Rostenkowski Reportedly Wavering : Deduction for State, Local Taxes Revived

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), scrambling to build support for a comprehensive tax-overhaul package, is leaning toward a major concession that would maintain the current federal deduction for state and local taxes, members of the panel said Thursday night.

The issue has been one of the key stumbling blocks to an overall compromise on tax revision. Members of Congress from such high-tax states as California and New York have insisted that the deduction be maintained.

President Reagan had proposed abolishing the popular writeoff to raise about $166 billion over the next five years. The extra revenue would be used as the cornerstone of his effort to lower tax rates.

In September, Rostenkowski proposed a compromise that would retain part of the deduction, a position that seemed to satisfy neither advocates nor opponents of the provision.

Issue Sensitive

Several members of the Ways and Means panel said Thursday that Rostenkowski had suggested in the last few days that he was willing to abandon the idea of partly closing the tax preference if, by doing so, he could win support for a broad tax package.

One committee member, acknowledging that the issue is particularly sensitive, said that Rostenkowski had agreed to keep the current deduction intact. But another member cautioned that “there is nothing set in concrete--no blood exchanged.”

One Democratic aide said that Rostenkowski has reached “the stage of serious deal-making.”

Although Rostenkowski’s concession would win him vital support, it would also make it difficult to keep the overall plan from losing revenue, as Reagan has demanded. By giving in on the state and local tax deduction, Rostenkowski would be faced with the need to eliminate other tax preferences that are popular with other groups, or to leave tax rates well above the levels proposed by the White House.

Reagan Rejection Feared

Committee members speculated that Rostenkowski, who has been meeting individually with members to hammer out a plan, would be forced to accept somewhat higher rates, but warned that Reagan may reject such a proposal. The President has insisted that the top tax rate under any tax bill should not exceed 35%.

The committee, after more than three weeks of deliberation, has made only halting progress in its effort to piece together a tax plan.

It has refused to confront most of the difficult issues--such as the deduction for state and local taxes, investment tax credits for businesses and taxation of employee fringe benefits--because there was no clear consensus on how to resolve them.

The committee is under pressure to produce a bill Congress can consider before it adjourns in December. The panel also is tied up with such controversial issues as the federal debt ceiling, Superfund and trade legislation. Committee members plan to meet over the weekend in what some described as a make-or-break session.

Accepted Idea

One member of the committee staff acknowledged that Rostenkowski has accepted the idea that he will have to move closer to the position of those favoring the state and local tax deduction to build a package acceptable to a committee majority.

Initially, Rostenkowski went more than halfway toward retaining the deduction, agreeing to allow taxpayers to deduct up to $1,000 of any state or local income and property taxes, or to deduct any such taxes that exceeded 5% of their adjusted gross income. Taxpayers would be able to choose whichever method gave them the largest deduction.

Congressmen from states with high tax burdens rejected his proposal, however, saying that it would put a crimp in the ability of local governments to provide needed local services such as education and welfare.