Showdown at Gucci Gulch

by Alan Murray

  Despite the tough talk, the two sides were gradually closing the gap. They had agreed on many important elements of a bill. The House had even made a significant move toward the Senate’s controversial proposal to eliminate IRA deductions for people who have pension plans. The House agreed to eliminate the popular savings deduction for families earning more than $50,000 a year and single people earning more than $35,000. Since most IRAs were owned by people in those upper-income groups, it was a significant concession.

  Even on the business side, the gap was closing. The Senate offer raised corporate taxes by $115 billion. That was still $27 billion less than the House offer, but the two sides seemed to be within striking range.

  Packwood won an important victory on Saturday, August 9, as the senators prepared their response to the House offer. Bentsen still wanted to soften the Senate’s tough anti-tax-shelter rule. He had asked Roger Mentz, in conjunction with his own staff, to come up with some proposals to ease the effects on commercial real estate developers, and Mentz complied with his request. Packwood was not happy about the situation; he knew his conferees would find it hard to resist helping the hard-lobbying developers. In addition, House conferees said they would favor passive-loss changes if the senators initiated them. Many of the biggest and richest developers in the nation flew to Washington during this period to meet with lawmakers and members of the administration. But Packwood also thought that any weakening in the passive-loss rule could threaten the entire low-rate structure of his bill.

  When Bentsen presented his proposal at the Saturday meeting, sentiment seemed to be evenly split. Five senators supported Bentsen’s amendment, and five were opposed. William Roth of Delaware was wavering. He sympathized with Bentsen, but he also was concerned about the proliferation of tax shelters. He asked Mentz to give his view.

  Because Mentz had helped draft the Bentsen proposal, Packwood feared the Treasury official might support it, or at least give an equivocal answer. But this time, Mentz was firm. The Bentsen proposal, he said, would be hard to administer. Speaking of the passive-loss rule in the Senate bill, he concluded, “It’s quite fair and reasonable the way it is, and I wouldn’t change it.”

  Roth turned to his tax aide, David Raboy, and asked, “What should I do?” Raboy whispered back that the Bentsen amendment had merit and should be adopted, but Roth was moved by Mentz’s short speech. (At the same time, John Colvin, Packwood’s tax aide, came over to Roth and Raboy to tell them that Packwood had decided to save a tax break dear to an important Roth constituent: Delaware chicken farmer Frank Perdue.) The senator decided to ignore Raboy’s advice and vote to preserve the passive-loss rule. The Bentsen amendment was defeated 6-5.

  Packwood’s troubles, however, were far from over. As the senators completed their counteroffer to the House, a serious blow hit. The Senate plan included a $17 billion revenue-raiser that involved the establishment of a “trust fund” to boost spending by the Internal Revenue Service for its tax-enforcement efforts. It was one of many tricks that Packwood and Darman slipped into the Senate plan. By giving the IRS a bigger budget, the tax writers estimated they could bring in even more money by catching some of the estimated $100 billion that was lost to tax evasion each year. Estimates suggested that every dollar spent on beefed-up IRS enforcement could bring in as much as ten dollars in previously uncollected taxes. The trust-fund proposal was not reform, but it was an easy way to pay for lower rates.

  The trust fund stirred complaints from the chairmen of the House and Senate Appropriations committees, whose panels had control over most funding for the government. Creating a trust fund to finance the IRS would remove the agency from the Appropriations committees’ control, and that was something that the turf-conscious chairmen were not willing to tolerate. Without a trust fund, however, the Finance Committee could not claim the big revenue increase; there would be no guarantee that the Appropriations panels would provide the funding increase that the tax writers sought.

  Eager to keep the big chunk of revenue intact, Packwood and Diefenderfer urged Brockway to find some other way to claim a $17 billion increase in revenue. They suggested that instead of boosting IRS funding, they simply direct the IRS to take money away from other of its functions and put it into enforcement. That prompted a complaint from the new IRS commissioner, Lawrence Gibbs, who told a private meeting of House conferees that the plan could cause serious problems for the agency. The IRS had just gone through a disastrous year in which some people’s tax refunds were lost or delayed for months. Shifting funds away from returns processing and taxpayer service and into enforcement would only exacerbate such problems.

  On Tuesday, August 12, Baker and Darman dragged a contrite Commissioner Gibbs back up to Capitol Hill to try and salvage the Senate’s faltering IRS proposal. With the two Treasury officials at his side, Gibbs’s tune changed considerably, and he no longer insisted that the plan was unworkable. Darman, at the same time, told the conferees the plan would indeed work. The House conferees, however, were unmoved. They refused to accept the proposal and insisted the senators find $17 billion elsewhere to make up the difference.

  The session was a stormy one. Meeting in private in a hearing room just below the House chamber in the Capitol, the conferees from the Senate and the House grew increasingly irate. They had reached the limits of their patience. The senators felt they had already made major compromises; they could not see their way to raising another $17 billion. Rostenkowski and his House members were adamant; they were not willing to let Packwood and his senators escape from their dilemma using smoke and mirrors. It looked as though the $17 billion problem might cause the conference to break down for good. The conferees were getting weary from the battle, and they were eager to go home for their summer recess. “If that’s what this hangs up on, it hangs up on it,” Packwood told a press conference. Chafee confessed privately, “For the first time, there has crept into this the view that we may not have a bill.”

  As the prospects dimmed, Long spoke up. The former chairman was a crafty lawmaker, as skillful and knowledgeable in the dynamics of the legislative process as any member of either body of Congress. He also had a charm that, combined with his quick mind, made him exceptionally influential. When he spoke—waving his hands, slurring words in his strong Louisiana patois, and peppering his speech with endless and wonderful stories about his “Uncle Earl” Long, governor of Louisiana in the 1940s and 1950s—a mysterious spell fell on everyone around him. In conference committees, his power to win concessions from the House was legendary. “The House sees Russell Long coming at it with a freight car full of, let’s say, ‘shinola’,” a House aide once said, “and it gets so terrified it’s going to have to eat the whole load that when it’s finally presented with just a small brown paper bag full, it gobbles it down gratefully.”

  Senator William Proxmire of Wisconsin, occasionally a victim of Long’s persuasive powers, once characterized Long this way: “If a man murdered a crippled, enfeebled orphan at high noon on the public square in plain view of a thousand people, I am convinced … that if the senator from Louisiana represented the guilty murderer, the jury would not only find the murderer innocent, they would award the defendant a million dollars on the ground that the victim had provoked him.”

  As former chairman, Long had probably done more than any other single person to create the very problems that tax reform was trying to correct. He was no reformer, but he was a politician, and he knew when the winds of popular opinion had changed. Having served thirty-eight years in the Senate, he had risen into the role of a senior statesman and was eager to use that position to give Packwood a hand. Darman explained: “Senator Long is a great respecter of the institution of the chairmanship, having derived enormous benefit from it and having learned that to make the process function you have to be willing to cede some authority to the chairman.” In private meetings, when virtually everyone else lapsed into calling Packwood “Bob,” Long continued to call him “Mr. Chairman,” as a symb
ol of his regard for the post.

  Furthermore, Packwood and Long had developed a close relationship over the years. Even before he came to Congress, Packwood had written a high school essay about the Louisiana senator. “I chose him,” Packwood explained later, “because he was new to the Senate so I thought the essay wouldn’t have to be long.” Packwood later told the Congressional Quarterly: “I cannot think of anybody I’ve learned as much from as Long. There’s almost nothing I wouldn’t do for him.” For his part, Long called Packwood a dear friend. “There was a time in my life when I was taking some lumps,” Long explained, “but Packwood helped a lot and helped me to do my job and be an effective chairman.”

  So when Long saw the conference rapidly disintegrating on that Tuesday, he decided to help out. The room grew quiet as he spoke.

  “Well, it doesn’t seem to me there’s much progress being made here,” he said, his eyes looking down as he scratched with a pencil on a piece of paper on the desk before him. “We senators have a lot of confidence in Mr. Packwood, and I suspect you folks do in Mr. Rostenkowski. So I don’t see why those chairmen don’t get together by themselves and come up with a proposal that we all can then consider.”

  Long had already suggested the idea to the Senate conferees in a private session, and they had agreed to let the two chairmen work out the problems. Packwood had also told Rostenkowski of Long’s idea, and Rostenkowski had responded favorably, but apparently no one had prepared the House members for the proposal. Each of them had their own interests to look after, and they did not want to give up their role in shaping the final package. Nevertheless, Long phrased his suggestion in a way that gave the House members no choice but to agree. If they dissented, they would be demonstrating a lack of confidence in their chairman. Rangel, worried about the sales-tax deduction, said to Rostenkowski, “I want you to know I’ll support you all the way,” but then quickly added, “as long as I can.”

  Long’s proposal was just what Rostenkowski and Packwood needed. Despite their ill-starred history, the two men had in the past few weeks developed a solid working relationship. They both wanted a bill. Both knew that their reputations would be permanently sullied by defeat. That common desire was enough to overcome their many differences. They seldom got angry at each other. Indeed, at times, they acted like collaborators, negotiating not with each other, but with their respective conferees. When Rostenkowski privately told Packwood his conferees demanded a bigger hit on the oil industry, Packwood urged him to have the House conferees make their case more loudly in their joint meetings, so the Senate conferees would see the House meant business. When Rostenkowski was having trouble with Rangel and others who insisted on keeping the sales-tax deduction, he urged Packwood to get the senators to stress in the group meetings how committed they were to curtailing that deduction.

  As a symbol of this new-found friendship, the two chairmen and their staffs went together one evening to Morton’s, Rostenkowski’s favorite steak house, and spent a long night talking, drinking, and reminiscing. As the alcohol flowed, Packwood asked Rostenkowski’s advice about whether he should run for president and pulled out a pen and notebook to scratch down the chairman’s response. Rostenkowski, in turn, began to tell stories about the 1968 Democratic presidential convention in Chicago. Both men liked to drink—Rostenkowski had even been arrested and had his license suspended for drunk driving earlier that year—and the food and alcohol served to cement their relationship. Clearly, these two men had put their pasts behind them and were ready to sit down and work out an agreement. Long’s suggestion that they go off alone to do just that was the perfect solution, and in the end, would make all the difference for tax reform.

  For the next few days, Packwood, Rostenkowski, and their staffs gathered in H 208, Rostenkowski’s private hideaway in the Capitol building. It was an impressive room, only a few short steps from the House floor. It contained a long, oval wooden table with brown felt in the middle. A vaulted ceiling soared above the table, and a huge, turn-of-the-century brass chandelier hung from the center. On the walls of the room were prints of former presidents: Madison, Jackson, Tyler, Polk. In the corner was a rolltop desk that hid a television set, and on a windowsill sat a stack of copies of the Chicago Sun-Times. The room had been the province of the Ways and Means Committee since 1908, and it was here that Rostenkowski held court. He would meet with the Democratic members of the committee, or with other House members who wished an audience with him. During conference, in fact, it was here that Rostenkowski heard the pleas of both House members and senators who came to him for special favors. It was here that he and Packwood sat down to work out the final details of the tax bill.

  The meetings were long, but productive. Rostenkowski usually sat at the head of the table, with Packwood over to his side. Diefenderfer, Colvin, Leonard, Dowley, Brockway, and other members of the staff gathered around on the sides. Some of the issues they discussed were exceedingly trivial and arcane, others were worth billions of dollars. The conversation grew most tense when it turned to oil. Rostenkowski was determined to cut back oil industry tax breaks; he saw it as a test of his strength as chairman. Packwood and Diefenderfer tried to convince him that their tough minimum tax was already a sizable blow to the oil industry, but the chairman was not easily swayed.

  Rostenkowski also talked tough when the issue of eliminating the special break for pension payments to federal employees came up. That was the issue that had almost killed his bill on the House floor. The federal-employee lobbyists, working with members from Maryland and other states with large numbers of federal workers, had nearly ruined his bill by scaring up votes against it. The Senate bill delayed this change until January 1, 1988, and Packwood said that Chafee and other senators wanted to give the federal employees a break. But Rostenkowski wanted revenge: He insisted the change take place immediately.

  Slowly, the two men began to see a package coming together. Occasionally, they would hit a snag, and Rostenkowski would wave Packwood into the back room, away from the staff. It was a tiny room, dominated by an enormous, round stained-glass window of the seal of the U.S. government. The window was 125 years old and faced out onto the grand stairway that led from the first to the second floor of the Capitol. From the room in Rostenkowski’s hideaway, the words E Pluribus Unum were displayed in reverse. Sitting on a couch next to this antique window, Rostenkowski and Packwood resolved some of the toughest tax problems they faced. Usually they would compare notes about what different lawmakers had said to each of them separately. Both were being petitioned constantly by their colleagues, but the sob stories they were being given were not always identical. “We sifted out a lot of the blarney,” Rostenkowski recalls. There was no shouting or yelling during those sessions, just determined negotiating by two men eager to reach the same end.

  From time to time, the two chairmen would leave H 208 and return to their opposite sides of the Capitol to meet with their conferees and report on the status of the negotiations. Then they would return to Rostenkowski’s hideaway and begin again. Several times a day, Packwood rushed across the second floor of the Capitol building, under the great rotunda, on his way to meet with Rostenkowski or on his way back to meet with the senators or participate in a Senate vote. Sometimes his staff would be in tow, other times Bradley could be seen at his side, leaning down and whispering advice in his ear. The meetings seemed to go on interminably.

  One of the biggest and most difficult issues involved the “stagger.” Each tax-reform plan—the president’s, the House’s, and the Senate’s—proposed delaying the cuts in tax rates until the middle of the first year the plan was in place. This so-called stagger was a trick devised to help keep the plans revenue neutral, but as the bill neared completion, politicians began to think more carefully about the political consequences of the stagger. If the rate cuts were delayed until July 1, 1987, but deductions were eliminated as of January 1, many taxpayers would face substantial tax increases the first year of tax reform. Dole, whose
ambitions to run for president were well known, noted that taxpayers would be filing their 1987 tax returns in April of 1988—right in the middle of the presidential primaries. If they did not like the first-year results, he said, there might be a backlash against the authors of the bill. Other politicians shared that worry. “This tax bill is going to be a revelation to many people, and it isn’t going to be pleasant,” Representative Tom Downey observed. Joint Tax Committee figures showed that the April surprise would leave millions of middle-income Americans facing tax increases of about seven hundred dollars in 1987.

  Darman also worried about the effects of the stagger, fearing it would undermine support for reform. “One of the important reasons for tax reform is to reduce societal resentment and cynicism about government,” he said. “If tax reform is ballyhooed and then one hundred million people have their first experience with tax reform and find it a loser, it will only compound cynicism.”

  The problem was that eliminating the stagger would cost $29 billion over five years. Packwood and Rostenkowski had exhausted their bag of revenue-raising tricks. The senators, Dole and Bradley aside, were willing to tolerate the first-year problem, but the House members, who all had to stand for reelection in 1988, were not. They demanded at least a partial fix, and it seemed that the only way to pay for it was through higher tax rates.

  Rostenkowski had thought for some time that the top rate would have to go above 27 percent to pay for the stagger, and he had tried to smooth the way for that change by appealing to the nation’s chief proponent of low tax rates: President Reagan. Rostenkowski made his pitch at a meeting with the president and his advisers—including Vice President George Bush, whose ambition was to succeed Reagan in 1988. Rostenkowski recalls saying: “Mr. President, you know this is a great opportunity for us. You’ve got me hand over fist, you’ve got the rates you wanted. There’s only one thing I’m a little concerned with—and, Mr. President, you know I’m concerned because I think it would be an embarrassment for you. As of April of 1988, seven million people could possibly be paying more taxes rather than getting a tax reduction. You know it would be embarrassing, Mr. President. I mean, people in ’88 filling out their income taxes and paying more taxes after you and I said there’s a reduction in the rates.”