Deduction in jeopardy?

A fight in Congress to extend the popular sales tax deduction for residents of Washington, and certain other business tax credits, may come down to the last minute.

The past two weeks, a provision to retain the sales tax deduction was blocked by Senate leadership three times, according to Sen. Maria Cantwells office.

Cantwell, a Democrat, has said she wants to get an extension of the deduction passed in the next month. The IRS has indicated it needs any changes to the tax law by mid-October for them to apply to the 2006 tax year.

The sticking point seems to be how the bill is put up for a vote. Cantwell, one of the bills sponsors, claims the Senates leadership wants to attach it to more contentious legislation.

The senator believes it should be passed on its own merits, as a clean bill, Cantwell spokeswoman Elizabeth Farrenti said. Republican leaders have refused to let it come to the floor as a clean bill.

In most states, taxpayers are allowed to deduct state income taxes when they pay federal income taxes each year. From 1986 until 2004, however, residents of states with sales tax but no state income tax such as Washington, Texas and Florida could not deduct what they paid to the state.

Proponents of the deduction argued it wasnt fair that residents of those states were consequently taxed twice: once when making a purchase and again when paying their federal taxes.

Since the new sales tax deduction took hold in 2004, Washingtonians have saved an estimated $500 million per year. In the deductions first year, nearly 850,000 taxpayers took advantage of it, saving an average of about $550 per family.

Under the 2004 bill, however, the deduction was temporary. Since then, Washington lawmakers and others in Washington, D.C., have tried to make it permanent.

In August, senators had the chance to renew the deduction as part of a huge tax package that also called for raising the national minimum wage and giving a long-sought break for the timber industry.

Along with those provisions, however, the bill called for ending the more hotly debated estate tax and also could have forced a wage cut for employees who received tips. As a result, Cantwell and a majority of other senators rejected it.

That led Cantwells opponent, Mike McGavick, to claim the incumbent senator didnt support the sales tax deduction.

He thinks its a real missed opportunity that Sen. Cantwell did not vote for the bill, McGavick spokesman Elliott Bundy said. He said it was a reasonable compromise and that any potential effects on tip-earners could have been worked out afterward.

On the basic issue of extending the sales tax deduction, however, theres no difference between the candidates.

Its a deduction thats right for Washington, one thats a basic issue of fairness, Bundy said.

In addition to extending the sales tax deduction, the new legislation backed by Cantwell, Sen. Max Baucus of Montana and others also extends a research and development tax credit for businesses and a federal deduction of up to $4,000 for qualified college tuition and other college-related expenses. That deduction was used by more than 95,000 Washingtonians in 2003.

John Logan, a senior state tax analyst with CCH Inc., said he thinks theres a decent chance the sales tax deduction will be rescued and extended by the Senate. Among the states affected, after all, are those important to the ruling Republican party. That includes Tennessee, home of U.S Senate Majority Leader Bill Frist.

Its very popular in states without income taxes. Among those are some very populous states like Texas and Florida, Logan said. My take on it is theres at least some chance it will be passed.

Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.