WASHINGTON — California's two U.S. senators Thursday urged rejection of a Treasury Department proposal that would strip taxpayers of the right to deduct state and local tax bills from their federal income taxes.
The Californians, Republican Pete Wilson and Democrat Alan Cranston, contended that the change would boost the average Californian's federal tax payments by nearly $600 annually as well as cripple the operations of local governments and schools. They joined New York's senators in introducing a resolution designed to pressure the Reagan Administration into eliminating the idea from its tax reform plans.
"It isn't fair; it isn't wise," Wilson complained at a Capitol Hill press conference with Cranston, Daniel Patrick Moynihan (D-N.Y.) and Alfonse M. D'Amato (R-N.Y.).
The four claimed that scrapping the deduction would slap a "double tax" on taxpayers and would aggravate, rather than alleviate, inequities in the current tax system. For example, Cranston said, deductions for taxes paid to foreign governments would be left intact under the sweeping Treasury plan designed to streamline the tax system.
"People can (still) deduct taxes they pay to foreign governments . . . but they can't deduct taxes they pay to their own state or city," Cranston said. "That's absolutely absurd and very, very unfair and discriminatory. That would increase the unfair discrimination our tax laws already make against Americans who work in America. It would encourage industry to take more American jobs overseas."
The Administration has yet to make a specific tax reform proposal to Congress. On Wednesday, Treasury Secretary James A. Baker III assured a House committee that the bulk of the department proposals are open to negotiation, but he warned that retention of many deductions like those for state and local taxes ultimately would undermine efforts to produce a more simple and fair tax system without raising or lowering federal revenues.
Although the four senators said they back tax reform and simplification, they rejected an argument, contained in a Treasury blueprint for reform proposed last year, that the state and local tax deduction amounts to a federal subsidy. Moynihan complained that elimination of the deduction would cause a "convulsion" in local government financing and that "there will be an earthquake going through the educational system."
Voter Backlash Seen
Wilson, a former San Diego mayor, predicted that it would be difficult, if not impossible, to win voter approval for needed increases in local and school property tax rates if taxpayers found their bills effectively hiked through the loss of the deduction. In that event, he said, "you undermine the basis for local financing of education and displace it more to the federal government."
Cranston added: "Repealing the deductibility of state-local taxes would increase the tax burden on citizens in states like California which have a strong state income tax and which rely on revenues from that tax to finance essential state services."
In his criticism, D'Amato accused the Treasury of applying a double standard by proposing that corporations be allowed to offset taxes paid overseas when paying federal taxes. The Treasury plan also suggests that corporations be allowed to deduct half of the dividends paid out to stockholders.
"It is grossly unfair for Treasury to say in one part of its proposal that double taxation is bad for corporations and then to propose it for individuals in another part of the plan," he said.