April 15, 2003

Like a Bad Penny

The small band of people pushing for a state income tax plan on harassing folks as they drop off their federal tax returns today. Lovely. TFT - Tennesseans for Far Higher Taxation - says Tennessee needs an income tax on top of its nearly 2 dozen other taxes and fees, plus a small reduction in the sales tax on a very small and arbitrary list of food items, because we Tennesseans can't deduct our state taxes from our federal taxes.

TFT has always played fast and loose with the truth on that issue, by using foggy language that makes it sound as if Tennesseans would see a dollar-for-dollar exchange under such a system.

TFT wants you to think that if you paid $100 in state income taxes, you would see your federal income tax bill fall by $100. But the truth is, you would only deduct the $100 from your adjusted gross income, which might change your tax bill by a few dollars. TFT also makes it sound as if every Tennessean would save money this way, but that's patently untrue. Most Tennesseans don't have enough possible deductions to itemize, and just take the standard deduction. Being able to deduct a state income tax wouldn't benefit them. And the notion that every Tennessean would save money is patently false - after all, one of TFT's goals for "tax reform" is for the state to have increased revenue. Can't be more money if everyone is paying less.

TFT - and the story I linked to above in the Memphis paper - also don't bother to tell you that there's another way to solve the deductibility problem: restore federal deductibility of state sales taxes. U.S. Rep. Marsha Blackburn, R-Tenn., has sponsored legislation that aims to do exactly that.

UPDATE: Devereaux C. writes to say the following:

I just did a little ciphering on this using the current IRS tax tables. Assuming married taxpayers filing jointly, with adjusted gross income of $50,000.00. A 3.5% Tennessee income tax on that, according to the TFT tax tables (the evil TFT that is) = $700.00.

Assuming that the taxpayers had itemized deductions equal to the standard deduction ($7,850.00) for the State income tax, adding the $700 State tax to the deduction equals an itemized deduction of $8,550.00. If they have one child, they are entitled to deduct $9,000.00 on line 40.

The resulting taxable income is $32,450.00 with a State income tax, and $33,150.00 without a State income tax deduction. The federal income tax on $32,450 for a married couple filing jointly is $5,666.00. The federal income tax on $33,150 for a married couple filing jointly is $5,303.00.

So, if my calculations are correct (and I make no warranties of correctness), paying $700 in State income tax would reduce this family's federal tax by $363.00, a net loss to them of $337.00.