Power Game

by Hedrick Smith

  The irony is that Rostenkowski is not a reformer by nature. “That really isn’t my chemistry, reform,” he confessed to me. “I’m a businessman. I’ve always been a businessman. I like deductions.… I enjoy going to dinners. I enjoy walking in restaurants. I enjoy taking the check. I enjoy meeting people and being with people. That’s my whole life-style.”

  The part about being a businessman isn’t literally accurate. Also, Rosty is more likely to be on a corporate junket collecting a fancy lecture fee than picking up the dinner tab. But his comments suggest how he views himself. He’s climbed from Chicago ward leader to major figure on the national scene, and he’s proud of making it. His constituents may be blue-collar, but with Daley-style pragmatism, Rosty has kept a protective eye out for Chicago business. He has written plenty of business tax breaks into law, especially in 1981, and he likes hobnobbing with corporate CEOs. “What atmosphere do I ever expect to live in when I leave Congress?” he asked rhetorically. “I want to mingle in this community of business activities. Where has my life been? My life has been in the business community.”61

  Nonetheless, by 1985 he was bitter at the “deceit of business” in exploiting the enormous tax credits, depreciation write-offs, and other corporate loopholes in Reagan’s 1981 tax plan. Angrily, he recalled having fought to ease the tax load of the steel industry and corporations like General Electric as a stimulus to economic growth, only to see them plunge into mergers and paper deals rather than reinvesting. In 1985, he was eager to correct the damage, curb the excess, and see more fair play put into a tax system where his grown daughters on modest salaries were paying more taxes than multimillionaires with tax dodges. Moreover, Rosty wanted a trophy. He wanted a legacy attached to his name. He bucked the conventional wisdom that passing tax reform was impossible, feeling that success might give him an outside shot at being speaker when O’Neill retired in 1986. Alliance with Reagan held all that promise.

  Rosty to Reagan: “Keep Your Powder Dry”

  Getting into the ring on tax reform with the nation’s undisputed political champ required fancy footwork. For a year, Rostenkowski had to bob and weave, jockeying between cooperation and independence from the president. His improvised opposition game went through five phases: touching gloves in alliance with Reagan; jabbing back at Democratic rivals and skeptics; putting the Democratic mark on the tax bill; getting Reagan to hold off his counterpunches; and finally, maneuvering Reagan into a corner where he had to get Republicans in line.

  It was a tricky relationship that required Rosty’s keeping some distance from Reagan. If the Democrats were to share the political credit, Rostenkowski’s partnership with Reagan had to be loose. He could not agree to a precooked deal or he would get politically smothered. In early 1985, Treasury Secretary Jim Baker and his deputy, Richard Darman, tried to lure Rostenkowski into crafting a joint bipartisan tax proposal. They wanted him on board before the president’s plan was unveiled. But Rosty refused. Burned by Reagan’s backing away from a deal in 1981, he was leery of being fooled the second time around. Also, if Baker and Darman wrapped up Rosty, he would have no bargaining chips to bring his committee Democrats on board. Finally, he was jealous of institutional prerogatives.

  “I’m the chairman of the committee,” he told Reagan’s men bluntly. “You get the ball off to me, and I’ll handle the ball. We’re [the committee] going to write the bill.”62

  Echoes of former congressional barons: Rosty could afford a bit of swagger because he knew House Republicans would balk at a reform bill hitting business with $125 billion in additional taxes over five years. Reagan’s plan brought the maximum individual tax rate down from 50 percent to 35 percent, cut the capital gains rate from 20 percent to 17.5 percent, raised the personal exemption from $1,000 to $2,000, and took 6 million poor off the tax rolls. And it lowered the corporate tax rate from 46 percent to 33 percent. But it was not a Republican-style bill; it paid for those tax reductions by revoking the corporate investment tax credit and closing some corporate loopholes. To pass it, Reagan needed mainstream Democrats, meaning Rostenkowski.

  In public, Rostenkowski wrapped himself in Reagan’s banner but raised the Democratic flag, too—never more artfully than on May 28, after Reagan unveiled his plan on national television. Rosty’s response was classic one-upmanship, an exercise in playing the opposition game sotto voce. Like O’Neill, Rostenkowski altered his style and tried video politicking.

  Never a TV star and always reluctant to be paired on television opposite Reagan, Rosty surprised everyone with a polished performance. He had hired Joe Rothstein, a media consultant, who put him through rehearsals with a TelePrompTer. Rothstein made the square-faced Chicago ward boss swap his spectacles for contact lenses, primped his makeup, showed him a relaxed, folksy delivery style, and told him to smile. Rostenkowski’s speechwriter, John Sherman, delivered a slick text which claimed tax reform as a Democratic issue since Harry Truman and welcomed Reagan as a maverick Republican. It was pitched deftly at the blue-collar Knights of Columbus crowd that Danny grew up with and that Reagan wanted to steal away from the Democratic party. Rosty identified with their bellyaches.

  “Every year politicians get up and promise to make the tax code fairer and simpler—but every year we seem to slip further behind,” he said. “Now most of us pay taxes with bitterness and frustration. Working families file their tax forms with the nagging feeling that they’re the country’s biggest chumps. Their taxes are withheld at work—while the elite have enormous freedom to move their money from one tax shelter to another. Their bitterness is about to boil over. And it’s time it did. But this time there’s a difference in the push for tax reform. This time it’s a Republican president who’s bucking his party’s tradition as protector of big business and the wealthy. His words and feelings go back to Roosevelt and Truman and Kennedy. But the commitment comes from Ronald Reagan. And that’s so important—and so welcome.… A Republican president has joined the Democrats in Congress to try to redeem this long-standing commitment to a tax system that’s simple and fair.”63

  Rosty put Reagan on notice that Congress would not merely rubber-stamp his tax plan, but would make it fairer. Then he stole a leaf from Reagan’s book—he appealed for listeners to write in. WRITE ROSTY buttons blossomed on Democratic lapels and more than eighty thousand letters poured in. Reagan was so impressed that he phoned Rosty to thank him.

  Round one: Rosty had put himself in contention with Reagan.

  Before he began recrafting Reagan’s bill, Rostenkowski arranged a nonaggression pact, extracting Reagan’s promise not to try to influence Rosty’s committee or take potshots at its bill until the committee had finally approved it.

  “Mr. President, you know if you’re gonna criticize me the first day we start, if you’re gonna take shots at this thing as we’re proceeding through it, this bill’s going nowhere,” Rostenkowski told Reagan.

  “What is it that you want?” Reagan asked.

  “I don’t want you to make any comment on it,” Rostenkowski said. “I want you to keep your powder dry.”

  “All right,” Reagan replied, “I’ll make a deal with you. I’ll keep my powder dry. I won’t say a word about the bill.”64

  Round two: An implicit swap—Rosty bought Reagan’s outline, and he got Reagan’s star hitched to his own wagon.

  Rostenkowski wanted plenty of time to work on the bill—seven months in all—to drive home the point to the voters that the Democrats had a vital hand in producing the new law. His early problems were with Democrats, not Republicans. Back in May, Jim Wright, then House majority leader, and Democratic Study Group liberals were pushing for a minimum tax on corporations and wealthy individuals that would raise $35 billion to $40 billion a year—to lower the deficit. Rostenkowski fought this plan because it would take away a huge chunk of tax revenues that his reform bill needed to finance tax breaks to individual middle-income taxpayers. And he got backing from Speaker O’Neill, who was dead set against Democrats’ s
ponsoring any tax increase.

  In the fall, Rostenkowski’s committee rebelled. His staff had made Reagan’s bill tougher on corporations and the rich and more favorable to the middle class. But day by day through late September and early October, committee Republicans and some Democrats picked apart reform and restored special-interest provisions. The lobbyists were riding high. Loopholes were going back into the law. Members from oil-and-gas states were teaming up with timber interests, banking interests, and the big-state members, demanding full deductibility of state and local taxes. Rostenkowski, unable to muster a steady majority, was losing control. His press clippings were turning sour. Tax reform was dying. The nadir came on October 15: Instead of clamping down on loopholes, as Reagan and Rostenkowski had proposed, the committee voted to sweeten a favorite tax shelter of commercial banks—the reduction in taxes allowed for bad-debt reserves. Rostenkowski threw down his pencil in anger. Outside the committee chamber, bank lobbyists shouted for joy.

  “The tax bill stinks like a dead fish,” John Sherman, Rosty’s press spokesman, groaned to me afterward.65

  Rostenkowski was in despair. He went home alone to his apartment. “I wrote myself a letter when I was in the bottom of the valley,” he admitted to me later. “I wrote myself how lonely and how miserable I was. You know, do people really want reform? I mean, are we all so phony?”66

  Remodeling, Democratic Style

  Shrewdly and patiently, Rostenkowski turned the game around and put a Democratic majority together. Some Democratic committee members were shocked at how far they had gone in catering to special interests. Rostenkowski shamed them into reversing the bank vote and tightening up on banks. He played on their loyalty to him and their pride in their team, the Ways and Means Committee, like a football coach at half time after a disgraceful first half. “The press was kickin’ the crap out of the committee,” he recalled. “So I had the committee get together and I said, ‘Is this what we want? Is this the image the Ways and Means Committee is gonna have? We’re liberalizing [loopholes] even from present law? I mean, is this reform? Are these Democrats? Is this the issue we’re gonna develop?’ ”

  Then, like a ward boss, he made the rounds, asking his members for their bottom line—what they absolutely had to have in the tax bill for their districts. On the problem areas, he set up bipartisan task forces, stacked 4–2 in favor of Democrats, and dictated just how much tax revenue could be given away in certain areas, and he let the task forces carve up that money. It gave Democratic members a sense of participation.

  In his first big move away from Reagan, he gave away his major plum to the big-state members: continuation of existing federal tax deductions for state and local taxes. Reagan wanted to knock that off and pick up huge tax revenues. Governor Mario Cuomo of New York, accusing Reagan of anti–New York bias, had turned that issue into his crusade. Cuomo made splashy appearances in Washington and called home New York’s senators and congressmen to toe his line. (Charles Rangel, a Harlem Democrat, poking fun at Cuomo’s heavy-handed tactics, had joked to Cuomo, “I don’t mind being your puppet, just don’t shine the light on the strings.”)

  Deductibility of state and local income taxes was worth $60 billion to $65 billion in tax revenues over five years. Rosty felt he had to trade it away to corral a committee majority. That concession was vital to gaining steady support from big-state members: Charlie Rangel, Tom Downey, and Raymond McGrath of New York; Robert Matsui and Pete Stark of California; his own protégé, Marty Russo from West Chicago; and others like Barbara Kennelly of Connecticut, Brian Donnelly of Massachusetts, and William Coyne of Pennsylvania. Downey and McGrath had told Rosty they would fight his whole bill—until he yielded on state and local taxes.

  A week after the disastrous bank vote, Rosty made his deals, one member at a time, demanding their loyal support in return. “You’ve got it—$65 billion,” he told Downey. “But you gotta be with me on everything else. I want you to be my ally. I need you to convince other people and to speak on the floor.”67

  Member by member, Rostenkowski built momentum for the tax bill. Later he would cement it with transition rules—favors to each of his allies: a special break to a stadium here, an airport there, a few businesses, some partnerships, all written in such fine print that only tax lawyers could decipher it. That was the essence of Rosty’s Chicago ward politics, the goodies doled out to members for playing ball with the chairman.

  Round three: Rosty had bought a guaranteed nineteen-vote majority on all but a handful of tough issues.

  But he had crossed the administration on state and local taxes. On October 24, when Jim Baker learned of that concession, he chased Rostenkowski by phone to North Carolina, where Rosty was giving a speech. Baker had wanted to use some of that tax money for concessions to probusiness Republicans. Baker was mad.

  “Goddamn, Danny, what did you do to me?” Baker demanded. “How can you do this?”

  “Hey, I’m not gettin’ any support from you!” Rosty shouted back, blaming Baker for the way committee Republicans were undercutting him. “What the hell do you think I am? You think I’m gonna run up against my Democrats?”

  Baker scolded Rosty for making the move without warning.

  “I’m gonna hang up on you, you son of a bitch,” Rostenkowski threatened.

  “No, no, no, don’t hang up,” Baker warned.68

  Rostenkowski slammed the phone in Baker’s ear. They resumed shouting face to face the next day in the Ways and Means Committee library. Others could hear them through the walls.

  That same afternoon, the administration’s top team considered pulling out of its partnership with Rostenkowski. But essentially he had them trapped, and they kept going. Still, Rosty had to play his game carefully—pulling Reagan along in his direction, while he put a Democratic stamp on the bill. He fretted that only four or five committee Republicans were being helpful, and he berated top administration officials for not bringing the Republicans along. Jim Baker and Dick Darman told Rosty that he himself should develop Republican support.

  By early November, Reagan was chafing at Rostenkowski’s tactics, especially Rosty’s plans for a fourth tax bracket (above Reagan’s three) to hit the rich. That violated one of Reagan’s “lines in the sand”—guidelines that he insisted on. On November 6, Reagan complained publicly about the “watering down” of his package. Rostenkowski quickly phoned the president to remind him of his vows of silence. It was bravado, but it worked.

  “What’s going on here?” Rostenkowski complained.

  “Sorry it happened,” Reagan apologized. “Won’t happen again.”69

  Round four: Rostenkowski had kept Reagan, Baker, Regan, and Darman in line as he altered Reagan’s package.

  In the next two weeks Rostenkowski reshaped the bill more to Democratic liking, which drove House Republicans wild and put Reagan in a difficult box. Rostenkowski was now playing his opposition game to the hilt and getting plenty of press play. The corporate tax rate went up from Reagan’s 33 percent to 36 percent; a fourth personal tax bracket was added at 38 percent; the capital gains tax was hiked from 17.5 percent to 22 percent; and a tough, 25 percent minimum tax was imposed on individuals and corporations. Business lost handsome tax write-offs from accelerated depreciation. Rostenkowski’s Democrats were tougher than Reagan on the oil-and-gas industry, on real estate shelters, on defense contractors, and on depletion allowances for coal, iron ore, and other minerals. And they gave better tax-rate schedules to the middle class, as well as deduction of mortgage interest on two homes.

  For Rostenkowski, the climax came on the night of November 22. He was near physical and nervous exhaustion. That afternoon, Reagan had privately given his approval to passing Rostenkowski’s bill, but the bill would change that night. Rostenkowski was under enormous pressure from Russo, Rangel, Downey, Frank Guarini, and others to yield to organized labor, which wanted to make all employee fringe benefits tax free. Reagan and Rostenkowski had proposed partial taxation.

 
As chairman, Rostenkowski felt every group should make sacrifices for tax reform. He did not want to tilt prolabor. But Rangel had pledged union lobbyists he would try that final night to make all fringe benefits tax free: health and life insurance, educational costs, prepaid legal fees. That would cost $11 billion to $12 billion in tax revenues over five years and throw Rostenkowski’s revenue-neutral tax bill out of whack. Rosty refused.

  During a recess, Marty Russo asked Rob Leonard, chief counsel and staff economic wizard, how much tax revenue would be raised over five years from a one-percent increase in the corporate tax rate. Leonard said $13 billion.

  “That’s it, the ballgame’s solved,” Russo shouted—meaning that a one-percent increase in the corporate rate would make up for the tax revenue lost by granting tax-free fringe benefits.70

  Rostenkowski was adamant. Months before, lining up some corporate support for tax reform, he had pledged CEOs from IBM, General Motors, General Foods, Procter & Gamble, Dart & Kraft, Sara Lee, and others that he would hold the corporate tax rate at 35 percent. Now, his Democrats, his team were trying to push him to 36 percent and he would not break his word. He was caught in a vise. He walked away into a side room, leaned against the wall, and broke down crying. His chief of staff, Joe Dowley, walked in.

  “Boss …” said Dowley, offering sympathy.

  “Just leave me alone, Joe,” Rosty croaked.71

  Marty Russo, a big, lumbering, aggressive politician, a chip off Rostenkowski’s block, wouldn’t let go. When Rostenkowski came back, Russo argued that Rosty would need labor’s support to pass the bill on the House floor. It was a politically smart trade-off to make, he said. He hunted down Jim Baker and Dick Darman, who had come to monitor the final votes. Baker conceded that at best, Rosty’s bill would only get about forty Republican votes on the floor, out of 218 votes needed.