Those taxpayers who itemize deductions have the option of deducting state and local taxes from their income. In doing so, each individual taxpayer must decide to deduct either the income tax withheld from his or her wages, or the total sales tax he or she paid during the tax year.

While the option of deducting sales taxes expired on December 31, 2011, it may be renewed by Congress in order to be in effect for 2012. If the provision is not extended by Congress, sales taxes on purchases in 2012 will not be deductible, but tax paid on purchases made in 2011 will continue to be for returns filed this year.

Individuals who choose to deduct sales taxes have the additional option of reporting the exact amount (if they saved all their receipts) or using an estimate from the Internal Revenue Service that depends on their state and their income level.

States vary widely in the percentage of taxpayers who use each deduction, with the greatest impact seen in states that have a very low or no state income tax. In general, more taxpayers elect to deduct income taxes than sales taxes. However, as one might expect, states that have no (or low) income taxes tend to see most taxpayers deducting sales taxes instead.

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming are all states in which over half of the taxpayers elect to deduct state and local sales taxes, rather than income taxes, on their federal return, and these are all states that have either a very limited income tax (in the case of Tennessee) or no income tax at all.

As the option to deduct sales tax, rather than income tax, is the temporary provision that must be extended each year, taxpayers in those states therefore have the most to lose should this option not be extended for a further year.