[Congressional Record Volume 147, Number 18 (Thursday, February 8, 2001)]
[Senate]
[Pages S1222-S1223]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. THOMPSON (for himself, Mr. Frist, Mrs. Hutchison, and Mr. 
        Gramm):
  S. 291. A bill to amend the Internal Revenue Code of 1986 to allow a 
deduction for State and local sales taxes in lieu of State and local 
income taxes and to allow the State and local income tax deduction 
against the alternative minimum tax; to the Committee on Finance.
  Mr. THOMPSON. Mr. President, today I am introducing legislation that 
will address an inequity in the tax code that affects the citizens of 
my state and citizens of other states that do not have a state income 
tax. Tennesseans are discriminated against under federal tax laws 
simply because our state choose to raise revenue primarily through a 
sales tax instead of an income tax. My bill would end this inequity by 
allowing taxpayers to deduct either their state and local sales taxes 
or their state and local income taxes on their federal tax forms, but 
not both. My bill would also ensure that Tennesseans who benefit from 
this deduction would not be caught under the federal alternative 
minimum tax, AMT, by allowing individuals to deduct their state and 
local taxes paid when computing their AMT tax liability.
  Under current law, individuals who itemize their deductions for 
federal tax purposes are only permitted to deduct state and local 
income taxes and property taxes paid. State and local sales taxes are 
not deductible. Therefore, residents of nine states are treated 
differently from residents of states that have an income tax. Seven 
states--Texas, Wyoming, Alaska, Florida, South Dakota, Washington, and 
Nevada--have no state income tax. Two states--Tennessee and New 
Hampshire--only impose an income tax on interest and dividends, but not 
wages.
  Prior to 1986, taxpayers were permitted to deduct all of their state 
and local taxes paid, including income, sales and property taxes, when 
computing their federal tax liability. The ability to deduct all state 
and local taxes is based on the principle that levying a tax on a tax 
is unfair.
  In 1986, however, Congress made dramatic changes to the tax code. The 
Tax Reform Act of 1986 significantly reduced federal tax rates on 
individuals. In exchange for these lower rates, Congress broadened the 
base of income that is taxed by eliminating many of the deductions and 
credits that previously existed in the code, including the deduction 
for state and local sales taxes. The deduction for state and local 
income taxes, however, was retained.
  The 1986 Act also tightened the alternative minimum tax rules. The 
AMT is a separate, complicated tax system that was originally intended 
to ensure

[[Page S1223]]

that wealthy taxpayers could not use the tax code's many deductions and 
credits to completely zero out their federal tax liability. However, 
each year more and more middle income individuals are being caught 
under the AMT who were never intended to be affected by it. Under 
current law, individuals are not permitted to deduct their state and 
local taxes when computing their alternative minimum tax liability. 
This is a major factor pushing Americans under the AMT. By allowing 
individuals to deduct state and local taxes under the AMT, my bill will 
ensure that restoring equity in this area will not push more 
Tennesseans under the AMT. It makes no sense to me to give Tennesseans 
a tax cut on the one hand, then take it away with the other.
  I believe that our federal tax laws should be neutral with respect to 
the treatment of state and local taxes. As I have said, that is not the 
case now. The current tax code is biased in favor of states that raise 
revenue through an income tax. The current tax code is also needlessly 
complex. There is widespread agreement among tax experts that the AMT 
is a primary cause of complexity in the tax code and should be 
repealed. I strongly support comprehensive reform of the tax code that 
will address issues such as neutrality, fairness and simplicity. As we 
work to reform the overall tax code, restoring equality in these areas 
and should be a part of the discussion.
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