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I was thinking about this after reading this excellent answer to another question.

Excluding the obvious cynical answer (to bring in more tax dollars), what is the logic behind the IRS allowing a choice of one state tax to be deducted on Schedule A (state income or state sales tax), but not both?

And why does it specifically exclude certain other state taxes as well? (such as a tax on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees)

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  • Imagine the loopholes and extra paperwork involved if IRS allowed other taxes you mentioned such as gas tax and sewer assessments. The tax code is already complex enough! – Mark Stewart Sep 20 '18 at 16:24
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what is the logic behind the IRS allowing a choice of one state tax to be deducted on Schedule A (state income or state sales tax), but not both?

I believe the idea was to allow deduction of income taxes only, however - there are States that do not have income taxes. So in order to not discriminate against taxpayers living in these States, sales tax deduction was allowed as a choice, if it is more beneficial.

And why does it specifically exclude certain other state taxes as well? (such as a tax on gasoline, car inspection fees, assessments for sidewalks or other improvements to your property, tax you paid for someone else, and license fees)

Property taxes are deductible, as long as they're based on the property value. Flat assessments are not based on the property value, thus are not taxes - they're assessments. Assessments are added to the basis in the property and reduce your gain (and thus reduce the capital gains tax, not income tax).

Portion of the car inspection/license fee that is based on the car value is deductible, as a personal property tax. This portion (if exists, not all States have that) should be marked on the DMV statement you get.

Consumption taxes (with the exception for sales tax, as described above) are not deductible.

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  • "So in order to not discriminate against taxpayers living in these States" How is it discriminating to not deduct something that you didn't pay in the first place? If anything, being able to choose deducting income tax or sales tax is kind of a positive discrimination for people from states without income tax, because those people can deduct all of their state tax (only sales tax for them, ignoring other types of state tax for now), but people from states with income tax only can deduct part of their state tax (only income part or only sales part). – user102008 Jun 24 '14 at 1:06
  • @user102008 maybe the constitution? equal application of the law applies to the federal government's treatment of states as well, although it was only recently clarified that way some legislatures and regulators actually consider the constitution when they make a law. Open to other possibilities though – CQM Jun 24 '14 at 2:03
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    In reality it may just mean that legislators from such states were powerful enough to put the change through into tax law. – BrenBarn Jun 24 '14 at 4:49
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    @user102008 I'd say that since the states that don't have income taxes finance most of their activities through sales taxes - allowing choosing which one to deduct is fair. Most (not all, I live in CA) states with income taxes have significantly lower sales taxes than those without. – littleadv Jun 24 '14 at 14:08
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    The comment by @user102008 highlights what makes this puzzling to me. If State A is funded 100% by income tax, State B is funded 100% by sales tax, and State C is funded 50% by income and 50% by sales - then it seems the citizens of States A and B have an advantage relative to citizens of State C when it comes to tax deductions. It makes sense to me why both taxes are deductible, but it puzzles me why only one can be chosen, and not the combination. – Kevin K Jun 24 '14 at 15:34

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