Washington state residents may get tax break

By Susan Gilmore and Alex Fryer
Seattle Times staff reporters

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Although the measure is embroiled in election-year partisanship, observers say the sales-tax provision is likely to be approved by the U.S. Senate and be sent to President Bush, who has indicated he will sign it.

The measure, which would let residents of Washington and six other states deduct a portion of their state sales tax from their federal income-tax bill, was passed by the Republican-dominated House as part of a $145 billion reordering of the U.S. corporate tax code.

What the bill would do Major provisions: • Repeal export-tax subsidies that violate global trade rules and replace them with $140 billion in various tax reductions • Provide a $9.6 billion buyout for tobacco growers • A $3.6 billion provision would allow taxpayers to deduct either state sales taxes or state income taxes from their federal income taxes for 2004 and 2005. Minor provisions: Measures tailored to help restaurant owners, private jet makers, bank directors, timber landowners, liquor distillers, Native American whalers, fishermen, commodity traders, and shipping conglomerates, to name a few. One last-minute provision, pushed in part by Home Depot, temporarily lifts customs duties on Chinese-made ceiling fans. How they voted: 251-178 for passage. For (all Republicans) : Dunn, Hastings, Nethercutt. Against (all Democrats) : Baird, Dicks, Inslee, Larsen, McDermott, Smith. What's next: The bill must be reconciled with the Senate version, which does not include the sales-tax deduction. The tobacco provision may be a major sticking point between the two chambers. Sources: The Washington Post, Reuters

The sales-tax deduction could save $300 to $500 a year for a family of four. It would only apply to those who itemize their deductions, about 40 percent of Washington residents. The deduction would be for 2004 and 2005 tax returns.

The 251-178 vote for the bill largely followed party lines. Of the 228 Republicans in the House, 23 voted against it. Forty-eight of the chamber's 205 Democrats voted for it.

All six House Democrats from Washington voted against it, including Rep. Brian Baird, D-Vancouver, who has made the sales-tax deduction a signature issue in recent years. All three of the state's Republicans voted for it.

The Senate now must take up the measure. Although senators earlier passed a corporate tax bill that did not include a sales-tax deduction, Sen. Maria Cantwell, D-Wash., believes the measure now has the votes.

"We think it's going to stick," said Cantwell's spokeswoman, Charla Neuman.

Baird said he and the state's other Democrats were unhappy with the provision that the deduction ends in two years. Baird said he wanted the Democratic alternative to the bill, which would have made the deduction permanent.

Rep. George Nethercutt, R-Spokane, who backed the measure in the House, acknowledged the bill is not perfect. "But you can't wait for the perfect, you have to go with the good," said Nethercutt, who is running against Democratic Sen. Patty Murray. "Once it's in place, it won't be repealed."

House Democratic leaders also were upset with a raft of other tax breaks for farmers and corporations that were loaded onto the bill. One was $9.6 billion to help bail out struggling tobacco farmers; another would help Alaskan Eskimo whalers.

"When our cranberry or raspberry growers see poor market conditions, they don't demand a federal buyout," Baird said.

The corporate tax bill is intended to lift European Union trade sanctions on some U.S. products — which increased to 8 percent on June 1 — by repealing current IRS tax breaks that have been ruled a violation of World Trade Organization rules.

The bill has major implications for Puget Sound exporters, particularly Boeing and Microsoft. If Congress had simply rewritten the tax codes to comply with the WTO rules, Microsoft would have to pay $200 million annually in additional taxes. Boeing would have to pay about $250 million extra annually. Both the Senate and House versions of the corporate tax bill include various provisions that enable Boeing and Microsoft to break even.

The issue of a sales-tax deduction has been around since 1986, when the IRS code was changed to eliminate the deduction.

The issue has created bitterness among Washington's 11 members of Congress.

Sales-tax exemptions The history: Washington and some other states lost them in 1986 when the IRS code was changed. The present: The House voted to restore the exemption for two years. The future: The House and Senate must agree on the exemption before it can go to President Bush.

Four days after formally kicking off his Senate campaign in May, Nethercutt announced he had secured a promise from House GOP leaders to include the $4 billion, sales-tax deduction in a larger tax bill. He said the timing of the announcement had nothing to do with his Senate campaign.

He voted for the measure yesterday before boarding Air Force One with President Bush for campaign fund-raisers in Washington state.

Baird said he has been working on the sale-tax deduction since 1998 and resents the fact Nethercutt is now taking credit for it.

"If you let Nethercutt get away with this, the true story is not being told," said Baird. He said Democrats tried to amend the bill yesterday to make the deduction permanent, "and there was not a peep from Nethercutt."

But Nethercutt campaign spokesman Alex Conant said it is disingenuous for the state's Democratic House members to embrace the sales-tax deduction and then vote against it.

Cantwell's spokeswoman was philosophical about the political element of the sales-tax deduction. "If it gets done, even for the sake of politics, that's great for the state of Washington," said Neuman. "Sometimes, politics is good."

Susan Gilmore: 206-464-2054 or sgilmore@seattletimes.com

Copyright © 2004 The Seattle Times Company

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