Treasury Secretary Donald T. Regan, developing a second-term tax proposal for consideration by the White House, tentatively has approved phasing out the income-tax deduction for state and local taxes and taxing all unemployment compensation and workman's compensation, according to a source.
Treasury officials have talked frequently of the need to broaden the tax base as part of a new tax plan, and the three tentative changes are among dozens of options. But major decisions influencing the ultimate shape of the proposal remain, the source said.
Alfred H. Kingon, assistant treasury secretary for policy and public affairs, refused yesterday to comment on any specific change that might be under consideration as part of the Treasury proposal.
Regan has accepted some things "as options," Kingon said. "That means you prefer this, may want to use this, if something else works out. We have changed our mind on a number of issues. He can reverse himself depending on what comes out" of further study, including an extensive computer analysis, Kingon said.
He emphasized that every option must meet several tests, including fairness and economic efficiency as well as how well it fits into the overall mix of measures to be recommended.
Treasury officials have said they are leaning toward a tax-simplification proposal under which income-tax rates would be lowered as the base is broadened by the elimination of deductions and exclusions. President Reagan has promised not to use tax "reform" as a guise for raising taxes.
But the elimination of the state and local tax deduction and the full taxation of unemployment benefits and workman's compensation would be controversial. The exclusion of unemployment and workman's compensation benefits from taxation probably is more important to low- and moderate-income taxpayers than to those with higher incomes.
Homeowners also would be hurt by the changes Regan tentatively has approved, because they would lose their property-tax deduction. Individuals who live in states with high income taxes and/or high sales taxes also would be especially affected.
But the additional tax burden on those groups could be offset by other tax-code changes.
Regan is said to be "leaning toward" a modified flat tax, which would narrow the distance between the highest and lowest tax rates, taxing everyone at more nearly the same rate.
A modified flat-tax proposal by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.) that recently has received considerable attention on Capitol Hill would tax the income of individuals at graduated rates ranging from 14 to 30 percent. The current range is 11 to 50 percent.
The Bradley-Gephardt proposal would eliminate some deductions and exclusions -- including those involving unemployment compensation and state and local sales taxes. The proposal would not remove the deduction for other state and local taxes.
Treasury officials have said they expect the final package to be "revenue neutral" -- raising the same revenues as the existing system.
The three changes described as tentatively approved by Regan would raise substantial revenue, which could be used to offset by other tax-code changes.
According to the Congressional Budget Office, eliminating the deduction for state and local taxes would bring in $37 billion; fully taxing workman's compensation would yield $2.4 billion, and the unemployment change would provide $2.6 billion.
Unemployment benefits now are taxable for individuals with adjusted gross income of at least $12,000.
Treasury officials have been guarded about the possible contents of the tax proposal, in large part because of Democratic presidential nominee Walter F. Mondale's charges that Reagan has a secret plan to raise taxes, if reelected. "I don't want to even know what's on your list," one official said yesterday.
Kingon said yesterday that he expected that it will be several weeks before Regan begins taking a final look at the tax proposal. It is expected to go to the White House in December, but not Dec. 1, as Regan had said.
In his State of the Union address, Reagan asked Treasury for a tax proposal taking into account the need for fairness and economic efficiency. He asked that it be delivered after Tuesday's election.