Authors: Hedrick Smith
Rosty put Reagan on notice that Congress would not merely rubber-stamp his tax plan, but would make it fairer. Then he stole a leaf from
Reagan’s book—he appealed for listeners to write in.
WRITE ROSTY
buttons blossomed on Democratic lapels and more than eighty thousand letters poured in. Reagan was so impressed that he phoned Rosty to thank him.
Round one:
Rosty had put himself in contention with Reagan.
Before he began recrafting Reagan’s bill, Rostenkowski arranged a nonaggression pact, extracting Reagan’s promise not to try to influence Rosty’s committee or take potshots at its bill until the committee had finally approved it.
“Mr. President, you know if you’re gonna criticize me the first day we start, if you’re gonna take shots at this thing as we’re proceeding through it, this bill’s going nowhere,” Rostenkowski told Reagan.
“What is it that you want?” Reagan asked.
“I don’t want you to make any comment on it,” Rostenkowski said. “I want you to keep your powder dry.”
“All right,” Reagan replied, “I’ll make a deal with you. I’ll keep my powder dry. I won’t say a word about the bill.”
64
Round two:
An implicit swap—Rosty bought Reagan’s outline, and he got Reagan’s star hitched to his own wagon.
Rostenkowski wanted plenty of time to work on the bill—seven months in all—to drive home the point to the voters that the Democrats had a vital hand in producing the new law. His early problems were with Democrats, not Republicans. Back in May, Jim Wright, then House majority leader, and Democratic Study Group liberals were pushing for a minimum tax on corporations and wealthy individuals that would raise $35 billion to $40 billion a year—to lower the deficit. Rostenkowski fought this plan because it would take away a huge chunk of tax revenues that his reform bill needed to finance tax breaks to individual middle-income taxpayers. And he got backing from Speaker O’Neill, who was dead set against Democrats’ sponsoring any tax increase.
In the fall, Rostenkowski’s committee rebelled. His staff had made Reagan’s bill tougher on corporations and the rich and more favorable to the middle class. But day by day through late September and early October, committee Republicans and some Democrats picked apart reform and restored special-interest provisions. The lobbyists were riding high. Loopholes were going back into the law. Members from oil-and-gas states were teaming up with timber interests, banking interests, and the big-state members, demanding full deductibility of state and local taxes. Rostenkowski, unable to muster a steady majority, was losing control. His press clippings were turning sour. Tax reform was
dying. The nadir came on October 15: Instead of clamping down on loopholes, as Reagan and Rostenkowski had proposed, the committee voted to sweeten a favorite tax shelter of commercial banks—the reduction in taxes allowed for bad-debt reserves. Rostenkowski threw down his pencil in anger. Outside the committee chamber, bank lobbyists shouted for joy.
“The tax bill stinks like a dead fish,” John Sherman, Rosty’s press spokesman, groaned to me afterward.
65
Rostenkowski was in despair. He went home alone to his apartment. “I wrote myself a letter when I was in the bottom of the valley,” he admitted to me later. “I wrote myself how lonely and how miserable I was. You know, do people really want reform? I mean, are we all so phony?”
66
Remodeling, Democratic Style
Shrewdly and patiently, Rostenkowski turned the game around and put a Democratic majority together. Some Democratic committee members were shocked at how far they had gone in catering to special interests. Rostenkowski shamed them into reversing the bank vote and tightening up on banks. He played on their loyalty to him and their pride in their team, the Ways and Means Committee, like a football coach at half time after a disgraceful first half. “The press was kickin’ the crap out of the committee,” he recalled. “So I had the committee get together and I said, ‘Is this what we want? Is this the image the Ways and Means Committee is gonna have? We’re liberalizing [loopholes] even from present law? I mean, is this reform? Are these Democrats? Is this the issue we’re gonna develop?’ ”
Then, like a ward boss, he made the rounds, asking his members for their bottom line—what they absolutely had to have in the tax bill for their districts. On the problem areas, he set up bipartisan task forces, stacked 4–2 in favor of Democrats, and dictated just how much tax revenue could be given away in certain areas, and he let the task forces carve up that money. It gave Democratic members a sense of participation.
In his first big move away from Reagan, he gave away his major plum to the big-state members: continuation of existing federal tax deductions for state and local taxes. Reagan wanted to knock that off and pick up huge tax revenues. Governor Mario Cuomo of New York, accusing Reagan of anti–New York bias, had turned that issue into his crusade. Cuomo made splashy appearances in Washington and called home
New York’s senators and congressmen to toe his line. (Charles Rangel, a Harlem Democrat, poking fun at Cuomo’s heavy-handed tactics, had joked to Cuomo, “I don’t mind being your puppet, just don’t shine the light on the strings.”)
Deductibility of state and local income taxes was worth $60 billion to $65 billion in tax revenues over five years. Rosty felt he had to trade it away to corral a committee majority. That concession was vital to gaining steady support from big-state members: Charlie Rangel, Tom Downey, and Raymond McGrath of New York; Robert Matsui and Pete Stark of California; his own protégé, Marty Russo from West Chicago; and others like Barbara Kennelly of Connecticut, Brian Donnelly of Massachusetts, and William Coyne of Pennsylvania. Downey and McGrath had told Rosty they would fight his whole bill—until he yielded on state and local taxes.
A week after the disastrous bank vote, Rosty made his deals, one member at a time, demanding their loyal support in return. “You’ve got it—$65 billion,” he told Downey. “But you gotta be with me on everything else. I want you to be my ally. I need you to convince other people and to speak on the floor.”
67
Member by member, Rostenkowski built momentum for the tax bill. Later he would cement it with transition rules—favors to each of his allies: a special break to a stadium here, an airport there, a few businesses, some partnerships, all written in such fine print that only tax lawyers could decipher it. That was the essence of Rosty’s Chicago ward politics, the goodies doled out to members for playing ball with the chairman.
Round three:
Rosty had bought a guaranteed nineteen-vote majority on all but a handful of tough issues.
But he had crossed the administration on state and local taxes. On October 24, when Jim Baker learned of that concession, he chased Rostenkowski by phone to North Carolina, where Rosty was giving a speech. Baker had wanted to use some of that tax money for concessions to probusiness Republicans. Baker was mad.
“Goddamn, Danny, what did you do to me?” Baker demanded. “How can you do this?”
“Hey, I’m not gettin’ any support from you!” Rosty shouted back, blaming Baker for the way committee Republicans were undercutting him. “What the hell do you think I am? You think I’m gonna run up against my Democrats?”
Baker scolded Rosty for making the move without warning.
“I’m gonna hang up on you, you son of a bitch,” Rostenkowski threatened.
“No, no, no, don’t hang up,” Baker warned.
68
Rostenkowski slammed the phone in Baker’s ear. They resumed shouting face to face the next day in the Ways and Means Committee library. Others could hear them through the walls.
That same afternoon, the administration’s top team considered pulling out of its partnership with Rostenkowski. But essentially he had them trapped, and they kept going. Still, Rosty had to play his game carefully—pulling Reagan along in his direction, while he put a Democratic stamp on the bill. He fretted that only four or five committee Republicans were being helpful, and he berated top administration officials for not bringing the Republicans along. Jim Baker and Dick Darman told Rosty that he himself should develop Republican support.
By early November, Reagan was chafing at Rostenkowski’s tactics, especially Rosty’s plans for a fourth tax bracket (above Reagan’s three) to hit the rich. That violated one of Reagan’s “lines in the sand”—guidelines that he insisted on. On November 6, Reagan complained publicly about the “watering down” of his package. Rostenkowski quickly phoned the president to remind him of his vows of silence. It was bravado, but it worked.
“What’s going on here?” Rostenkowski complained.
“Sorry it happened,” Reagan apologized. “Won’t happen again.”
69
Round four:
Rostenkowski had kept Reagan, Baker, Regan, and Darman in line as he altered Reagan’s package.
In the next two weeks Rostenkowski reshaped the bill more to Democratic liking, which drove House Republicans wild and put Reagan in a difficult box. Rostenkowski was now playing his opposition game to the hilt and getting plenty of press play. The corporate tax rate went up from Reagan’s 33 percent to 36 percent; a fourth personal tax bracket was added at 38 percent; the capital gains tax was hiked from 17.5 percent to 22 percent; and a tough, 25 percent minimum tax was imposed on individuals and corporations. Business lost handsome tax write-offs from accelerated depreciation. Rostenkowski’s Democrats were tougher than Reagan on the oil-and-gas industry, on real estate shelters, on defense contractors, and on depletion allowances for coal, iron ore, and other minerals. And they gave better tax-rate schedules to the middle class, as well as deduction of mortgage interest on two homes.
For Rostenkowski, the climax came on the night of November 22. He was near physical and nervous exhaustion. That afternoon, Reagan had privately given his approval to passing Rostenkowski’s bill, but the bill would change that night. Rostenkowski was under enormous pressure from Russo, Rangel, Downey, Frank Guarini, and others to yield
to organized labor, which wanted to make all employee fringe benefits tax free. Reagan and Rostenkowski had proposed partial taxation.
As chairman, Rostenkowski felt every group should make sacrifices for tax reform. He did not want to tilt prolabor. But Rangel had pledged union lobbyists he would try that final night to make
all
fringe benefits tax free: health and life insurance, educational costs, prepaid legal fees. That would cost $11 billion to $12 billion in tax revenues over five years and throw Rostenkowski’s revenue-neutral tax bill out of whack. Rosty refused.
During a recess, Marty Russo asked Rob Leonard, chief counsel and staff economic wizard, how much tax revenue would be raised over five years from a one-percent increase in the corporate tax rate. Leonard said $13 billion.
“That’s it, the ballgame’s solved,” Russo shouted—meaning that a one-percent increase in the corporate rate would make up for the tax revenue lost by granting tax-free fringe benefits.
70
Rostenkowski was adamant. Months before, lining up some corporate support for tax reform, he had pledged CEOs from IBM, General Motors, General Foods, Procter & Gamble, Dart & Kraft, Sara Lee, and others that he would hold the corporate tax rate at 35 percent. Now, his Democrats, his team were trying to push him to 36 percent and he would not break his word. He was caught in a vise. He walked away into a side room, leaned against the wall, and broke down crying. His chief of staff, Joe Dowley, walked in.
“Boss …” said Dowley, offering sympathy.
“Just leave me alone, Joe,” Rosty croaked.
71
Marty Russo, a big, lumbering, aggressive politician, a chip off Rostenkowski’s block, wouldn’t let go. When Rostenkowski came back, Russo argued that Rosty would need labor’s support to pass the bill on the House floor. It was a politically smart trade-off to make, he said. He hunted down Jim Baker and Dick Darman, who had come to monitor the final votes. Baker conceded that at best, Rosty’s bill would only get about forty Republican votes on the floor, out of 218 votes needed.
“Are you telling me that I have to get 178 Democrats to pass the bill?” asked Russo, one of Rosty’s chief vote whips.
“Probably,” Baker said.
Russo took that piece of intelligence back to the caucusing Democrats. “We can’t get 178 Democrats if we don’t take care of fringe benefits,” he told Rosty.
72
That rekindled the revolt of the prolabor group. Rostenkowski tried to stop them, calling for loyalty, recalling his
pledge to the business executives, pleading not to upset things when victory was so close. But they called for a show of hands. Rosty lost.
He tried another gambit of the old-breed power game. It was his bill, his fight, and they were his team. He asked for a chairman’s prerogative. He proposed that when Rangel offered the amendment on fringe benefits, Rosty would call for a voice vote and declare Rangel’s proposal beaten. But if a roll call were demanded, Rangel would win, and Rosty himself would propose raising the corporate tax rate. Team feeling was strong. The other Democrats agreed.
Formal committee sessions resumed, close to midnight. The Republicans were angry, demanding roll-call votes on everything. Rangel’s fringe-benefit amendment came up. Roll call. It passed with an easy Democratic majority. Rostenkowski proposed upping the corporate rate; the Democrats passed it. They finished the bill close to three
A.M
. The Republicans were furious.
With House Republicans in open revolt, Reagan stalled on making any endorsement. Rostenkowski telephoned the president to appeal for Reagan’s support, but Reagan dodged him for four days. Rosty wanted to fly with Reagan to the West Coast over the Thanksgiving break, but Jim Baker headed him off. Reagan finally called Rostenkowski back on November 30—angry that Rosty had bleated to the press about phoning Reagan and getting no answer.
“You asked me to keep my powder dry,” the president reminded him. “You asked me not to make any comment. Now, I’m asking you to do the same thing. Don’t you make any comment.”