by Alan Murray
The Packwood plan was not viewed as real reform. The trick of tax overhaul was to pay for lower rates by eliminating loopholes. Packwood had used the excise-tax proposal as a crutch: It enabled him to retain many of the egregious tax preferences that any tax-reform bill would surely curtail. These included existing tax breaks for the oil, timber, and mining industries, and for steel, shipping, and other heavy industries. Even officials in the Republican administration who had been involved in the early formulation of reform attacked the product. “It’s hard to call it tax reform if you have to go to a new source of revenue to pay for lower rates,” said Buck Chapoton. Ron Pearlman, who had left the Treasury at the end of 1985, agreed, “It has become a political document.”
Once again, the tax-reform effort seemed to have stalled. Back in their home states, the senators were hearing little but complaints. George Mitchell of Maine, for example, pushed his policy of meeting any constituent with a gripe to the absolute limit during tax reform. He was forced to schedule appointments every fifteen minutes for entire afternoons and sometimes had to extend his office hours late into the night to accommodate the overflow. “If I can keep this policy going through this year,” he said, “I’ll be able to keep it forever.”
During a visit home to Portland, Maine, in still-chilly April, Mitchell was besieged with pleas for help. At a breakfast meeting in a roadside motel sponsored by the Maine Chamber of Commerce, he was urged to save tax breaks for the timber industry, which comprised nearly one third of Maine’s economy. “To look at timber as a special interest isn’t accurate,” said Edward Johnston of the Maine Forest Products Council. The politician could not help but agree. “I strongly support current law,” he said. That afternoon, at his dreary government office, Mitchell heard similar carping from local realtors, corporate-pension managers, a utility-company executive and even a former mayor of Portland. A hulking Maine trucker, wearing a loudly checkered sports coat, came to the senator’s office, along with a lobbyist all the way from Washington, who was resplendent in a navy-blue suit with a white hankerchief in the pocket. At the end of the long day, Mitchell concluded: “It follows a predictable pattern. They all want 100 percent” of their existing tax breaks.
Under similar pressure from their constituents, most members of the Finance Committee decided that was what they wanted too: 100 percent. Even though Packwood had taken pains to include in his starting-point plan the most cherished items on each of his members’ wish lists—including his own—none of the members were satisfied. The bill was not taking much away from anyone; that being the case, the members thought to themselves, why should they give up anything at all? Packwood quickly grew frustrated. “I discovered that if they have priorities one, two, and three, and you give them one, two, and three, then four, five, and six become their most important priorities,” he said.
The panel began drafting the tax bill on March 24, in its hearing room in the Dirksen Building. While not as big as the giant chamber used by the House Ways and Means Committee, the Finance Committee room was more old-worldly than its House counterpart, with stern, classical proportions, tall windows, and stately wood paneling. It was in this setting that the committee reluctantly set to work on the tax plan.
The panel’s very first action attacked a central tenet of the tax reform effort: The committee voted unanimously to remove from the Packwood plan the requirement that income from municipal bonds be taxable under the minimum tax. The tax-free treatment of municipal bonds had enabled many wealthy people to escape taxes altogether; if a minimum tax was to work properly, it had to curtail that tax-exempt income. But the revelation a week earlier that Packwood’s plan contained such a provision had sent Wall Street bond dealers into a panic, and had caused the tax-exempt bond market to all but collapse. Gun-shy Finance Committee members immediately began scurrying to remove the offending proposal from the plan. Packwood at first defended the proposal, then tried to blame the Treasury for devising it. The Treasury, in turn, blamed Packwood. In the end, the beleagured chairman joined with his colleagues to kill the offending proposal. It was only the first of a long series of retreats.
The part of the Packwood plan that was the most chock-full of parochial interests was the natural resources section, and that was the committee’s second order of business. The Packwood package retained existing law for almost every tax break associated with the timber, mining, agriculture, and oil and gas industries. Those preferences were usually considered prime targets for any reform effort, but Packwood had secretly formed a conspiracy among a majority of his committee members to keep the preferences intact. One of his chief confederates was Lloyd Bentsen of Texas, with whom he had earlier held a colloquy during a hearing in which they congratulated each other for believing so firmly in the use of the tax code for incentives. “I don’t think parochial interests are a bad thing at all,” Packwood said, and Bentsen nodded his assent.
Some of the reform-minded panel members tried to object to keeping all of these industry-specific breaks. John Chafee of Rhode Island complained that the oil and timber industries were not contributing to the cause of lowering rates. Bradley made a similar charge; but Packwood was quick to retaliate. He reminded Chafee that he was one of the committee’s champions for tax credits used to rehabilitate historic and old structures, and to Bradley he threw back his advocacy of tax-free bonds to finance solid-waste disposal facilities. Packwood seemed to be warning, “Don’t throw stones.” He brought down the gavel, and without a vote, retained existing law for natural resources industries.
“It keeps getting lonelier and lonelier,” Bradley said a few days later, as he tried without success—and almost without any support—to trim at least some of the natural-resources provisions. “None of us is committed to tax reform,” said Senator Malcolm Wallop, Republican of Wyoming, at the same markup session. “We’ve abandoned it a long time ago. We’re not going to retrieve it.”
One outrage followed another. On April 10, the committee adopted a crazy-quilt depreciation system that ostensibly gave more generous write-offs for machinery and equipment that were used in “productive” purposes than for those that were not. This dubious distinction was the invention of lobbyists Charls Walker and Ernest Christian and their heavy-industry allies in the Carlton group that represented major rubber, steel, aluminum, and petroleum producers. The system, in fact, was largely a ruse to mask the committee members’ frenzy to aid the industries they were beholden to. The special “productivity property” class included airplanes, many of which were built in Dole’s home state of Kansas, and mining, paper manufacturing, farming, and oil-and-gas equipment, which were important to the same block of members who pushed through the retention of existing law for natural resources.
The depreciation scheme lost buckets of revenue—at least $11 billion more over five years than the already generous write-off system that was included in the Packwood plan. It also created bizarre effects. Trucks that carried “nonproductive” assets, such as hamburger buns or baseball gloves, would not get the richer write-offs, but if the very same trucks carried “productive” assets, such as knitting machines and printing presses, they would. “It’s nuts for us to sit down and decide which are productive assets and which are not,” Senator William Armstrong, Republican of Colorado, confessed to The Washington Post.
The trend of giveaways, once begun, could not be slowed. Each day, the committee not only failed to eliminate or curtail tax breaks, but they approved new breaks that were more generous than existing law. It was the kind of special-interest spectacle for which the Finance Committee was well known. The bill was supposed to be the most ambitious piece of tax-reform legislation since the inception of the modern income tax, but instead of taking away tax benefits, the committee spent two straight weeks adding them back at a terrifying pace. When Bentsen’s tax aide, Jim Gould, visited a friend at a downtown lobbying firm, he was jokingly greeted as “Santa’s helper.”
The committee played Santa Claus for almost
everyone who asked. Bradley looked on, wide-eyed with horror, as both senators from Nebraska pleaded before the committee to give a single, Omaha-based company, Enron Corporation, a $100 million tax subsidy. The committee postponed taking the action, thanks in part to Bradley’s vehement protests, but they did not demur on most other giveaways. At a cost of $4.5 billion over the five-year period, they expanded the types and volume of tax-exempt bonds that could be issued. They raised Packwood’s limits on the amount of tax-free contributions to 401(k) pension plans, increasing the benefits for highly paid executives. And, at the urging of Packwood himself, the committee retained a tax shelter for homebuilders called “builder bonds” that one of the biggest developers in the nation, Trammell Crow of Dallas, described as a “scam.”
“We’re sliding deeper and deeper into the abyss,” warned Chafee, after the committee agreed that the proper longevity of an oil refinery for tax purposes was five years. It was a ridiculously short depreciation period for such a long-term asset, but it meant big write-offs for refineries and lower taxes as a result. (Steel mills also got the preposterous five-year write-off.)
Sick and tired of the giveaways, the usually reform-minded Chafee decided that the exercise was a failure and that the least he could do was protect the groups he thought deserved a break. As a former governor of Rhode Island, the senator chose government workers. The Packwood proposal included the government pension provision that had caused a fight on the House floor, but on Wednesday, April 16, the day after tax day, the committee decided by voice vote to accept a Chafee amendment that eliminated the tax increase for pensioners that the House bill mandated. The action, which helped 17 million federal and state workers, punched a $7.4 billion hole in the Packwood proposal and ended any chance that there might have been for salvaging the tax-reform bill. It was a watershed day: One of the few tax reformers on the committee had inflicted one of the deepest wounds that the legislation had suffered to that point. Thereafter, there was clearly no way to stop the attack. “With friends like that,” Diefenderfer remarked to Packwood after the Chafee vote, “who needs enemies?”
The panel’s goal was to close enough loopholes to bring the top tax rate down to 35 percent, but it was already $29 billion short of the revenue needed to meet that goal, and even bigger shortfalls lay ahead. The bill was hemorrhaging revenue with every decision, and no end was in sight. Newspaper reports brutalized the panel for its giveaways, for its pandering to special interests. The New Republic magazine took aim directly at Packwood; it headlined a highly critical piece about the markup, SENATOR HACKWOOD.
As bad as events had been, Friday, April 18, promised to be far worse. The markup schedule dictated that the most costly individual tax items were to be voted on that day. With the downhill slide of the markup thus far, Packwood’s chances of winning those votes were shaky at best. Friday was shaping up as the day of reckoning. Huge sums were on the line, and the fate of the entire enterprise hung in the balance. Some $70 billion worth of tax breaks that Packwood wanted to pare were scheduled for a vote in the morning, and it was clear to Diefenderfer that the chairman was likely to lose.
Armstrong had collected enough votes to keep the current deduction for business meals. In addition, Moynihan had teamed with tax-reform opponents to gather enough votes to save the deduction for sales taxes, a big-money item that was vital to preserving revenue neutrality. Dole was on Moynihan’s side, and even Bradley was so discouraged that he decided to vote with Moynihan.
Diefenderfer stayed late that Thursday, trying to figure a way out. He frantically contacted senators’ offices, trying to find some support, but there was none. It was well past dinner when he called his boss. “It doesn’t look good,” he told Packwood. “We have problems.”
Early the next morning Diefenderfer and his assistants made their way to Packwood’s office in the Russell Office Building. Starting at about seven-thirty, they manned the telephones, trying to scare up a vote or two, trying to save the floundering effort, but it was to no avail. The calls only confirmed the fears of the night before. Discipline had broken down. The bill was a goner.
“We’ll pull it down,” Packwood concluded in his matter-of-fact, businesslike style.
By that time, reporters and staff aides had already gathered in the committee’s hearing room and were awaiting Packwood’s arrival. They gossiped about the tax-reform carnage the day might produce. Surely there would be plenty. Armstrong’s people were crowing about their boss’s imminent victory; he had even canceled a trip to see his amendment through. There were whispers as well about Moynihan’s potential coup. Two floors below, dozens of lobbyists settled into their seats in the auditorium. Packwood, who was usually punctual, had not arrived and the lobbyists wondered what was delaying him. No one was prepared when he finally entered, took his chair in the center of the horseshoe-shaped hearing table in the front of the room, and delivered his message in rapid-fire fashion.
“I don’t want to give any impression that we have any idea of quitting,” Packwood said, “but I did not want to run the risk of killing this bill. What I was afraid of today is that if we held votes, it would be the end of the bill.” There would be no votes today, he said. There would be no votes for some time to come.
Some lobbyists listening downstairs started to cheer.
To many, Packwood’s action signaled the end of reform. The Finance Committee was clearly too wedded to its many tax breaks to accomplish such a massive rewrite of the code. A pessimistic Moynihan declared the effort “in ruins,” and said, “it has clearly failed in the Senate.” Secretary Baker, the administration’s top gun for tax reform, was equally distressed: “We’re in the soup.”
David Pryor, the folksy Arkansan who was the most junior member of the committee, summed it up best: “We’re all riding a lame horse right now. We have to decide whether we want to keep riding it or trade it in. I frankly think this is a horse that’s so lame we can’t continue to ride it.”
The tax bill had reached its lowest ebb.
Chapter 9
The Two-Pitcher Lunch
About fifteen minutes after the markup disbanded, Packwood telephoned Diefenderfer from his office. “Lunch?” Packwood asked. “Sure,” the aide replied.
Diefenderfer enjoyed his occasional long lunches with the boss, but on this day he knew the conversation would be as gloomy as the overcast skies. They were facing the greatest setback of their many years together on Capitol Hill. Diefenderfer had been Packwood’s top aide at the Commerce Committee before moving to the Finance Committee, and the two men had been through many tough battles, but this was the biggest and the hardest to solve. They left the Capitol grounds together, making small talk, trying not to dwell on their failure. They walked the few blocks to their favorite saloon, The Irish Times.
The Irish Times is the kind of place that people go to get drunk. Neon signs on the window flash BUDWEISER and STROH’S, and above the door, a painted sign advertises: GIVE ME YOUR THIRSTY, YOUR FAMISHED, YOUR BEFUDDLED MASSES. Inside, a visitor’s first impression is the odor of spilled beer; the second is the lighting—or lack of it. It is not the kind of place that engenders optimism. Even on the sunniest days, its checkerboard tablecloths are shrouded in darkness.
Packwood and Diefenderfer ordered two cheeseburgers, rare, and a pitcher of draft beer. “We’re not going any place the way we’re going,” the senator said. “The bill is getting worse rather than better.” Both men knew what vast understatement those words conveyed and solemnly began to review the bidding. It was their task, starting at that moment, to turn around what appeared to be an impossible situation. Tax reform—and Packwood’s reputation—hung in the balance.
As they took their first sips of beer, Packwood suggested a new approach. Instead of writing a bill that reached into every corner and crevice of the massive tax code, he asked, why not select just a few, small pieces of the mammoth design and patch together a less far-reaching measure? Maybe it could consist of just a minimum
tax and a few repealed deductions. At least it could be called reform.
Diefenderfer disliked that option. The stripped-down approach, he thought, would be considered a humiliating defeat among Washington scorekeepers. If Packwood was unable to persuade his panel to draft a sweeping bill along the lines the president was demanding—and the House already had passed—the press would label the committee a sellout and its fledgling chairman an impotent leader. Packwood would be relegated to the status of legislative loser, one of the worst fates to befall a big-time politician.
Diefenderfer was no tax expert, but he was extremely close to Packwood. His opinions carried tremendous weight. He was more than staff director at the Finance Committee; he was an all-purpose political adviser. It was his job to keep his boss out of trouble, and he usually succeeded. “Diefenderfer is in a category by himself with Packwood,” Darman observed several months later. “When Diefenderfer tells Packwood what’s on his mind, Packwood listens.”
Packwood and Diefenderfer were almost inseparable, and they were a distinctive pair as they walked through the halls of Congress. Diefenderfer was a big, bearded, lumbering man of forty-one years, who was proud of his aggressiveness (he held a brown belt in judo) and his steel-country roots in western Pennsylvania. The shorter Packwood would often walk slightly ahead of Diefenderfer, striding with his high forehead jutting forward, looking oddly like the movie character E.T.