by Alan Murray
Tom Franks was, for the most part, a soft and solo salesman. But one of the biggest and best-financed lobbying efforts, staged by a high-powered group of New Yorkers, was not so gentle. In conjunction with a determined Governor Mario Cuomo, the coalition pulled all the stops out to save the deduction for state and local taxes.
The New Yorkers’ lobbying drive began in the spring of 1985 with an urgent mailgram to several hundred of the richest and most important people in New York City. The mailgram was an invitation to a meeting on an issue that, it said, threatened nothing less than the future of the city and the state. The mailgram was signed by David Rockefeller, former chairman of Chase Manhattan Bank; James Robinson III, chairman of American Express; and Laurence Tisch, chairman of Loews Corporation.
The featured speaker at the meeting, held in the lavishly appointed Harley Hotel in Manhattan, was Senator D’Amato. The topic: tax reform. The Treasury’s plan would repeal the deduction for state and local taxes, and its effect on New York, the state with the highest taxes in the nation, would be severe, D’Amato said. Each of the people attending the meeting had plenty of their own complaints about the controversial tax overhaul; most had business interests that would be hurt. But D’Amato’s message was clear: The proposal to eliminate the state and local deduction needed their undivided attention. “You’ve got to focus on this and this only, because if you don’t, we’ll get killed,” he said.
Thus began one of the most persistent and pervasive lobbying campaigns of the tax reform story. During the next year and a half, these wealthy New Yorkers doled out more than $1.5 million to protect their precious write-off.
Lewis Rudin, a New York real estate manager, was named to head the campaign. He enlisted Jay Kriegel to help run it. A fast-talking lawyer, Kriegel had served as chief of staff and special counsel to former mayor John Lindsay of New York. Kriegel later opened New York City’s Washington office and lobbied Congress extensively in the early 1970s for revenue-sharing benefits. He knew the ways of Washington well.
From the start, Kriegel realized that saving the state and local deduction would be no small task. Eliminating the deduction raised $150 billion in revenue over five years and was a keystone of the Treasury plan. Baker and Darman repeatedly insisted there could be no bill without its repeal. Furthermore, the Reagan administration seemed to revel in the criticisms of New York’s Democratic Governor Cuomo. If tax reform ended up as a fight between New York and the rest of the country, the administration strategists thought, New York would surely lose. To some GOP political analysts, a loss for Cuomo would be especially welcome, because he was a potential contender for the Democratic nomination for president in 1988.
“They wanted to isolate us, and there was a grave risk they would succeed,” Kriegel said later. “Given the nature of the attack, from the president on down, it was clear that the usual response wouldn’t be adequate. Unless we did something significantly bigger, we were going to lose.”
The determined New Yorkers decided that they had to broaden their base of support and get other states involved. “The only way we could win was to prove this was not just a New York issue,” said Kriegel. They opened an office near the Capitol and hired a young Democratic fundraiser, Bob Chlopak, to head it. They began to accumulate a national base of support. They ran eye-catching television commercials that pictured a large man in a wading pool trying to telephone his congressman to complain about the repeal of the deduction for property taxes. Other groups quickly joined the effort. Public-employee unions were the first to sign on, providing some of the money needed to fund the campaign. Organizations like the Conference of Mayors also soon joined. The group, started by a handful of rich New Yorkers, gradually became a national coalition, calling itself the “Coalition Against Double Taxation.” A research director was hired to crank out studies showing how eliminating the deduction would affect every state. When representatives of the coalition met with a congressman from Georgia, they showed him detailed information on how it would affect Georgia services, Georgia taxes, and what it would do to everyone in Georgia. When they met with someone from Connecticut, they unveiled the same detailed figures about Connecticut.
Unlike the insurance industry, which conducted a scattershot lobbying campaign designed to hit every member of Congress, the cleverly run state-and-local group aimed carefully at important tax writers. They sent grass-roots organizers into the California congressional district of Democratic Representative Robert Matsui, for example, and set up a committee of community leaders opposed to repeal to put pressure on the Ways and Means member. They ran advertisements in local newspapers saying the proposal to repeal the deduction of property taxes would hurt every homeowner, DO YOU WANT TO PAY MORE FOR YOUR OWN HOME? the ad asked. “If not, call Congressman Bob Matsui today.” The hard-nosed tactics were repeated in the districts of key Ways and Means members across the country.
Early on, both Rostenkowski and the Treasury recognized the state-and-local issue was especially controversial and would probably require some sort of compromise. Baker and Darman continued to argue, however, that they could not afford to give up the entire provision. If the deduction were retained, tax writers would have to look elsewhere to find a large chunk of revenue. The alternatives were not happy ones for the Treasury officials: Either tax rates would have to rise above the level they recommended, or business tax breaks would have to be curtailed even more than the Treasury request.
With so much on the line, the appearance of Cuomo before the Ways and Means Committee in July was a particularly tense event. He was scheduled to testify about the president’s proposal, and the day began with an informal breakfast gathering in the book-lined library in the rear of the Ways and Means hearing room. The library was dominated by a thirty-foot-long mahogany table, inlaid with black slate around its oval-shaped rim. Embedded in the slate were brass plates bearing the names of previous Ways and Means chairmen, starting with THOMAS FITZSIMMONS, PA., FEDERALIST, 1789-95 and sweeping around to the plate in front of Rostenkowski’s own seat that read DAN ROSTENKOWSKI, IL., 1981—. Such private breakfast sessions were among the best attended and most informative of the Ways and Means Committee’s events, much more so than the public hearings that followed them. Rostenkowski used these sessions to expose his members to corporate chief executives who backed tax reform and to let his tax writers know that at least some corporations were their friends. But this day, state-and-local day, the breakfast featured an unwavering opponent of the president’s reform.
Cuomo’s message was loud and emphatic, especially in the cramped quarters of the library. His arguments were marshalled with eloquence, but they were forceful—too forceful, some members thought, for the setting. They were the verbal equivalent of fist-pounding: a fiery sermon about the rectitude of the state and local deduction. Members of the committee felt they were being lectured to, and they did not like it.
The ill-feelings that began in the library spilled over into the public hearing later that day. It did not take long for Cuomo to get into a row. His victim was one of the most mild-mannered and courtly members of the committee, John Duncan. During the New York governor’s testimony, members speculated about whether some high-tax-state taxpayers might move to low-tax states if the deduction were taken away. “I’ve never met anyone from Tennessee who retired to New York,” Duncan said. Cuomo shot back, “Maybe after they retired they denied they were from Tennessee.”
The arrogant quip angered committee members. “If we had a vote on it [the state and local deduction] at that point,” speculates Joe Dowley, “it would have been a lot easier to dispose of the issue.” No votes were taken, however, and the issue got even stickier as the weeks went by.
In August, the Coalition Against Double Taxation made a critical decision that threatened to foil the plans of Rostenkowski and the Treasury and scuttle tax reform. Acting against the advice of some of their most savvy political advisers, Kriegel and Chlopak convinced others in the coalition to adopt a
“no-compromise” strategy: They decided to refuse to settle for half a loaf. Washington is a city that operates on deals, but the coalition was saying it would not deal. The group wanted to retain the entire state and local deduction and decided compromise would not do.
Cuomo echoed this sentiment to the New York members of Ways and Means during a special meeting in the state’s offices in Manhattan’s World Trade Center. There, with the help of other statewide politicians, he laid down the law: no compromise. Rangel, a senior member of Ways and Means and a close ally of Rostenkowski, was not eager to accept the stance, but the lawmakers left the meeting speaking with one voice on the pivotal issue.
The strategy risked incurring the wrath of Rostenkowski, but Kriegel felt by that point that the coalition would ultimately prevail. If he was right, the entire tax-reform effort faced a serious threat.
By September, after a summer’s worth of rising complaints and little support for tax reform, Rostenkowski thought it was time to lay down some laws of his own. On Saturday, September 7, he packed up his thirty-six-member committee, a handful of economists, and some top Treasury officials, including Baker and Darman, and set off for a weekend of sublime seclusion in the Virginia hills. In the spacious, sunken living room of a house on the grounds of a convention center called Airlie House, away from the prying eyes of the press and the crush of lobbyists, the chairman tried to breathe new life into tax reform.
It was not easy. Harvard economist and former Reagan adviser Martin Feldstein argued strenuously at the retreat that the tax plan would harm heavy, rust-belt industries like steel. Members raised other thorny concerns: Does the proposal encourage adequate savings and investment? Will the package produce a short-term economic recession? Might it hamper America’s already-lagging international competitiveness? New York Republican Raymond McGrath said that “two of the three people in America who favor tax reform are in this room, and only one of them has a vote”—a reference to Rostenkowski and Baker, who were present, and President Reagan, who was not. There also was mostly hushed talk about trying to kill the bill. In an aside, Bill Frenzel of Minnesota warned his colleagues that if they wanted tax reform dead, they had better give it “a good karate chop, or it will come back and beat the shit out of you.”
Most ominous of all, one of Rostenkowski’s earliest, and most private, fears was coming to pass. His members were beginning to form political marriages that, if successful, might block his bill. During some of the quieter moments at Airlie House, lawmakers from high-tax states like New York, who were worried about the state and local deduction, made preliminary overtures to those from oil-and-gas regions like Texas, who feared Rostenkowski would attack their favorite industry’s tax breaks. Together, the disaffected lawmakers might form a coalition that could stop any bill.
Baker added his own impediment by outlining four issues on which, he said, the president would not compromise. He described them as “lines drawn in the sand”—a curious metaphor for unyielding demands, but it was clear he meant business. The four were: reducing the top individual tax rate to 35 percent from the existing 50 percent, removing low-income families from the income-tax rolls, retaining the mortgage-interest deduction, and keeping the entire proposal revenue neutral compared with existing law. The only guideline that was in dispute was the top tax rate; the committee was not as wedded to so low a top rate. Representative Frank Guarini, Democrat of New Jersey, asked his colleagues to vote that day to “lock in” 35 percent as their first decision on the bill, but no one responded to the suggestion.
Amid all this resistance, Rostenkowski’s closing statement provided the retreat’s one shining moment for tax reform. In the sunken living room that looked out through a picture window on the tartan hills, the chairman delivered an impassioned appeal. His words were borne out of his own conviction that the time was right for reform, but also out of the frustration he was feeling. His own members, he knew, were turning their backs on him.
He reminded them that they had been through a lot together, and that if they failed this time, it could well be the professional disappointment of their lives. It would cast a pall on the committee that might never be removed. He spoke about the need for reform, the chance to bring fairness into the code. Although not a reformer by nature, Rostenkowski did have a desire to pursue tax justice. When uncertain about how to go on a tax issue, he would frequently turn to his advisers and ask, “What’s the right answer?” He told his committee members about his own daughters, who, he said, were working hard to make ends meet, but who paid more in taxes than some millionaires. Three of them were airline stewardesses, the fourth was an office assistant. Tears came to his eyes at the mention of them. “We have an opportunity to etch what little we can in the history books,” he said. “It’s not going to be easy, but it’s doable.”
At the end, under the blue-eyed gaze of their chairman, few of the members were willing to say no, either to Rostenkowski or to his drive for reform. The weekend’s windup appeared to be the start of a new era of good feeling.
Any good feelings among the Ways and Means committee members were short-lived, however. Tax overhaul encountered new obstacles as soon as the members returned for work in the House. The first problem was the rush of interest in tackling another national problem that fell under the wide reach of the Ways and Means Committee—the trade deficit. Georgia’s Ed Jenkins put his colleagues on notice that tax reform was not his top priority, that he would attempt to attach a textile-protectionist amendment to every bill the committee tried to pass. Faced with a similar wave of interest from a growing number of members not on the committee, Rostenkowski was forced to delay the start of work on the tax-reform bill until he pushed Jenkins’s textile bill out of committee and onto the House floor.
When Rostenkowski announced his plans to move the trade bill first, he owned up to a “hesitancy” among his members to dive into reform. Jenkins was more direct: “The members of the committee simply don’t feel the rising tide from the public or from other members of the House for a comprehensive tax-reform bill. They don’t want to be leading the train with no boxcars back there.”
Tax reform’s troubles did not end after the trade issue had been dealt with. An influential group of liberal House Democrats called the Democratic Study Group came out strongly against the president’s demand to lower the top tax rate to 35 percent. They feared such a steep decline from 50 percent would produce a windfall for the richest Americans. They also could not see the reason for turning the tax code inside out without raising some revenue to attack the nation’s number-one problem: budget deficits.
In early September, President Reagan began to tour the nation in an attempt to rouse the public from its indifference over tax reform. It was his first speaking tour since his operation for intestinal cancer that summer, and it met with little success. Speaking in his shirt-sleeves outside the Jackson County Courthouse in Independence, Missouri, the president conjured up images of Harry Truman. “It’s the working men and women of America who pay the taxes, foot the bills, and make the sacrifices that keep this country going,” he told the crowd. “And I’m here to talk to you about a long-overdue change in our tax laws, a change that is aimed at benefiting you…. I think Harry would be very pleased.”
The president traveled as well to Concord, New Hampshire; Raleigh, North Carolina; and Athens, Tennessee, to sell his reform package, but the takers were few. Reagan acknowledged that the battle to win public support for tax reform would be difficult. The American people, he said, have “heard too many promises by too many politicians about how their lives are going to be made better. They have been hurt too many times by elected officials who promised better and delivered worse.” The president insisted that this time, “I promise you we are going to win.” But skepticism continued, and polls showed that those who opposed the president’s tax reform effort were as numerous as those who supported it.
Meanwhile, Rostenkowski hoped to create some new enthusiasm, at least among
his own members, by presenting them with a new tax-reform plan drafted by his staff. The president’s plan had been so thoroughly discredited in the minds of the committee members that some new starting point was needed if the process were to move ahead. Indeed, the many political problems with the president’s plan might well have contributed to the continuing public disinterest.
When the Ways and Means plan was unveiled in late September, however, it was greeted not with praise, but with resentment. “Almost none of the members felt any allegiance to it,” Dowley recalls. “Few of them felt it was a product of their making.” Even the chairman was reluctant to put his name to it at first. It was called the “staff option.”
The plan eliminated the president’s controversial windfall recapture tax—to the relief of almost everyone. It also compromised on the state and local deduction, preserving a large share of the write-off, but the compromise was not enough. Members immediately rejected the proposal as inadequate.
To keep the president on board the plan, the top individual tax rate was set at 35 percent. The top corporate rate was placed at 35 percent, up from the president’s 33 percent. In addition, the top capital-gains rate, which the president wanted to reduce, was increased to 21 percent from the existing 20 percent. The New Right’s insistence on a $2,000 personal exemption was cut back. Only taxpayers who did not itemize their deductions would get the full $2,000 exemption; itemizers would get only $1,500.
Depreciation write-offs were made significantly less generous compared with the president’s plan; and oil-and-gas tax breaks, along with other benefits for specific industries, were socked hard. Compared with the president’s proposal, the Ways and Means plan gave a smaller tax cut to the very wealthy and a somewhat larger one to families earning between $30,000 and $100,000 a year. And, as with the Reagan plan, millions of working-poor families were removed from the income tax rolls.