Showdown at Gucci Gulch

by Alan Murray

  The concession to the state-and-local lobby took a huge obstacle out of the path of tax reform, but it still wasn’t enough to get it rolling. The effort needed a strong hand to guide it, and that was what Rostenkowski provided. At times, he bullied his members; at other times, he cajoled and begged them. When necessary, as with the state and local deduction, he simply bought their support. It was the kind of one-on-one wheeling and dealing that the Chicago pol knew best.

  Rostenkowski’s methods were rooted in something that transcended traditional explanations of legislative success, such as seniority or leadership position or political quid pro quos. The methods were wrapped up in the man himself. There were times when a Rostenkowski bear hug or a cold-edged glare was enough to change votes and move legislation. Congress is not a bureaucracy that moves by rote and form letter; it is a place where one person can make a difference and often does. When it came to tax reform, Rostenkowski was such a person. He was a force unto himself, a character to be dealt with.

  The Congress is filled with ambitious and extroverted men and women who, most of the time, vote for legislation because they have to—their district needs a water project, their party’s leadership demands their vote, or they fear a position won’t sit well with their constituents. They vote for partisan reasons or take stands because they want to avoid blame for missing some new trend. But every once in a while, a legislator such as Rostenkowski wins votes by the force of his personality. In Congress, and in politics in general, charisma can be a palpable commodity, an energy that can be felt. When some lawmakers talk, listeners simply can’t stand too close.

  Such was the case with Lyndon Johnson when he was Senate majority leader. He intimidated his colleagues simply by bringing his big face with its huge ears down to their eye level. Legislation moved when he wanted it to. The white-maned Tip O’Neill, who wore 52-long suits, had the same kind of effect on his colleagues in the House. A speech by him in the well of the House chamber or a chat in the cloakroom off the House floor could turn a vote or change a mind and make a difference in the end. Dan Rostenkowski possessed elements of this kind of presence. Members outside the committee would sometimes prefer to deal with his staff rather than face the man himself. When he walked into a room, his own committee members grew silent. Once, he made clear that Representative Harold Ford of Tennessee was not enjoying his favor. Thereafter, the other members tried not to be caught near Ford in the chairman’s presence. “You didn’t want that odor on you,” a Ways and Means member recalls.

  By Monday, October 21, five days after the damaging bank vote, Rostenkowski was ready to launch his reconstructed phoenix. True to form, he did so in person. Early that morning, he marched into Flippo’s office unannounced and demanded to see the congressman right away. Such a visit was highly unusual, but the request could hardly be denied. It was the kind of terrorizing tactic that would send shivers down the spines of any member involved. It was like the top executive in a corporation bursting into a subordinate’s office to demand an instant accounting.

  A meeting was hastily convened, and Rostenkowski got right to the point. “Your amendment set the wrong tone,” the chairman charged and then asked, “What can we do to get you to back off?” It did not take much. The big man had come to ask a favor, and that could not be ignored. Flippo quickly consented to work with the chairman and agreed to make the motion himself to reconsider the bank vote. The proposal that would substitute for the original bank amendment, they concurred, would be one of Flippo’s fallback proposals, which would take the special bad-debt deduction away, but only from the biggest banks.

  Rostenkowski met that day with other members who had made the retention of the state and local deduction their top goal. He summoned Tom Downey of New York to his office in the Capitol building off the House floor and laid out the deal straightaway, demanding that Downey begin to support him in return. Downey agreed.

  “I’m glad we’re allies,” Rostenkowski said with a toothy grin.

  “I’m glad I’m an ally rather than a guerrilla warrior,” Downey replied. “I don’t find that comfortable.”

  Ray McGrath, the Republican from New York, was also given the word, and his reaction was all the chairman could have hoped for. From then on, he voted with Rostenkowski on almost every issue. “When I’m bought,” he said privately, “I stay bought.” His loyalty to the Democratic chairman became a bitter joke among his Republican colleagues. Once, when Rostenkowski called for a caucus of Democrats during a drafting session, a Republican sneered into a microphone: “Ray, you better go too.”

  The bank vote was overturned on Wednesday, October 23, eight days after the initial debacle. Flippo moved to reconsider his old vote, and Democratic Representative Pete Stark of California offered the new compromise amendment that already had been worked out by Flippo and Rostenkowski. The compromise passed 14-7, with the support of the state and local rebels. It was one of the most important votes in the entire tax-reform debate; for the first time, it looked like tax reform might start to move.

  “That was it. That was the first indication that we were going to get a bill,” Rostenkowski said. “The members started to realize that they were going to bite the bullet. The element of being cute evaporated.” Rostenkowski now had a solid core of unwavering supporters, and he was ready to go forward.

  At six o’clock that evening, Darman met with Brockway, Dowley, and Leonard. The Treasury official was happy that tax reform was being rejuvenated, but he wondered what had caused the change. Rostenkowski had not told the Treasury that he had given in on the state and local deduction, but Darman was suspicious. Halfway through the meeting, Rostenkowski stuck his head through the open door, and Dowley commented briefly to him that Ray McGrath had been won over “totally.” Darman knew McGrath cared only about state and local taxes. If McGrath had been brought aboard “totally,” then surely the state and local deduction must have been saved. “Uh oh, shit,” Darman thought, “these guys have already struck the deal.”

  Darman was still convinced that retaining the state and local deduction would be the death of tax reform, or at least the death of a reform bill the president could support. If Rostenkowski failed to eliminate some of the deduction, Darman feared, the House plan would need a top rate as high as 40 percent in order to raise the same amount of money as the existing tax system. The president might be willing to support a bill that edged a point or two above the 35-percent top rate he demanded, but not a bill with a top rate of 40 percent or higher.

  The next day, the rumors of Rostenkowski’s concession were everywhere. Baker was furious, feeling the Democratic chairman had not leveled with him. He telephoned Rostenkowski, who was in North Carolina to attend a fundraiser for Democratic Representative Charlie Rose. Their exchange was heated. Rostenkowski refused to concede that he had made a deal to keep the deduction, but Baker and Darman knew he was lying. Newspaper stories the next day quoted lawmakers from New York boasting about their conversations with the chairman. On Friday, Baker and his entourage confronted Rostenkowski in person at the Ways and Means Committee office. There was shouting, but still no admission of a deal. Bad blood began to boil between the two men.

  After the angry meeting, Baker and Darman went to Andrews Air Force Base outside Washington to brief Chief of Staff Regan and his legislative aides on the committee situation. The meeting was held at the out-of-the-way locale because other White House staffers, such as Communications Director Patrick Buchanan, opposed the Ways and Means effort, and Regan wanted to avoid unproductive sniping. For the Treasury officials, tax reform had become a two-front war. They had to try to keep the Ways and Means Committee moving in the right direction, but they also had to keep the White House on board. The White House staff was hearing endless complaints from House Republicans about the tax effort, and there were those on the president’s staff who thought it was time to, as one put it, take the bill “to the swamp and drown it.” In addition, there was the continuing tension between Regan’s
staff and Baker’s staff; the new Treasury chief continued to get rave reviews while the new chief of staff was under heavy criticism.

  Darman prepared a memo for the meeting. “There is no realistic chance of a fully satisfactory bill coming out of Ways and Means,” it began. The top rate would probably be 37.5 percent, he concluded, and could go all the way to 40 percent if Rostenkowski insisted on giving up state and local entirely. (Baker and Darman still thought the chairman might relent on his deal.) The memo suggested two alternatives for the Reagan administration: It could keep working to improve the Ways and Means package and hope to fix it in the Senate, or it could “punt now”—blame the Democrats for going astray and promise to try tax reform again another year.

  Regan agreed to the first approach, but he and his aides were worried. Tax reform wasn’t going well in the House, they thought, and the president might eventually have to abandon ship.

  Discouraged by the House actions, Darman had already begun plotting a contingency—a “minimal” tax-reform bill. In an elaborate drawing that looked like an electrical diagram, he linked together the few pieces of reform that might be pushed through the Ways and Means Committee to pay for a small lowering in the top rate—perhaps to just 45 percent, down from the existing 50 percent. He also schemed out what he called the “Dole-Packwood hero option.” After fundamental tax reform failed in the House, Majority Leader Dole and Finance Committee Chairman Packwood might rescue the bill and turn it into a plan with a top rate of 30 percent, paid for by enacting some sort of a national sales tax or value-added tax, which many senators were known to favor and which Darman favored as well. The Treasury official even discussed the hero option with Packwood’s trusted aide, Bill Diefenderfer, who said the plan might work, but only if the president first endorsed the value-added tax. Given the president’s strong opposition to new taxes, however, the option was a long shot. Time was running out for tax reform, Darman feared, and faith in Chairman Rostenkowski’s ability to achieve acceptable reform was on the wane.

  Unaware of this planning in the highest reaches of the Reagan administration, Rostenkowski worked busily in his own element, making the back-room political concessions necessary to get the bill moving. In many ways, tax reform for him had become like any other tax bill. Deals had to be cut to keep the special interests from overwhelming the effort; votes had to be paid for with favors and special tax breaks. “I’m a negotiator,” Rostenkowski said proudly. He built his bill by compromise, doing whatever was necessary to raise the revenue needed to pay for lower rates. He made no pretense of purity. “Tax reform,” he said, “like all major changes in policy, is negotiated, not dictated. Like it or not, tax reform ends up a series of compromises. No compromise, no reform…. We may have to yield more to powerful interests.”

  A central element of Rostenkowski’s strategy was to divide his committee into “working groups” to deal with the delicate issues. Each group was asked to trim enough tax breaks in its assigned area of the code to reach a revenue-raising target set by the chairman. In most of the working groups, the membership was stacked to give the chairman an easy majority, but the working-group members were given wide discretion to reach the chairman’s revenue goal in whatever way they wished.

  This arrangement immediately gave Rostenkowski some new headaches. His first major challenge arose in the working group assigned to deal with tax-exempt bonds. There, the carefully planned balance of power was disturbed when Representative Wyche Fowler, Democrat of Georgia, joined the panel even though he had not been assigned to it by the chairman and his aides. Fowler was one of the members who made it clear that his support for reform would have to be bought with concessions. He put the congressional tax staff on notice that he planned to fight for a long list of special tax breaks, one of the longest compiled by any Ways and Means member.

  The reason, he told tax staffers, was his impending race for the Senate; carrying water for special interests would undoubtedly help raise money for the expensive effort. His fundraising strategy apparently worked: During 1985, Fowler received $539,575 in campaign contributions from a host of special-interest groups and wealthy donors with keen interest in the tax bill, including tax-shelter promoters in New York and oil drillers and real estate developers in Texas. Hamilton Jordan, Fowler’s chief rival for the Democratic Senate nomination in Georgia, once was asked what would most help his campaign. “A few days on the Ways and Means Committee,” he instantly replied.

  The cool half-million that Fowler raised was only the third-highest total among Ways and Means Committee members. He was eclipsed by the two other senatorial aspirants on the committee: Henson Moore of Louisiana, who raised $1.4 million in 1985, and Democratic Representative James Jones of Oklahoma, who raised $616,624. Indeed, as they considered every nook and cranny of the tax code, members of Ways and Means became quick favorites of lobbyists and campaign contributors of all sorts. Some members even raised their per-person rates for fundraisers to as much as $1,000 from the more usual $250 or $500 rates. All told, the thirty-six Ways and Means Committee members raised approximately $7 million in 1985 and did so without apology. “That’s just the way the world works in terms of politics,” said Representative Moore.

  The taxation of municipal bonds was one of the most intensely lobbied parts of the tax bill. Bond lawyers huddled in a great mass late into the night outside of room 1129 in the Longworth Building, where the working group met. The room was down the hall from the ornate Ways and Means hearing room and stood in sharp contrast to it. It was a small, simple conference room furnished sparingly with a schoolmarmish desk, a plain oval conference table, and about thirty chairs that would fit the décor of a Howard Johnson’s restaurant.

  The focus of the working group was bonds issued by state and local governments to fund private development. Municipal bonds issued for use by the governments were not taxable at the federal level, and Rostenkowski was not proposing to change that. But in recent years, state and local governments had begun to issue tax-exempt bonds for use by private industry. Rostenkowski tried to pare those bonds back in 1983, but opposition was so strong that he failed to win a majority on the floor to agree to bring his measure up for debate. Some curbs were enacted in 1984, but tax-exempt financing continued to expand at a rapid pace. The total amount of tax-exempt bonds soared to $71.7 billion from $8.9 billion a decade earlier; fully two thirds of the tax-exempt bond market consisted of bonds used for private purposes. While state and local officials defended the break vigorously (and enjoyed the political rewards of passing out what amounted to low-interest loans to their friends in the business community), reformers saw this proliferation as a rip-off of the taxpayer under the guise of civic do-goodism. “It’s pretty straightforward,” said Bob McIntyre, of Citizens for Tax Justice. “The federal government puts up the money in the form of interest subsidies, and corporate executives spend the cash.”

  Private-purpose tax-exempt bonds were especially important to Wyche Fowler, whose home area in Atlanta used them to construct airport facilities. They were important to other members as well, who were under pressure to avoid new bond curbs from the governors and mayors who dispensed them, the securities firms that sold them, and the bond lawyers who did the legal work. Bob Matsui of California was the champion of a coalition of bond groups and managed during the hours-long meeting of the working group to win many of the coalition’s demands. Each victory for the bond people marked a defeat for Chairman Rostenkowski.

  Tempers in the bond group frayed almost to the breaking point. Flippo, who was supposed to be one of the chairman’s allies in trying to limit tax-exempt bonds, voted instead to retain the use of the bonds to finance ports, which were important to his state of Alabama. Henson Moore felt betrayed by the move, and complained that he had been taking some tough votes that helped the chairman, but now members of Rostenkowski’s own party were going against reform. Moore used the occasion to propose removing all limitations on tax-exempt bonds issued by universities and ho
spitals, which was his own pet cause. The move prompted an explosion. Moore made a remark to Flippo that questioned his intentions. In reply, Flippo suggested that they “step outside to finish the conversation.” Others intervened before the lawmakers came to blows.

  Word about the blowup in room 1129 reached Joe Dowley, who was monitoring three separate working groups from his Ways and Means office at the other end of the hall. At about 10:00 P.M., he hustled over to the bond group to try to regain control. His target was Representative William Coyne, Democrat of Pennsylvania, a quiet bachelor from Pittsburgh. He asked Coyne, on behalf of the chairman, to vote for the chairman’s position. But on the very next vote, Coyne defied the chairman’s emissary and voted the other way.

  Dowley immediately put a call into Rostenkowski, who was traveling out of town. Rostenkowski, in turn, telephoned the working group and demanded to speak to Coyne. The Pennsylvanian was beholden to the chairman for his seat on the working group and for his recent assignment to the full committee as well. After a thorough talking to, Coyne agreed to change his allegiance. The group disbanded for the evening, while the staff worked to put together a new package.

  In order to ensure support for the package, Rostenkowski’s staff included numerous special breaks to appease the members. Fowler won an exemption for airport facilities, McGrath was able to keep a break for bonds used to build solid-waste disposal facilities, and Flippo and Coyne were allowed to revive some so-called small-issue industrial development bonds, the type of bonds used most often to benefit companies directly. Port bonds also got easy treatment. The chairman’s badgering and the carefully constructed new package softened the opposition, and the working group was finally able to reach agreement.