The pork-laden corporate tax overhaul recently approved by Congress (and expected to be signed by President Bush) puts yet another nail in the coffin of a Washington State income tax. One of the strongest economic arguments for replacing part of the sales tax with an income tax (which Alan posted on earlier) was that sales taxes couldn’t be deducted from federal income tax payments, while state income taxes could be: less money going to the feds would mean that the state could have gotten more tax revenue without necessarily adding to residents’ total tax burden. (This argument was advanced by the Gates Commission in 2002.)
That argument appears to be heading out the door. The Seattle P-I quotes a Congressional Research Service estimate of $488 – $541 million per year in statewide savings from sales tax deductibility. The benefits accrue to the (relatively wealthy) taxpayers who itemize their federal tax returns. The costs appear likely to accrue to tomorrow’s taxpayers in the form of higher budget deficits.