by Alan Murray
Above all, this is a drama about a powerful idea whose time arrived to the surprise of many so-called insiders.
In our system, Congress, especially the House, with little party discipline or ideological rigidity, is often like a seamless web of floating coalitions. This was vividly present in the making of the tax bill; the conservative president’s initiative was supported by some liberal Democrats and opposed by some conservative Republicans. The way the leading opponents and proponents tried to piece together a winning coalition, with help from the narrow-interest groups, made this an exciting saga.
To be sure, the way this legislation was fashioned, careening between extinction and dramatic revival, wasn’t a very neat or efficient process; the dance of legislation rarely is. In the last century Bismarck observed that two things one never should watch being made are sausage and legislation. Compared to the Tax Reform Act of 1986, a sausage factory is tidy and orderly.
Moreover, the ultimate impact remains uncertain. Prominent economists like Alan Greenspan remain ambivalent as to how it will affect the economy; the initial consensus is it will be a small negative in the short run and a slight plus over the longer haul. It is, however, easy to find distinguished economists who disagree with both those scenarios. Political analyst Kevin Phillips is convinced the bill ultimately will prove a political loser; in the 1986 Congressional elections the most sweeping tax legislation ever passed by Congress was barely mentioned.
Whatever the economic and political effects, the tax-reform bill is a monumental piece of social legislation. It takes more than four million poor people off the federal income tax rolls, the most important antipoverty measure enacted over the past decade. And the attack on individual and corporate tax shelters makes it unlikely that wealthy individuals or businesses will be able to escape paying any taxes and thus might restore some of the eroding confidence Americans feel in the tax system.
In economic, political, social, and human terms, this bill touches most Americans in a significant way. This legislation and its impact will be debated for years; it may even become one of those rare defining issues in the American political system.
In this book Jeffrey Birnbaum and Alan Murray give us a factual and fascinating blueprint for appreciating and understanding how and why this historic measure became the law of the land, the same sort of insights they displayed in The Wall Street Journal for two years. I am the Journal’s Washington bureau chief, but other more detached observers credit Birnbaum and Murray with very special reporting that enabled the entire range of interests—rich and poor, business and labor, consumer and investor, scholar and practitioner—to follow, in vivid detail, one of the most remarkable legislative feats in years.
The authors brought different perspectives to this task. Birnbaum covered the Congress, spending most of his waking—and a few sleeping—hours in the corridors of the tax-writing committees, alternating between Gucci-clad lobbyists, earnest and sometimes naïve young staff assistants, and the elected politicians who so closely mirror this heterogeneous melting pot of a nation. Murray viewed it from downtown Washington: the executive branch with top political appointees exercising more influence and impact than they ever dreamed, the still-entrenched bureaucracies, and the business interests that were so affected by any major change in the tax system.
These two bright, industrious young journalists genuinely appreciate and believe in the political process and politicians, as well as understand that an informed public is the centerpiece of democratic government.
Note on Sources
This narrative reflects the fruit of the nearly three years we both spent covering the tax bill for The Wall Street Journal, from the time the Treasury began its work in early 1984 until the bill was signed in October 1986. In addition to our reporting for the paper, we spent nearly 150 hours in the summer and fall of 1986 interviewing those who were responsible for this legislative achievement. All of the principal actors in the drama—including James Baker, Bill Bradley, Richard Darman, Bob Packwood, Donald Regan, and Dan Rostenkowski—were generous in giving their time to ensure that our story was complete and accurate. We interviewed at length all of the major participants in the reform effort except President Reagan, who in late 1986 was preoccupied with the Iranian arms crisis.
Some of the dialogue in the book is taken from transcripts of proceedings; other dialogue is based on the recollections of people interviewed or on the notes of people present at the meetings. Wherever possible, the dialogue has been confirmed by more than one source. In cases where the accuracy of the dialogue is open to question, we have explicitly identified the source. Whenever people are said in the text to have “thought” something, the source for that information is the person who was doing the thinking. Nothing in the book has been invented; it is a carefully documented story.
In addition to our own reporting, we have relied heavily on the work of our many colleagues at the Journal who had a hand in the tax coverage. Especially helpful were Paul Blustein, who led the coverage during the inception of the tax plan in the Treasury Department; Brooks Jackson, who provided invaluable stories on the role of campaign contributions in the tax debate; Monica Langley, whose work on tax lobbying was especially useful; and also David Rogers, David Shribman, John Yang, Laurie McGinley, Rose Gutfeld, Jane Mayer, and many others.
We also owe a debt to reporters at other publications whose excellent reporting enriched our efforts. These include Pamela Fessler and Eileen Shanahan of Congressional Quarterly; Dale Russakoff and Anne Swardson of The Washington Post; Gary Klott and David Rosenbaum of The New York Times; Mark Kirchmeier, a Washington writer; and Jeffrey Levey of the Bureau of National Affairs. On matters of tax history, we have relied greatly on the work of John Witte at the University of Wisconsin and Joseph Pechman at the Brookings Institution. For historical information on members of Congress, we have made use of Politics in America, edited by Alan Ehrenhalt, and The Almanac of American Politics, by Michael Barone and Grant Ujifusa.
Chronology
1982
August 5: Senator Bill Bradley and Representative Richard Gephardt introduce their Fair Tax Act, the Democratic version of tax reform.
1984
January 25: President Ronald Reagan calls for a Treasury study of tax reform in his State of the Union address.
April 26: Representative Jack Kemp and Senator Robert Kasten introduce the Republican version of tax reform.
November 27: Treasury Secretary Donald Regan unveils Treasury I.
1985
January 8: Secretary Regan and White House Chief of Staff James Baker swap jobs.
May 28: President Reagan and Chairman Dan Rostenkowski of the House Ways and Means Committee appear on national television to endorse tax reform.
May 29: President Reagan unveils his own plan, which is the handiwork of Secretary Baker and Deputy Treasury Secretary Richard Darman.
October 1: After a summer’s worth of hearings, the House Ways and Means Committee begins serious drafting sessions, using a plan devised by its staff as the starting point.
October 15: The committee nearly kills reform by voting to expand a tax break for commercial banks.
October 23: The bank vote is reversed after Rostenkowski agrees to retain the deduction for state and local taxes.
November 23: The Ways and Means Committee approves its version of tax reform without the endorsement of President Reagan.
December 11: House Republicans stage a rebellion that defeats the “rule” on the House floor, preventing the tax-reform bill from being considered.
December 16: President Reagan comes to Capitol Hill to make a personal plea to the GOP to keep tax reform alive.
December 17: The House passes the Tax Reform Act by voice vote.
1986
March 19: The Senate Finance Committee begins drafting a tax-reform bill, using a plan devised by its chairman, Bob Packwood, as the starting point.
April 18: Packwood withdraws his tax plan, battered
by special-interest amendments, and goes to lunch with his aide Bill Diefenderfer to consider the alternatives.
April 24: Packwood unveils a new, low-tax-rate plan to his members.
April 25: Packwood disowns the new plan and blames it on David Brockway, the director of the Joint Committee on Taxation.
April 29: Packwood unveils revised approaches with a top individual tax rate of no more than 27 percent.
May 7: The Finance Committee approves its tax plan by a unanimous 20-0 vote.
June 4: The Senate begins to debate tax reform.
June 24: The Senate passes tax reform by a vote of 97-3.
July 17: The House-Senate conference begins with Rostenkowski as chairman.
August 12: With the conferees at an impasse, Senator Russell Long suggests the two chairmen go off by themselves to draft the legislation.
August 16: The conference report, the final version of tax reform, is approved.
September 25: The House affirms the bill by a vote of 292-136.
September 27: The Senate passes the bill and sends it to President Reagan by a vote of 74-23.
October 22: President Reagan signs the Tax Reform Act of 1986 in a ceremony on the South Lawn of the White House.
Chapter 1
Showdown
The clerk will call the roll for final passage …
It is twenty minutes past midnight on the morning of Wednesday, May 7, 1986, and the Senate Finance Committee has been working almost nonstop since early the previous morning. Under the glare of television lights, the twenty powerful senators seated around the semicircular hearing table show signs of fatigue. Some droop back in their chairs, others lean forward, propping their heads in their hands. Committee Chairman Bob Packwood’s high forehead glistens with sweat, and his eyes are dark and sunken. Next to Packwood, the committee’s ranking Democrat, Senator Russell Long—son of legendary Louisiana populist Huey Long and a Washington legend himself—wears dark glasses to protect his eyes from the lights.
Despite the late hour, the marble-lined committee room is packed to the doors with people, and guards are stationed at the entrance to stop more from pushing in. Deputy Treasury Secretary Richard Darman sits near the front of the room, facing the senators, his brown hair combed straight back and his face stone-serious. Surrounding him are the staffs of the Treasury Department, the congressional Joint Committee on Taxation, and the Finance Committee. Reporters sit cheek-by-jowl around two tables not far from the door, and the remainder of the room is filled with lobbyists—lots of lobbyists.
There is a sort of hierarchy to the tax lobbyists who swarm about the Dirksen Senate Office Building on this spring night. Those with seats in the committee room tend to be mostly notetakers. They are the lobbyists’ front guard, the younger lawyers and legal assistants whose job it is to get up at sunrise and stand in long lines to make certain they secure seats in the crowded committee room. Other less eager and more highly paid notetakers fill a large auditorium two floors below. The auditorium is wired for sound, and the lobbyists listen to the proceedings while munching on take-out pizza and Dunkin’ Donuts. The room has been occupied by too many people for too long, and it smells faintly like a gymnasium. A few of the lobbyists smoke and play poker at a table on the auditorium stage; others doze in the back. The room is at once raucous and somber; it has the strange aura of a wake.
In the hallway outside the committee room, more lobbyists stand nervously, like so many expectant fathers crowded into the waiting room of a maternity ward. These hallway loiterers include the top ranks of Washington’s tax lobbying world—men and women who are paid $200, $300, even $400 an hour to influence legislators and preserve tax benefits worth millions of dollars to their anxious clients. They lean against the walls and talk among themselves, trading bits of gossip. “Did you hear?” says one. “They changed the effective date for the investment credit.” The whispered message travels quickly down one side of the long hallway and echoes back up the other. A few of the lobbyists huddle around the back door of the committee room, hoping to catch a senator coming in or going out, hoping for one last chance to make a pitch before the vote. The desperation in their voices makes it clear that big money is at stake. Their expensive suits and shiny Italian shoes give this hallway its nickname: Gucci Gulch.
Until two weeks ago, most of these lobbyists were still betting that tax reform would never happen. It was too bold, they thought, too radical. It proposed wiping out a multitude of special-interest tax breaks in return for sharp cuts in tax rates. That would be a boon to the great mass of people who pay their taxes each year without taking advantage of these deductions, exclusions, and credits. But it would be a disaster for the many business interests and high-income individuals who have come to depend on tax favors from Congress. It is those groups, the lobbyists thought, who control Washington. They have the power, the money, and the influence. They are the ones who hire lobbyists.
Then again, the lobbyists were wrong about President Reagan. They thought he would never back a tax-overhaul effort that stepped on the toes of countless Republican business constituents. But he did. And they were wrong about the Democratic House: Defying everyone’s predictions, the House too approved a sweeping tax-reform bill shortly before Christmas the year before. Nevertheless, until just two weeks ago, the lobbyists were still betting that the Finance Committee would bury the effort. The committee, after all, was the lobbyists’ best friend. Its members were the authors of countless tax breaks that aided favored constituents; they were the recipients of millions of dollars in campaign contributions from groups determined to defeat reform. The conventional wisdom in Washington was that this Senate committee would certainly send tax reform to its grave.
But in the early morning hours of May 7, all bets are off. Something strange has been happening in the back rooms of the Dirksen Building over the past two weeks. Working privately, out of the public eye, Chairman Packwood and a handful of his committee members have undergone a remarkable conversion. They have prepared a reform plan even more radical than the one passed by the Democratic House: a plan that cuts back a wide swath of special-interest tax breaks and lowers the top statutory tax rate to 27 percent, the lowest of any major industrialized nation. It is without a doubt the most significant reform in the history of the income tax. It removes millions of low-income workers from the income-tax rolls, eliminates most tax shelters and ensures that profitable corporations and wealthy people pay at least some tax. If enacted, it would affect the lives and pocketbooks of virtually every American.
The clerk slowly calls out the names of the senators:
Senator Dole.
The dark-eyed legislator from Kansas is the majority leader of the Senate, and his vote strongly influences other Republicans on the committee. He has been critical of tax reform in the past, arguing that it does nothing to help ease the nation’s biggest problem—a huge budget deficit—but he is caught up in the momentum of the past two weeks. “I want to thank the chairman for this historic effort,” he says, “and I vote aye.”
Senator Roth.
Senator Danforth.
As the clerk calls out the names of the Republicans, moving along the table from the most senior to the most junior member, it gradually becomes clear that all of them, even those who have been hostile to the bill all along, are voting aye.
“There, that’s good work,” whispers Dole to the chairman, as all eleven Republicans vote for the unprecedented tax measure.
Then come the Democrats:
Senator Long.
The Louisiana lawmaker, his sunglasses now laid aside, also gives a nod to Chairman Packwood, who is sitting to his right. Long chaired the committee for fifteen years before the Republicans took control of the Senate in 1981, and he labored hard to enact many of the tax incentives that the tax-reform bill now threatens to eliminate. But he too has become a reformer. “Like Senator Dole, I want to congratulate the chairman for the fantastic work he’s done on this bill, and I vot
e aye,” he says.
The clerk calls the names of the Democratic senators in order of seniority, and again only ayes are heard. By the time the voting gets to Senator Bill Bradley of New Jersey, one of the most junior members of the committee, there still has not been a single dissent. The former basketball player has a proud, almost smug look on his face when his name is called. He authored a version of tax reform four years ago; he is, as Senator Packwood will later say, the “godfather” of reform. He pauses a moment and nods his head approvingly before answering aye.
The last two Democrats cast their votes, and a flush comes over Chairman Packwood’s face. His dramatic proposal is not only going to win, it is going to win unanimously. No one expected that. No one thought that his committee—of all committees—could muster even a majority for such a radical bill, much less unanimous support. The chairman is the last to vote, and as he does, tears begin to well up in his eyes. He gives a slow, solemn aye.
Senator Chafee rises quickly to his feet and begins to applaud the chairman. Other senators and staff aides follow suit. Even the lobbyists in the back of the room, unable to avoid the sweep of sentiment, join in the applause. Packwood grabs the hands of Dole and Long and thrusts them into the air in a show of victory. Then he looks down at his desk, choked with emotion.
In the hallway outside, and in the auditorium two floors below, there is mostly silence. A few groans are heard. Many of the lobbyists have clients who will lose hundreds of thousands, millions, even billions of dollars as a result of that 20-0 vote. The same questions buzz through their heads: How did it happen? Why did so many special interests go down in flaming defeat? How could the usual ways of Washington be turned on their head?