Eliminating the deduction for state and local taxes, a cornerstone of President Reagan's tax-revision program, is likely to have a significantly greater impact on middle- income Americans in many states than the president has indicated.
Reagan has asserted in stump speeches promoting the plan that the deduction for state and local taxes benefits only the wealthiest one-third of taxpayers, but Internal Revenue Service figures show that more than half the nation's married couples claim the state and local deduction, including 78 percent of those earning the median U.S. income of a family of four, $33,600.
An analysis of Treasury Department data indicates that a sizable number of the "losers" -- that is, people whose tax payments would increase -- would come from median-income families who own homes and itemize deductions in states and localities with medium to high tax rates, including Maryland, Virginia and the District.
The "losers" also would be concentrated in families where both parents work, while the "winners" would largely be families in which one spouse stays home, according to the analysis by The Washington Post with assistance from Stephen Corrick, a tax partner in Arthur Andersen & Co., an accounting firm.
Overall, the president's plan would cut taxes for 55 million of the nation's 95 million taxpayers, would leave the taxes of about 21 million unchanged, and would raise taxes for about 19 million.
The fine line between winners and losers among middle-income itemizers illustrates how every taxpayer is different in the eyes of the IRS; there are many reasons why one would win under the Reagan plan while another with the same income would lose.
In medium- to high-tax states, however, the largest factor causing tax hikes for many middle-income couples -- those in the $30,000 to $40,000 median-income range, earning more than half the families in the state and less than the other half -- would be the loss of the deduction for state and local sales, property and income taxes, according to the analysis.
This poses political problems for Reagan because he is counting on repeal of this deduction to raise $150 billion by 1990, the largest single chunk of new revenue in his proposal. Without this "revenue machine," as one Treasury official called it, the plan to curb tax breaks and reduce rates for individuals and businesses would greatly increase the federal budget deficit.
No feature of Reagan's proposal has caused more controversy or faces more opposition. New York Gov. Mario M. Cuomo (D) is leading the charge for the high-tax states, arguing that the proposal pits them against the others and penalizes their taxpayers. The National Conference of Mayors made a similar statement last week.
The administration has refused to compromise on the issue, arguing that the deduction is an unfair federal subsidy of high-tax states. A median-income family in New York deducts an average of $3,650 in state and local taxes, while its counterpart in Wyoming deducts $690. The median family deducts $3,360 in Maryland, $2,630 in the District and $2,270 in Virginia, according to Treasury.
Treasury officials also emphasize that the poorest taxpayers, who do not itemize deductions, obtain no federal tax break for their state and local tax bills. This group includes about 21.4 million families, almost half the nation's families.
"If you start with a situation that is unfair and biased, and try to eliminate the unfairness and the bias, you naturally are going to hurt those who unnecessarily benefited from the situation," a Treasury official said. "That is politically unfortunate, but it is very difficult to be sympathetic."
The controversy is linked to another volatile debate -- whether the tax overhaul plays favorites among families. In defending abolition of the deduction, the administration has provided Congress with data on only one kind of family -- a working father, two children and a mother who stays home.
The administration's data show that these families, at the median-income level in each of the 50 states, would pay less tax once the Reagan plan is fully phased in.
This has caused considerable criticism because such families have more to gain than do working couples and couples without children. Moreover, IRS statistics show that two-thirds of families at the median level today have two wage-earners, unlike the family in the administration's examples.
The Reagan plan attacks two additional benefits for working couples. It would eliminate the two-earner deduction for couples pushed into higher brackets when pooling their incomes, and it would convert the child-care tax credit to a deduction, which would most benefit the rich.
The Post's analysis replaced the administration's examples with working couples and found that in Virginia, Maryland and the District these itemizers would face tax increases or no change under Reagan's plan, although their one-earner counterparts enjoyed tax cuts. Single taxpayers with the same income as the administration example would also face increases or no change, because they take only one personal exemption.
The analysis showed that the president's proposal to almost double the personal exemption to $2,000 and to lower the marginal tax rates for median-income couples would not compensate for the loss of the state and local deduction, the two-earner deduction and the child-care credit for median-income itemizers in the Washington area.
However, Maryland and the District are among the nation's highest taxed areas and Virginia is near the top one-third.
The administration says the lower rates plus higher exemptions would make up the difference for 79 percent of taxpayers, including the majority who do not itemize and never benefited from the state and local tax deductions.
In low-tax Wyoming, the analysis showed that families would enjoy tax reductions in all categories, but those reductions would vary from $518 in the administration example to $123 for a childless couple.
In New York, the highest-tax state, all payers except those in the administration example -- who would obtain a $139 tax cut -- would face increases. The increases would be $366 for a single person with the same income, $306 for a childless couple and $223 for a two-earner couple with two children and now taking a child-care credit.
In saying that only the richest one-third of taxpayers use the state and local deduction, Reagan apparently extrapolated from IRS data showing that 33 million of the nation's 95 million taxpayers itemize deductions. However, more than 13 million of those "taxpayers" earn less than $5,000 a year and -- having no income-tax liability -- file a return only to recoup small amounts of money. Among those with federal income-tax liability, more than 40 percent use the state and deduction, according to the IRS, and more than half of those taxpayers earn less than $40,000 a year.
"There is a real problem with precision when you extrapolate from a certain middle-income family to the whole system," said Sen. Bill Bradley (D-N.J.), author of another tax-overhaul proposal.