Power Game

by Hedrick Smith

  “He was absolutely stunned,” O’Neill told reporters afterward. “His chin hit his chest.”

  Senate Republicans seethed. Reagan had torpedoed all hope of significant deficit reduction. Dole gave up. Three days later, a 1986 budget bill passed with Reagan’s backing, and except for a freeze on defense appropriations, it was pretty tame. Reagan claimed a big win, but Senate Republicans mocked it as timid. (Officially, the White House claimed its package would lower the 1985 deficit by $40 billion in 1986; in fact, the deficit rose $8 billion to a new record of $220.7 billion.)

  Back in January 1985, Dole had seen the storm signals for Republicans. “If we fall flat on the deficit, we’re in deep trouble,” he told me. “If we come up with some limp little package, we’ve lost the play.” In short, a timid deficit package would weaken the economy and voters would penalize Republican Senate candidates in 1986. Dole’s comments were prophetic: The economy sagged, and Republicans lost control of the Senate in 1986, with the economy a factor in pivotal states. Reagan’s party paid a political price for his failure to forge an effective budget coalition.

  The Pitfalls of Bipartisan Coalitions

  On tax reform, President Reagan took the bipartisan approach dictated by the 1984 election results and which generally makes sense for paramount political issues. For the first time on his top-priority issue, Reagan began by reaching for a grand coalition with mainstream House Democrats instead of working from a partisan Republican base and chipping away Democratic defectors. He had entered earlier bipartisan coalitions in 1982 and 1983, during recession, when he had been on the political defensive. He had bowed to congressional pressure for a bipartisan three-year $98 billion tax increase and a plan to fund the MX missile; and he had used a bipartisan commission to fashion a modest plan to put the Social Security system on a sounder financial basis. Now once again, on tax reform, necessity dictated that Reagan strike a bargain with House Democratic leaders. Democrats had a whopping hundred-vote House majority and the Constitution requires tax bills to originate in the House. That meant working through the Ways and Means Committee, which was 2–1 Democrats and more liberal than the House as a whole.

  This was a risky coalition game because it put Reagan’s Republican base in jeopardy. The administration’s partnership with Dan Rostenkowski, Democratic chairman of the House Ways and Means Committee, was bound to grate on House Republicans. Militant Young Turk Republicans regarded Rosty as the archetypal partisan foe. Rostenkowski, from the outset, counted on Reagan to get House Republicans to swallow a bill they were bound to dislike. He was fond of saying that Democrats could not pass a major tax-reform bill alone; it took alliance with a Republican president to get a majority coalition. Jim Baker, too, knew that success depended not only on Rostenkowski’s corralling the Democrats but on Reagan’s sway with a good chunk of Republicans.

  Not only were there old partisan frictions to overcome, but very few Republicans in Congress had much enthusiasm for tax reform in principle. In 1981, Republicans had followed Reagan down the line on his tax bill, but there was a big difference this time. The 1981 tax bill was apple-pie politics; it was all tax cuts. Every individual and every interest group was a winner. But Reagan’s 1985 tax-reform bill had losers as well as winners: regions, industries, and individuals who had to fork up more taxes to pay for the cuts of others. He wanted the new tax scheme kept “revenue neutral”—that is, no net gain or loss to the Treasury. The glue for the 1985 coalition was the lure of lowering personal income tax rates for the vast majority of Americans. Reagan tossed out that bait repeatedly, but he had trouble getting skeptical voters to bite. And the lack of popular trust and enthusiasm left Congress hard to convince.

  Most congressional Republicans saw tax reform as antibusiness. To lower personal tax rates, the Reagan bill had to get more tax revenues from the corporate side. It rolled back advantages Reagan gave to business in 1981, most importantly the investment tax credit. The elimination of that tax write-off would cost business $100 billion over five years. Other big billions would have to come from changing depreciation schedules or tightening up tax breaks for real estate, insurance, banking, and other business. Picking up these tax revenues made possible a lower corporate tax rate overall, and that appealed to retail and high-tech industries. But the capital-intensive Snowbelt industries, such as steel, and the U.S. Chamber of Commerce were opposed. The Republican talk was that the bill would hurt the investment climate and push the economy toward recession. Jack Kemp, as a longtime advocate of tax reform, was a notable exception; in 1984, he had proposed a flat tax—a top rate of twenty-four percent—claiming tax reform would attract millions of new middle-class voters to the Republican party.

  Reagan’s constancy and strong engagement was the main difference between the failure of the 1985 budget coalition and the perilously narrow success of the tax-reform coalition in 1985. Reagan did not fight hard for the budget, but he put down his marker on the tax issue and he stuck to his position.

  The success of the tax bill had other critical ingredients: Rostenkowski’s shrewd bargaining to line up a sizable majority of Democrats; the patient legislative politics of Jim Baker and Deputy Treasury Secretary Dick Darman, whose stroking of Congress and the White House kept the coalition alive when it frayed from tension; and finally, the backing of Speaker O’Neill. In the Senate in 1986, Reagan’s bill was literally saved by the ingenuity and astonishing legislative skill of Bob Packwood of Oregon, Senate Finance Committee chairman, who formed an even more genuine bipartisan coalition. In the House coalition, Reagan wheedled Republican votes, and Rostenkowski bargained for Democratic votes; but in the Senate, Packwood engineered support on both sides.

  It was Reagan who put the ball in play and kept the game alive at the critical moment in December 1985. His goal was to bring down the top tax rates. In 1981, he had lowered them from seventy to fifty percent and now was pushing to thirty-five percent or below. That helped the rich the most. But Baker and Darman were smart enough to craft a bill with populist appeal—by removing six million poor people from the tax rolls, lowering most individual rates, and taxing corporations more. That made the Reagan bill as “populist a piece of legislation as Democrats could have written,” John Sherman, Rostenkowski’s press secretary, said admiringly.45

  Stumping from Oklahoma City to Concord, New Hampshire, Reagan pushed his bill as a tax cut (though some people would pay more). But Reagan’s main appeal was an attack on the existing tax code, for the engine that drove tax reform through Congress was tapping anger against the tax system. What made it hard for other politicians to let tax reform die was that killing reform became equated with protecting the despised status quo. As opinion polls showed, most voters did not trust promises of a tax cut. But they could identify with Reagan’s savaging the rancid inequalities of the existing tax system as “complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers.”

  Reagan’s pitch was more likely to move congressional Democrats than Republicans. Reform has a ring that appeals to Democrats traditionally; in this case, it had special appeal because reform was taken as a code word for shifting a bigger tax burden to business and closing tax loopholes. In fact, the model for Reagan’s package had been conceived by Democrats Bill Bradley and Richard Gephardt, back in 1982; Tip O’Neill had urged Walter Mondale to adopt it for his 1984 campaign, but Mondale foolishly declined. But the Bradley-Gephardt bill opened the way to a bipartisan coalition and to Reagan’s rough partnership with Rostenkowski, who got Reagan to promise not to interfere with his committee or to comment publicly until the work was done.

  In short, the White House and Treasury Department harnessed themselves to Rostenkowski’s wagon. They squirmed while Rostenkowski took Reagan’s outline and revised it to give it Democratic flavor and to pick up Democratic votes. He raised the corporate tax rate from thirty-three to thirty-six percent and toughened depreciation rules on ind
ustry; he added a fourth personal tax bracket at thirty-eight percent (Reagan’s top bracket was thirty-five percent) and upped the capital gains tax two points; and he imposed a tough minimum tax on individuals and corporations to prevent them from paying no taxes through deals allowed under Reagan’s 1981 bill.

  These changes sorely tried Republicans; they had not been happy with Reagan’s original plan and they were more unhappy with Rostenkowski’s. Moreover, Republicans felt shunted aside, excluded from helping write the tax bill because of Reagan’s reliance on Rostenkowski’s way of building support mainly among his own Democrats. This strained the coalition, and twice the administration nearly bailed out.

  On October 24, the Treasury Department got wind that Rostenkowski had bartered away a $65 billion tax plum (over five years)—full federal tax deductions for state and local income taxes. With the tax bill dying, Rostenkowski used that concession to revive it—to corral New Yorkers and other big-state Democrats to construct a committee majority. Jim Baker had expected Rostenkowski to make only a partial concession, because Baker wanted some of that money to ease the tax burden on business and to appeal to moderate Republicans. Angered by Rostenkowski’s secret maneuver, Baker phoned to protest. He chased down Rostenkowski, traveling in North Carolina, and they got into a shouting match. The coalition was in peril.46

  The next afternoon, Reagan’s top team—Jim Baker, Dick Darman, Don Regan, and his deputy, Dennis Thomas, and “B” Ogelsby, the top White House legislative liaison, met at Andrews Air Force Base to decide whether to stick with their bipartisan strategy or to pull out. They picked the air base for secrecy and also because Regan, returning from the president’s speech to the United Nations, was flying on to Augusta, Georgia, for a weekend golf game with Shultz, Bush, and Bush’s friend, Nicholas Brady.

  Despite their anger at Rostenkowski, Baker and Darman wanted to stick with him, but they warned the others that this was a turning point. “If we’re going to pull the plug,” Darman said, “we have to do it in the short term.” Translated: If the president pulls out now, the blame for collapse of the tax bill can be put on Rostenkowski; but if Reagan waits, he too will bear the onus for failure—if Republicans revolt. After some talk, the Reagan team decided unanimously to swallow hard and keep on with Rostenkowski. “We’ll stick with it,” Don Regan said. “We’re going all the way. We’re not pulling the plug.”47

  To show displeasure, Baker and Darman boycotted Rostenkowski’s committee sessions, which they had been attending. Even so, the administration kept bending. Reagan could not afford to abandon tax reform; he had made it the domestic centerpiece of his second term. Moreover, Baker argued internally that with all Reagan’s other defeats in 1985—the budget, the MX missile, sanctions against South Africa, and trade legislation—Reagan needed a big win. Baker’s strategy was to let Rostenkowski’s bill pass in the House and then “fix it” in the Republican-controlled Senate. For Baker reasoned (correctly) that Rostenkowski’s bill was more liberal than what Congress would ultimately pass.

  The High Price of Hesitancy

  The political base of any coalition needs careful tending, and Reagan’s coalition was eroding at its base. Rebellion was festering in the Republican back benches. A Republican split had been inevitable, given the distaste of some Republicans for any tax reform. On the 1982 tax increase, only half the House Republicans had followed Reagan. This time, Baker and the White House hoped for respectable Republican support, but rebellion was spreading all across the spectrum, among Republican regulars, Young Turks, and even moderates. It was a far wider revolt than the administration expected, and it was fanned by the Treasury Department’s closeness to Rostenkowski and by his largely partisan redrafting of Reagan’s bill.

  House Republicans had been a minority so long and were so frustrated with being ineffectual, that they were acutely touchy about being treated as bit players. They were not only vexed by the substance of Rostenkowski’s bill, but they were also outraged at being neglected by their own Republican administration. They began sending letters to President Reagan, warning that tax reform had gone off track. Just as Rostenkowski’s version was finally being passed by his committee through the night of November 22, Republican Whip Trent Lott and others pressed the White House not to endorse it. Earlier that afternoon, Reagan had given his approval, but once again he zigzagged with Regan and Dennis Thomas and withheld a public endorsement.

  Reagan again paid a high price for hesitancy in backing a coalition partner. In 1981, he had been bold, clear, and constant. But in 1985, he had hamstrung Senate Republicans by welshing on his budget partnership with them. Now his position on the tax bill hung in the balance for several days—while Reagan ducked phone calls from Rostenkowski. Baker at Treasury argued that the president had to stick with his game plan to move the legislative process forward; otherwise tax reform would be killed in its crib. At the White House, Regan and Dennis Thomas equivocated, trying to find ways to placate angry Republicans.

  The president’s hesitancy merely fanned the Republican rebellion, undermining the coalition. Tax reform had lost momentum. Congress and antireform lobbyists read Reagan’s delay as a signal that the president was going to reject Rostenkowski’s bill. Young Turk Republicans got hold of a study by the president’s Council of Economic Advisers, concluding that the long-run effects of the tax-reform bill were favorable but warning that in the short run, the bill would hasten a downturn. The study, leaked to conservative columnists Rowland Evans and Robert Novak, provided more ammunition for mutiny.

  Full-scale insurrection was declared on December 4 at a two-hour House Republican Conference, presided over by Kemp, as conference chairman. The mutiny had more purpose and unity than the Reagan administration. That day, 112 House Republicans voted to instruct their leaders to go all out to defeat the tax-reform bill. All four top Republican leaders, Bob Michel, Trent Lott, Dick Cheney, and Jack Kemp, were against the bill. Cheney accused the administration of “selling out to Rostenkowski and cutting out our own guys” from writing the legislation.

  Later that day, President Reagan finally took Jim Baker’s advice and urged Republicans to back the process of tax reform. But his statement came too late, and it was lukewarm, obviously the product of conflicting advice and Reagan’s personal uncertainty. He had misgivings about parts of Rostenkowski’s bill, but it was his only practical vehicle.

  One axiom of the coalition game is that in the clinch, the leader cannot flinch. Reagan did. He did not push firmly for Rostenkowski’s bill; to keep the process moving, he urged the House to pass that bill or a Republican alternative. In fact, the Republican alternative had no chance. By hedging, Reagan undercut his own appeal and his only chance for a coalition. His appeal did not stanch the Republican mutiny. The next evening, House Republican Leader Bob Michel, a born loyalist, told me, “This is a personal trauma for me to be going against my president, but I just can’t go for this bill.”48 It hurt industry in his Illinois district. For a congressional party leader to oppose a bill his president wants is fatal to the president.

  As the message finally sank in at the White House, Reagan and his aides began warning House Republican leaders that the Republican party would suffer badly if they let down the president. Trent Lott, the torchbearer of revolt, was called to the White House and emerged to report defiantly, “I told him, ‘Mr. President, if you’re going to lie down with the dogs, you’re going to get fleas,’ ”49 So much for Reagan’s cooperation with the Democrats. In the final two days before the House vote on December 11, 1985, Reagan personally telephoned Lott and Cheney to urge them not to lead the fight against the bill, even if they voted against it themselves. But both, vying to succeed Michel, wanted to be in the van of rebellion; neither would make Reagan the promise he sought.

  That should have been ample warning; nonetheless, the president’s men were ambushed. Somehow they expected Reagan’s final appeals to prevail, but they had started to push too late and they were out-smarted. Lott and Cheney
, two very clever legislative tacticians, saw the weak spot. Rather than attack the tax bill directly, they attacked the rule bringing the tax bill to the floor. In the House, every bill requires a rule to set terms of debate. No rule, no vote for the bill, the bill is dead. The White House did not expect an ambush on the rule.

  Lott excluded White House lobbyists from the Republican whip meeting, leaving the White House in the dark. Attacking the rule got some extra votes because some House members like to play their votes both ways to appeal to opposing constituencies. They will vote against the rule to get credit with foes of the measure for having tried to stop it (but hoping that other members will pass the rule); then these same members will vote for the bill, to get credit with its supporters. The Lott-Cheney tactic worked brilliantly. The rule was beaten 223–202. The jolt to Reagan was that 164 House Republicans had voted against him, and only fourteen for him. The process was dead unless Reagan could revive it.

  Speaker O’Neill declared that Reagan would be a “lame-duck president” if he could not muster at least fifty Republican votes for a rule bringing the tax bill to a vote.

  The endgame of this bipartisan coalition was striking because, unlike other Reagan coalition operations, the White House could not dole out goodies to buy support from alienated Republicans. Rostenkowski had already used the soup-kitchen approach; now the tax package was fixed. It took moral suasion and appeals to Republican self-interest to save the bill. For six days, the Reagan team—Baker, Darman, Ogelsby, Thomas, and Regan—begged for Republican votes, listening to House members vent their fury, appealing to them not to cripple their president and hurt their party and themselves in the process.