Road to Revision : Plan Gained Life of Its Own as None Would Risk Blame for Killing Reform

Last December, moments after the Democratic-controlled House approved its version of tax revision, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.)--the man who had guided the bill through a bruising gauntlet of opponents--toasted the victory with a glass of champagne.

“To a rocky road in the Senate,” he said, amid cheers from the largely partisan crowd. Rostenkowski fully expected the bill to collapse in the Republican-controlled Senate.

Yet the Senate Finance Committee--dominated by senators sympathetic to the viewpoints of big business and headed by Sen. Bob Packwood (R-Ore.), who once said: “I kind of like the tax code the way it is”--astonished Washington by actually producing a radical tax revision plan of its own.

The unthinkable had become the inevitable.

Plan’s Survival Dismissed

And the crowning irony is that virtually no one in the Senate or the House--with the conspicuous exception of Sen. Bill Bradley (D-N.J.)--really wanted any such overhaul plan to survive. Instead, the nation’s tax code is now all but certain to be rewritten from top to bottom because none of the central players in the drama dared risk being blamed for killing reform.

“Everybody was driven by fear,” said Michael Barker, a contributing editor to Tax Notes, a specialized weekly magazine here. “On the House side, they were afraid of what Reagan could do to the Democrats if they killed it. And in the Senate, this proves that even Bob Packwood and the oil-state senators can be shamed into trying to do the right thing.”

Said a weary David Brockway, head of the congressional Joint Tax Committee staff, just after House and Senate conferees approved the overhaul package Saturday night: “I never thought it would come to pass. Before I came to Washington, it seemed almost self-evident to me that a bill of this kind would pass. But then you’re here for a while, and you begin to see all the reasons around you why it isn’t so obvious.”

Certainly the political odds against rewriting a tax code that affects every man, woman and child in the United States, as well as every economic and political interest large and small, were staggering from the outset. Indeed, even when President Reagan proposed such a revision in his 1984 State of the Union speech, he did so primarily as an election-year gambit to prevent the Democrats from grabbing the issue.

‘Heroine’ Rescued

And in the more than two years since then, competing versions of the tax plan went through a “Perils of Pauline” melodrama in which the “heroine” was rescued more times than even the most credulous audience could believe.

On May 29, 1985, the Treasury Department followed up on Reagan’s election-year pledge by producing a comprehensive tax-overhaul package that hit the array of lobbyists and lawyers lodged along Washington’s downtown K Street like a bolt out of the blue.

Treasury’s plan was “pure tax reform”--an economist’s dream of a simple, streamlined tax law that slashed tax rates and stripped away almost all the special breaks and preferences that had been lobbied and shoehorned into the old revenue code over the decades. By treating all income and all types of financial activity the same, Treasury’s plan sought to create a fair and “level” playing field for all taxpayers and all businesses.

That approach, while academically sound, was politically poisonous, as the White House itself quickly recognized. The Administration took a half-step back and started again.

The job of engineering a proposal that would be politically palatable yet retain some of the virtues of Treasury’s “pure” reform was handed to James A. Baker III, who switched to Treasury secretary from White House chief of staff about that time, and to Deputy Treasury Secretary Richard G. Darman.

Reduced Tax Breaks

After six months of internal battling, Baker had hammered out a new Administration plan that still lowered maximum tax rates sharply--top individual and corporate rates were the same 35% and 33% levels proposed in the Treasury plan--and reduced the plethora of tax breaks while making a number of key concessions to such well-connected interest groups as the oil and gas industry. It also bowed to politicians such as Packwood, who insisted that employer-paid fringe benefits remain essentially untaxed.

Many economists were disturbed by the political trade-offs--Alan Blinder of Princeton University and the Brookings Institution quipped: “I would have liked the movie better if I hadn’t read the book first,”--but the package was finally delivered into the congressional labyrinth.

Many Democrats immediately blasted what they charged was an Administration cave-in to business interests.

The Democrat who mattered most, though, House Ways and Means Committee Chairman Rostenkowski, took a different tack. Having twice suffered big defeats at the hands of the Reagan Administration, in the 1981 and 1982 tax bills, the chairman of the committee where all tax bills must originate wanted to redeem his reputation on Capitol Hill. So he embraced the broad thrust of the Reagan plan and went to work putting his own stamp on the fine print.

Never known before as an avid tax reformer, he began reminding anyone who would listen that tax “fairness” had been a Democratic totem for years.

‘Simplicity, Fairness’

“Why should we let Reagan take the tax issue away from us?” he asked rhetorically in an interview with The Times last September, just before the Ways and Means Committee began working behind closed doors on its tax revision plan. “Reform, simplicity, fairness--those are Democratic words.”

Such rhetoric counted for little in the trench warfare that ensued. At one point, shouts of “We won, we won,” echoed through the crowded halls outside the committee hearing room when a banking industry lobbyist learned that the 36-member panel had defeated Rostenkowski’s effort to eliminate a crucial tax break for large banks.

The banks had overreached, however. The committee quickly reversed its decision, giving Rostenkowski new strength.

At another key juncture, he cut a deal that opened the way to final success. Committee members from high-tax states like New York had formed a strange-bedfellows alliance with oil-state lawmakers to protect both state tax deductions and oil industry tax breaks; Rostenkowski shattered the alliance by agreeing to retain the full deduction for state and local taxes--but not the oil tax breaks.

There was new trouble when the committee bill got to the House floor. Republican members of the committee, seething because they had been locked out of the bill’s development, stirred a revolt. Only an extraordinary personal visit to Capitol Hill by President Reagan, combined with intense lobbying by Treasury Secretary Baker, produced enough Republican votes to win House passage on a chaotic voice vote.

Appeared Doomed

At that point, tax revision still seemed doomed in the Senate. In the Finance Committee, members spent two weeks tacking one special interest amendment after another onto the chairman’s original proposal. In consternation, Packwood halted the committee sessions--just in time to keep his colleagues from approving another round of changes that would have drained about $100 billion in revenues out of the bill and sent the nation’s runaway deficit into outer space.

“If we had a horse this sick back home,” said Sen. Malcolm Wallop (R-Wyo.), “we’d take it out and shoot it.”

With his committee out of control and his own reputation on the line, a desperate Packwood turned to Brockway, the top congressional tax technician. Together, they devised a radical plan that slashed the top personal tax rate to 27% by cutting back on tax shelters, consumer interest deductions and individual retirement accounts.

The combination of stunningly low tax rates and elimination of tax shelters for the rich had a political appeal that proved irresistible. Working through a “core group” of seven of the 20 Finance Committee members, Packwood obtained a unanimous vote from the committee approving his plan only a week after unveiling it.

“We’re in disbelief about what is going on here,” said Kenneth Hagerty, lobbyist for the American Electronic Assn., outside the Finance Committee room last May. “These are fundamental changes and they’re being decided in minutes.”

Deft Political Footwork

At that juncture, Senate approval seemed assured, though Packwood still needed some deft political footwork to beat back an effort on the floor to restore much of the deduction for individual retirement accounts--a move that would have upset the delicate formula by which the plan lowered most individual tax bills without aggravating the deficit.

After its phoenix-like revival so many times, the series of setbacks that hit the tax bill during the monthlong House-Senate conference committee appears in retrospect to be little more than brief hitches in the inevitable bipartisan drive to victory.

But it didn’t always look so rosy to the participants.

Only three days before the compromise was approved, for instance, experts told Packwood and Rostenkowski that a re-estimate of their deal to shift a total of $124 billion in tax burden away from individuals and onto corporations over the next five years did not add up correctly.

“It was sort of like Banana Republic currency,” Packwood’s chief aide, Bill Diefenderfer, said Sunday. “One day you get paid 100 pesos, and the next day it’s worth 50.”

For a few hours, the House insisted that the Senate bargainers agree to make up $10 billion of the revenue losses by eliminating more corporate tax preferences. Finally, Diefenderfer recalls: “Packwood said we’d split the difference with them. And Rostenkowski said: ‘It’s a deal.’ . . . They reached across the table and shook hands, and that was it.”

Times staff writer Michael Wines contributed to this story.