Showdown at Gucci Gulch

by Alan Murray

  During this formative stage, most of the discussion amounted to posturing, but the group did make one important decision—where to begin. Only one member, Senator John Chafee, Republican of Rhode Island, wanted to use President Reagan’s plan as the starting point for the panel’s work, and only three Democrats, including Senator Bradley, favored beginning with the House-passed plan. Arch-tax-reform foe David Boren of Oklahoma suggested that the committee direct Packwood to devise a new document that they would use as the basis for the markup.

  Boren was betting that a satisfactory document could never be written, that the president’s parameters were just too tight. How could anyone devise a plan that would meet all the druthers of the parochial-minded senators, get the top individual rate down to 35 percent from 50 percent, and still manage to raise as much revenue as the existing law? Packwood, Treasury Secretary Baker, and several committee members told reporters after the gathering that they believed it could be done. But hard work lay ahead.

  At first, Packwood tried to convince Russell Long to join him in designing the sensitive starting-point document, but the Democrat avoided that trap. The responsibility rested with the chairman, he told his colleagues at Berkeley Springs, “I’m not trying to be co-chairman of this committee.”

  With the burden on his shoulders alone, Packwood returned to Washington to continue a process that his staff had begun late in the previous year. He interviewed each of his members to find out what they needed in the way of tax breaks to win their support for a bill. In front of the crackling fireplace in his book-lined Senate office, Packwood spent a total of seventy hours meeting with each of his nineteen members. Tax reform was the taking away of breaks to pay for lower rates, but Packwood’s theory of building a majority tried to avoid the painful part of the exercise: He wanted to buy tax reform by pleasing his members with giveaways.

  Packwood and his staff made long wish lists to use as a guide in this endeavor. One list stated that George Mitchell, Democrat of Maine, wanted to protect tax breaks for three solid-waste disposal facilities back home; that John Danforth, Republican of Missouri, cared about tax-free financing for a St. Louis Cardinals’ sports stadium; and that Charles Grassley, Republican of Iowa, hoped to preserve “a growing Christmas tree industry in Iowa.” The first three items on the list of Steve Symms of Idaho consisted of one word each: mining, agriculture, and timber.

  The few broader-minded comments contained in the lists were, for the most part, critical of the entire venture. Boren, the Oklahoma Democrat, “opposes tax reform;” David Pryor, Democrat of Arkansas, “found no support for it” at home; and David Durenberger, Republican of Minnesota, believed “the deficit is the top concern.”

  Still, Packwood plunged ahead. In checking his lists, one fact became clear: He needed a new source of revenue, such as a new sales tax or an oil-import fee, if his plan was going to add to zero. He and his members demanded the retention of too many expensive breaks for the rates to be reduced far enough to satisfy the president. His wish lists were far longer than his hit lists. “No matter how you jimmy it and pry it, you just can’t get there by moving the shells around,” Packwood said. So the hunt for a new source of revenue began, and tax reform’s troubles quickly multiplied.

  While Packwood saw no alternative, Bradley thought that the search for a new source of revenue was sending tax reform down the wrong path. The key to success was to focus on the attractiveness of low rates, he thought, not on the pain of eliminating deductions. But he was in a distinct minority. From experience he knew there were a lot of excuses for avoiding tax reform and every one of them could be traced to the kind of dilemma Packwood was trying to overcome. Bradley placed tax-reform opponents in three categories: those who like the tax code the way it is, those who try to make tax overhaul part of a tax-increase effort, and those who advocate a new form of tax. Over the next several weeks, the tax bill ran into each form of opposition.

  The first objection came from a number of senators, mostly Republicans, who argued that reducing the burgeoning budget deficit was far more important than tinkering with the tax code. They saw the massive reorganization of the tax system as a luxury the country could scarcely afford, given the fact that the nation’s most crying need was to stanch the flow of red ink that topped the staggering sum of $200 billion a year. Not coincidentally, these senators also were bothered by the massive tax increase that the bill would level on their traditional business constituencies, such as real estate and mining. Senator Rudy Boschwitz, Republican of Minnesota and an expert in campaign fundraising, argued that the budget deficit should be addressed first and that tax reform should be delayed until later. In fact, his proposal was a thinly veiled effort to kill tax reform outright. His allies included Senate Budget Chairman Pete Domenici, Republican of New Mexico; Senator Slade Gorton, Republican of Washington State; and later on, Majority Leader Dole.

  A letter drafted by Boschwitz attracted the signatures of fifty senators—half of the Senate—including seven Finance Committee members. It read in part: “Until a firm, definite budget agreement has been reached between Congress and the White House, we do not believe that tax reform should be considered or debated by the United States Senate.” White House Chief of Staff Regan was so worried about the letter that he paid a personal visit to Dole’s hideaway near the Capitol rotunda to complain about the anti-tax-reform effort, but the sentiment was too strong to stop. Even as the Finance Committee began to draft the bill, the Senate overwhelmingly passed a resolution saying that tax reform should be kept off the Senate floor until the senators first took some action to reduce the deficit. Bradley derided the nonbinding measure as a “delaying tactic by opponents of tax reform,” but thirteen of the twenty members of the Finance Committee voted for the resolution, including Dole. Dole took this complaint a step further and demanded that any new tax devised by Packwood be used to reduce deficits—not to lower tax rates as part of reform.

  Dole had his doubts about the reform effort from the start. He had worked to plug loopholes in 1982 and 1984, when he was Finance Committee chairman, but he thought that a comprehensive reform bill was too ambitious. Congress had passed a tax bill almost every year since President Reagan took office, he thought, and maybe it was time to slow down. Besides, as Rostenkowski had predicted, other Senate Republicans were not buying the idea. “It seems to me we don’t move too quickly around this place and that was a pretty big undertaking,” Dole recalls. “He [Packwood] didn’t have a majority of the Republicans on the floor for the concept. It was going nowhere. I think a majority of members would say it was a real turkey for a while.”

  Senator John Heinz of Pennsylvania, a Finance Committee member and the chairman of the Senate Republican’s fundraising committee, did not hesitate to criticize reform. Heinz was worried about the effect a tax bill would have on the declining rust-belt industries in his home state, and he was an early partisan against taking away heavy industry’s tax favors.

  Even when he met early in the year with a group of corporate chief executives who supported the bill—the CEO Tax Group—Heinz did not attempt to hide his opposition to reform. The executives included some heavyweights, such as John Akers of IBM, John Richman of Dart & Kraft, Finn Caspersen of Beneficial Corporation, Howard Goldfeder of Federated Department Stores, John Smale of Procter & Gamble, and Allen Jacobson of 3M. The meeting occurred in a small conference room in the Dirksen Office Building—so small in fact that the door could hardly open when everyone crammed inside. Heinz did most of the talking. He lectured the CEOs about the importance of the tax breaks that they wanted to get rid of in order to pay for lower rates. He accused them of taking their position for purely selfish reasons. The executives tried to argue their point of view, but Heinz would not let up. An exasperated Caspersen finally interjected, “Senator, you’re not talking to a bunch of high school students.” The meeting dissolved with the red-faced executives stomping out into the hallway. Later, Caspersen told lobbyists that the Heinz perform
ance was “a sophomoric display.” Akers of IBM was even less forgiving: “If that guy worked for me,” said the man who oversaw a company with 369,545 employees, “I’d fire him.”

  Despite the opposition, Packwood was unrelenting. He was being inexorably drawn further and further into the enterprise. He deflected demands to enact deficit reduction prior to tax reform by saying he would be willing to turn his tax bill into a tax increase, if that were the will of the Senate, but he continued to scramble to put his plan together throughout February. He was on a desperate search for revenue of his own; he needed to find enough loopholes that the senators on his committee would allow him to close in order to pay for the sharply lower tax rates that the president demanded.

  The process was fraught with flirtations and disappointments. Ideas would rise and fall, float and sink, lasting only a few days or sometimes a few hours. Some proposals were more serious than others; tax amnesty, which would have given tax cheaters immunity from prosecution if they paid their back taxes, was a serious contender until the revenue estimators said the idea would raise almost no money. Oil-state senators who wanted an oil-import fee went so far as to get a green light from the White House staff to try to round up enough votes for their idea, but when the count of supporters fell short of a majority on the Finance Committee, that proposal also disappeared.

  Improbable ideas came to the surface, sending shock waves through the business community. Everyone knew Packwood was in desperate straits, and no one was discounting any possible revenue-raisers. A number of proposals surfaced that serious tax reformers did not consider reform at all; they would simply have denied businesses the ability to deduct legitimate business expenses. Diefenderfer tested out the idea of preventing corporations from deducting all of their interest expenses. That one drew an almost-audible gasp from K Street. In fact, Diefenderfer now says the idea was broached mostly to lure the approval of the supply-side Republicans who were pushing the radical notion, and whose support Packwood hoped to co-opt. A proposal to disallow the deduction for some advertising expenses also found its way onto a Packwood-plan summary, but the suggestion was soon dropped as well.

  The ultimate solution to the revenue dilemma was designed by Packwood’s top tax aide, John Colvin. It was one of the most cynical and misleading proposals in the entire tax-reform debate. Colvin, a staunch staff man completely loyal to Packwood, was lying on his living-room floor one evening, combing through lists of tax breaks, when he noticed that corporations could deduct from their income taxes the excise tax and tariff payments they make to the federal government. Those payments were generally considered by tax experts to be a cost of doing business; they had to be deducted from a firm’s “gross” income, like any other expense, before getting taxable net income. Something clicked in Colvin’s mind: Disallowing that deduction could solve a lot of problems all at once, he reasoned. For one, it would raise an enormous amount of revenue: $62 billion over five years. For another, it would be counted as a corporate tax increase, even though it was really nothing more than a backdoor increase in the excise taxes and tariffs themselves. What’s more, almost all of that increase would probably be passed through directly to the consumer, without burdening the corporations themselves—a goal of the pro-business members of the Finance Committee. That meant that Packwood could argue that he was increasing corporate taxes, while, in fact, sparing corporations much of the extra burden.

  On the surface, the hokey idea seemed an ideal solution. It was a sort of consumption tax, which would appeal to many Republican members of the committee. Senator Roth, and some others on the panel, had been arguing for years that consumption, rather than income, should be the basis of taxation. Roth favored a value-added tax, a kind of consumption tax, as the proper route to take.

  Packwood, as well, was attracted by a broad-based consumption tax, but he was wary of the political risks. Oregon voters had turned down by a decisive margin a proposal to establish a sales tax for their state. In addition, Representative Al Ullman, an Oregon Democrat and former chairman of the House Ways and Means Committee, had been defeated for reelection in 1980 after he advocated imposing a value-added tax nationwide. Denying the deduction for excise taxes offered the possibility of achieving the same goal without the political risk. It was a clever, if poorly disguised, trick.

  When Colvin broached the idea with his boss, Packwood said, “Gee, John that’s not going to fly.” On second thought, he decided it might. It had a “patina of plausibility,” he said, that served his purpose.

  When Packwood briefed Baker and Darman on the excise-tax proposal in his Senate office in early March, the two Treasury officials immediately liked the idea. Darman favored consumption taxes and thought a value-added tax would ultimately be needed to close the budget deficit. Colvin’s backdoor excise-tax increase also appealed to Darman’s Machiavellian instincts. It was a Darmanesque idea; indeed, after the plan was released, the Deputy Treasury Secretary was frequently accused of authoring it.

  More important, Baker and Darman liked the idea because it meant Packwood could at least get a plan down on paper. Their objective, as always, was to keep the process moving. They were supremely confident that somehow, in the end, they would be able to save the bill and produce the victory they craved.

  On March 11, Packwood took his plan to the president. The meeting went smoothly, and the president, unperturbed by the strange excise-tax proposal, expressed his own enthusiasm. That view was not shared by all of the president’s top advisers, who wanted to study the proposal more carefully. But Packwood was not taking any chances. As soon as the meeting was over, he dashed over to the White House press corps to announce the president’s support. He proclaimed, “By and large he likes the bill and will support it.” It took the White House itself somewhat longer to come to generally the same, though less exuberant, conclusion.

  Packwood let out the details of the plan sparingly. Over a few days, he met with his members one-by-one to tell them its contents, but he did not let them take copies away from the briefings. Bradley got half of his twenty-minute glimpse at the package while walking alongside Packwood on the way to the Senate chamber for a vote. Despite the inconvenience, however, the pertinent parts did not remain secret long. The excise tax proposal, in particular, created such a ruckus that a whole new army of lobbyists lined up against it, even before the plan was officially unveiled.

  The massive lobbying effort against the excise-tax proposal included, ironically, some of the House tax plan’s strongest advocates. The companies hardest hit by the excise-tax proposal included many of the same companies that suffered from high effective tax rates under existing law. These were the firms that were more than willing to trade tax breaks for low rates and were thus the segment of the business community Rostenkowski held up as exemplary tax-reform advocates—tobacco companies, for instance, and trucking firms.

  The biggest excise taxes were levied on cigarettes, gasoline, and alcohol, but, in fact, the excise-tax proposal seemed to anger almost everyone. Former top tax aides to Dole and Rostenkowski, who were then lobbyists, were enlisted to put together coalitions to fight the proposal, and Washington was quickly awash in corporate executives seeking relief from the proposal. They included Ernest Gallo of the California wine-producing family, David Roderick, chairman of U.S. Steel, which owned Marathon Oil, and August Busch III of Anheuser-Busch, the big brewer. They argued that the elimination of the deduction would mean a big increase in their companies’ tax bills and would probably lead to higher prices for their customers.

  That argument forged an odd alliance. The corporate chieftains were joined in the fight by their usual nemeses, consumer advocates. Groups such as Citizens for Tax Justice, the Consumer Federation of America, Ralph Nader’s Public Citizen, and the American Association of Retired Persons agreed that the Packwood proposal would increase prices, and they worried that the burden of the price hikes would fall disproportionately on poor people.

  The uproar over the pro
vision was an example of the potency of the chairmanship. When a tax-writing-committee chairman makes even the most modest reference to a possible change in the law, an upheaval can result. “You meet the power people of America if you just sit there as chairman,” Dole once said. “If you want to meet someone bad enough, just indicate you’re going to look into a part of the tax bill that affects them. You don’t even have to leave home, they’ll be right in to see you.”

  Russell Long knew the power of the chair well. “The chairman should, and usually does, have far more power than anybody on the committee,” he said.

  My guess is he has more power than any two or three people on the committee. To get something done, I need to have the cooperation of the chairman. He can make things move or slow them down or not move at all. If he runs his committee in a democratic way, then every senator will get the opportunity to add his suggestions. But there are all sorts of ways available to him that are not available to the average person to see that something either doesn’t move or moves very slowly, if he doesn’t want it to happen.

  When asked once if he liked being chairman, Packwood broke into one of his deep, whooping belly laughs. “I love being chairman,” he said. “It’s a privilege.”

  But the chairman is not omnipotent. If he champions a lame proposal, he too can lose. Packwood tried valiantly to defend the excise-tax proposal, but after a while, his heart was not in it. He clearly did not have the votes. At the first markup session, on March 19, Packwood called the plan “the engine that makes the rest of the bill possible,” but eleven of the twenty members of the committee expressed serious misgivings. “That’s not going to happen,” predicted Senator Daniel Patrick Moynihan, Democrat of New York, during the session. “I can feel it around this room.”