The Die Is Cast: June 3–9, 1981

The day after telling Rostenkowski to "come on back," the president took the boll weevil option. The new package, announced on June 4, was cosponsored by Hance and Conable—a forced marriage if ever there was one, since Conable saw Hance as a pork-barreling oilman. At a breakfast that morning, Reagan told the southerners that though he could not prevent Republican opposition in their districts, if they supported the new bill, he would not campaign against them. That was one enticement; another was that Conable-Hance managed a smaller deficit than the original plan, while still adding some of Rostenkowski's appetizers.

Hance had suggested postponing the effective date of the individual cut as well as reducing the first year to 5 percent. He accepted a three-month delay, matching the Democrats' schedule, in return for a $700 million tax break for oil producers.^[19] The deficit projections were reduced, however, by deleting some parts of the original business tax package—precisely what Conable, and many other traditional Republicans, cared about most. Stockman was encouraged: the new steps "were consistent with good tax policy and also reduced the revenue loss by tens of billions of dollars in the out-years."^[20] But it was not to last.

Policy on depreciation involves formulas for estimating the useful lives of categories of capital plant. The rule for any item thus becomes part of the price the business pays for it. The inflation of the 1970s fueled demands for more generous depreciation rules, both because companies' assets were being overvalued and because more generous depreciation would lower the after-tax price of new investment. A lower price in theory would mean more investment and, eventually, more productivity. A crucial segment of Democrats—Jim Jones, Lloyd Bentsen, and Representative Sam Gibbons (the number-two man on Ways and Means)—wanted to liberalize depreciation rules on these grounds. Traditional Republicans like Barber Conable agreed.

The 10-5-3 accelerated depreciation plan reduced the many categories

and useful lives of equipment developed by the Treasury and Congress over the years to three categories: ten-year, five-year, and three-year writeoffs. Businesses loved the idea because most items could be depreciated much faster under 10-5-3 than under existing law. A series of other provisions, particularly tax credits, in the package made it even more attractive.^[21] The Treasury Tax Policy staff, and their political leaders, were less enamored. In the words of one participant, "It was considered too simplistic, too meat-ax. Machinery and equipment do have different useful lives. And it was too generous, it created negative tax rates." In essence, the government would give companies money to invest.

The argument blaming declining productivity growth on too little investment was dubious to begin with. The Commerce Department reported: in 1980 total investment (apart from housing) accounted for 11.3 percent of gross national product; in 1970 it had been 10.5 percent, 9.6 percent in 1960, 9.5 percent in 1950. For some reason, old levels of investment did not create the same productivity growth as before, but in that case more investment might not be the answer. Neither was more generous tax treatment clearly the key to greater investment. A survey of business reaction to the investment tax credit showed that "while business welcomes the tax reduction" firms "buy little or no additional equipment as a consequence of the tax credit."^[22] Yet the basic argument for business tax cuts seems to have been widely accepted.^[23]

Whatever its economic merits, the administration's original "Accelerated Cost Recovery System" (ACRS) was fervently supported by business interests and traditional Republicans. The new Conable-Hance package reduced the estimated tax cut by $15 billion over three years (and more later).^[24] This angered Ways and Means Republicans who didn't much like not having been consulted about it either.^[25] While they grumbled, the administration faced two threats that could provoke a defection.

The first difficulty involved the administration's economic projections. Senator Domenici had numbers from his staff and enough contacts with other sources to believe that the deficit picture was far worse than OMB had revealed. Because he was losing sleep over the prospects, the Senate Budget chairman finally told Chief of Staff Baker that he might have to lead a revolt against the tax bill. Baker, Darman, Stockman, all tried to get Domenici to back off. "I couldn't convince him," one senior aide recalls. "None of us could." They assured him they would seek more cuts, including those in defense, later in the year if necessary. Finally, "he went up to the residence with the president and practically got down on his knees to say he couldn't vote for the tax bill, and the president said, 'Pete, trust me, it will work.' And against all the advice of his staff,

of Bell, he voted for it." Domenici would huff and puff but simply could not defy his president. One of his aides reported in late 1982 that the New Mexico senator was still tortured about the decision; it would "haunt him for the next ten years."^[26]

The administration itself was divided over its projections. Regan, Baker, Darman, Stockman, and mainstream Republican economists all subordinated worries about long-term deficits to a concern with winning now as much as possible of the good things in the president's agenda. "As a group," Murray Weidenbaum would tell the president two months later, "your advisers decided that the midyear review should not be changed. It would have confused the tax picture."^[27]

A second and more powerful challenge to the revised tax package emerged from the business establishment. Most of Washington's top business lobbyists met regularly in a breakfast group at the Carlton Hotel. At White House urging this informal gathering had expanded into a more formal Budget Control Working Group that lobbied Capitol Hill for President Reagan's package. They "were not enamored of 10-10-10…. But [they] wanted the Accelerated Depreciation" and weren't sure that the tax cut would create horrible deficit problems. According to a group leader: "We did have some economists who said it would work, that the boost in the economy would be so great that we'd get it back in three years." One faction in particular, led by Chamber of Commerce President Richard Lesher and its chief economist Richard Rahn, included some fervent supply-siders. Groups like the National Association of Manufacturers (NAM) were more skeptical, but all had rallied to the president's side with uncharacteristic fervor. They were thrilled to be rid of Carter, wanted help from the new administration on environmental and other regulatory issues, trusted Reagan's old-hand advisers, and so had subordinated doubts about the tax cut.

On Thursday, June 4, at a routine morning meeting at the White House, the business community suddenly learned the administration couldn't confirm the business part of the package. Richard Rahn of the Chamber (whose black eyepatch and boots made him a fitting symbol of that group's individualism) erupted, declaring the new plan "a breach of faith." News of the business reaction spread quickly. Rahn and his colleagues were shocked by this new twist, but White House advisers with liaisons to business were equally stunned by Rahn's response. And "for some reason … they in the White House thought we would bolt."

Who could be sure? Looking back, it seems unlikely, but White House strategists were working on such a longshot game that even a lessening of enthusiasm might be dangerous. It was not as if they had enough boll weevils to give a cushion. Charles Stenholm estimated only fifteen to twenty members of the conservative Democratic Forum were with the

president on taxes.^[28] If business really wanted its own cuts, maybe some more traditional House Republicans would ally with Rostenkowski to help business, thereby torpedoing the individual reductions, which, after all, is what they wanted to do anyway. Another source reports:

The next morning all of us, about fifteen, met with Regan, Baker, and Ture. Regan said, "I hear you're unhappy; we want to do something about it." He looked at Rahn and said, "Let's not just complain." I asked Regan, are your feet in concrete on this? Regan said yes. I told him, "All I have to say is, the Roundtable [chief executives of the nation's largest corporations] meets Monday, and they've never really liked 10-10-10. The two guys who sold them were Wriston and Shultz, who are out of the country right now." Silence. Baker said, "Can this be fixed?" I said, "Three days ago it might have been fixed. Now you're set in concrete."

This participant reports that at the June 5 meeting someone suggested "that they just restore the last part but move it out past the third year of the budget horizon." In other words, they would postpone but not eliminate the deficit effects, moving them far enough into the future for the boll weevils not to have to look at them. There are conflicting reports about who came up with the idea and when, but it held the most promise of solving the political problem of holding both business and the boll weevils.

Secretary of the Treasury Regan was no fan of most of the excised provisions, but Baker was pressuring him to solve the political problem any way he could. The secretary then thought the most important part of his own job was to serve the president, which meant above all maintaining a coalition to support the individual tax reduction.^[29] Over the weekend, the Treasury redrafted Conable-Hance along the lines suggested by the business representatives. The revised package, actually introduced in the House on Tuesday, June 9, produced the same revenue loss for the budget period, FY82–84, as had the June 4 plan. But for FY81–86 it cost $163 billion, $ 10 billion less than the February plan but $40 billion more than on June 4.^[30] If business was bluffing, the bluff had worked.

The administration now had 5-10-10 on the individual side, a delayed version of the original business plan, and many provisions designed to win marginal, particularly Republican, votes.