President Reagan's tax plan would produce either a short-run tax increase or a smaller cut than promised for a substantial number of taxpayers who itemize deductions next year, tax specialists said yesterday.
The one-year quirk would be caused by the staggered effective dates in the plan. Under the proposal, many deductions and exclusions would be dropped Jan. 1, 1986, the first day any part of the plan would become effective, while rate reductions would not be effective until July 1, 1986.
That means that the maximum federal tax rate for individuals next year would be 42.5 percent, a combination of a half year of the current top rate of 50 percent and a half year of the plan's new maximum 35 percent rate.
State and local taxes, meanwhile, could automatically rise in the District of Columbia and some of the 29 states that tie their tax base to the federal system. The effect would vary from state to state.
The elderly also would be affected by another little-noticed provision that would eliminate the extra personal exemption for taxpayers over age 65, replacing it with a tax credit for those over 65 with lower incomes.
These and other provisions came to light yesterday as tax accountants and others began to dig into the proposal, outlined by President Reagan Tuesday night with details released to the public on Wednesday.
The plan proposed replacing the current system of 14 tax rates with three: 15 percent, 25 percent and 35 percent as income rises. Most taxpayers would pay a lower rate than they now pay, and the number of lower income persons who pay no tax would be increased.
But the rate reductions would not be felt in money withheld from taxpayers' paychecks until July 1, 1986. The result for the whole year, therefore, is a "blended" rate that would split the difference between the new rates and the current set of rates, which range between 11 percent and 50 percent. Treasury officials said the details of those blended rates and how they would fit with the current set of brackets have not yet been worked out.
Tax specialists said this rate-blending could in some cases cause taxpayers to pay less. Someone with few deductions, for example, might be pushed into a higher bracket by the plan, but could benefit from offsetting provisions such as the higher standard deduction and higher personal exemption.
But many taxpayers who itemize deductions -- 33 percent of all taxpayers -- could find themselves facing small rate cuts on top of a much bigger base of taxable income even with the higher personal exemption, possibly resulting in a tax increase.
"I would suggest that many taxpayers anticipating cuts might wind up with an increase next year," said Gerald W. Padwe, national director of tax practice for Touche Ross & Co., an accounting firm.
Officials of Touche Ross, which held a briefing for reporters yesterday, praised another feature of the plan that does away with the extra personal exemption for the elderly but replaces it with an expanded tax credit oriented toward the low-income elderly. The personal exemption would increase from $1,040 to $2,000 under the plan.
The credit, which also would apply to the blind and disabled, would be up to 15 percent of a "base amount" of $7,000 for qualifying single taxpayers over age 65 and $11,500 for qualifying married taxpayers. The credit would begin to phase out after income levels of $11,000 for singles and $14,000 for joint returns. The top level for the phase-out would be determined by a series of complicated adjustments.
"If they're poor, they get the credit. If they're not, it phases out," Padwe said.
The package is far from final, and Congress could reformulate the transition rules. Treasury officials pointed out that the tax plan projects that federal revenues from individual taxpayers will decline next year, a clear sign that the net effect would be a tax cut, not an increase.
Moreover, they said, a number of deductions and exclusions will phase out gradually. Taxation of the buildup in value of a life-insurance policy, for example, would be imposed only on new policies, and the limitations on interest deductions phased in over 10 years, according to C. Eugene Steuerle, deputy director of the Treasury Department's Office of Tax Analysis.
But the Treasury officials did not deny that the delay in cutting rates, done to keep from losing federal revenue, could hike some taxes temporarily.
"I don't think it's a major consideration. If you want to make the point that people won't have as much of a tax cut in 1986 as in 1987, you're right. But I'm not sure how much to make of it," Steuerle said.
Twenty-nine states, as well as the District, automatically tie their tax systems to the federal base. So changes in federally permitted deductions would also affect state revenues. In states that base their taxes on the federal definition of adjusted gross income, the change would be relatively slight because most of the tax plan's changes occur after AGI is calculated on the tax form, according to Gerald Miller, executive director of the National Association of State Budget Officers.
Others, such as Virginia, are more closely tied to the federal system and in all probability would experience higher revenue, unless they reduced rates.