Rep. Judd Gregg (R-N.H.) knew he was creating a loophole in the tax code when he proposed and won a 20 percent tax credit for small businesses during the House Ways and Means Committee's session Friday.

He didn't care.

"We are no longer doing tax reform," Gregg said. "We're doing old-time tax law, where the king of the hill wins and it's a cat-and-dog fight. I can't stick with idealism when no one else does."

Ways and Means members have been pounding away at cutting rates and ending tax breaks for almost a month. They may yet manage to restructure and streamline the tax code.

But the early returns indicate the committee also has voted to create new tax breaks, has accepted some narrowly focused special-interest proposals and has approved several provisions that would add complexity to the tax code, not take it away.

"Simplicity was the weakest reed of the president's tax plan, and it has gotten progressively weaker ever since," said Rep. Donald J. Pease (D-Ohio).

"Simplicity? Forget it," said Rep. Barbara B. Kennelly (D-Conn.).

Yesterday, the panel voted to restructure tax advantages for construction of housing for low-income renters and to cut tax preferences for the timber industry. In a rare Sunday session, members today will work on trusts and estates.

Most low-income housing projects are financed by interest-paying, tax-exempt bonds. Under the proposal, the number of bonds that could be issued would be restricted. But developers could take writeoffs for depreciation of low- income property that would be more generous relative to the depreciation on ordinary real estate.

The difference between the two types of depreciation would be 25 percent to 50 percent, instead of the 15 percent it is now.

In another example of adding complexity, the committee voted to maintain low-rate capital gains taxation of timber if it is produced by individuals, but to tax timber sales and royalties as ordinary income if the owner is a corporation. The changes would raise timber taxes by $4.9 billion over five years, an increase likely to encounter opposition from Senate Finance Committtee Chairman Bob Packwood (R-Ore.), a strong supporter of the timber industry.

In the last two days, Ways and Means has made significant progress on revising the tax code. Yesterday, several Ways and Means members said they thought Chairman Dan Rostenkowski (D-Ill.) had exerted more control over members in the last two days than in the past.

"He's picked up enough strength and support that he's got the ability to negotiate," said Rep. Robert T. Matsui (D-Calif.).

Some of those successes have involved compromises, however.

Take the case of airports.

President Reagan and Rostenkowski had both called for limits on the bonds that finance such semi-private entities as airports. Municipalities and airlines like the bonds because they make it cheaper to build airports.

The airport portion of the bond package approved by the committee after much negotiation works like this: Bonds to build pure airport structures, such as runways, would be tax-exempt. If the bonds pay for freight-handling facilities, they also would be tax-exempt but subject to a volume limitation that states would administer. If, on the other hand, the bonds funded construction of restaurants or hotels within an airport, they would not be eligible for any tax exemption.

Committee aides pointed out that there are legitimate policy reasons for those differences, as airports are public entities while restaurants in them are businesses that don't need tax advantages. Moreover, they said, the emerging tax package's complexity principally occurs on the business end of the tax code.

In its effort to make the tax code fairer to lower-income taxpayers, however, the committee has introduced some confusion for individuals as well. The standard deduction, taken by those who do not itemize, would for the first time vary by family size and by income under the committee plan.

Then there are the home-state favors. Rep. William M. Thomas (R-Calif.), for example, proposed that licenses to develop new kinds of "sexually propagated plants" be accorded low-rate capital gains treatment. He explained that such a change, which the committee adopted, would put new plants developed by the traditional birds-and-bees method on an equal tax footing with those created by cloning or genetics. Cotton, a principal product of Thomas' district, is sexually propagated.