by Alan Murray
Word about the vote quickly reached a knot of bank lobbyists outside. “We won! We won!” David Rosenauer shouted, and the lobbyist’s cry of victory echoed in the hallway. The bank’s win was the biggest defeat yet for tax overhaul, leaving the bill teetering on the brink.
Chapter 6
The Phoenix Project
In the moments after the bank vote, an odd silence filled the committee room. Some members clustered around the chairman. Others sat without moving. Everyone was shaken, surprised. The dissatisfaction and uneasiness that had been building for weeks suddenly had reached a crescendo. Staffers wracked their brains to figure out where they could find the votes to defeat the bank amendment. They urged the chairman to move to reconsider it right away. But Rostenkowski told them to cool down.
“This one’s gonna hang out there,” the chairman said. “Just let them stew in it for a while.”
The delay was a gamble. The bank vote marked a threshold on the rocky road to tax reform in the House. The committee would either have to step across it, or stop and allow the effort to die. Many members were clearly leaning toward the second option.
But Rostenkowski put his faith in an idea he had tossed around with John Sherman, his speech writer and press aide. Tax reform, for them, was the “phoenix project,” named after the mythological creature that rose from the ashes of its own destruction. Like the phoenix, tax reform would rise to its most spectacular success only after it had first crashed in flames. Rostenkowski would ask jokingly, “Is it bad enough yet, John?” And Sherman would respond, “No, not yet, Boss, it’s not bad enough.”
The savvy chairman took the jest seriously. He sensed that tax reform was propelled largely on the strength of a negative motivation. The populace was too distrustful of government to believe that Congress would produce a bill that improved the tax system, and as a result, the polls showed only mild support for the committee’s efforts. Tax reform was, as Rostenkowski put it, “the bill that nobody wanted.” At the same time, however, the taxpayers’ distaste for the system was so deep and so strong that no politician could afford to be perceived as working to make it worse. Anyone who stood in the way of reform would be tagged in the press as having sold out to special interests; that was a harsh label few were eager to accept.
The bank vote marked the burning of the phoenix. Rostenkowski now hoped to shame his members into making it rise again. In the weeks that followed the vote, Rostenkowski would have to use all his skills to turn a losing enterprise into a victory.
Newspaper and trade publications did their part to help. They humiliated the committee by reporting the gloating words of the bank lobbyist: “We won! We won!” The embarrassment was compounded by a scathing article by tax reporter Anne Swardson in The Washington Post headlined: TAX REFORMERS TURN RECIDIVIST; BANK LOBBYISTS WON ANOTHER BREAK FROM WAYS AND MEANS. The piece featured pictures of members who voted for the offending amendment with their lame explanations as to why. The story was exactly the kind of public pulverizing the chairman was counting on to help turn his members around. “The last thing that any of these guys want,” explained one aide, “is for it to be written that tax reform dies in the Ways and Means Committee because sleaze-bag politicians want to take care of First National City Bank so the average public gets screwed.”
In the wake of the bank vote, the conflicting pressures on committee members mounted. They were forced to choose between two distasteful alternatives: They could either turn their backs on the interest groups they had always supported and push for reform; or they could forget reform and risk being viewed by voters as panderers to the big-money interests. Unwilling to make the choice, members grew frustrated, and their tempers flared.
Deputy Treasury Secretary Darman was an early victim of the anger. In a meeting several hours after the bank vote, he began to lecture the committee on the nature of their enterprise. Tax reform meant siding with the general interest against the special interest, he scolded. Members simply could not continue to give away billions of dollars in new tax breaks to banks and other special pleaders and still get reform; they had to curtail those breaks to pay for lower rates.
The speech was more than Flippo could bear. Flippo sincerely believed that the write-off for bad-debt reserves helped preserve the financial integrity of banks. So when Darman, an outsider, a Republican, a nonelected administration official, tried to impose his thinking on the members of Congress, Flippo rebelled. He gave voice to the feelings that other members had bottled up for weeks. He accused Darman of being hypocritical. He reminded him that he and Baker had taken a “pure” tax-reform plan, Treasury I, and watered it down for six months with political deals and giveaways to their own constituencies. Were the groups favored by the Ways and Means Committee members any less worthy? For Baker and Darman even to suggest that the House of Representatives should blindly accept the Reagan version of tax reform, Flippo said, was ridiculous.
The testiness did not stop there. Two days later, the committee defied Rostenkowski again on a separate piece of legislation. The panel narrowly approved, over the chairman’s objection, a small, broad-based excise tax on manufacturers to finance the Superfund toxic-waste-cleanup program. The levy was a form of value-added tax that Rostenkowski thought would spell political trouble for his Democrats in the long run, but his committee members disagreed. During that meeting, Representative Henson Moore, Republican of Louisiana, lashed out at the diminutive Pearlman of the Treasury, calling him a “son of a bitch,” and Sam Gibbons unleashed yet another tirade against the staff and their proposals.
Those kinds of outbursts proved to Rostenkowski that the phoenix project needed help. Members were afraid of killing reform, but they still needed encouragement before they could bring themselves to support it; shame alone would not suffice. Committee members were overwhelmed by reform; it hit too many interests that were dear to them. Rostenkowski would have to use all of the tricks in his politician’s repertoire to save the effort.
The biggest challenge to Rostenkowski and his bill clearly was the curtailment of the deduction for state and local taxes. Many members, particularly liberal Democrats, who might otherwise have been natural reformers, were so disturbed by the proposal that they could not bring themselves to support tax reform because of it. The fate of the bill and the treatment of the state and local deduction were closely intertwined. Joe Dowley expressed it this way:
The bank vote was merely symptomatic of the greater problem. Tax reform was dead unless we got some movement on the state-and-local issue. We advised him [Rostenkowski] after the bank vote that some arrangement had to be made on state and local. There weren’t enough votes aligned to the core idea of tax reform at the time.
The advice was well informed. New Yorkers and oil-and-gas state lawmakers were firming the kill-the-bill alliance that they had begun to discuss at Airlie House. Rostenkowski’s people knew there was trouble for sure when Democratic Representative James Jones of Oklahoma wrote an oped piece for The Washington Post that demanded the retention of the deduction for state and local taxes. State taxes in Oklahoma were so low that President Reagan had chosen Jones’s home state to make his biggest pitch for repeal of that deduction. He argued that the write-off represented a subsidy by low-tax states like Oklahoma to high-tax states like New York, but Jones wasn’t buying that line.
For political expediency, Jones and other “oilies” had joined forces with New York Jewish groups to protect each other’s tax breaks. The strategem had roots in an organization developed by Representative Tony Coelho of California, the chairman of the Democratic Congressional Campaign Committee. The initial purpose of the group, called the Council for a Secure America, was to boost both Israel and the U.S. oil industry by discouraging U.S. imports of oil, especially from Arab states. But the contacts made through the organization proved to be useful in the fight against tax reform. It was an unholy alliance that paired Jewish political activists, many of whom lived in high-energy-consuming states in the Northea
st and ran businesses dependent on tax breaks, with oil-and-gas drillers, who were eager to maintain or enact special breaks that helped keep energy profits high. Both sides of the group opposed the tax bill for their own reasons, and both saw the New Yorkers’ struggle to keep the deduction for state and local taxes as the most effective way to reach their goal.
For many lawmakers, preserving the state and local deduction was a euphemism for killing the bill or making sure, at least, that it was all gift-wrapping with nothing inside the box. The deduction seemed to be the plan’s Achilles’ heel. Rostenkowski’s proposed curtailment of the deduction raised nearly $65 billion over five years, and that revenue was thought to be essential to writing a bill that fit the parameters set by President Reagan. Baker and Darman insisted that the committee could not draft an acceptable bill without eliminating at least part of the popular deduction. As a result, many of the interest groups who joined the effort to save the deduction thought that by doing so they could help destroy the whole measure.
Jenkins of Georgia was one of the first to realize that the administration’s strategy of pitting low-tax states against high-tax states was not working. Serving as a kind of Rostenkowski scout, he devoted hours during the fall to pulling colleagues aside along the back rail of the House floor to test their resistance to the proposal. To his own amazement, Jenkins discovered that members opposed fiddling with the deduction no matter how low their own state’s taxes were. He sent that message to the chairman: Any bill that clipped the deduction, he warned, stood to be defeated on the House floor. To emphasize the point, Republican Representative Ray McGrath of New York presented Rostenkowski with a list of 208 names of House members, nearly half of the entire 435-member House, who would vote against any tax-reform bill that tampered with the deduction.
Still, the New York lobby was not convinced that its battle was won. They were determined to make Rostenkowski fold completely. After the bank vote, to ensure their success, they enlisted the aid of Representative Marty Russo, the chairman’s own protégé from Illinois.
Russo was a surprise choice for the role of convincing Rostenkowski to preserve the state and local deduction. He was one of the chairman’s closest allies. The two men were seen everywhere together in the House. They possessed one of the strongest and most visible mentor relationships in an institution that has many. Russo was almost a younger version of Rostenkowski. Both gestured broadly and spoke loudly. They were products of similar working-class, ethnic roots. They were both inside dealers, political animals. The tall Russo functioned as Rostenkowski’s lieutenant and political progeny. They often confided in each other and, it was commonly believed, always worked on the same side. There was no one more loyal to Rostenkowski on the committee.
Russo lived in a group house with three other Democratic members of Congress who left their families at home: Representative Charles Schumer of Brooklyn and Representatives George Miller and Leon Panetta of California. Earlier in the century, that kind of living arrangement was the rule, rather than the exception, for federal lawmakers. In those days, new congressmen were given steamer trunks to symbolize their temporary stay in the nation’s capital, and their workweek extended only from Tuesday to Thursday. The steamer trunks were a thing of the past, but the close friendships that developed among housemates persisted. When one asked another for a favor, the request was taken seriously; they were almost like fraternity brothers.
Schumer, like all the New York representatives, was committed to preserving the state and local deduction, and he became the New York lobby’s link to Russo. Jay Kriegel, the kingpin of the New York group, telephoned Schumer to say that he was worried: As far as he could tell, there were only fourteen solid votes to retain the deduction on the thirty-six-member Ways and Means Committee. The determined Kriegel wanted a majority. What could he do? Schumer suggested that Russo might help and promised to try to enlist his support.
Russo had a reputation as one of the House’s better vote-counters and deal-cutters. Having Russo as an ally would be a big plus for the lobby. But would he cross Rostenkowski? Schumer sat with Russo one night soon after the bank vote in the living room of their two-story, Capitol Hill townhouse, a short two blocks from the Longworth Building. On chairs and couches around the television set, they discussed the New Yorkers’ woes. First they thrashed out the merits of the provision. Then they concentrated on the politics, on the pitfalls the issue presented to Rostenkowski, and on the committee. The talk began at 11:00 P.M. and drifted well past midnight. It was punctuated by frequent trips by Schumer, a big eater, to the refrigerator.
“The New York community is desperate,” Schumer told Russo. The problems with the state and local deduction “were holding up reform.” The New York representative tried to appeal to his housemate’s sense of loyalty to Rostenkowski, arguing that a major defeat loomed on the House floor for the chairman if he didn’t alter his course. Russo had already heard plenty of complaints about curtailing the deduction and was disturbed by the proposal himself, but he hesitated to go against Rostenkowski. He said he would think over the request.
Two days later, Russo decided to join the New Yorkers’ cause. Upon reflection, he came to believe that Rostenkowski would indeed suffer an embarrassing loss if his bill came to the House floor with the deduction trimmed back. He wanted to spare his mentor that setback if he could. Paradoxically, working against the chairman seemed the only way to save him. At the same time, Russo also was anxious to broaden his own base of support in the House, to become known as something more than a Rostenkowski clone. A chance to help save the important deduction was another way to distinguish himself from his mentor.
The New Yorkers were happy to have Russo on board. Kriegel jetted to Washington to talk to him, and afterward, Russo began lobbying the committee, looking for new, solid votes. In a matter of days, he collected enough names to claim majority support on the committee for retaining the deduction. He took this intelligence to the chairman.
Rostenkowski was not pleased. He and Russo had a long, intense talk, fraught with the tension inherent any time a younger man questions the wisdom of his elder. Nevertheless, for Rostenkowski, the signs were hard to resist: The outcry to retain the deduction had come from almost everywhere, and now it was even coming from his most loyal members.
The repeal of the state and local deduction had become an easy reason for members to vote against reform. It served as legitimate cover for whatever other special interests the opponents of reform wanted to protect. Rostenkowski felt it was time to clear that cloud. He had resisted buckling sooner because he feared that the Reagan administration would walk away from the legislation if he did. The many billions of dollars lost by keeping the preference would have to be made up, in part, with a top individual tax rate higher than the president’s demand of 35 percent. Dizzying questions swirled through the chairman’s head. Could he retain the deduction and, somehow, also give the president what he wanted? By agreeing to keep the popular deduction, would he be ending any hope of support from the president and, therefore, any hope for bipartisan tax reform?
On the Sunday after the bank vote, October 20, Rostenkowski’s staff got the first inkling from Darman that the president wouldn’t jump ship if the 35 percent “line in the sand” shifted a bit. In the oval-shaped conference room of the Joint Tax Committee in the basement of the Longworth Building, Darman met with Joe Dowley, Rob Leonard, David Brockway, and other congressional staffers. The elegant room adjoined Brockway’s own crowded office and was a frequent spot for weekend skull sessions on the tax bill. It had an elaborate terra-cotta and gold-leaf ceiling, with a ponderous, brass chandelier badly in need of polishing that looked as though its pointed base was about to fall into the red-felt top of the table below it. During that meeting, Darman hinted to Rostenkowski’s aides that the top individual tax rate could go higher than 35 percent. Dowley recalls the conversation: “I don’t remember Dick Darman ever actually conceding that, but he allowed as how maybe the rat
es could go up and it wouldn’t be the end of the world. There was a constant concern about the president walking away from the bill. It was extremely helpful to know there was a crack in the armor there and that, being realistic, they wanted a bill.”
That opening provided enough room for the staffers to try to put together a plan that saved the state and local deduction and had a chance of winning the committee’s approval. It was the green light that Rostenkowski had been waiting for.
Brockway and Randy Weiss, the Joint Tax Committee’s top economist, had already discovered a trick that allowed them to raise much of the revenue they needed to cover the huge gap created by preserving the state and local deduction. Tremendous amounts of revenue could be gained, they found, by lowering the income levels at which the new tax rates kicked in. Up until then, everyone had focused on the rates themselves. But lowering the rate “break points” had the same effect as raising the rates on many middle-and upper-middle-income taxpayers, and was not as noticeable. By starting the 35-percent bracket at about $45,000 in taxable income, instead of the $66,000 starting point suggested by the president, Brockway and Weiss discovered they could raise enough money to pay for retaining the state and local deduction. They might still need a fourth rate slightly above 35 percent to keep the plan from giving too large a tax reduction to the wealthy, but they would not have to go to rates of 40 percent or higher, as Baker and Darman privately feared.
Armed with assurances from the staff that the top rate could be kept below 40 percent, Rostenkowski made the watershed decision to give in and retain the entire state and local deduction. Unbeknownst to Baker and Darman, he began to tell members that he would work to save the deduction, and he asked for their loyalty in exchange.