Key provisions in President Reagan's tax-simplification plan have regional implications that place many Democrats, particularly those representing the party's northern urban strongholds, in a bind.
The president's proposals would finance the cost of individual and corporate rate reductions largely by eliminating the federal deduction of state and local taxes and by cutting corporate tax breaks for capital investment. Both are considered far more important to the Northeast and Midwest than to the Sun Belt.
"I think the Democrats are going to become increasingly schizophrenic about the tax bill," said Jack Albertine, executive director of the American Business Conference, a Democrat and a leading supporter of Reagan's proposal.
"On the one hand, they have to like the idea of tax reform, a level playing field for business and simplification for individuals," he said. "But the Democrats obviously cannot be happy with the regional implications. This bill will reinforce the natural constituencies of the new Republican Party -- the Sun Belt."
Elimination of the state and local tax cut would provide $149 billion over five years, and the changes in capital tax breaks, including repeal of the investment tax credit, would raise $208 billion. This money, or some other source of cash, is essential to keep the measure relatively "revenue neutral."
In terms of regional consequences, the benefits of the state and local tax deduction go overwhelmingly to northeastern and midwestern jurisdictions. The top five are New York, the District of Columbia, Maryland, New Jersey and Delaware, while Sun Belt states, with the exceptions of California and Colorado, all fall below the national average.
Loss of the deduction is most painful for taxpayers in major northern cities, where local taxes are often higher than in more Republican suburban and rural communities. In addition, leading supporters of the deduction are municipal unions, among the most loyal supporters of the Democratic Party.
In public comments, the administration has taken contradictory positions on regional consequences of its tax bill. On May 5, Treasury Secretary James A. Baker III testified on Capitol Hill: "I question whether we ought to get into the business of proving that the proposal does or does not do something for one area of the country, because it would divide or pit us against each other."
On June 5, however, Reagan told an Oklahoma City audience that it should not be made to subsidize high-tax states that "have not yet learned to say 'no' to special-interest groups."
Later that week, White House communications director Patrick J. Buchanan faulted "neo-socialist" states seeking to retain the state and local tax deduction. Then, on June 13, Reagan said: "We are not favoring one state over another."
Politically, there is a striking inverse correlation between states most dependent on the deduction and the level of support given the Reagan-Bush ticket in 1984.
Of 14 states where taxpayers most often took advantage of the deduction, 10 cast significantly fewer votes proportionally for Reagan than the national average, three were at the average and only Connecticut cast a significantly higher percentage of ballots for Reagan.
In contrast, of the 14 states whose taxpayers made less use of the deduction, nine backed Reagan by margins significantly higher than the national average, four were at the average and only West Virginia was sharply below it.
Although no accurate data exists about differing use among the states of capital-investment tax breaks -- the investment tax credit and accelerated depreciation -- it is generally believed that cuts in these breaks hurt a very similar set of states as those affected by elimination of the state and local deduction.
Rep. Mary Rose Oakar (D-Ohio), secretary of the Democratic caucus, said, "The bill appears to be designed against the Northeast and Midwest." Conversely, House Minority Whip Trent Lott (R-Miss.), a leader of Sun Belt GOP forces, said the president's tax bill "does work to the advantage of our region."
House Speaker Thomas P. (Tip) O'Neill Jr. (D-Mass.) described the proposed elimination of the state and local deduction as "extremely unfair," although he said he did not want to preempt the Ways and Means Committee's decision-making process.
For many Democrats, including O'Neill, saving the state and local deduction crashes into another tax-policy goal: producing a bill more "populist" and less tilted to the rich than the administration's plan.
Without major surgery on the administration's three-tier individual rate system, restoration of the state and local deduction would mean that families earning more than $200,000 would see their proposed tax cut increase by $7,500.
For a family in the $30,000-to-$50,000 range, restoration of the deduction would mean a tax cut only $180 larger.