by Alan Murray
An amendment to undermine the chairman’s position was offered by Wyche Fowler of Georgia. It would keep the deduction at 100 percent, but would add a new set of compliance measures to assure that deductions were taken for legitimate business expenses only. The Fowler plan was welcomed by the lobbying coalition, but it raised far less revenue than the $13 billion Rostenkowski wanted.
As debate on the issue began, the chairman was informed by his staff that he would probably lose to the Fowler amendment by two votes. The loss would be a severe blow, dashing the chairman’s hopes for keeping the top individual tax rate in a range acceptable to the president and possibly inspiring other dissidents to bring forth their own, expensive amendments to further undercut the enterprise.
Before he asked for a show of hands, Rostenkowski made an extraordinary plea for support. This was a difficult issue for him. His Illinois protégé, Marty Russo, sided with his opponents. Bob Juliano, a longtime friend from Chicago, was a head lobbyist for the coalition. But Rostenkowski had said time and again that everyone’s tax breaks had to be placed on the table for reform to succeed; it was important that this one not be taken off.
Everyone knew that another watershed vote was at hand. The chairman spoke in a low, measured voice. The entire hearing room was rapt. He reminded his members that they were engaged in tax reform. The purpose was to rid the system of “unfairness.” The tax code had become a monster, he said, and the average American didn’t trust it any longer. Few things contributed as much to their disgust with the system, he said, as expense-account living. While the average guy took his lunch to work in a pail, and the secretary took hers in a brown bag, some big shot down the street could go to a fancy restaurant and deduct his lavish meal. That was unfair, Rostenkowski said, and could not be left untouched in any reform worthy of the name. He warned that three-inch-high newspaper headlines would scream out criticism of the committee if the members failed this test.
Amid the high rhetoric, Rostenkowski also inserted a short but pointed warning: There was going to be a bill, he said, and as chairman, he would decide who got—and who didn’t get—transition rules. Transition rules sound like something minor, but in fact, they are one of the most important and least understood elements of tax writing. Ostensibly, they ease the transition between existing tax law and the new law, but in fact, they serve as legislative favors that the chairman can dole out to help win over enough votes for his legislation. They provide billions of dollars’ worth of special, targeted tax benefits for members’ home-district companies and localities and are always highly valued. Rostenkowski’s threat to deny transition rules to any member who crossed him could not be ignored.
Whether it was Rostenkowski’s plea for reform or his threat to withhold transition rules that caused the change, the committee majority shifted after the speech. Representative Hal Daub, Republican of Nebraska, and an apparently chastened Harold Ford of Tennessee, changed their votes. Rostenkowski won the issue, and after a series of votes, accepted a compromise that would allow a deduction for 80 percent of business meals and entertainment expenses—the formula that eventually became law.
The next day, Friday, November 22, was to be the last, and it began with preparations designed to ensure a happy ending. Starting at 7:00 A.M., Rostenkowski and Rob Leonard sat with a stack of papers and a telephone in the library in the back of the hearing room, dispensing more than $5 billion in special transition-rule favors. “What do you need?” the chairman asked each member. In general, friends of the effort were rewarded with lots of transition-rule relief. Others, who the chairman hoped could be encouraged to support the effort, also got special treatment.
A key target of the chairman’s transition-rule largesse was Representative Claude Pepper, the aged chairman of the House Rules Committee. Pepper, a Democrat from Florida, would have influence in dictating how the Ways and Means bill would be debated and voted upon on the House floor. Rostenkowski, like Wilbur Mills before him, wanted a “closed rule” for the debate, which would permit few if any amendments to the vast piece of legislation. Too many amendments, he knew, could unravel his tightly wrapped package. He hoped that his many favors to Pepper would make him more compliant with the request. These breaks included exceptions to tax-exempt-bond limits for a new stadium for the Miami Dolphins football team, a convention center in Miami Beach, a midtown Miami redevelopment project, and two new heating and cooling systems for the Florida region.
Other transition breaks were given to Rangel, for New York’s Metropolitan Transit Authority; to McGrath, for a new headquarters for Merrill Lynch; and to Guarini, for a sports facility in the Meadowlands of New Jersey. The chairman reserved some of the benefits for himself, including one of the largest—a $200 million break for Commonwealth Edison, an Illinois utility.
As was common practice, the benefits were concealed in language designed to prevent the public from figuring out the beneficiary. For example, the Miami convention center transition rule for Pepper read as follows:
An exception from the repeal of authority to issue I.D.B.’s for convention centers would be provided for a specified amount of bonds issued for expansion of a convention center with respect to which a convention tax was upheld by a state supreme court on February 8, 1985.
Only one convention center in the country met the description: Miami’s.
The list of transition rules was completed and distributed by evening. For a time, it looked like the tax-reform act might be put to bed early.
Tax bills, however, almost never finish during decent hours. There is something mystical about the hours of three o’clock or four o’clock in the morning for tax-writing lawmakers. Perhaps it is the thrill of seeing the sun rise over the Capitol dome—or, more probably, the natural inclination of humans to procrastinate until a deadline is reached and passed—but tax bills don’t ever seem to come to an end without at least one sleepless night.
Rostenkowski warned his members that he wasn’t going to allow them to leave until the deal was done. In response, Representative Andy Jacobs, a zany and unpredictable Democrat from Indiana, passed out disposable urinals—white plastic bags designed “for men and boys.” They were meant, he explained, to make it easier for the members to remain in the hearing room for long hours without being followed into the lavatory by anxious lobbyists.
The panel had a lot to do: There was a major package of provisions that the chairman would present at the very end with the rates, the personal exemption, and other major features of the individual tax system. Before dinner, the package was ready, and the Democrats retired to the library to review it. They wanted to be sure the distribution of tax cuts among income groups was “right”—giving a bigger percentage reduction to the middle-and low-income categories than to the upper classes. They saw, for the first time, that the state and local deduction was preserved in full, that the chairman made good on his assurances. The plan included a fourth tax bracket for individuals of 38 percent, a top capital-gains rate of 20 percent and a top corporate rate of 35 percent—a number that was worked out in advance with Rostenkowski’s tax-reform supporters in the corporate world. The package also taxed employer-provided group-term life insurance benefits, a slap at labor and at fringe benefits’ chief congressional supporter, Senate Finance Chairman Packwood.
Debate on the document didn’t get far. David Brockway, the director of the Joint Tax Committee, approached Rostenkowski with a dour expression on his face. “Sorry, Mr. Chairman,” he said, “I’m afraid I fucked up here. We’re short $17 billion.”
Instead of being revenue neutral, as expected, the plan added an estimated $17 billion to the government’s budget deficits over the next five years. Like the Treasury before him, Rostenkowski was hit with a last-minute revenue shortage.
Brockway was told about the bad news by his revenue estimators, who had found the glitch just moments before. Rostenkowski took it calmly. He directed the staff to fix it and they quickly vanished into the sixth floor of a cramped
office building across the street, which was actually a converted hotel. They worked there feverishly with the estimators’ computers trying to find a new combination of proposals that would bring the plan back into balance.
A second serious problem arose over the plan to tax employer-provided life insurance. Democrats were hearing strong complaints in the hallway from their allies in organized labor, who were staunchly opposed to any taxation of fringe benefits. Democratic members did not like the thought of going against their friends in the labor movement, and some of the chairman’s allies also feared that the provision would cost the bill Democratic support on the House floor. At the time, hopes of winning GOP support for the bill were fading by the moment, as the Ways and Means Republicans, meeting down the hall from the Democrats in room 1129, grew increasingly enraged about how they had been ignored throughout the process. They convinced themselves that whatever the chairman was about to present to them would be unsatisfactory. That meant Rostenkowski could scarcely afford to lose any of his Democratic allies.
Worried about the prospects, Rostenkowski’s protégé, Russo, asked Secretary Baker how many Republicans could be expected to vote for the bill.
“About the same percentage of Republican votes on the floor as it will receive in the committee,” Baker answered.
“What does that translate to, eighty or a hundred?” Russo estimated.
“No,” Baker replied, “more like forty or fifty.”
“That’s all?” Russo asked, disbelieving. There were 182 Republicans in the House.
“Well, maybe closer to thirty-five,” Baker said upon reflection.
With so little Republican backing, Russo knew the bill had to keep Democrats on board. By irritating labor, the fringe-benefit proposal might spell real trouble. During a meeting of the Democrats in the library, Russo sat in the back and encouraged other members to walk up to Rostenkowski and tell him that the loss of labor could be a problem for the bill. He wanted to send the message that there was going to be trouble on the House floor if the chairman persisted in trying to tax fringes.
At that point, someone asked how much revenue a one-percentage-point increase in the corporate rate would raise. Rob Leonard answered about $10 billion over five years—approximately the same amount as the fringe-benefit proposal.
“Well, that’s it. That solves it,” said Byron Dorgan of North Dakota. Russo bolstered the idea of the trade-off by revealing what Baker told him. By taxing fringes, Russo asserted, the bill probably would lose far more Democratic votes than it would gain in Republican support. The wiser course, he argued, would be to raise the corporate rate. Other Democrats, especially Rangel of New York, chimed in with their support for the switch.
By this time, Brockway and the other tax aides had found ways to fix the $17 billion problem. They pushed down some of the rate “break points” a bit further, and they increased the top capital-gains rate to 22 percent. But now the problem was the life insurance proposal, and Rostenkowski was at his wit’s end. The hours had flown by; it was after midnight, and his day had begun at the crack of dawn. The trade-off his members were seeking flew in the face of his strategy. He had promised his corporate backers that the top rate for businesses would be 35 percent and no higher. He had, in fact, planned an elaborate show of corporate support for the tax-reform bill based on that figure.
Without the knowledge of reporters and most lobbyists in the hallway, Finn Caspersen, the chairman of Beneficial Corporation, was waiting in Joe Dowley’s office across from the hearing room. When the package was completed, he was to emerge triumphantly and declare that, despite the huge increase in business taxes, the bill did have business support. IBM had a public affairs officer on hand, who was carrying a sheath of press releases lauding the bill. The lobbyist from Procter & Gamble even distributed a few of his company’s releases extolling the bill before the bill was done. But all of this orchestrated elation was contingent on the 35-percent corporate rate.
Back in the library, Rostenkowski, who was sitting on a couch in an alcove of the room, made a plea to keep the corporate rate where it was. He was so wracked with fatigue that some members remember seeing tears come to his eyes during the speech. When he asked for a show of hands on the fringe-benefit issue from the members who were huddled around him, however, the vote went against him: thirteen or fourteen hands, an easy majority of his twenty-three Democrats, were raised to keep all fringe benefits tax-free. Most of the Democrats wanted to back labor and raise the corporate rate. “There goes the bill,” Rostenkowski said and stood up and started to leave.
But during the long, hard trek toward reform, Rostenkowski had engendered loyalty among his committee members and won the control he cherished. So when they saw his despair, they began to relent. As if in one voice, they called him back and asked him what he wanted them to do. He was the chairman. It was his bill. He had won their respect and deserved their support.
One of the first to speak was Charlie Rangel, the chief backer of tax-free fringes. “Mr. Chairman,” he said, calling to Rostenkowski from off to his right, “we’ve got the votes but you’re our leader—what do you want us to do?” Representative Cecil Heftel of Hawaii, who had not been much of a reformer up to that point, chimed in from the left: “Look, Mr. Chairman, we’re all on the same team. We’re all pulling together here. I think we ought to be with you. You’ve carried the load for us, you put us back in the ballgame on this issue.” Others followed suit, including Russo, who was standing not far from Heftel. At that moment, some time after 1:00 A.M. on Saturday, the Democrats, who had for so long fought Rostenkowski and his bill, rose up to back him, even though many of them feared he was wrong.
By now, the chairman’s voice was choked with emotion, and his eyes were red and teary. He made a deal with his members: They would allow him to pass his package intact—with the 35-percent corporate rate and the taxation of life insurance fringes—but only if the Republicans permitted a voice vote, so the Democrats would not have to go on record by name opposing labor. If the Republicans insisted on a roll-call vote, Rostenkowski said, the Democrats could feel free to vote to retain tax-free life insurance benefits. “If there are recorded votes,” the chairman repeated, “all bets are off.” The Democrats left the library like a football team charging onto the field from the locker room, ready for the second half.
Rostenkowski entered the hearing room expecting to put the final touches on the historic legislation. Aides had told the chairman that the Republicans were willing to approve the package on a voice vote and keep the corporate rate from being pushed up. Rostenkowski was triumphant. Henson Moore compared the chairman’s efforts to those of a master violinist: “He’s played the committee like Yehudi Menuhin plays the Stradivarius. It was a virtuoso performance.”
It was not a flawless bill. Indeed, the tinkering that was done to pay for retaining the state and local deduction and to make up for the $17 billion shortfall had narrowed the tax rate cuts for many middle-income Americans so sharply that some taxpayers would actually have higher marginal tax rates than under existing law. But overall, the Ways and Means bill ended more tax preferences than any legislation had in decades and made a substantial cut in the top rate. It was still more reform than anyone had thought possible. If approved, it would mean that Rostenkowski’s reputation, long under a cloud, would be rejuvenated. Against the odds, the chairman had taken on Ronald Reagan and saved the issue for the Democrats.
Rostenkowski was more than ready for an end. He had stretched his endurance to the limit. He and his aides were almost staggering with fatigue. His daughter was seriously ill. He had finally reached the end of a very long journey. During the course of the markup, Rostenkowski had sat in his tiny, Spartan apartment not far from the Capitol and written a long letter to himself detailing the hard lessons he had learned along the way. It began, “If at any time in the future you want to go through this process again, you’re committed to read the following….”
Rostenkowski t
ook his seat to bring the gavel down on the final session of the tax-reform bill. Then came the bad news. Ken Kies, the Republicans’ top tax aide, informed Joe Dowley that the Republicans would demand recorded votes on pieces of the package. The Republicans were tired of being pushed around by the chairman. The decision would destroy his elaborately laid strategy.
No one remembers for sure what Dowley’s words were in response, but his intention was clear. The usually calm, cerebral aide threatened to smash Kies in the face. Kies shouted back. The scene was ugly.
Rostenkowski called another caucus of the Democrats and assured them that he would make good on his promise. Back in the hearing room a few minutes later, he offered the amendment to raise the corporate rate one percentage point to 36 percent from 35 percent. Rangel moved to keep life insurance fringes tax-free and even to extend the exemption for some benefits that had expired. Only Republicans voted nay.
After the vote, the Procter & Gamble press release was solemnly retrieved from reporters. The IBM spokesman was sent home. Finn Caspersen had already boarded his corporate jet and winged away. Nick Calio, a lobbyist for the Tax Reform Action Coalition, a large collection of pro-tax-reform companies eager for the 35-percent rate, kicked the wall and took a long walk around the corridors.
At 3:30 A.M., a weary Rostenkowski emerged into the teeming hallway to declare that the tax reform act had been completed. “The fat lady sang,” he said to the cameras, putting forward a brave face. “We have not written a perfect law. Perhaps a faculty of scholars could do a better job. A group of ideologues could have provided greater consistency. But politics is an imperfect process.”
He and his members disappeared into the front office of Ways and Means and quietly shared some champagne. It tasted bittersweet. “It was the most emotional night in my life, divorced from my family,” Rostenkowski remembers. “I was boiling inside.”