WASHINGTON -- Nevadans could continue to reap an additional benefit from their income taxes next year after the House approved a bill Thursday that extends a deduction for state and local sales taxes for at least one more year.
The tax break was a noncontroversial element of a $56 billion tax cut bill the House passed 234-197. It prolongs a benefit that was aimed primarily at taxpayers in Nevada and seven other states that do not levy a state income tax.
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"If it's extended, it's clearly a benefit to Nevada," said Richard Mason, an assistant professor at the University of Nevada, Reno, who teaches income tax law.
The sales tax deduction, a two-year trial that Congress passed in 2004, is slated to expire at the end of the year unless it is renewed.
The Senate passed legislation last month extending the tax break. With Thursday's vote, the House added its approval.
But, as debate over the $56 billion illustrated, lawmakers remain split on a major element that reduces tax rates on capital gains and dividends for an additional two years. It was not clear whether a compromise on the overall bill would be reached before Congress adjourns for the holidays.
Reps. Jon Porter and Jim Gibbons, both R-Nev., voted for the Republican-authored tax cut bill, with both touting the sales tax benefit as a reason.
"This provision keeps hard-earned tax dollars in our state, providing an economic stimulus and tax fairness," Gibbons said.
Porter said it was "only fair" that Nevadans are allowed to write off sales taxes since residents of other states can write off their state income taxes.
Rep. Shelley Berkley, D-Nev., voted against the bill despite the sales tax break. She said the measure was too targeted to help wealthy Americans while adding $50 billion to the federal deficit.
"Unfortunately there's a decent provision in a god-awful piece of legislation," Berkley said. "There is nothing more fiscally irresponsible that what we are doing today."
The sales tax deduction was calculated to cost the Treasury $2.1 billion over five years. But leaders from states that would benefit the most framed the issue as a matter of equity.
They argued that residents of income-taxing states such as California, Arizona and New York were able to deduct their state income taxes on their federal returns, giving them a lower tax bill.
Without a corresponding tax break, "Nevadans were paying more federal taxes on the same income," Mason said.
There were federal write-offs for sales tax up to 1986, when they were repealed by President Reagan and lawmakers at the time as part of a tax simplification effort. The sales tax deduction was resurrected in 2004 as a temporary benefit that its supporters now are trying to cement.
The sales tax benefit is most likely to impact Nevada taxpayers who itemize their tax returns, Mason said. Those are people who want to ensure a refund check after spending on mortgage interest, large medical expenses or donations to charity, he said.
Taxpayers can deduct either an amount calculated by the Internal Revenue Service based on family size and income, or a larger amount if they have saved receipts.
For Nevadans, the IRS-calculated deduction ranges from $304 to $1,970, according to published 2004 tax year tables. The deduction is on the Schedule A form, line 5b.
Some experts say that allowing taxpayers to deduct sales taxes is not good tax policy.
Daniel Mitchell, a chief economist at the Heritage Foundation, suggested Congress do away with all state and local tax deductions, including the state income tax and property tax. A presidential panel last month recommended a similar approach to simplify the tax code.
"There's no question the law has been discriminatory to states like Nevada," Mitchell said. "There's two ways of dealing with it, extend the sales tax or get rid of all deductions."
Mitchell said state deductions often prompt local politicians to raise taxes. For example, a $100 increase in state income taxes would be cushioned by the federal offset and equate to an $80 tax increase, he said.
