Reagan Backs Packwood Tax Revision Bill

Senate Finance Committee Chairman Bob Packwood (R-Ore.) won President Reagan’s support Tuesday for a draft tax revision bill that would repeal the federal deduction for state and local sales taxes and personal property taxes and limit the write-off for state and local income taxes.

“By and large, he likes the bill,” Packwood said after outlining details of the plan for the President. He added that Reagan told him: “Bob, from what I know of the outline, I like the bill and congratulate you on producing it.”

Although Packwood refused to discuss any details of the plan, which was prepared by the Finance Committee staff, other committee members disclosed some of the key provisions. Sen. John Heinz (R-Pa.) said that the committee’s draft resembles that proposed last year by Reagan.

No ‘New Tax’

“The proposal is closer to what the President proposed than what the House passed,” said Heinz. “There is nothing in it that you or I would consider a new tax.”

The Finance Committee is expected to alter the proposal before sending it to the Senate floor, where more changes are possible. After the Senate passes a tax overhaul bill, its provisions will be reconciled with those of the bill the House passed last year.

Finance Committee members said that Packwood’s draft bill would replace the existing multiplicity of individual tax rates, ranging from 11% to 50%, with three rates--15%, 25% and 35%. Reagan had asked for those three rates, but the House added a fourth--38%.

Packwood’s bill also would raise from $1,080 to $2,000 the personal exemption for most taxpayers. The wealthiest taxpayers--families with incomes exceeding $75,000--would get less than the full increase, although committee members did not disclose how much less. The House bill would set the personal exemption at $2,000 for taxpayers who do not itemize their deductions and $1,500 for those who do.

One of the most controversial aspects of the bill will be its treatment of state and local tax payments, which currently can be deducted from federal income taxes. Sen. Daniel Patrick Moynihan (D-N.Y.), a committee mEmber, said the bill would repeal the current deduction for state and local sales taxes as well as personal property taxes on such items as cars and boats.

Deduction Limits

The federal tax deduction for state and local income taxes would be limited for families with incomes in excess of $75,000. Their deduction would be worth only 25% of their tax payments instead of the 35% that they would otherwise get because they would be in the 35% tax bracket.

At the same time, the coveted deduction for real estate taxes would remain untouched--as would the current deduction for charitable contributions.

The President had proposed eliminating state and local tax deductions entirely, saving the federal government about $122 billion over the next five years. The committee draft plan would save only about $27 billion. The House-passed bill would not change the deduction for state and local taxes.

Members said that the committee draft would not tax employer-provided fringe benefits. But it would restrict the amount an individual could put into tax-deferred retirement accounts such as individual retirement accounts and “401 (k)” plans.

To help offset the revenue lost from the reduced tax rates, Packwood’s bill would increase some current excise taxes. But it does not include a plan for tax amnesty or an oil import fee, two ideas that have been widely discussed in recent weeks.

Tougher on Business

The Senate draft bill would be tougher on business than current law, but not as tough as the House-passed bill. Like Reagan’s proposal and the House bill, the Senate draft would repeal the investment tax credit. Its depreciation benefits for new investments would be more generous than the House bill’s would be.

Although Packwood’s bill would neither raise nor lose federal revenue, Heinz predicted that some committee members would try to use the bill to raise revenue to help reduce the budget deficit. “It’s about the only graceful way out for the President,” he added.

Unlike the House bill, the Senate draft would not take effect retroactively on Jan. 1, 1986--a provision that has dampened business activity in recent months. Most of the provisions in the Senate draft would go into effect next year.

Packwood said that his committee would begin drafting a bill next week, using the new draft as a starting point, with the goal of bringing it to the Senate floor in June. “I think we’ll pass it and in a fashion acceptable to the bulk of the Senate and the President,” he said.

Packwood made every effort to keep the details from becoming public. In separate briefings on Tuesday, he outlined the plan for seven committee members but refused to give them a copy of the plan.

“I got to look inside a big, black notebook,” said Heinz, “but I had to return the notebook.”