Tax Breaks May Be Abolished Jan. 1 : Would End Problem of Revoking Deductions Retroactively

House and Senate tax writers indicated Friday that their proposed tax-overhaul law will abolish various tax breaks beginning next Jan. 1 but they also hinted again that the law’s payoff--a steep cut in tax rates--may be delayed until later in 1987.

Agreement on an effective date for the elimination of the tax breaks emerged after the release of staff documents which suggested that the House drop its plans to implement many tax-law changes in 1986, and instead follow the Senate’s 1987 schedule.

The leaders of the House-Senate conference committee that is combining the two tax bills informally agreed with those suggestions, saying the Jan. 1 date will end the politically touchy problem of revoking some taxpayers’ deductions and other tax preferences retroactively.

‘Few Exceptions’

“With a few exceptions, the bill will not be retroactive. Dates will be prospective,” Senate Finance Committee Chairman Bob Packwood (R-Ore.) said. Rep. Dan Rostenkowski (D-Ill.), the House Ways and Means Committee chairman who heads the conference committee, said he is “not enamored” with the idea of revoking tax breaks after the fact.

But it remained unclear as to when the reductions in tax rates would take effect. Both the House and Senate measures envision a six-month lag between the end of tax breaks and the lowering of rates but that has come under attack because it would create a sharp, one-time jump in taxpayers’ bills.

Senate Majority Leader Bob Dole (R-Kan.), a member of the conference committee, warned Thursday that this lag is “not what we’ve been advertising” as tax reform. On Friday, Packwood placed the time lag among three controversial and costly sticking points that the conferees must resolve before agreement can be reached on a final law.

Tax Treatment of IRAs

Two other principal issues, he said, are the tax treatment of contributions to individual retirement accounts and tax relief for so-called middle-income taxpayers earning between $20,000 and $50,000 annually.

On Friday, the second day of discussions, House and Senate panel members again traded jabs over the equity of each bill’s treatment of middle-class and wealthy taxpayers.

The House bill taxes income at generally higher rates than the Senate--from 15% up to 38%--but because it preserves more deductions, it gives a larger tax cut to both the middle class and the wealthy. The Senate bill taxes more than four of every five taxpayers at a 15% rate, and the remainder at a peak rate of 27%.

Because the Senate bill phases out some deductions and other breaks for wealthy taxpayers, however, a tax bite of 32% and even higher would apply to earnings between $75,000 and $185,000 a year. Above that level, the rate on each new dollar of income reverts to 27%.

Under Repeated Fire

That “bulge” in rates in the Senate bill came under repeated fire from House members on Friday.

Rep. Bill Archer (R-Tex.) angrily argued that “it’s just not true” that the Senate bill’s maximum rate is 27%, and challenged the Senate conferees to redraw their two-tier tax system to add a third, higher rate for the rich.

Packwood and Sen. Bill Bradley (D-N.J.) noted, however, that the Senate bill grants far smaller tax cuts to the very rich than does the House legislation, largely because it eliminates more tax breaks.

And Treasury Secretary James A. Baker III, in a brief appearance, said the Reagan Administration also favors more tax relief for the middle class “if you can come up with a way that doesn’t destroy economic growth.” Sharply higher corporate taxes, he warned, would raise prices, make American goods less competitive and slow the economy.