Rostenkowski Reported Ready to Break Logjam, Keep Deduction for State Taxes

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 write-off, using the extra revenue as the cornerstone of his effort to lower tax rates without raising federal deficits.

$166 Billion in Revenue

Eliminating the deduction would add about $166 billion in federal revenues over the next five years--an amount that looms large in the delicate task of designing a tax program that would have broad popular appeal while retaining its so-called “revenue neutrality.”

In September, when Rostenkowski’s staff offered a new tax package as a starting point for the committee’s deliberations, he proposed a complicated compromise formula that would retain part of the deduction--a position that seemed to satisfy neither advocates nor opponents of the provision.

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.

‘Serious Deal-Making’

A House Democratic aide said that Rostenkowski has reached “the stage of serious deal-making,” but a member of the panel cautioned that “there is nothing set in concrete--no blood exchanged.”

John Sherman, a spokesman for the committee, said that Rostenkowski has agreed that he will need to move closer to the position of those who support keeping the state and local tax deduction intact. And Sherman acknowledged that a package acceptable to a majority of House members might well require no change in current law.

“He could probably win the battle in the committee (for his compromise position),” Sherman said, “but that might end up losing the war (on the House floor).”

Although Rostenkowski’s concession would win him vital support, it would also make it difficult to keep the overall plan from losing revenue, a position that both Reagan and Rostenkowski have vowed to maintain. 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 in his search for consensus, would be forced to accept somewhat higher rates, but they warned that Reagan may reject such a proposal. The President has insisted that the top individual 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.

The committee is under pressure to produce a bill that the House can consider before it adjourns in December. Without an agreement on a package that can clear the House this year, most lawmakers believe, there will be little chance to revive the issue until after the 1986 elections. The Senate is expected to take up the bill next year only if the House approves a package this year.

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.