NCPA - National Center for Policy Analysis

States Vary Widely in Number of Taxpayers Deducting State or Local Sales Taxes

January 18, 2012

Taxpayers who itemize deductions have the option of deducting state and local taxes from their income.  In doing so, each individual taxpayer must decide to deduct either the income tax withheld from his or her wages, or the total sales tax he or she paid during the tax year.  Individuals who choose to deduct sales taxes have the additional option of reporting the exact amount (if they saved all their receipts) or using an estimate from the IRS that depends on their state and their income level.  The option to deduct sales tax, rather than income tax, is a temporary provision that must be extended each year, says Nick Kasprak, a programmer and analyst at the Tax Foundation.

States vary widely in the percentage of taxpayers who use each deduction.

  • In general, more taxpayers elect to deduct income taxes than sales taxes.
  • However, as one might expect, states that have no (or low) income taxes tend to see most taxpayers deducting sales taxes instead.
  • Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are all states in which over half of the taxpayers elect to deduct state and local sales taxes, rather than income taxes, on their federal return, and these are all states that have either a very limited income tax (in the case of Tennessee) or no income tax at all.
  • The small number of taxpayers who do deduct income taxes in these states likely owe them to a different state than the one listed as their home on their federal return.

Taxpayers in these states therefore have the most to lose should this option not be extended each year.

Source: Nick Kasprak, "States Vary Widely in Number of Taxpayers Deducting State or Local Sales Taxes," Tax Foundation, January 11, 2012.

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