President Reagan's plan to eliminate the federal deduction for state and local taxes could be the most controversial aspect of his tax-simplification proposal, but divisions among governors, mayors and other officials have diluted the opposition.
Under the plan to be unveiled formally today, the federal government would be expected to raise about $34 billion in 1988 by taxing sums paid in state and local income, sales and property taxes.
That provision is the largest single source of revenue recovery in the plan to overhaul the nation's tax code through a "revenue-neutral" process that would not alter overall federal tax revenues.
The National Governors' Association, the National League of Cities and the U.S. Conference of Mayors oppose eliminating the deduction.
But many leading members of these organizations, Democrats and Republicans, agree with Reagan's key arguments for the plan -- that a few high-tax states are the principal beneficiaries of the deductions and that a lower overall tax rate would be of more help to more people.
"You can't look at any of these issues without looking at the entire plan," Massachusetts Gov. Michael S. Dukakis (D) said yesterday. "If my taxpayers are better off -- particularly my middle-income taxpayers are better off -- under this plan or the Treasury plan, that's really the issue, isn't it?"
The administration's proposal to retain some other deductions that would have been scrapped by an earlier Treasury Department plan has given hope to some supporters of the state and local deduction. The partial reversal also has increased pressure to keep the revised package intact.
But as congressional committees prepared yesterday to begin work on Reagan's plan, there was some strong opposition to -- and still diffused political support for -- fighting the elimination of the state and local tax deduction.
Rep. James R. Jones (D-Okla.) of the House Ways and Means Committee noted yesterday that the White House had not changed its stance on dropping the deduction since last fall's Treasury proposal.
"It would appear," Jones said, "that their unwillingness to change the state and local deductibility provision means that on a scale of political squeaky wheels, it didn't read very high."
The leading critic of Reagan's plan among state and local officials is New York Gov. Mario M. Cuomo (D). New York has the highest state and local taxes in the nation, according to most studies.
Last night Cuomo called Reagan's plan "an insult to the fundamental principles of federalism." He said it "punishes states that are trying to provide essential services in the face of massive federal spending cuts" and "subjects taxpayers to double taxation: a tax on taxes already paid to state and local government."
Cuomo and others contend that high-tax states, primarily in the Northeast and Midwest, would be hit hardest and would be less competitive with their lower-tax neighbors. With the federal government shifting more programs to the states, critics add, state and local tax increases are more necessary -- and more likely to be resisted.
"If those taxes aren't deductible, it's just one other thing that makes it more difficult for them to raise those taxes," said Cleveland Mayor George Voinovich (R), president of the National League of Cities. "You just end up with a situation where the problems are there and we don't have the resources to respond to them."
Mitchell E. Daniels Jr., White House director of intergovernmental affairs, said that Cuomo and others were "out on a very long limb" because only about one-third of taxpayers, mainly those in upper-income brackets who itemize their deductions, benefit from the state and local tax deduction.
"Gov. Cuomo is really saying that he's prepared to tax the poorer two-thirds to preserve a special benefit for the more privileged one-third . . . ," Daniels said. "I think that's an untenable position."
Pennsylvania Gov. Richard L. Thornburgh (R), a supporter of Reagan's plan, said yesterday, however, that opposition to the measure could spread "if state and local governments are being singled out" to bear the brunt of the plan's costs.
Kansas Gov. John Carlin (D), president of the National Governors' Association, said governors would be more inclined to support the entire plan if it were part of a deficit-reduction package. But, he said, "if it's just a means to fund certain other attractive tax programs, I think it would take on a whole different and negative discussion among governors."
Some key congressional tax reformers appeared to hold out hope that the Reagan proposal on state and local tax deductibility could be altered without jeopardizing passage of the entire package