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Tax overhaul boon to Floridians

Congress restores the state's sales tax deduction for 2004 and 2005 as part of a large revamp of the corporate tax code.

Congress gave Floridians an income tax break Monday by reinstating the sales tax deduction as part of a $136-billion rewrite of the corporate tax code.

The tax bill, which the Senate approved 69-17, began as an effort to help U.S. exporters avoid European tariffs. But as Republican leaders hunted for votes, it swelled into a 633-page document trimming taxes for interests ranging from major manufacturers to native Alaskan whalers and ethanol producers. Other winners included fishing tackle box makers, NASCAR track owners and Chinese ceiling fan importers such as Home Depot.

Sen. John McCain, R-Ariz., called the tax cut package "a classic example of the special interests prevailing over the people's interests."

But the sales tax deduction was aimed squarely at individuals and is a boon for Floridians, as well as residents of the six other states that have no state income tax. It puts them on more equal tax footing with taxpayers in the rest of the country, who get to deduct their state and local income taxes on their federal returns. Those who live in states with a state income tax can choose between keeping the deduction on their state income or deducting state and local sales taxes instead.

The new deduction will save an average family of four nearly $300 in income taxes, Florida Chief Financial Officer Tom Gallagher said. It will apply only for the 2004 and 2005 tax years unless Congress decides to extend it. Congress eliminated the previous sales tax deduction in 1986.

"It will provide needed tax relief combined with economic stimulus for the state," Gallagher said. "I encourage Congress to make it a permanent part of the federal tax code."

Florida collects about $16-billion in state sales taxes and another $1-billion in local sales taxes each year. Roughly half of that is paid by individual Florida residents and the rest by tourists and businesses.

Taxpayers who want to take advantage of the deduction will have to itemize their return, which only about 35 percent of Americans do. They can choose between taking the sales tax deduction based on their actual receipts or by using IRS tables, which will provide estimates of the amount of sales tax an individual has paid based upon income level and other factors. Those tables have not yet been created.

But the tables will not take into account major purchases such as boats and motor vehicles, so taxpayers who use the IRS tables rather than actual receipts will be permitted to add those major items to the deduction derived from the table.

The White House has signaled that President Bush will sign the legislation. But the administration kept a low profile as the bill progressed, underscoring the controversy enveloping some provisions.

The Senate finished the bill, along with other pre-election business, in a testy mood, with clashes over provisions that were dropped from the compromise House-Senate tax measure.

Those battles, along with Republican divisions over how to pay for a farm disaster package, forced Congress to meet over the weekend and on the Columbus Day holiday. The House finished its work Saturday.

The Senate toiled into Monday as Democrats used delaying tactics to protest the removal of items from the original Senate version. These included provisions allowing federal regulation of tobacco, blocking Bush administration rules on overtime pay and cutting taxes for companies that pay workers who are reservists and are called to active duty.

"The conferees chose ceiling fans over businesses saving jobs of our National Guard and reservists," said Sen. Christopher Dodd, D-Conn.

In the end, the Senate approved separate bills on tobacco, overtime and reservists' pay. House passage seemed doubtful.

Though the tax bill would cut business taxes by $136-billion over the next decade, its backers say it will raise an equal amount of revenue by increasing other taxes, including extending customs fees and tightening rules governing the deduction for cars contributed to charities.

Supporters said the bill would create jobs - the loss of which during the Bush administration has become a campaign issue. Sen. Max Baucus, D-Mont., who helped write the measure, said 200,000 U.S. manufacturing firms would benefit.

"This bill's not perfect, but we all say many, many times we should not let perfection be the enemy of the good," Baucus said.

But opponents said the main beneficiaries would be well-connected special interests.

"What was supposed to be a quick and minor fix of the tax code blossomed into this huge giveaway of tax benefits," said Sen. Richard Durbin, D-Ill.

Sen. Charles Grassley, R-Iowa, responded earlier in the debate to critics who said the measure had provisions for specific interests by saying, "Well, that's true. But that's how the Senate works."

Work on the tax bill began two years ago as a drive to repeal a $5-billion-a-year tax break for U.S. exporters that the World Trade Organization ruled was an illegal subsidy giving U.S. companies an unfair advantage in global trade. About 1,600 American exports to Europe were slapped with penalty tariffs rising 1 percent monthly to 12 percent now.

The legislation repealed that tax break, which was to cost $49.2-billion over 10 years. The legislation's other savings included nearly $82-billion from closing tax loopholes and corporate shelters.

In their place, taxes were cut for U.S. manufacturers by $76.5-billion. The top corporate tax rate was cut by 3 percent - to 32 percent - and qualifying businesses were expanded to include engineering and architectural firms, film and music companies, and the oil and gas industry.

Tax breaks for multinational companies totaled $42.6-billion, including lower rates for one year for companies returning overseas profits to the United States.

Opponents said that would reward companies that moved jobs overseas, but supporters said it would increase capital available for investments in the United States.

There also is a $10.1-billion buyout of holders of quotas held by tobacco farmers, though a provision allowing the Food and Drug Administration to regulate tobacco was dropped.

To minimize lost tax revenue, the legislation made changes in tax laws that negatively affect certain industries, including the movie industry.

Information from Times wires was included in this report.

State and local sales taxes will be deductible on 2004 and 2005 federal income tax returns. Here are some questions and answers about the change in the law:

No. However, if you had nearly enough deductions to itemize on your last tax return, this new deduction might make it profitable for you to itemize in 2004.

Florida Chief Financial Officer Tom Gallagher estimates that an average family of four will save nearly $300. The higher your income, the bigger your deduction.

Kiplinger.com calculated that a Florida family of four with $90,000 in income would save $350 in federal income taxes if the family is in the 25 percent tax bracket. Taxpayers with higher incomes generally will save more.

Either the actual sales taxes you paid on purchases based on your receipts, or an amount from IRS tables.

The tables will calculate an estimate of what taxpayers have paid in sales taxes during the year based upon a variety of factors, including average spending in their state, filing status, number of dependents, adjusted gross income and state and local sales tax rates.

No. The tables have yet to be developed. Congress indicated it does not expect the secretary of the treasury to have the tables ready in time to file 2004 returns. If that's the case, "just how people will manage 2004 is anyone's guess at this point," said Mark Luscombe, principal tax analyst for CCH Inc.

You're in luck. Sales taxes on motor vehicles and boats can be deducted in addition to the amount from the tax table.

The deduction goes away unless Congress extends it.

Yes. Congress changed the law in 1986, taking away deductions for sales taxes and consumer interest as part of tax simplification. "It never amounted to a big tax deduction unless people had a major purchase," said St. Petersburg accountant Wayne "Skipp" Fraser. However, he said some people never quit saving receipts, thinking the tax is deductible.