federal fiscal policy for the non-partisan Center on Budget and Policy Priorities. "Congress and the president have gotten bad about wanting to deal straightforwardly with a number of tax issues."

Every year, Congress considers only one or two major tax measures. Chairmen of the tax-writing committees are constantly adding breaks and deductions to gin up support.

The tax extenders bill on hold in the Senate included $20 billion in tax incentives for renewable energy development and billions more for a research and development tax credit. Both of those are popular.

An alternative bill being shopped by Senate Finance Committee Chairman Max Baucus, D-Mont., includes a $3.3 billion provision to help rural counties whose tax revenues have dropped as timber sales on federal lands have fallen, and $223 million that would allow Alaska fishermen to partially avoid a tax hit on the payments they may receive because of the 1989 Exxon Valdez oil spill.

Baucus' bill would also drop prevailing-wage requirements in some bond provisions, something the White House and congressional Republican have sought.

"People see these things as leverage," Cantwell said. "But it is about tax fairness."

Baird sees it as the horse trading needed to pass an extenders bill. The sales tax deduction is critical to garnering votes for any package, he said.

"They would have a hard time passing it without our votes," he said

There is also sharp disagreement between the House and the Senate over how to pay for extending the tax deductions and credits. The House version of the extenders bill covers the costs by targeting offshore-deferred compensation plans for hedge fund managers and other tax savings now provided to multinational companies. Fiscally conservative Democrats, known as Blue Dogs, insisted on the pay-as-you-go provisions.

But Senate Republicans have rejected such provisions, insisting Congress shouldn't have to raise taxes on some people to pay for the tax savings of others. Republicans are also concerned about having to come up with a way to cover the costs of the massive tax cuts approved in the early days of the Bush administration that expire starting 2010.

"The mother of them all is the Bush tax cuts," said Horney.

Horney said there were no quick fixes to the tax extenders problem.

"At least this year, the people of Washington state have to be patient," he said. "This could drag out and it might have to be done retroactively."