In a remarkable burst of candor, Treasury Secretary James Baker has admitted that if state and local taxes continue to be deductible against federal income taxes (as they've been since 1913) the Reagan "tax simplification" plan, as now written, won't fly. It would lose too much revenue.

Without the $35 billion to $40 billion a year the Treasury would garner from ending this "loophole," concessions extended elsewhere in the tax reform package -- chiefly in the form of lower rates for upper-bracket taxpayers -- would dangerously inflate the already huge federal deficit.

This fact may explain the fervor with which the president has embraced the misguided and misleading campaign against state and local tax deductibility. In his stagey appearances for "tax reform," Reagan has repeatedly appealed to "low-tax states" against "high-tax states," and to taxpayers who don't itemize deductions against those who do. His message: You're "subsidizing" the others.

The argument, Mr. President, is a crock.

Leave aside, if you like, a central philosophical issue that one would expect Ronald Reagan to be sympathetic to -- that never in the history of the modern income tax (nor of the old Civil War-era one, either) has an administration proposed "double taxation" of the dollars a citizen pays to support his state, county or local government.

Leave aside also, if you like, a powerful point about fiscal burdens and benefits. In most fiscal years a "high-tax state" such as New York actually "subsidizes" other states and regions. It sends to Washington millions of dollars more than are returned to it in federal payments.

By compiling arbitrary lists of winners and losers among states, or taxpayers, you could soon make nonsense and even wreckage of federalism.

The United States has flourished for two centuries as a great confederation, allocating a shifting array of burdens and benefits as seemed best for the common good of all. Now, for temporary political reasons, the Reagan administration is trying to spark an internecine quarrel which in the end can yield no winners, only losers.

Apart from that -- and here we get to the heart of the matter -- the sheep/goats, winners/ losers division recently featured in the president's speeches is utterly without substance.

For most citizens -- especially if they live, as most of us do, in cities, towns and suburbs -- the largest state or local tax burden lies in property taxes. And these are locally authorized, levied, collected and spent -- usually by a democratic process most of us are closer to, and have far more control over, than the remote and baffling process by which Congress and the federal agencies levy and distribute taxes and revenues. Moreover, they go for vital services (chiefly education) and capital plant.

Often the size of local property tax bills suffices to justify the use of the long tax form, especially when the taxpayer is also a homeowner and mortgage payer. If taxpayers who itemize are indeed only a third of those who file, they're the third who pay most of all taxes to all jurisdictions -- the beasts of burden of the tax system. They're being subsidized, Mr. President? Who're you kidding?

Should Congress eliminate the deductibility of these taxes (and of state income and sales taxes, which are usually more modest) the tax bills of millions of taxpayers will go up; rate flattening won't offset the loss.

Moreover -- to resort for a moment to the Reagan administration's shameless style of argument -- you could say that what's at stake is a proposed transfer of tax benefits from local services to oil drillers and high-tech defense contractors, who would be big winners in the Reagan tax bill.

Let us not, however, fight fire with fire.

The principled point is the need to guard the vitality of state and local government, not to impair it by hogging still more traditionally local tax sources for the federal Treasury. In a better hour you can imagine Ronald Reagan, who sometimes poses as a federalist, voicing these sentiments. They would be more in character than the demagoguery his speechwriters have been concocting for him lately.