State and local sales tax deduction good for South Dakota
June 23, 2014
South Dakota is one of seven states throughout the country without a state income tax. With a zero percent state income tax rate, zero percent corporate income tax rate, and four percent sales tax rate, South Dakotans enjoy one of the lowest tax burdens in the country. Our state's strong leadership and good fiscal management have created conditions that allow our elected officials to rely on sales tax as the primary tool to finance government services, keeping South Dakotan's tax burden low and increasing prosperity and creating jobs throughout the state.
However, unlike the state, the federal tax code is a maze of complicated and temporary tax provisions. These provisions often take the form of tax deductions, which allow taxpayers to reduce their total taxable income. Taxpayers can choose between taking the standard deduction or itemizing their deductions. In South Dakota, nearly 20 percent of taxpayers choose to itemize their deductions each year.
While taxpayers who choose to itemize their deductions in states with an income tax can deduct their state and local income taxes from their federal income, taxpayers in states like South Dakota have been excluded from utilizing this deduction due to the decision by the state to collect sales tax rather than income tax to fund government services. In order to level the playing field for all taxpayers, Congress amended the tax code in 2004 to create an itemized deduction for state and local sales taxes for taxpayers who wish to take this deduction rather than the state income tax deduction. Unfortunately, this deduction is a temporary part of the tax code that was last extended at the end of 2012 and expired at the end of 2013. If Congress fails to act before this year's taxes are due next April, South Dakotans who itemize on their federal taxes will find themselves facing a larger tax bill.
I believe it is important that Congress acts to prevent this tax increase. As a member of the tax-writing Senate Finance Committee, I joined with my colleagues on both sides of the aisle last week in passing a bill extending a series of expiring tax provisions for the next two years. Included in the package was a provision extending the state and local sales tax deduction. During consideration of the legislation, I filed an amendment along with Senator Maria Cantwell (D-Wa.) that would have made the deduction for state and local sales taxes a permanent part of the tax code. Unfortunately, my amendment was not included in the final bill that passed out of the committee. I am hopeful the full Senate will take up this legislation in the very near future to extend expiring tax relief through the end of 2015.
The local and state sales tax deduction is important to ensuring Congress levels the playing field for taxpayers living in states without state income taxes, including South Dakota. Nearly 16 percent of South Dakotans claimed the state and local sales tax deduction in 2011. While I am pleased that legislation is moving through the process that would extend this important deduction for an additional two years, I believe South Dakotans deserve certainty in knowing that they will not once again find themselves disadvantaged relative to taxpayers in other states. I will continue to work with my colleagues across the aisle to ensure this common-sense deduction becomes a permanent part of the tax code.