Beleaguered Tax Reform Is Far From Dead

Last Tuesday, when a massive electrical failure plunged the entire Capitol into darkness just as the House Democratic leadership was meeting to discuss tax revision, Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.) quipped that “the Republicans always say Democrats are only for tax reform in a dark room. I guess this shows they’re right.”

O’Neill’s jest reflects a widespread conviction that the kind of major tax law revision proposed by President Reagan never will see the light of day--in part because congressional Democrats fear that the GOP would get credit for a politically popular move. And certainly Reagan’s plan, which offends a horde of special interests, has made few new friends since it was unveiled; it has even alienated some who once championed the cause.

But for all its apparent troubles, prospects for a comprehensive rewrite of the federal tax code are far from dead. Reagan’s plan, or some variation of it, has one very important thing going for it: Not many legislators want to be identified as enemies of tax reform.

The Democratic-dominated House, to avoid being branded as the slayer of Reagan’s plan, is likely to approve a tax overhaul bill late this year after Congress, which began its summer vacation Friday, returns to work in September.

Although the more hostile Senate still could balk, it may find itself under tremendous political pressure to follow suit as the 1986 elections draw nearer--especially because 22 GOP Senate seats will be at stake. The Senate leadership is still smarting because it believes the White House pulled the rug out from under it in the battle over the fiscal 1986 budget.

“Both the Democrats in the House and the Senate Republicans are in a very awkward political situation--neither of them can be seen as turning down the President’s plan,” said John Salmon, a Washington tax lawyer who was chief counsel on the House Ways and Means Committee staff until this year. “It may be more difficult to pass a bill in the Senate, but they’ve got a good chance until the July 4 break next year to pull it all together.”

Others are far more skeptical about tax reform’s chances for survival. Tom Korologos, a lobbyist for Timmons & Co., has even told some of his clients not to bother him with their objections to the tax proposal because it is not going anywhere.

Americans Indifferent

Recent polls show that most Americans are indifferent to the fate of tax revision, with a majority fearful that the proposal to lower tax rates while eliminating many tax breaks will end up costing them more money. And Rep. Richard A. Gephardt (D-Mo.), who co-sponsored with Sen. Bill Bradley (D-N.J.) an earlier tax reform plan, now says that tax revision “is oversold as an overwhelming political issue.”

But House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.), seeking “to knock down the rumors . . . that tax reform is dead,” said last week that he, along with Treasury Secretary James A. Baker III and other ranking tax writers, remains confident that “we will get a bill to the President.”

According to a poll of the Ways and Means Committee by the weekly National Journal, at least 25 of the 36 members predict that the committee will approve a bill this fall. Reagan’s potential for political revenge is a key factor.

Rep. Bill Gradison of Ohio, a Republican member of the panel, told The Times: “I can’t see the House rejecting tax reform and turning Ronald Reagan loose next year to campaign around the country against the Democrats as the ones who killed the opportunity for a fairer tax system.”

California Rep. Robert T. Matsui of Sacramento, a Democratic member of the panel, added: “The worst thing for us would be to fail to get a bill out of committee. It would just confirm that the Democrats are bankrupt of ideas and a captive of special interests.”

But the special interests will not be silenced in the Ways and Means Committee. Nearly all 36 members of the tightly knit panel have at least one important provision in the current tax code that they want to protect. Various committee members have expressed support for changes that would help middle-class taxpayers, preserve at least part of the state and local tax deduction and protect such diverse interest groups as the insurance industry, banks and professional sports.

Revenue-Losing Changes

So, when the committee begins writing its own tax bill this fall, it is all but certain to produce dozens of revenue-losing changes. To prevent the plan from turning into a gigantic tax cut, committee members then will have to find new revenue sources to offset the losses.

As a consequence, business depreciation write-offs are likely to be less generous than those proposed by Reagan, and corporations probably will be forced to accept a gradual, multiyear reduction in tax rates to 34% or 35% from the current 42%, instead of the abrupt drop to 33% proposed by the White House.

For individual taxpayers, whose maximum tax rate under the Reagan proposal would fall from 50% to 35% as of July 1, the shift to the lower tax rates and to a $2,000 personal exemption--nearly double today’s level--might also proceed more gradually. And the top tax rate on capital gains--profits from the sale of investments--might rise from today’s 20% to as much as 23% instead of sliding to 17.5%, as it would under Reagan’s plan.

Such changes, designed to put a Democratic stamp on Reagan’s tax package, could make the House version even harder for the Senate to swallow than the original White House proposal.

But even though relations between Senate Republicans and the White House are at a low ebb because of disputes over how to deal with the budget deficit, many observers believe that the Senate would be forced to go along with a serious tax overhaul plan if it were endorsed by Reagan and the House.

Pressure on Senate

“If only a half-way, watered-down measure emerges from the House, then it will probably just fade from view,” said former Sen. Floyd K. Haskell (D-Colo.), a tax reform advocate who now heads the Taxpayer’s Committee. “On the other hand, if a real, substantive reform bill came over from the House, the pressures on the Senate to approve something would be nearly overwhelming.”

And Bradley, a member of the Senate Finance Committee and a potential Democratic presidential candidate in 1988, warned: “I can’t believe a Republican Senate will deny a Republican President the major domestic initiative of his second term. If they go along, we get tax reform. If they don’t, it becomes a Democratic issue for economic growth and fairness.”

But whatever plan ultimately emerges will be shaped as much by tax politics and congressional personalities as by the quest for “economic growth and fairness.”

In the House, Rostenkowski hopes to wield tax overhaul as a club to use in his long-shot effort to defeat Majority Leader Jim Wright of Texas for the top House post of Speaker after O’Neill retires next year.

Wright Opposes Effort

Wright generally has opposed the tax reform effort because he believes that Reagan and the Republicans will get the lion’s share of the credit and because he worries about the impact of the proposal on the oil industry and other businesses in his state.

Rostenkowski, who damaged his reputation with more liberal Democrats in 1981 when he engaged in a losing bidding war with the White House for business support during the tax cut battle, hopes to revive his image by producing a stronger bill this year.

“Rosty needs to produce a good, clean reform bill to have any chance of overtaking Wright’s lead,” said an aide to one top House Democrat. “It has to be 99 and 44/100% pure--a reverse Marilyn Chambers,” he cracked, a reference to the former Ivory Soap girl who became a sex movie star.

But other political pressures will be pushing in the opposite direction. Campaign gifts from interest groups to members of the congressional tax-writing committees have soared in recent years.

In the two years preceding the last election, the 20 members of the Senate Finance Committee received a total of $10.9 million from the political action committees of special-interest groups, and the 36 members of the House Ways and Means Committee got $6 million. The oil industry kicked in more than $500,000; the insurance industry, $855,000, and labor unions, more than $1.3 million.

Gain Access

Legislators deny that contributions from business and labor influence votes. They say the money simply helps lobbyists gain access to present their cases on the merits.

Others are more suspicious. Economic analyst Michael Barker, writing in his newsletter, Politics and Markets, noted that most of the issues before the tax committees are “mind-numbingly complicated” and of importance only to affected interests. “If the issue is of no immediate consequence to their constituents (if nobody’s looking),” he said, “PAC money becomes the decisive ingredient.”

In the Senate, Finance Committee Chairman Bob Packwood (R-Ore.) appears to have damaged his reputation by flip-flopping on the issue of protecting the timber industry. He first insisted that he would kill a tax bill if it eliminated special preferences for the biggest industry in Oregon, then retreated the next day by conceding that he had never told Treasury Secretary Baker the issue was that important to him.

Many lobbyists and Senate aides believe that Republican leader Bob Dole of Kansas, who chaired the Finance Committee until this year, will supplant Packwood as the key influence over the legislation in the Senate and in negotiations with the House over the final shape of a tax bill.

Treasury Politics

Divisions among top Treasury officials also could play a role in the tax debate. Baker’s right-hand man, Deputy Secretary Richard G. Darman, is at odds with many of the tax specialists in the department, including Ronald A. Pearlman, assistant secretary for tax policy, congressional sources say.

If Pearlman, who is respected by congressional tax writers, leaves before a bill is completed, it could complicate dealings with the Administration because Darman is widely distrusted on Capitol Hill. “With Darman, I’m afraid the relationship tends to be more adversarial,” said Rostenkowski, the White House’s chief congressional ally on tax revision.

Whatever the outcome of the tax revision effort, close observers continue to play down expectations that the White House will meet its timetable of winning approval of a bill this year.

“I am still startled by how many responsible people think tax revision can actually be passed in time to go into effect in 1986,” said John E. (Buck) Chapoton, who was Treasury’s top tax policy official until last August and is now a tax lawyer here for Vinson & Elkins. “That just won’t happen.

“But I do think something called tax reform will be passed next year--and the odds for a really fundamental change are still at least even.”