Packwood's Conversion

In the Republican Senate there was deep concern over shifting huge tax burdens to companies that were already facing hard times. Would the country be better off, senators wondered, if individuals paid lower taxes, but there were no (or ill-paid) jobs?^[73]

And what about the deficit? Fifty senators, including seven members of the Finance Committee, wrote to President Reagan on March 4 requesting him to delay the tax bill until there was agreement on reducing the deficit.^[74] According to the originator, Senator Rudy Boschwitz (R-Minn.), who, Dole said, spoke for a majority, the Senate would "neither consider nor debate" the tax bill until the second round of Gramm-Rudman had been settled.^[75] On April 9 the Senate voted (72 to 24) in a nonbinding resolution to delay the tax bill.^[76]

Republican Senator Grassley expressed the sentiment of many when he argued that "the country would be better off if we would pass a one-sentence bill saying we're not going to change the tax law for five years." Yet, without wishing to go forward, Congress couldn't quite get itself to go back. "Tax reform," Grassley continued, "has taken on a life of its own."^[77]

Members of the Senate Finance Committee held a private retreat on January 24 and 25. They started by deciding not to begin from the House bill, which most considered put too great a burden on business. "The Ways and Means Committee has always been close to the people," Senator Moynihan explained. "Finance has always been a committee close to industry."^[78] Even so, the group agreed that their bill should be revenue neutral and should move tax burdens from individuals to business.^[79]

In March, before Finance began its markup, one episode gave meaning to such shadowy terms as "the street" and "the market." The activities of the tax committees are carefully scrutinized by those who will be affected by them. At the request of Baker and Darman, who were convinced that tax-free municipal bonds enable wealthy individuals to escape taxation, Senator Packwood suggested making such bond income subject to a 20 percent minimum tax. At once, trading in municipal bonds stopped. The crisis was overcome by a joint statement from Packwood and Rostenkowski stipulating that such a provision, if enacted, would apply only to new but not to old bonds.^[80] That revenue raiser was the first, but not the last, revenue raiser dumped when markup began on March 24.

Discovering that it was not easy to reconcile lower personal and corporate tax rates with the demands for exemptions for specific industries, Senator Packwood proposed eliminating the deduction for excise taxes on many commodities, such as alcohol, tobacco, and telephones. Easy money in the tens of billions, or so it seemed. But soon Democratic party critics of such taxes as unfair to people of low income were joined by the industries involved in forming the (inevitable) Coalition Against Regressive Taxation. It purported to show that the income tax reductions for low- and middle-income taxpayers would be effectively wiped out by higher excise taxes. That proposal and, with it, $62 billion in revenues also evaporated.^[81]

After three weeks of bargaining on provisions, Senator Packwood suddenly announced on April 18 that, rather than kill the bill by continuing on as they were, he was suspending his committee's markup.^[82] What had happened? Compared with his initial proposal, based on the administration's version, Finance Chairman Packwood had already given up $10 billion in tax preferences over five years. There followed a series of votes on such issues as foreign taxation, private pensions, and tax-exempt bonds, amounting to some $19 billion more.^[83] Packwood himself had sought to keep preferences for the lumber industries—so important to the depressed economy in his home state of Oregon. He thought it fair play to allow each committee member to keep his first priority preferences. It turned out, however, that, if these were granted, secondary and tertiary priorities then moved to the top of the list.

When Senator Chafee (R-R.I.)—joined by Moynihan, Bradley, Mitchell (D-Maine), and Assistant Secretary of the Treasury Roger Mentz—tried to delete a preference for builder bonds issued under governmental auspices, Packwood opposed the suggestion as contrary to what he called the "tradition of subsidies for housing." It lost 7 to 10. When Chafee joined the fray by moving to dilute Packwood's proposal to tax trusts established by parents for their children, the latter protested on grounds of revenue loss. "That," Chafee retorted, "hasn't seemed to slow anyone else down. If you can't fight them, join them, and it's a big crowd to join."^[84] Chafee also wanted to preserve a Preference for federal retirees that would cost an estimated $7 billion in revenue.^[85] By then, $25 or $30 billion had been used up.^[86] "I think our low point came," recalled Senator Moynihan, when we solemnly concluded that the depreciable life of an oil refinery was five years, an absurd idea for so permanent a structure."^[87] But the final straw came when Senators Durenberger and Moynihan garnered sufficient votes to restore the deductibility of state and local taxes. As Moynihan graphically described the events in a newsletter to his constituents: "Packwood … recognized that our amendment would be followed by dozens more. His proposal was in ruins. He banged the

gavel and announced there would be no more votes that day, and no more meetings until further notice. Tax reform was promptly pronounced dead."^[88]

Although he believed that tax preferences were a creative use of the tax code for worthy causes, Senator Packwood was nonetheless intrigued with the concept of a low-rate, broad-based tax. Back home, as he traveled around Oregon, the senator had begun to ask how far down rates would have to go before the other person lost interest in preferences. Though proposals on rates varied, they centered around 25 percent.

At the same time, Packwood had reviewed a list of witnesses coming before his committee, thinking "they all have a preference and they can't conceive how they can act without that preference."^[89] Something was very wrong when business had become addicted to preferences and Congress couldn't stop feeding that addiction.

After adjourning the Finance Committee, Packwood went to lunch with Bill Diefenderfer, who had come to serve as chief of staff in order to help with the tax bill; both were appalled at the way things had gone. The publicity about an orgy of special interests embarrassed them.^[90] Packwood's reputation, in both the short-term currency of Washington judgments of influence and the long-term judgment of history, was in danger.^[91] Up for reelection, he was not looking good in the newspapers.

Three weeks of exhausting efforts in markup had ended up with more of the same. But what would happen if they seized the ideological high ground with a truly radical proposal, cutting rates to 25 percent, challenging all their colleagues so to speak to give up their preference for preferences? Maybe something would emerge that would credit the Senate and make their work worthwhile. At the worst, Packwood could gain political credit.^[92] "We looked at each other," Packwood recounted, "and I said, 'Why not give it a try?'"^[93] If they were going to lose, they might as well lose, as Moynihan put it, "in the cause of the most extraordinary tax bill in our history."^[94]

That afternoon, Packwood and Diefenderfer called the top tax expert in Congress, staff head of the Joint Committee on Taxation, David H. Brockway, who, if anybody could, would know whether a 25 percent rate was feasible. "Dave," Packwood asked, "draw us a series of tax plans that sets the rate at 25 percent." It developed that 25 percent would work only by eliminating the deduction for state and local taxes. Packwood ruled that out as politically impossible. But a 26 percent or 27 percent rate might make it.^[95]

On Tuesday, April 22, Packwood asked the five committee members he had reason to believe would support tax reform—Republicans Chafee and Danforth, and Democrats Bradley, Mitchell, and Moynihan—to

meet in his office. (The Chernobyl disaster was in the headlines, so nobody paid any attention to them.) Packwood told the group what they already knew; if everyone promoted his own interests, that was the end. The president wanted a bill. Everyone had given up on reform. What was there to lose? They agreed to try.^[96]

Every morning as they met, Moynihan would deliver his "Grace Report," noting that W. R. Grace and Co., whose chairman led a crusade for reducing waste in government, had paid taxes to Quadafi's Libya but received a half-million-dollar refund from Uncle Sam.^[97] A couple of tax plans ending up with 26 or 27 percent rates were presented at a private committee meeting on Thursday, April 24. The faithful five told Packwood they liked it. They needed only five more of the committee's twenty members to go ahead.^[98]

The "core group," as they called themselves, made three choices. One was to peg the rates at 15 percent for families up to $42,300 in income and 27 percent above that. A second was to adopt the president's proposal for a $2,000-per-person exemption, easing the burden on families, especially low-income families who would not have sufficient taxable income to remain on the tax rolls. The third, suggested to Moynihan by New York tax attorney Donald Shapiro, was to distinguish between "active" and "passive" income (passive meaning essentially paper gains and losses by people who do not personally participate in a business), in order to tax the passive part. This provision alone, by killing most real estate tax shelters, would bring in $50 billion over five years. (Introduced by Moynihan and Chafee in 1983, Moynihan narrowly missed getting the provision into a 1984 tax bill and promptly put it in the hopper for 1986 as S. 956.) Its size gave the core group hope of avoiding an attack on highly popular deductions like mortgage interest.^[99] But it would hit up the wealthy who used lots of tax preferences "almost exclusively," thereby making the package as a whole better for the middle class and making up for the big cut in the top rate.^[100]

Meeting long into the evening on Saturday, May 3, and finishing on Sunday, May 4 (absent the usual lobbyists), the core group, with Treasury Secretary Baker's encouragement, finished designing its bill.^[101] A key to the proceedings was that Chairman Packwood—who, some members felt, had previously taken too much for his state's lumber interests—now was willing to reduce preferences for home builders.^[102] "It was like a poker game," Packwood remembered. "Everyone anted up to make the pot worthwhile."^[103] Amid the usual senatorial doubts—tax reform was "comatose and in intensive care" (Senator Heinz), "very silly … public interest is about zero … die on the floor" (Senator Durenberger)—the Finance Committee reconvened.^[104]

Between May 5 and May 7, the Finance Committee bargained out a bill. As it met, Finance had an entirely new attitude. First, Russell Long had decided to back the core group's plan, with a few exceptions, and was rallying his allies.^[105] Second, Packwood, making a few strategic concessions in advance, won approval for a rule that, during the formal markup, any amendment would have to be revenue neutral.^[106] "That," Senator Pryor judged, "was the critical moment in this bill. After that it was a totally different game. Each of us knew that with any amendment, you'd have to find the money to pay for it."^[107] Various industries—oil, gas, mining—got some back in return for slightly higher rates and some sleight-of-hand. But the bill remained largely intact.

After the new bill passed unanimously in committee, every member stood up to applaud Chairman Packwood. Although by no means was every member in favor, none felt able to oppose so impressive a measure. Moynihan reports that a large gathering of lobbyists in the basement of the Dirksen Senate Office Building "broke out in hissing."^[108]

In a long speech to the Senate explaining how all this had come about, Chairman Packwood gave credit to Bill Bradley and others who had seen the wisdom of returning to the earliest philosophy of the income tax so that America would once again be "a place where people may make investments or may give to charity because they are motivated by the charity or because they think the investment is a good investment."^[109] Packwood did not predict a capitalist renaissance, but otherwise the thought could well have come from Ronald Reagan.

The day after the Finance Committee acted, the world looked different; tax reform had gone from "silly" two weeks earlier to now unstoppable. the Wall Street Journal spoke of it as an "overwhelming likelihood."^[110] "It's the 15% and the 27%," Senator Lloyd Bentsen (D-Tex.) stated. "It's very dramatic. That's what brought me over."^[111] "That's the locomotive," Senator David Pryor (D-Ariz.) agreed.^[112] Even Senator Boschwitz, who earlier had threatened to hold up the tax bill, was all for it. "What we had then," he explained, "was tax complication. What we have now is tax reform. I am left breathless by this bill."^[113]

Obstacles remained. The provision that drew the most criticism from the public, as well as from the mutual fund industry, was the restriction on individual retirement accounts.^[114] Was the IRA a spur to saving, a boondoggle for the rich, or both, or neither? Finance Committee Chief of Staff William Diefenderfer said it wouldn't be so easy to amend the bill on the floor because the proposer would have to take over $20 billion from someone else's preferences to replace revenue losses. He'd rather use the money to lower taxes across the board.^[115] Governor Cuomo of New York, supported by Republican Senator D'Amato, objected to

changes in the sales tax deduction.^[116] Senator Dole suggested the transition rules be written to raise revenue in the first two years, reducing the deficit.^[117] Such an increase would risk conservative defection. But it, and the sales tax issue, could wait for conference with the House.

Asserting that tax reform was not yet "unstoppable," Dole joined Packwood and White House strategists in calling for a "clean," that is, unamended, bill. Changes should be saved for conference. Packwood claimed that thirty-two senators had agreed on a "no amendment" strategy, and President Reagan seconded that at a breakfast meeting with senators on June 5.^[118] Inevitably, some senators objected to being treated like a lesser breed, namely members of the House who traditionally were restricted by closed rules to prevent amendments to revenue bills. Yet the ethos of the clean bill proved so strong that no one wanted to be the first to offer an amendment that would be struck down in the name of reform. In order to break the ice, Senator Robert Stafford offered an amendment, later withdrawn, in which any person who reached age seventy-five and whose hair had not turned white wouldn't have to pay taxes.^[119]

The fact that Packwood had thirty-two votes against any amendment helped; just as important was a requirement that reduced revenues had to be "paid for" somewhere else. Where did that offset device come from? Of all places, Gramm-Rudman-Hollings!^[120] Thus by voice vote the Senate rejected a bid by Senator Alan Dixon (D-Ill.) to retain the sales tax deduction. He lost support because he proposed to pay for the change by disallowing a small percentage of all deductions, including portions of the state and local tax deduction. The leadership did allow the Senate to signal the conference committee by voting 76 to 21 in favor of a nonbinding resolution requesting conferees keep the sales tax deduction.^[121]

Another key vote was on IRAs. That was partly a class issue: whether the users were deserving (poorer people) or undeserving (richer people). When evidence from returns (two-thirds were in the $75,000 to $100,000 income bracket compared to one-fourth between $30,000 to $40,000 and little below that^[122] ) showed that most of the IRA users earned over $75,000 a year, the attractiveness of IRAs waned. The 1981 argument that IRAs increased savings had also been under heavy attack from many economists, who claimed it only attracted money from taxable to tax-free accounts.^[123] Yet the users remained a huge and politically very active group. Liberal Senator Dodd (D-Conn.) joined conservative D'Amato to sponsor an amendment to retain IRAs, paid for by a higher corporate minimum tax and individual taxes.^[124] The crucial vote to table their amendment was 51 to 48. The intense interest of IRA investors was

shown by the fact that all nine Democrats and nine of the eighteen Republicans running for reelection supported retention. Senator Steven D. Symms (R-Idaho) had received more than 900 letters a week, most of which were handwritten and therefore more meaningful than the usual, organized, preprinted postcards.^[125] Packwood had secretly to promise to support Senators Gramm, Gorton, and Evans on a sales tax amendment in order to get their votes to beat the IRA amendment.

To mollify IRA backers, a sense-of-the-Senate motion calling for its own conferees to assign the "highest priority to maintaining maximum possible tax benefits for IRAs" was passed 96 to 4. The language of the amendment—the conferees are advised to act "in a manner which does not adversely affect the tax rates or distribution by income class" of the tax bill—explains why IRAs were not rescued.^[126]

Another serious challenge to the bill—because it threatened what Dole called the "glue"^[127] holding it together, namely the top 27 percent rate—came from a proposal by Senator George Mitchell, a member of the core group, to add a top rate of 35 percent. Despite the fact that Mitchell raised the old battle cry of the liberals, progressivity, the liberal leader in the Senate, Ted Kennedy, stuck to the no-amendment strategy.^[128] Senator Packwood won its rejection (71 to 29).

The next day found Packwood hiding from view as the Gramm, Gorton, and Evans sales tax proposal got turned down.^[129] Naturally they were furious, but, when the no-amendment strategy showed signs of unraveling a week later, Packwood came up with $1.6 billion in alternatives to pay for a compromise restoring 60 percent of sales tax deductability in states (like Texas and Washington) that had no income tax.^[130]

Good sentiments cost little, so the Senate passed a resolution (95 to 1) urging the conference committee to give the middle class a better break.^[131] There was no specification of incomes. That provision fit an emerging pattern: amendments came up, they were defeated, and then the Senate adopted position-taking instructions to conferees that they should protect the very interests they were engaged in bashing. As during House debate, the promise was that things would be "fixed in conference." It would be quite a conference. The Senate plan had two brackets instead of four, and its low bracket was much lower than in the House plan. There were differences in many other areas. Yet, compared to the existing code, the similarities between the House and the Senate bills were more dramatic than the differences.

The Senate voted 97 to 3 for tax reform. "Motherhood" could hardly have won more votes. Almost no one, apparently, wanted to be left out of this historic occasion.