Number: RL32781
Title: Federal Deductibility of State and Local Taxes
Authors: Steven Maguire, Government and Finance Division 
Abstract: 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 109th 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.
Pages: 13
Date: September 30, 2008