Life and Death
Asserting that "those who are waiting for a battle of the tax titans are likely to be disappointed," Dan Rostenkowski and Robert Packwood agreed that they wanted to make reform come true. And President Reagan, speaking at Dothan, Alabama, reminded everyone how he had unswervingly pursued the objective of a big reduction in tax rates paid for by an offsetting decrease in tax preferences, despite public indifference and cynical politicians. "The president's reappearance, center stage, as a main actor in the tax reform drama," Congressional Quarterly reporter Eileen Shanahan suggested, together with a supportive press conference by Chief of Staff Regan, augured well.[132] But Regan was not a conferee.
The House had a much higher top rate (38 percent instead of 27 percent) and higher business taxes. Those two provisions allowed the House to give more tax relief to the broad middle class and not, for example, eliminate deductions for state sales taxes. The House was committed to its distribution, but senators were leery of taxing business more than they already had (the 27 percent top rate had been crucial to Senate passage). What to do? Rostenkowski moved first, announcing on June 27 that he would "be willing to shoot for the Senate's top rate as long as we approach the House's after-tax income distribution."[133] Birnbaum and Murray report that "Rostenkowski's concession set the direction for the conference."[134]
The conference, which began July 17, used revenue estimates by the Joint Tax Committee (JTC). Because these estimates were static, that is, based on current conditions remaining the same, they could be questioned. Yet it was easier to agree on static assumptions than on which way the world would change. By using JTC numbers, conferees could avoid the numbers games that bedeviled budget politics.
Unfortunately, JTC numbers themselves kept changing. On July 24 the staff revealed that the Senate bill actually fell $21.2 billion short of revenue neutrality (the decimal point suggests a spurious precision). Oops. Someone's taxes would have to make up the difference.[135]
The Senate made a couple of attempts to recoup the shortfall, but neither won much support among House conferees. They did, however, accept some of the Senate's individual deduction repeals, particularly the "passive loss" provisions. The House counterproposal then added about $23 billion in business taxes to the Senate bill, thus taking around $142 billion from that sector, a considerable comedown, they said, from their original $160 billion. If senators insisted on further protecting corporate tax preferences, Representative Rostenkowski said, bargaining in public, "their choice is to either shift more of the tax burden to the
middle-class income family or to raise the rates for both individuals and corporations." But many senators weren't willing to increase business taxes. "If ever," Senator Malcolm Wallop (R-Wy.) declared, "there was a dead body leaving the morgue, this is it."[136] Such a proposal, Republican John Chafee of Rhode Island insisted, "would be absolutely rejected." Various senators expressed fear of job losses.[137] At the same time, House conferees insisted on maintaining the deduction for state and local sales taxes, as well as for income taxes.[138]
The conference stalemated. Under the headline, "Tax Reform: Last Lap or Last Legs," the New York Times asked the conferees to "put national interest first." The paper wondered whether "they understand … how much blame they will suffer if the opportunity is lost?"[139]
By August 12 the conferees had made some progress. Searching for revenues, the House had moved toward the Senate's tougher provisions on IRAs and agreed also to eliminate separate, preferential treatment of capital gains. But they still wanted more business taxes and refused to give in on state and local taxes. They rejected Senate claims that $17 billion could be raised by tougher IRS enforcement.[140]
At an impasse, Russell Long convinced the conferees to empower their chairmen to meet privately seeking an agreement. Word of heated exchanges leaked out.[141] "Yelling at each other," "questioning motives," "pretty nasty," were some of the phrases used.[142] Yet the chairmen made considerable progress, moving toward slight increases in the top rates for individuals and businesses.
Fate, or perhaps an unwarranted reliance on estimates, intervened. Economic changes, or rather CBO estimates of future economic growth, had altered sufficiently to suggest an additional $17 billion was necessary to achieve revenue neutrality. "Danny and I looked at each other," Packwood recalled, "and he said 'I wish we could blame each other.'"[143]
Frustrated, the two chairmen considered giving up. Packwood lashed out at the JTC staff, the bearers of bad news. Yet if they gave up before the August recess, the whole package might unravel as members caught flak at home. They tried again. Each threw some items in the pot that mattered greatly to some of their conferees but not to majorities.[144]
Following twenty hours of meetings, Senator Packwood announced in the early hours of Saturday, August 16, that he and Representative Rostenkowski had reached agreement.[145] To agree, Packwood had to abandon one of his strongest backers, Senator Danforth, on a $3.5 billion defense contracting issue. In total, the chairmen made up the missing $17 billion with $10 billion in business taxes and $7 billion more from individuals.[146] Taxing business $124 billion more than current law, it turned out, was very close to President Reagan's original proposal.[147]
House conferees thought the tax cut to people with incomes between
$50,000 and $100,000 (middle class?) was too small. President Reagan wanted the top 28 percent rate. And all sides needed more money. They got some with a faster phase-out of some exceptions. And they squared the circle by creating a 33 percent marginal rate to last until a payer's average or effective rate reached 28 percent. So the brackets went 15–28–33 (from around $100,000 to $200,000) and then back to 28 percent! This "bubble" would prove hard to defend, for richer people seemed to get to pay less. "I think," said Senator Wallop, tax reform's "become an obsession!" "I want a bill, Packwood wants a bill," Chairman Rostenkowski exclaimed. "It's an emotional thing with us."[148]
In the end, only two Senate members (Wallop and Danforth) and one House member (Bill Archer, R-Tex.) voted against the conference report. Members were held until 11:00 p.m. on Saturday, August 16, so there would be a solid conference report to which they could return, rather than promises that might be picked apart by lobbyists. Left for "transition rules" was $5 billion; congressmen, especially conferees, could thus buy local favors.[149] This is either unconscionable (the rules should apply to all or to none) or a modest sop to constituency interests. Take your pick.
Senator Bradley, an original proponent of tax reform, played a unique role in running back and forth between House Democrats and his Senate colleagues. House Republicans appear largely to have been ignored.[150]
Amazement was one reaction: "It simply accomplishes what nobody believed was possible," said Fred Wertheimer, president of Common Cause. "It takes a huge chunk out of special interest after special interest who were not paying their fair share."[151] "They said out there it couldn't be done. Well, well," Rostenkowski cried, "we've done it." The sense of triumph in Congress mingled with a sense of achieving historical change. "None of us," mused John Sherman of Rostenkowski's staff, "will ever work on a piece of legislation that grand again."[152]
Under the heading of "A Reagan-Style Bill," Peter J. Kilborn of the New York Times described it as "less Republican than … Populist … and … less traditionally conservative than … the expression of the Reagan … credo [of] low individual taxes and small government." If this legislation passed, Kilborn concluded, "Ronald Reagan will have earned himself a place among the handful of presidents who have nurtured fundamental change."[153]
Maybe so, but the grandeur of change was little consolation for some of those affected. A series of headlines in the New York Times expressed second thoughts: "Realty Woes Seen in Tax Bill: Property Values Could Decline";[154] "Educators See Great Harm";[155] "Danforth Promises Determined Battle";[156] "U.S. Tax Bill May Force New York to Cut Housing and Public Works."[157]
House Republicans sounded ambivalent: Minority Leader Bob Michel said his own feet were "firmly planted in mid-air." Jack Kemp spoke of "a moment of truth for the Republican Party. Is it going to be a party of tax breaks or a party of the people?" Kemp's populist theme did not appeal much to Bill Frenzel, who termed the reform "anti-growth, anti-savings, and anti-capital formation." Representatives from both parties repeatedly observed that their constituents were lukewarm or cynical, believing that no matter what was said, most people would end up paying higher taxes.[158] And yet it was hard to oppose "reform"—the public might be skeptical at heart, but all the voices in public debate and the pressure from the press would mock opponents.
In what was described as the best speech of his career, Richard Gephardt urged House colleagues to remember "the good parts" of tax reform: taking millions of poor people off the rolls, imposing a stiffer minimum tax so the wealthy and the profitable would have to pay, and reducing rates for the middle class. But Majority Leader Jim Wright spoke against the bill saying that its revenue neutrality failed to reduce the deficit. "It's like a big drink of bad whiskey," the Texan told fellow Democrats. "It makes you feel good now, but you wind up with an awful hangover." Wright, however, in deference to O'Neill and perhaps to his own prospects of replacing the Speaker, would not lead a fight against the bill.[159]
On September 18, with release of the final version of the tax bill to be voted on, the transition rules were made public. Although legislators claimed more than a thousand requests had been denied, many were granted. The costliest, at one-half a billion dollars (brought up by Charles Rangel of the House Ways and Means Committee and strongly seconded by Senator Moynihan, an unwavering supporter of reform), provided relief for investors in existing low-income housing projects. Also, colleges, sports stadiums from Buffalo to St. Louis to San Francisco, Chrysler, General Motors, Phillips Petroleum, and other companies were able to hold on to existing tax breaks. No doubt this swayed some votes.[160]
Institutional and party loyalty won out. Representative Bill Archer told a meeting of House Republicans that he planned to offer a motion on the floor to send the tax bill back to conference with instructions to reinstate some popular deductions such as IRAs and sales taxes that had been restricted or diminished in August. Normally, the most senior Republican member of Ways and Means who opposes the bill—the ranking Republican, John Duncan of Tennessee, supported it—would have the right to offer the recommittal motion, and Archer was it. The Republican leadership understood, however, that "it would be very embarrassing, at the least, for this No. 1 domestic priority of the President's to be rejected by House Republicans." So Michel offered a preemptive motion
to recommit the bill to the conference committee with no instructions, a motion that, stripped of enticements, was sure to fail. Phillip M. Crane of Illinois wanted to challenge Michel, but Archer refused; "there's no challenge to his leadership. If he wants to offer the motion, more power to him.[161]
After a rare speech from the floor by Speaker O'Neill—he said tax reform was "the decision of a lifetime" to make good the promise of the 1952 national Democratic party platform, when he had first run for office, and that "justice requires the elimination of tax loopholes which favor special interests"—the House first voted against recommittal by 108 votes (Republicans gave a bare 92 to 86 margin) and then provided a decisive 292 to 136 majority.[162] It was, as Secretary of the Treasury James Baker said, a victory for bipartisanship: there were 176 Democrats and 116 Republicans in favor and 74 Democrats and 62 Republicans against.[163]
On September 27, by a vote of 74 to 23, the Senate passed the final bill. "As an unbiased observer," an early political advocate of a low-rate, broad-based tax, Bill Bradley, offered his judgment: "I'd say this is the most significant tax bill since 1954 and maybe since 1913" (when the amendment making the graduated income tax constitutional was passed).[164] Larger effects resulted from 1981's ERTA, but 1986's tax reform was a more dramatic and improbable victory.
If it was a triumph for "the people," the people didn't know it. In CBS-New York Times opinion polls of probable voters, a plurality of Republicans and Independents favored the bill, but Democrats were opposed. Just over one-half of Republicans and Independents and over two-thirds of Democrats polled thought people richer than themselves would benefit. Small majorities of all three identifications thought that people poorer than they were would benefit most.[165] These results laid bare the profound public suspicion of politicians and the tax code.
On October 22, 1986, President Reagan signed tax reform into law. He took pride in giving the nation "the lowest marginal tax rates among major industrialized nations." He called it "fair and simple." Now, "fair" is in the eyes of the beholder, but most people did agree; whether it would be simple, even with the qualifier "for most Americans," was doubtful.