Texas Comptroller Calls for End to Discriminatory Federal Tax Rule

Published August 1, 2004

Texas is one of only seven states without a state income tax. According to the state’s comptroller, that places Texans at a disadvantage when paying federal income taxes. On June 28, Comptroller Carole Keeton Strayhorn (R) called for “a halt to the discriminatory treatment of Texas taxpayers.”

In March 2002, Strayhorn released a report on the discriminatory treatment of Texas taxpayers by the federal government. That report, “Restoration of the IRS Sales Tax Deduction Should be One of Texas’ Main Priorities in Congress,” was recently updated.

Strayhorn’s study shows Texas families and the state’s economy will benefit if state and local sales taxes, along with motor vehicle sales taxes, are made deductible on federal income tax returns.

According to Strayhorn, federal tax deductibility of state and local sales taxes would put an extra $310 a year into the pockets of the average Texas family.

Current System Unfair

“Citizens in Texas and six other states are denied fair and equitable tax treatment because they have no state income tax,” Strayhorn said. “Two years ago, I urged the state’s congressional delegation to fight for the restoration of Internal Revenue Service state and local sales tax deductions for Texas families. I am pleased that [HR 4520] will allow this deduction.

“The current system is unfair,” Strayhorn said. “It discriminates against Texans and the citizens of other states who have decided against a state income tax. As a result, Texans pay a higher percentage of taxes to the federal government than their neighbors in Oklahoma and Arkansas, which have a state income tax. That’s wrong.

“An Oklahoman who pays a state income tax can deduct that amount from her or his federal tax return. But the antiquated federal law punishes those of us who pay state and local sales taxes rather than state income taxes,” Strayhorn said. “If Texas taxpayers could deduct sales taxes and motor vehicle sales taxes, the playing field would be level,” she added.

Change Would Create Jobs

A Texas family of four with a median annual income of $57,945 could potentially get an additional tax deduction of $928. Estimates from the comptroller’s report indicate the net tax savings would also generate 16,573 new jobs in Texas and $923 million in increased Gross State Product in 2005.

Because Texas taxpayers would have more money to spend on their families’ priorities, Texas’ state sales tax receipts for 2005-06 could be expected to increase by almost $38 million, Strayhorn’s report estimates, while the cost to the federal government would be less than 1 percent of the cost of existing deductions.

“This will be a win for Texas taxpayers and Texas government and a win for tax fairness. I urge Congress to quickly adopt legislation that will put hard-earned money back in the pockets of hard-working Texas families,” Strayhorn said.

The states that currently have no state income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

Mark Sanders works in the office of Texas Comptroller Carole Keeton Strayhorn. His email address is [email protected].

For more information …

Texas Comptroller Carole Keeton Strayhorn’s report, “Restoration of the IRS Sales Tax Deduction Should be One of Texas’ Main Priorities in Congress,” is available online at http://www.window.state.tx.us/specialrpt/deduction04/.