Packwood Sees Passage of Tax Reform in 1985 : Plan to End Deductions for Local Levies Could Add $1,100 to California Family’s Bill, Study Says

WASHINGTON —  Senate Finance Committee Chairman Bob Packwood (R-Ore.) predicted Sunday that Congress would have a sweeping tax reform bill on President Reagan’s desk by Christmas, but a new congressional study showed that a proposal to eliminate deductions for state and local taxes could add $1,100 to the average California family’s federal tax burden each year.

Dropping state and local tax deductions, which many state and municipal officials consider sacrosanct, is just one of several controversial proposals that Reagan is expected to make Tuesday when he unveils a long-awaited reform program, which would lower overall federal tax rates while streamlining the current patchwork system of deductions.

Few Changes Predicted

Packwood, interviewed on ABC’s “This Week With David Brinkley,” said he believes that Reagan’s package will emerge from Congress virtually intact and that it will go “to the President by Christmas.”

But Chairman Dan Rostenkowski (D-Ill.) of the House Ways and Means Committee, which will begin hearings on the proposal next month, warned on NBC’s “Meet the Press” that the package might pass the Democratic-run House but would get hung up in the Republican-controlled Senate.

Although Rostenkowski and other top Democrats have endorsed the concept of tax reform, they have expressed reservations about some of the changes that Reagan is expected to propose. Among the most controversial is the one that would end the rule allowing taxpayers to deduct state and local tax payments from their federal bills.

City and state officials contend that such a change could cut $12 billion a year from state and local revenues because taxpayers who lose the right to deduct the levies from their federal payments would seek other ways to avoid paying them. The officials also say the change would make taxpayers more reluctant to go along with state and local tax hikes.

But the Treasury Department, which loses an estimated $28 billion yearly in tax revenues because of the deduction, urged elimination of the break on the ground that it unfairly benefits persons in states that impose high taxes.

Supporters of the change also argue that, for most low- and middle-income taxpayers, the reform package would result in lower overall rates, which would more than offset the effect of eliminating the state and local tax deduction.

The congressional study focused solely on the impact of removing the state and local deduction and did not take into account the effect of the prospective reduction in rates or any other change that Reagan may propose.

However, as the study suggested, the change would have a widely varying impact. The report, prepared by the Congressional Research Service at the request of the Joint Economic Committee, indicated that the average American family stands to lose $927 if it no longer is permitted to deduct state and local taxes.

Varies by State

But the cost to families in high-taxing industrial states would be much higher. For example, a New York family would lose $1,646 annually in tax breaks, a California family $1,100, and a Massachusetts family $1,246, the report said. But in Wyoming, where local taxes are minimal, the change would cost the average family only $323.

Rep. David R. Obey (D-Wis.), chairman of the Joint Economic Committee, urged retention of the deduction and announced that his panel would begin hearings on the question Wednesday, the day after Reagan announces his tax plan.

“It has a number of far-reaching effects on patterns of industrial development and the ability of states and local governments to meet their pressing responsibilities in the areas of education, infrastructure, health and local services,” Obey said.

Obey suggested that the proposal would face tough sledding in the House, where 150 representatives, more than one-third of the 435-member roster, represent the 10 states most affected by any such change.

Will Call Attention to Bill

“I’m sure Danny Rostenkowski knows how to count, but I’m certainly going to call it to his attention,” Obey said.

Sen. Bill Bradley (D-N.J.), appearing with Packwood on the ABC program, said Congress may lose its best chance to pass a bipartisan tax reform program if it fails to act by the end of this year.

“I think this is the window of opportunity,” said Bradley, who has co-sponsored his own tax reform plan with Rep. Richard A. Gephardt (D-Mo.). “I think once you get into 1986, you get into a political election campaign.”