Steven Mendelsohnⁱ
University of Iowa, College of Law
Law, Health Policy & Disability Center

As spring approaches, people's attentions turn to many things, including taxes. While our concerns are often focused on our federal income tax returns due April 15, we should remember that state and local taxes also play an important role. State income taxes rarely amount to as much as federal taxes, but when you take state income taxes, sales taxes, business and property taxes all into account, the potential impact becomes clear. For that reason, this article seeks to remind readers of potential state tax issues that might prove of particular relevance to people with disabilities.

State Income Taxes

Well over 40 states levy income taxes. While these are largely parallel to the federal tax in the categories they use (gross income, taxable income, deductions, credits and the like), the definitions of each of these may vary. Thus, on occasion, state taxable income may be a different amount than federal taxable income, and different credits or deductions may exist under your state's law than under the federal. The amounts may be different, or the definitions could be. In some cases, these differences will be relevant to people with disabilities and their families. For example, the size of standard deductions or personal exemptions may vary. People with disabilities as defined by the Americans with Disabilities Act or by some other law, or certain specific disabilities (most typically blindness or deafness) may be the object of these provisions.

Where such provisions exist, they may apply to all taxpayers or only to those with limited incomes. They may apply to even more limited subclasses, such as veterans with disabilities.

These provisions are varied and changeable. Unless you make a special effort to find out about them, and unless you ensure your tax preparer is aware of the fact that the taxpayer or a family member is a person with a disability, the possible tax advantage (or for that matter the risk) may not come to light.

Income tax preparation software claims to be comprehensive, but there are real questions as to its completeness in unearthing these provisions and discovering the situations to which they apply.

Sales Taxes

Again, all but a few states collect sales taxes. Sales taxes are of two sorts: those collected by states and those levied by local governments and special districts. As with income taxes, although the general structure and administration of sales tax laws are broadly similar from state to state, variation exists in the range of items or services that are exempt and in the ways of identifying and claiming those exemptions. Some of these exemptions can prove of importance to people with disabilities.

Among the most common state/local sales tax exemptions are for prescription pharmaceuticals, medical services and other kinds of medical equipment and supplies, often including diabetic supplies and hearing aids. Where a state law specifies that a given device is exempt, the vendor knows not to charge for it and the customer need not worry about getting the exemption. Yet, in other cases, where it is the nature of the item or the purpose that qualifies it for the exemption, things may not be so straightforward. A good example would be supplies such as replacement batteries for exempt hearing aids.

Depending on your state, one of three basic approaches is likely to be most appropriate. First, in any state, you need to clarify the scope of the exemption to make sure it applies to what you are buying, particularly with items of assistive technology (AT). Every state tax agency has a department for answering questions or issuing rulings on questions. Depending on the state, the state may notify vendors or issue certificates or opinions to retail purchasers. Thus, one way for claiming the sales tax exemption is for the vendor not to charge it, or for the purchaser to indicate to the vendor who tries to charge the sales tax that the item is exempt. The third way is to claim a refund for taxes paid. This may come from a vendor or a customer, depending on the circumstances.

In some states, non-profit or public sector retail purchasers may have a blanket sales tax exemption for anything they buy in the course of their work. While this can make it easier for organizations- including disability consumer groups- for the individual, this kind of provision does not solve the problem.

Worth noting here is an interaction between federal income and state sales taxes. Before 1986, state sales taxes were available as an itemized deduction on one's federal return. Then they went away, but now they are back. Taxpayers once again have the choice between claiming their state income or state sales taxes as a federal deduction, depending on which is larger, if they itemize. If you make big-ticket AT purchases that are not sales tax exempt, you may still be able to get some tax relief.

Business Taxes

Small businesses are becoming an increasingly prominent pathway to self-sufficiency for people with disabilities. States impose a variety of taxes on small businesses, including licensing and user fees, franchise taxes, gross receipt taxes and a number of others.

Sprinkled through these various state tax provisions are a number of provisions, usually in the nature of reduced taxation, for various categories of people with disabilities. Again, legal status, nature of the disability, income, age and other factors may all play a role. It is important to find out about these provisions, especially for a new or small business with limited capital and a need to watch every penny.

Also see the June 2005 EQUITY Article "Tax Issues for Self-Employment and Business Startups" for more information.

Property Taxes

More than any of the other forms of taxation we have discussed so far, property taxes are a joint state and local creation. Provisions of state or local law or by a combination of the two will govern each aspect of their calculation and collection.

Property taxes are ordinarily determined by two variables: assessed valuation and tax rate. Where disability comes into the picture is in the existence- usually under state or local auspices- of provisions that reduce or eliminate the tax for some or all people with disabilities. These provisions take many forms. They may exempt some of taxes owed, or that certain increases may not apply. Beyond the how, there is the question of whom. These provisions may apply to people who are registered or certified in various ways as having a disability, to people with disabilities over a certain age or with incomes under a certain level, to veterans with disabilities, or to any of a number of other subgroups.

Third-party Provisions

One of the important truths of tax law is that we do not always know the provisions that have the greatest effect on our lives. This is because they are provisions that do not apply to individuals directly, but apply to third-parties, whose actions and decisions in turn effect people's lives, whether we know it or not.

As these relate to people with disabilities, one of the most familiar examples under federal law is the disabled access credit, which gives small businesses a significant tax break for various measures to make employment and public accommodations more accessible.

However, it is not only at the federal level that important third-party tax law provisions exist. Sometimes these are obscure and often indirect, but their importance, must not be overlooked.

Numerous models of economic development incentives exist among the states, some of which can be applied to issues of concern to people with disabilities. Beyond these, there are some very interesting opportunities available in the states to use tax law as a source of funding for programs and initiatives of benefit to people with disabilities.

Dedicated Funds

One key example is what may be called dedicated revenue. Dedicated revenue is public money raised and set aside for a particular purpose. The most famous example of dedicated-revenue in the tax world is the federal presidential campaign fund check-off, whereby taxpayers are allowed to designate $1 of their taxes to go to the presidential campaign fund. There are examples of dedicated tax-based fund-raising at the state level as well. For instance, at least one state for a number of years designated a different cause or purpose each year for an income tax voluntary contribution. In an age of growing competition for increasingly scarce resources, the politics surrounding any such efforts to target public funds may prove distasteful and destructive to coalition building and group efforts. Yet, in those instances where broad-based objectives that take people with disabilities into account can be devised and can gain sufficient support, this tax strategy ought to be used.

Two well-known variations should be noted. First, states underwrite, issue and provide tax-exemption for a variety of bonds. Many of these are issued to pay the costs of economic or infrastructure development, ranging from shopping centers and roads to university dormitories and sports stadiums.

Municipal bonds would not exist without federal and state tax preferences. Yet the economic development potential of such bonds for people with disabilities, in terms of the support of enterprises, the hiring practices, the accessibility requirements or other issues, have rarely been explored.

User fees are not often thought of as taxes, but they are a form of taxation by another name. More than half the states operate specialized telecommunications equipment distribution funds, financed by surcharges (taxes by another name) on each telephone line in the state. The potential of this approach for meeting other telecommunications access costs needs to be explored. While resistance to fee increases is great, when the fee has a specific purpose that people support and where the funds are set-aside for that purpose, normal high levels of opposition may be reduced.

Charitable Contributions

One way U.S. society channels funds to various causes is by making it possible for people to obtain a tax deduction by contributing to charities and non-profit organizations. People with disabilities are all too familiar with the pitfalls and loss of dignity that can result from charities that provide services.

Opportunities do exist for making tax deductible charitable contributions for economic development, empowerment, and independent living that enhance the quality of people with disabilities lives. Consider if state-chartered, tax-favored organizations were created to receive and disperse funds for economic development, for assistive technology, for matching funds components of Individual Development Account (IDA) programs, or for similar goals. All this could be done, often under conditions where the likelihood of a high rate of return to the state is strong and measurable.

One example of a State tax credit dedicated to building assets was featured in the 2005 June EQUITY. See "Using Tax Policy to Promote Asset Building Strategies for People with Disabilities: A Case Study of the New Hampshire Community Development Finance Authority".

Conclusion

The ways that state and local tax laws can be used for the benefit of people with disabilities are limited only by our imagination. Starting with what already exists and applying it to the concerns and situations of people with disabilities will always represent a productive starting point for harnessing this imaginative power.

i Steven Mendelsohn is a nationally recognized legal expert on tax policy and its impact on persons with disabilities. He is currently co-principal investigator of the Asset Accumulation and Tax Policy Project (AATPP) at the Law, Health Policy and Disability Center, University of Iowa, College of Law. AATPP is 100% funded by U.S. Department of Education grant #H133A031732.