by Alan Murray
To help keep that bloc of senators together, and to gather even more votes, Packwood and Bradley sought to tap the growing support among lobbyists. Bradley had begun this process in early 1986, working closely with many of the same groups that had supported the Rostenkowski bill. He kept in contact with the CEO Tax Group and the Tax Reform Action Coalition—business groups that wanted a lower corporate rate—as well as “good government” groups, such as Common Cause and Citizens for Tax Justice, and also various anti-poverty groups. These groups became the nucleus for a far larger coalition patched together by Packwood and one of his top Finance Committees aides, Mary McAuliffe. The 15-27-33 coalition—which took its forgettable name from the all-important individual and corporate rates in the plan—grew rapidly. By the end of May, less than a month after the committee had approved its bill, the 15-27-33 coalition had expanded to well over six hundred companies and organizations, including some of the most vocal opponents of the House bill. For example, the Independent Petroleum Association of America and the General Contractors of America were members in good standing, and for good reason: Tax breaks precious to both groups were retained in the Finance Committee bill, but were curtailed by the House.
The pro-reform coalition was extremely diverse. It ranged from Amway Corporation to the Children’s Defense Fund, from Church Women United to the Irish Distillers Group, from Philip Morris to the Consumer Federation of America. There were eleven groups whose name began with the word national, including the National Council of LaRaza, the National Puerto Rican Coalition, the National Black Child Development Institute and the National Coalition of American Nuns. Another five began with the word American, including the American Association of University Women and the American Frozen Food Institute. The coalition even included the Sisters of the Humility of Mary. Only a few months earlier, Senator Armstrong of Colorado had said of tax reform, “Nobody wants it.” Now, the list of members of the 15-27-33 coalition made it look like everyone wanted it.
In late May, a week before the start of the Senate floor debate, Dole announced that senators who sought to make major changes in the bill would simply be “out of luck.” Tax reform had a good head of steam, and looked like it could chug right through the Senate. “In all the years I’ve been here,” said Senator Paul Laxalt, Republican of Nevada, “I’ve never seen such unanimity on a piece of legislation. Most senators sense this is almost historic.”
Still, tax overhaul had been burdened with problems and setbacks all along its way, and Bradley, for one, was taking nothing for granted. “You don’t start worrying about the next season if you are heading to Boston to play the Celtics in the Eastern Final,” the former New York Knick said. “You’ve got to get through the [Senate] floor…. Frankly, I’m very pleased that the bill is where it is, but it’s still got a long way to go. And it’s not over ’til it’s over. Until the bill is finished, entrenched opposition always has a counteroffensive.”
Faced with such strong support for the broad outlines of the Senate bill, many senators began shifting their attention to the smaller issues. The Finance Committee bill was a massive document with hundreds of provisions. The amounts of money involved were so immense that provisions costing less than $100 million were referred to derisively by tax writers as “zero point one.” Those costing less than $5 million were denoted simply by an asterisk. But the spare change of tax writers was a holy fortune to anyone else, and as the Senate floor debate approached, the scramble among senators and lobbyists to get some of that change became intense. Speaker O’Neill was fond of reminding his colleagues that “all politics is local.” The grab for tax-bill favors was proof of that adage. Forgetting about the overarching significance of the tax-reform bill, senators worked hard to win special tax relief for certain friends back home.
The common practice for a Finance Committee chairman is to come to the floor with a kind of slush fund under his control for the purpose of dispensing transition rules. In past years, transition rules were included in the bill for the benefit of specific constituents, but were drafted in ways that would also aid others who were similarly situated. The tax-reform rules, however, were frequently written like rifle shots to benefit only the constituent companies or individuals—and no one else. That meant that two companies or people with exactly the same tax situation could well be treated very differently under the bill. The mere volume of these special handouts in the Senate alone also was unique at a staggering total of $5.5 billion. Still it was not enough. Every time Packwood ventured onto the Senate floor, his colleagues stuffed pieces of paper into his jacket pocket, with additional requests for transition rules.
All told, the Finance Committee bill granted generous transition rules to 174 beneficiaries. Many of them were corporations, such as Avon Products, General Motors, RCA, Pan American World Airways, MCI Communications, General Mills, and Control Data. Others were cities and municipal facilities such as the New Orleans Superdome and the University of Delaware. There also were some oddball winners, such as five biomedical researchers in Rochester, New York, and the estate of James H. W. Thompson, a wealthy silk merchant who mysteriously disappeared in Malaysia in 1967.
In addition to the transition rules, there were other narrow tax-law changes designed to benefit a few lucky taxpayers. Page Wodell was one of the biggest winners. A provision buried in the Finance Committee bill would save Wodell about $5 million. He had lost a bid in tax court to escape that much in tax on his grandmother’s estate. Unwilling to call it quits, Wodell turned to his Yale University classmate, Senator Chafee, who added the amendment to the Finance Committee bill. “It was just plain unfair,” the Republican tax writer said of his schoolmate’s problems.
The Houston Chronicle was also a winner. The Texas newspaper was owned by a tax-free foundation and was threatened by the 1969 law that prohibited such foundations from running large businesses. For seventeen years, the newspaper had been trying to get around the law. Texas Senator Bentsen, a man who well understood the value of good relations with the press, was always happy to help. He had tried repeatedly to sponsor amendments exempting the Chronicle from the 1969 law, but his amendments had always been dropped. When the tax-reform bill came along in 1986, he decided to try his old chestnut again. “What would a tax bill be without the Houston Chronicle amendment?” joked John Salmon, the Ways and Means Committee’s former chief counsel.
Then there was the “Marriott amendment,” a name designed to convey the provision’s importance to the hotel industry. Sponsored by Dole, who was a popular and well-compensated speaker at convention banquets, the amendment stated that “business meals provided as an integral part of certain convention programs would be fully deductible in 1987 and 1988.” That meant that extravagant dinners at meetings in Las Vegas and Hawaii would be fully subsidized by taxpayers, while a salesman’s working lunch would be limited to 80 percent.
Dole also secured an exception to protect the tax benefits for a giant renovation project in a blighted area in downtown Manhattan on behalf of the junior senator from New York, Alfonse D’Amato. On his own behalf, Dole won a special rule for the redevelopment of another downtown Manhattan—in his home state of Kansas.
Not all special-interest breaks were as easy to decipher as these. A time-worn tradition of transition rules was to camouflage their beneficiaries in indirect language. For example, General Motors was not named directly in the transition-rules sections of the bill. It was described as “an automobile manufacturer that was incorporated in Delaware on October 13, 1916.” A rapid-transit line to Dulles International Airport was called “a mass-commuting facility that provides access to an international airport.” A drilling project by an Alabama firm called Sonat was listed as “a binding contract entered into on October 20, 1984, for the purchase of six semi-submersible drilling units.” And a tax break designed to attract outside investors to finance citrus farmers who suffered freeze damage was described this way:
The rules governing expensing of costs of
replanting groves, orchards or vineyards destroyed by freezing or other natural disasters would be extended to replanting on land other than the land on which the plants were destroyed and to businesses having new owners who materially participate in the business so long as the new owners hold less than 50 percent interest.
Transition rules and other specialized relief were an inescapable part of every congressional tax bill; most senators dipped into this pork barrel without hesitation. One senator, however—Democrat Howard Metzenbaum of Ohio—took it upon himself to crusade against the most unsavory of these favors. A self-made millionaire who earned his fortune in the parking-lot business, Metzenbaum had developed a reputation during a decade in the Senate as the liberal master of obstruction. He was the self-appointed guardian of the “general interest,” and tax-bill provisions that benefited narrow business interests were among his favorite targets. He regularly fought the ones that he and his able aide, David Starr, deemed the most egregious. Dole liked to refer to the gadfly senator as the “Commissioner.” On more than one occasion, Dole, when he was Finance Committee chairman, used the obstreperous Metzenbaum to winnow away tax subsidies that he had granted in his committee or on the floor, but he secretly wished to discard. “When you prepare an amendment or a bill, subconsciously you’re thinking about Howard Metzenbaum,” Senator Pryor said. “Will it pass the Metzenbaum test?”
On the floor, the white-haired Ohioan unveiled a long list of what he considered the most disgraceful transition rules. For a bill that carried the title “reform,” the list was startling. Senators had slipped in one provision after another benefiting small constituent groups and home-state employers. Senator Boren had included an exemption from a multimillion-dollar pension-fund withdrawal penalty for Phillips Petroleum, which was a major employer in his home state of Oklahoma. Senator Long had sponsored an exemption from tax for a fund set up by Manville Corporation for victims of poisoning from one of its main products, asbestos. Senator Armstrong had championed a rule that allowed a small group of investors to save an estimated $1 million each by retaining special capital-gains treatment for their stake in a Colorado coal company.
Metzenbaum even took aim at a tax break for Bermuda that was traced to Packwood himself. Under existing law, convention trips to certain countries were deductible, but only if those countries gave the United States their banks’ records for use in tax audits of American citizens. Bermuda had consistently refused to hand over such information. Nevertheless, the Finance Committee tax bill extended to Bermuda the special convention benefit. The Finance Committee staff claimed that the provision was inserted in the bill at the request of the White House because of “foreign-policy considerations.” No doubt Packwood and his wife were fully briefed on the situation in July 1985, when they were flown to Bermuda in a government plane for a weekend of what a White House spokesman called “sensitive and important discussions.”
Despite his crusading rhetoric, even the Commissioner did not walk away from the fray with unsoiled hands. Metzenbaum personally advocated transition rules for North Star Steel of Youngstown, the Cleveland Dome stadium, and convention centers in Columbus and Akron. In addition, he excluded from his published list of heinous transition rules the largest transition rule of the bunch, and surely the most controversial—the steel rule.
The steel provision was championed by Senator Heinz at the urging of Packwood’s aide, Diefenderfer, a native Pennsylvanian. It provided to steel companies a $500 million refund of their unused investment tax credits. Steel companies at the time were suffering losses and therefore paid no tax, so their credits were worthless. The refund provision promised them ready cash in exchange for the extra tax breaks. Metzenbaum’s home state of Ohio was filled with troubled steel mills; he steered clear of attacking that one.
The insertion of such a large transition rule raised the ire of several senators from states that were not big steel producers. Pryor was so angry that he wrote a letter of protest to Packwood. The steel break “looks bad, smells bad, and is bad,” he said. Chafee called it “a major change in tax law that went beyond what I’d call a transition rule.” Still, Packwood defended it and beat back what amounted to a halfhearted effort by Pryor to take it out. By holding tight to the provision, Packwood made some steel-state and steel-company friends for tax overhaul.
The Finance Committee was far from alone in hiding special giveaways in its tax bill. The Ways and Means reform bill, as well, was chock full of transition rules. Its most colorful example was sponsored by Representative J. J. Pickle, Democrat of Texas, and was dubbed the “turkey-buzzard amendment.” Tucked away in the voluminous Ways and Means measure, the provision was worth $800,000 to Hill Country Life of Texas, an insurance company in Pickle’s Austin district. The firm’s emblem was a turkey buzzard and its motto seemed to fit transition-rule politics: “Keep turning over rocks and you’ll eventually find some grubs.”
“Grubs” such as the turkey-buzzard amendment sullied the noble intentions of tax reform, but these little tax favors kept the tax bill moving through Congress. The Treasury Department wisely turned its head when it came to the dirty business of negotiating transition rules. Even the most committed congressional reformers realized that these relatively small provisions were a necessary price to pay. If ten or fifteen billion dollars in temporary transition rules would enable Congress to close several hundred billions of dollars’ worth of permanent tax loopholes, then they were willing to go along. Metzenbaum would continue his crusade, but with little success. The transition rules were a necessary evil; they would help assure passage of the bill.
The Senate debate began on June 4. It was a beautiful early summer day, before the stifling humidity of midsummer had set in. The first senators to speak made largely laudatory comments about the bill and its chances for rapid approval. Packwood called it “an opportunity that will not come this way again in a generation. It’s not often this brass ring will swing by.” But the rhetoric masked the serious challenges to the bill that lay ahead.
The most pressing problem involved IRAs. Under existing law, workers could salt away as much as $2,000 in these retirement accounts each year and deduct the amount of the contribution. The Finance Committee bill proposed wiping out that deduction for people who were covered by employer-provided pension plans. IRAs were used by more than twenty-five million Americans to set aside money for retirement, and the Finance Committee’s proposal would affect almost three quarters of them.
William Roth of Delaware was the IRA’s most vocal supporter. A cosponsor of the Kemp-Roth tax cuts of 1981, Roth believed that the government needed to encourage savings as a way to increase the pool of capital necessary to spur investment. He contended that IRAs, which were expanded in his 1981 bill, were one of the most important savings incentives in the federal tax code.
Economists as eminent as Federal Reserve Chairman Paul Volcker disputed the contention that IRAs instigated more savings. He and others speculated that IRAs, for the most part, only caused savings to be shifted from other accounts into IRAs. “It is hard to see an impact on the overall savings rate” from IRAs, Volcker once told a congressional hearing. “In fact, the personal savings rate has gone down” during the period since 1981.
The real importance of IRAs was political. Lawmakers judged them to be the one tax shelter in reach of the middle class. In fact, more than 45 percent of all IRA deductions were taken by taxpayers with adjusted gross incomes exceeding $40,000 a year, a group which accounted for less than 11 percent of the taxpaying public. But the “middle class” in political terms was far different from the middle class in purely economic terms. While the median income of a family of four in the United States hovered around $33,000 a year, members of Congress frequently defined the “middle” to include people whose incomes were considerably higher than that—$50,000, $60,000, even $100,000 a year. It was this group, lawmakers knew, who were politically active back home and who were most likely to make campaign contributions.
/> So, it was with good reason that Roth and others began to preach about the need to restore the IRA deduction, even on the first day of the tax-reform debate in the Senate. “A lot of solid, middle-class people—not rich people—use IRAs as a way of providing for their retirement,” Roth asserted. Senator D’Amato of New York, led a separate group that also pushed to save the IRA. The determined D’Amato called the no-amendment effort “absolutely ludicrous…. I didn’t get elected and I don’t think senators are elected to be rubber stamps.” He and Senator Christopher Dodd, Democrat of Connecticut, both of whom were standing for reelection that year, made clear they would be angling soon to shoot down Packwood’s IRA provision and help out the vast “middle class” back home. Of the more than thirty amendments that senators threatened to unleash, the IRA amendments stood the best chance of success and were the greatest challenge to the no-amendment strategy.
Roth, however, poorly understood the new political dynamic of tax overhaul. He chose to pay for partial retention of the IRA deduction by curtailing tax breaks that were dear to many of his colleagues. For example, his proposal trimmed the completed-contract method of accounting, which was important to military contractors, who were big employers in several states, including Missouri, Kansas, Connecticut, and Washington. To the chagrin of rust-belt senators, Roth’s proposal also eliminated the $500 million transition rule for steel companies. On Tuesday, June 10, Dole prevailed on Roth not to offer his amendment. Roth, knowing he did not have the votes, agreed and promised instead to offer a nonbinding resolution that asserted the need to retain the existing IRA deduction.