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Reagan's Tax Plan Draws Fire on Deductibility Issue

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Washington--Educators last week assailed President Reagan's proposal to eliminate the federal income-tax deduction for state and local taxes.

They said such a move would pressure states and localities, particularly those with high income taxes, to cut their taxes and would hamper the imposition of new taxes to pay for education reform.

"The tremendous pressure for improvement in education," a coalition of 15 major education groups said in a letter to members of the Congress's tax-writing committees, "will result in frustration if the primary revenue sources of public elementary, secondary, and postsecon-dary education are undercut by the loss of federal deductibility."

The proposal is a key component of the President's plan to overhaul the tax system by lowering individual income-tax rates, eliminating many current deductions, and increasing some corporate taxes. Mr. Reagan announced its outlines in a nationally televised address last Tuesday and sent the plan--a revised version of one drafted by the Treasury Department last fall--to the Congress last Wednesday.

Proposal Defended

Defending the proposal to end the state and local deductions, Mr. Reagan said that it benefits relatively few high-income individuals in a few high-tax states.

"Two-thirds of Americans don't even itemize, so they receive no benefit from the state and local tax deduction," Mr. Reagan said in his speech. "But they're being forced to subsidize the high-tax policies of a handful of states. This is truly taxation without representation.''

The Treasury Department estimated that repealing the deduction would generate $33.8 billion in federal revenue in fiscal 1988.

On Capitol Hill, reactions to the plan and its prospects for passage this session were mixed.

"We have a fair chance of getting it through the Congress this year," Secretary of the Treasury James A. Baker 3rd was quoted as saying.

But two Congressional sponsors of tax-reform legislation, Representa-tive Jack F. Kemp, Republican of New York, and Representative Richard A. Gephardt, Democrat of Missouri, criticized the Administration package. Their plans would limit but not eliminate deductions for state and local taxes.

Scott Widmeyer, a spokesman for the American Federation of Teachers, predicted that the deductibility of state and local taxes will be central to the debate on tax reform because "it's the big-ticket item." Mr. Widmeyer also contended that "Reagan is singling that out for the breaks he's providing" for corporate interests such as the oil and gas industry.

Representatives of the midwestern and northeastern "Rust Belt" states joined in the criticism of the proposed repeal of deductions for state and local taxes.

"Residents of our states pay the highest income taxes" and would suffer most, since a large proportion of state revenues in the West and South come from energy and excise taxes, said Richard L. Mintz, a spokesman for the Northeast-Midwest Congressional Coalition, which comprises representatives of 18 states.

The New York Times, in an editorial, warned, "With most comparable taxpayers in low-tax states getting a net reduction, the high-tax states and cities would come under irresistible pressure to reduce their tax rates--and thus their budgets."

And Senator Daniel P. Moynihan, Democrat of New York, said, "Since more than half of all property taxes in New York go directly to our schools, elimination of this tax deduction would produce this choice: higher taxes or less education."

A study prepared earlier this year by the aft said that eliminating the deduction could cost schools $271 per student on average, or about $16.5 billion nationwide. (See Education Week, March 20, 1985.)

The aft is the lead organization in the coalition of 15 education groups opposing the provision on deductibility. Other members include the National Education Association, the National School Boards Association, the American Association of School Administrators, the Council of Great City Schools, the Council for Exceptional Children, and the National pta.

Representatives of private education also assailed the proposal to end the deductions for state and local taxes.

Other Proposals

Other aspects of the plan of concern to educators include:

Individual Tax Rates: The average teacher's salary is $23,546, according to a recent national survey by the nea Individuals earning this salary and filing a single return would be taxed at a slightly lower rate next year, under the President's plan--from about 26 percent to 25 percent.

The personal exemption would rise from $1,040 to $2,000.

Tax on Fringe Benefits: Currently, employer contributions to employees' health-care plans are not included in employees' gross income and are thus untaxed. President Reagan proposes including employer contributions to health-care plans in calculating employees' gross taxable income, up to $10 a month for individual coverage and $25 a month for family plans.

The exclusion of the employer-provided benefit has "contributed to the erosion of the tax base and to consequent high marginal tax rates,'' the Administration argued. But the aft's Mr. Widmeyer said his union is concerned that this provision may jeopardize health coverage for some. He argued that some people may choose not to carry health insurance rather than pay for a share of it.

Child-Care Deduction: Current law allows individuals a tax credit to help defray the cost of child care necessitated by work.

The President's proposal would eliminate the credit but allow individuals to deduct dependent-care expenses from their gross income. The maximum annual deduction would be $2,400 for taxpayers with one dependent and $4,800 for those with two or more.

Helen Blank, director of the day-care division of the Children's Defense Fund, an advocacy group based here, said substituting a deduction for the credit essentially "changes the philosophy" behind the credit by making it less progressive. Moreover, the deduction would no longer be available to non-itemizers, whose numbers are expected to grow under the new plan. She added, however, that the overall tax plan would benefit lower-income families.

Forty percent of the proposed dependent-care deductions would be taken by families with incomes above $50,000, the Administration projects. "The choice of the deduc-tion reflects the view that progressivity should be provided directly through personal exemption and the rate structure" and not through targeted credits, the plan says.

Charitable Contributions: The Treasury Department initially sought to end deductions for charitable gifts, a proposal intensely opposed by the array of organizations--including private schools, universities, foundations and charities, and museums--that are dependent on charitable giving.

President Reagan proposes to eliminate after 1986 the charitable deduction for people who do not itemize their returns but to keep it for those who do. "Because non-itemizers generally have lower incomes and thus lower marginal tax rates than itemizers, their contributions generally are not affected significantly by tax considerations," the plan says.

But representatives of the groups who objected to the initial proposal expressed some concern about the latest one. Independent Sector, a coalition of national voluntary organizations, said that $6 billion in charitable deductions could be lost since nonitemizers are the mainstays of charitable giving.

Student Aid: The uniform formula that colleges and universities use to determine a student's need for financial aid is based on the federal tax code. While it remains to be seen how a change in the tax code will affect financial aid, any major change is sure to cause administrative prob-lems, higher-education experts say.

Dallas Martin, executive director of the National Association of Student Financial Aid Officers, said that because student-aid calculations are based on parents' federal tax returns, the need formula and a new tax system are likely to conflict.

Scholarship and Fellowship Income: Currently, income from any scholarship or fellowship is excluded from taxable income "unless it represents compensation for services." This is "unfair to the ordinary taxpayer," the Administration contends.

President Reagan proposes to include scholarships and fellowship grants in income subject to taxation. But "in the case of degree candidates, scholarships would be excludable to the extent that they were required to be, and in fact were, spent on tuition and equipment required for courses of instruction, but not for room, board, or other personal living expenses."

Tuition Tax Credits: Despite speculation among education groups, fueled by an inaccurate New York Times report last week, tuition tax credits were not included in the tax-overhaul plan.

Senator Bob Packwood, Republican of Oregon, was quoted in the Times as saying that the tax credits would be included in the plan. But aides to Senator Packwood said that the Times misinterpreted his statement and that he was merely asserting that the President still supports tax credits.

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