Tax break for nearly 1 million in Washington

By Alex Fryer
Seattle Times Washington bureau

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Residents will be able to deduct Washington sales taxes on their federal tax return for the first time in nearly 20 years under the legislation, which passed the Senate yesterday and is expected to be signed by President Bush.

The change will benefit an estimated 940,000 people who itemize deductions — about 22 percent of the state's federal tax filers. It will apply to the 2004 and 2005 tax years.

The change won't help people who take the standard deduction; they tend to be lower-income taxpayers and people without mortgages or other large deductions.

Here's how the sales-tax deduction will work:

• Taxpayers who kept receipts of purchases for the year may claim the sales-tax deduction on the amount they can prove they paid. But most people will use an Internal Revenue Service table that will estimate sales tax paid.

• While sales taxes will be fully deductible, the actual dollar benefit will depend on which federal tax bracket the taxpayer is in. The Congressional Research Service estimates the average taxpayer who can take advantage of the benefit will pay between $519 and $575 less in federal taxes.

• The sales-tax deduction is due to expire after two years, but the state's congressional delegation hopes to renew it.

The sales-tax deduction was eliminated in the massive tax overhaul President Reagan pushed through Congress in 1986.

But full deductibility remained for state income taxes. Since then, officials from Washington and other states that rely on the sales tax but have no income tax have argued federal tax policy was unfair to them.

"This relief will grant tax fairness to Washington state families and is a shot in the arm for our local economy," said Sen. Maria Cantwell, D-Wash.
 
The state's chief economic forecaster said tax relief, while beneficial, will have minimal impact on the state's overall income and job creation.

The provision is expected to pump about $420 million into the state's economy and create around 3,000 jobs for the two years it's in effect.

That isn't a lot of jobs, considering the state is otherwise expected to add about 55,000 jobs a year, said Chang Mook Sohn, director of the state Revenue Forecast Council.

And the $420 million windfall represents a small fraction of future economic growth, he said.

"I wouldn't say it's insignificant, but I wouldn't say it was very significant, either," he said. "It all depends on perspective and a person's definition of significant."

The sales-tax deduction, like many other issues, got caught up in election-year politics.

Rep. George Nethercutt, R-Spokane, who is challenging Democratic Sen. Patty Murray, announced in May that he had secured a deal with House GOP leaders to include sales-tax deductibility in the corporate tax bill.

But plenty of other lawmakers across the country claimed credit for the measure, including Majority Leader Tom DeLay of Texas, whose state would benefit.

Both Washington state senators, Murray and Cantwell, pushed for passage of the sales-tax provision in recent weeks.

"We've got to do more to create quality jobs in our state and provide businesses with the incentives to keep them there. This bill is an important step forward in that ongoing battle," Murray said.

"This is a major victory for Washington families," Nethercutt said in a statement last week when the House passed the bill. "We are returning fairness to the tax code for Washingtonians after 18 years of inequity."

The deduction was included in a massive tax package originally designed to fix a corporate tax break ruled illegal by the World Trade Organization.

Repeal of the tax break, which benefited Microsoft and Boeing, was necessary to lift retaliatory sanctions imposed on goods exported to Europe.

The European Union created a list of targeted goods, which included jewelry, machinery and wood products.

Weyerhaeuser was the only major Washington state company affected by the retaliatory tariffs.

Although its annual European exports totaled less than $20 million, the company was "watching the [corporate tax] bill with interest, and we're pleased it passed," spokesman Frank Mendizabal said.

Alex Fryer: 206-464-8124 or afryer@seattletimes.com