Senate Finance Moves

As Ways and Means Democrats worked on their package, public conflict shifted to the Senate, where Chairman Dole was working to report his bill before the July 4th recess. Dole wanted to keep the pressure on Ways and Means. He circumvented the constitutional requirement that revenue measures originate in the House by attaching the bill to a House-passed increase in the debt ceiling. His real difficulty was how to accommodate the intense pressure within his committee for "goodies" while keeping the deficit down.

In a markup that began June 18 and ended June 25, Finance adopted 5-10-10, the rerevised ACRS, and a raftload of additional provisions, ranging from a tax credit for oil royalty owners to one for rehabilitating old buildings included in the Conable-Hance package.

Finance then added, among other things, a reduction in the windfall (oil) profits tax and deductions to help truckers cover the costs of deregulation. The biggest addition was something called the All-Savers plan, under which savers could deduct from their income the first $1,000 of interest ($2,000 for couples) on special one-year CDs, paying 70 percent of the current T-bill rate.

As originally proposed by the savings and loan industry, the point of All-Savers was to generate deposits for thrift institutions, which had severe problems because inflation had made many of their old mortgages money-losers. The thrifts claimed that the tax break would encourage savings. Because that was such a good idea, senators extended it to banks and credit unions. Most observers assumed that All-Savers would just cause a shift of money from one kind of account to another. CEA member William Niskanen called it "one of the worst ideas I've seen in public life for a long time. I see no reason why it would increase savings."^[38] Dole called it an "all-subsidy" plan.^[39] Treasury and tax committee specialists were horrified, but pressure from senators, particularly Democrats, was too great to resist.^[40]

To compensate for some of these valuables, Dole included a few reforms. One would eliminate the "commodity tax straddle." When Finance approved its package, 19 to 1, on June 25, it seemed that Dole had fought off enough other tax breaks to have worked a miracle.^[41] He had hit the FY84 revenue-loss target of $150 billion almost exactly but included enough attractive items to get a nearly unanimous vote from his committee.

Only by the standards of the Senate was Dole's a victory for fiscal responsibility. He met the original target by first adopting the administration's compromise to 5-10-10 and then postponing the third-year business tax cuts beyond the budget horizon. Finance had not exactly reduced costs. On one major issue, the indexing of tax rates, Dole had arranged to increase the tax cut substantially, but Stockman didn't know that.

Indexing means raising the brackets each year by the amount of inflation, thereby not pushing people into a higher bracket by a wage increase that gives them no increase in real income. Like repairing the marriage penalty and reducing the estate tax, indexing was Reagan administration policy but not part of the first tax bill package.

Along with Finance member Bill Armstrong (R-Colo.), Dole had sponsored indexing proposals in 1979 and 1980.^[42] Because of inflation, Dole

said, some families' taxes were "nearly 50 percent higher than in 1965." Indexing, he said, "is more honest"; raising taxes was a decision "Congress should take responsibility for, rather than ceding that duty to the Consumer Price Index."^[43]

Although the administration supported indexing in principle, Regan, Baker, Stockman, and even the president insisted that indexing not be added to the bill. In reply, "Dole assured us in plain English," a member of the Legislative Strategy Group recalls, "that indexing would not be in the package at the time it was considered in Senate Finance." Whatever he said to the administration, Dole had his staff working on ways, to add indexing from the time the Reagan package was added in February. About a week earlier they had adopted a neat tactic: indexing, beginning in 1985, would be reported as a separate, committee-supported amendment. The date and separate reporting meant indexing would not count in the FY82–84 tax cut totals. The amendment (sponsored by Armstrong) was reported by a vote of 9 to 5. "There were a lot of absentees," one aide reports, "out of deference to the chairman."

By Stockman's account, the administration still thought Dole was on their side.^[44] Perhaps that is why, when Dole and Armstrong spoke for the amendment on the Senate floor on July 1, he and Senator Long had the following exchange:

Mr. Dole: The Senator from Kansas would like to speak in favor of the amendment prior to the vote.

Mr. Long: If the Senator wants to speak, go right on ahead.

Mr. Dole: If there are other speakers, I would sort of like to blend in with the group.^[45]

Understandably! According to estimates when the tax bill was passed, in FY86 indexing accounted for as much extra revenue loss as all other additions to the original package combined.^[46] The reasons for indexing were compelling, nonetheless, for an establishment politician like Dole, who worried about the perceived legitimacy of the tax code.

With only one Democrat, Bill Bradley, voting against Dole's plan in the committee, the game was essentially over in the Senate. The only question was how many riders would get on the tax-cut train. In late June, Russell Long had told the president, "You have the votes in the Senate to pass your tax bill," and the former Finance chairman was not one to misjudge such matters. Yet Long urged that the third year be subject to a trigger in the event of high deficits. Reagan refused. "Government," he replied, "spends all the taxes it gets. If we reduce taxes, we'll reduce spending."^[47] This restatement of his children's allowance theory was the essence of Reaganomics. There would be no further compromise.^[48]

Ways and Means Democrats were uniting behind a package that would have provided 80 percent of individual cuts to persons earning less than $50,000, compared to 65 percent in the Senate Finance bill.^[49] They would change depreciation to better fit their remaining principles. Ironically, the very fact that the Democrats had lost twice in a row encouraged unity. How many times could the boll weevils reject their party on crucial votes and still be able to live with their colleagues? A number of boll weevils wanted to make amends to the House leadership; they had done enough for Reagan. Charles Wilson, a defector on reconciliation, was working with the leadership to hold his Texas colleagues. When Congress returned from its July 4 recess, most estimates held that the Democrats might well win in the House.