Write-off standoff: Sales tax break caught amid ‘cliff’ talks

Nevadans have just a little bit further to fall than most Americans if the country tumbles off the "fiscal cliff" Jan. 2.

Amid all the jostling over the federal tax rates scheduled to expire and increase at the end of this year – income, payroll, estate, capital gains, dividends and the alternative minimum tax – lawmakers from Nevada and a handful of other states are fighting to revive the expired deduction for state and local sales taxes.

The deduction has already had more lives than Lazarus. It was explicitly authorized in 1942, revised in 1964 and repealed in 1986. The sales tax deduction was reinstated in 2004, but only as a deduction in lieu of state income taxes – until 1986, taxpayers could deduct both their state income and sales taxes. The break was temporary, however, authorized for only two years. And every two years, like clockwork, the deduction has been allowed to die, only to be resurrected at the last possible moment for another two years.

If Congress doesn’t extend the break for at least the 2012 tax year, Nevadans who have claimed the deduction will see their federal tax bill go up by hundreds of dollars in the spring, even if every other tax rate is extended.

The federal tax code is a Byzantine abomination, created to encourage and discourage certain behaviors, to reward favored constituencies and punish unpopular ones. It is in desperate need of reform and simplification. However, the sales tax deduction, when considered against the rest of the code, is a fair policy. As long as state income taxes are deductible, the residents of states that have resisted creating an income tax should have the ability to deduct a major levy as well.

Lawmakers from Nevada, Texas, Washington, Wyoming, Florida, South Dakota and Tennessee signed a letter sent last week to Senate Majority Leader Harry Reid, D-Nev., and Senate Minority Leader Mitch McConnell, R-Ky., urging the leaders to reinstate the deduction retroactively for 2012. The likelihood that Sen. Reid would keep the deduction in its grave, when more than 314,000 of his constituents claimed it on their 2010 returns, is slim.

That said, the ever-temporary nature of the deduction is a small part of the much larger problem facing the country: unpredictable tax rates. Uncertainty over whether taxes will rise or fall is discouraging the investment most businesses need to create jobs. Investors large and small are heading for the sidelines and taking their capital with them.

Enough with the patchwork tax legislation. Lock in tax rates for at least 10 years. Then make the sales tax deduction permanent, or let it die, once and for all. And – if we have to settle for option two – repeal the deduction for state income taxes, too. It’s only fair.