Again Urges Eliminating Deductions for State Taxes : Reagan Calls for ‘True Tax Reform’

President Reagan, calling on Senate Republicans to deliver “true tax reform” this year, suggested Wednesday that senators resurrect his plan to eliminate federal deductions for state and local taxes.

And Senate Finance Committee Chairman Bob Packwood (R-Ore.) hinted that a compromise might be possible on the proposal, a principal source of new revenue in the Administration’s tax revision package.

Lays Out ’86 Agenda

Last month, Packwood said that the proposal, which had been killed by the House, was not likely to be restored by the Senate. But, shortly before the President held a breakfast meeting Wednesday to lay his 1986 agenda before GOP senators, Packwood told reporters that he might offer a plan to sharply limit the amount of state and local taxes that taxpayers may deduct when filing itemized returns.

He said that he now finds “not bad” a proposal to allow individuals no deductions for state and local sales taxes and deductions of only 70% of the amount claimed for other state levies, such as property and income taxes.

Under that plan, a 70% ceiling would also be placed on all other itemized deductions except those for home mortgage interest and charitable contributions. A similar plan was backed by House Republicans last year, but it was killed as the House Ways and Means Committee wrote an alternative tax revision measure.

Cuts in Tax Rates

Over five years, elimination of the deductions for individuals’ state and local taxes would increase revenues by an estimated $166 billion and provide funds to offset proposed cuts in federal tax rates and increases in deductions.

At his breakfast session with the senators Wednesday, Reagan spoke favorably of a bill pushed through the House by the Democrats and sent to the Senate, calling it a “first step” toward the kind of tax revision he wants. But, he added that “we do believe more needs to be done to achieve true tax reform.”

“The improvements we will be looking for in the Senate include a 35% top tax rate, a $2,000 personal exemption for at least low- and middle-income families (and) tax incentives which lower the cost of capital,” he said.

White House spokesman Larry Speakes, who relayed the President’s remarks to the media, said that Reagan did not explicitly ask the senators to restore his plan to eliminate deductions for state and local taxes. Instead, Speakes said, Reagan “mentioned it and indicated that he was disturbed when that was taken out (of the House bill), and he cited his arguments for it--that two-thirds of the people would not be affected by that change. One-third only itemize.”

Both Reagan and Packwood reiterated their view that a final tax bill should be “revenue neutral”--producing no more or no less revenue than current law--even though the three specific changes that Reagan wants would reduce government revenues.

Speakes said he knows of no plan for the President to produce a list of ways to increase revenues to balance the reductions in the current tax bill. But he said that Reagan plans to work directly with Packwood and other Senate leaders as the Senate version of the measure takes shape.

Gramm-Rudman Hitch

The struggle to write a Senate bill is expected to be significantly complicated by a little-noticed provision of the new Gramm-Rudman deficit-reduction law, which makes it more difficult to pass revenue-reducing tax proposals.

The measure requires that any tax proposal that would reduce revenues receive at least 60 votes, instead of a simple majority, if it comes to the floor after the Senate has adopted its initial budget resolution. The vote on the budget resolution is scheduled for April 15.

Congressional budget staff members said that the provision was quietly inserted into the Gramm-Rudman law with little debate and no discussion with the White House about its implications for tax reform.

Packwood predicted that the coming fiscal year will be the most difficult under Gramm-Rudman; after that, he said, the government will be on a “glide path” toward a balanced budget.

Public Support Sought

Last year, Reagan traveled across the nation, week after week, in an effort to generate grass-roots support for tax revision, while members of Congress repeatedly told him that they could sense no strong sentiment for it.

In giving the GOP senators their send-off for the second session of the 99th Congress, Reagan told them Wednesday that he is still convinced that the public wants changes in the nation’s tax code.