Power Game (88 page)

Reagan still got a chance to create a bipartisan coalition, picking up where Dole had left off, by striking a deal with Tip O’Neill. The issue came to a head on July 9, a sweltering, sticky afternoon, when Reagan met under the oak tree on the South Lawn with bipartisan leaders from both houses. The group sat around in armchairs on the lawn—some in shirt-sleeves, Reagan kept on his jacket. White House stewards passed iced tea and Coke. Tip O’Neill sat next to Reagan, and Dole was a couple of chairs away. Their talk was drowned out from time to time by airliners making the final approach to National Airport.

The test issues at the oak-tree meeting were the Social Security freeze and whether to go for some kind of tax increase now being pushed by some Senate Republicans. O’Neill had recently made a gesture toward compromise, a willingness to increase taxes on Social Security benefits. But Reagan was haunted by the 1984 campaign, almost as if he had lost—not won—it. Democratic attacks had made him gun-shy on Social Security, and Kemp’s prodding nudged him to move away from freezing COLAs. And obviously Mondale had gotten under Reagan’s skin with his campaign declaration that he—Mondale—was honest enough to tell the country that beating the deficit required a tax increase and that Reagan would have to do it, too, but Reagan would not admit it. That hot July afternoon, Reagan lashed out at Mondale.

“I answered Mondale,” Reagan declared. “When Mondale said what our country needs is a tax bill, I said, There’ll never be a tax bill as long as I’m president of the United States.’ ”
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Then wheeling on O’Neill, he trumpeted: “Do you think I am ever going to have a tax bill? Never! Do you think I’m going to let Mondale say, ‘Look, I told you I was right?’ Never!”
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On Social Security, there was confusion about precisely what Reagan said because a plane droned over at the critical moment. Reagan said he did not want to touch Social Security. Dole thought he heard Reagan add “assuming” House Democrats could come up “with some offsetting savings” elsewhere in the budget.
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But O’Neill, sitting next to Reagan, told me he had not heard any such qualifier and happily told reporters that the president “has taken Social Security off the table.”

The president had dealt a severe blow to the Republican coalition and to chances for big reduction in the deficit, though both Reagan and O’Neill professed interest in a modest cut. Senate Republicans erupted in fury, feeling betrayed. Warren Rudman protested that they had taken the risk of “kamikaze pilots only to be shot down by our own leader.” Dole remarked bitterly: “You know, we were left hanging out there. We marched up the hill and across the ravine, just right up to the cliff, and then they pushed us over.”
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Still, so many senators were alarmed by the skyrocketing deficit that they gave Reagan another chance to form a bipartisan coalition. To make him feel less vulnerable to partisan attacks on taxes and Social Security, three Democrats joined three Republicans to devise a new Senate plan with major impact—to trim deficits over three years by $300 billion. It had everything—cuts in social programs, a one-year freeze on defense and Social Security, and $59 billion in new revenues. No taxes were specified, but the idea was to delay the tax-indexing plan adopted in 1981—putting off a tax reduction rather than raising tax rates, to meet Reagan’s objections to a tax increase. But when they put their package to Reagan in late July, the president was so angered that he slammed his glasses on the table.
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Dole and Budget Chairman Domenici tried one final tack: a five-dollar-per-barrel fee on oil imports, thinking that was not literally a tax. Dole, Domenici, and Paul Laxalt were leaving Dole’s office to seek a House-Senate compromise with Tip O’Neill on July 29, when the phone rang. It was President Reagan: thumbs down on the import tax. Dole went to see O’Neill anyway, thinking a bipartisan deal would be irresistible to Reagan. But he did not reckon on how far the White House would go in slapping him down.

As Dole, Domenici, and Laxalt were talking with O’Neill, White House spokesman Larry Speakes went before TV cameras at 9:28
A.M
. to disclose Reagan’s phone call to Dole. Reading a statement, Speakes
emphasized that Reagan would “not support a tax increase in the form of an oil-import fee … a change in Social Security COLAs … [or] a change in tax indexing.” Chris Matthews, the speaker’s press aide, took a news bulletin to O’Neill. The speaker read it and handed the paper to Dole.

“He was absolutely stunned,” O’Neill told reporters afterward. “His chin hit his chest.”

Senate Republicans seethed. Reagan had torpedoed all hope of significant deficit reduction. Dole gave up. Three days later, a 1986 budget bill passed with Reagan’s backing, and except for a freeze on defense appropriations, it was pretty tame. Reagan claimed a big win, but Senate Republicans mocked it as timid. (Officially, the White House claimed its package would lower the 1985 deficit by $40 billion in 1986; in fact, the deficit rose $8 billion to a new record of $220.7 billion.)

Back in January 1985, Dole had seen the storm signals for Republicans. “If we fall flat on the deficit, we’re in deep trouble,” he told me. “If we come up with some limp little package, we’ve lost the play.” In short, a timid deficit package would weaken the economy and voters would penalize Republican Senate candidates in 1986. Dole’s comments were prophetic: The economy sagged, and Republicans lost control of the Senate in 1986, with the economy a factor in pivotal states. Reagan’s party paid a political price for his failure to forge an effective budget coalition.

The Pitfalls of Bipartisan Coalitions

On tax reform, President Reagan took the bipartisan approach dictated by the 1984 election results and which generally makes sense for paramount political issues. For the first time on his top-priority issue, Reagan began by reaching for a grand coalition with mainstream House Democrats instead of working from a partisan Republican base and chipping away Democratic defectors. He had entered earlier bipartisan coalitions in 1982 and 1983, during recession, when he had been on the political defensive. He had bowed to congressional pressure for a bipartisan three-year $98 billion tax increase and a plan to fund the MX missile; and he had used a bipartisan commission to fashion a modest plan to put the Social Security system on a sounder financial basis. Now once again, on tax reform, necessity dictated that Reagan strike a bargain with House Democratic leaders. Democrats had a whopping hundred-vote House majority and the Constitution requires tax bills to
originate in the House. That meant working through the Ways and Means Committee, which was 2–1 Democrats and more liberal than the House as a whole.

This was a risky coalition game because it put Reagan’s Republican base in jeopardy. The administration’s partnership with Dan Rostenkowski, Democratic chairman of the House Ways and Means Committee, was bound to grate on House Republicans. Militant Young Turk Republicans regarded Rosty as the archetypal partisan foe. Rostenkowski, from the outset, counted on Reagan to get House Republicans to swallow a bill they were bound to dislike. He was fond of saying that Democrats could not pass a major tax-reform bill alone; it took alliance with a Republican president to get a majority coalition. Jim Baker, too, knew that success depended not only on Rostenkowski’s corralling the Democrats but on Reagan’s sway with a good chunk of Republicans.

Not only were there old partisan frictions to overcome, but very few Republicans in Congress had much enthusiasm for tax reform in principle. In 1981, Republicans had followed Reagan down the line on his tax bill, but there was a big difference this time. The 1981 tax bill was apple-pie politics; it was all tax cuts. Every individual and every interest group was a winner. But Reagan’s 1985 tax-reform bill had losers as well as winners: regions, industries, and individuals who had to fork up more taxes to pay for the cuts of others. He wanted the new tax scheme kept “revenue neutral”—that is, no net gain or loss to the Treasury. The glue for the 1985 coalition was the lure of lowering personal income tax rates for the vast majority of Americans. Reagan tossed out that bait repeatedly, but he had trouble getting skeptical voters to bite. And the lack of popular trust and enthusiasm left Congress hard to convince.

Most congressional Republicans saw tax reform as antibusiness. To lower personal tax rates, the Reagan bill had to get more tax revenues from the corporate side. It rolled back advantages Reagan gave to business in 1981, most importantly the investment tax credit. The elimination of that tax write-off would cost business $100 billion over five years. Other big billions would have to come from changing depreciation schedules or tightening up tax breaks for real estate, insurance, banking, and other business. Picking up these tax revenues made possible a lower corporate tax rate overall, and that appealed to retail and high-tech industries. But the capital-intensive Snowbelt industries, such as steel, and the U.S. Chamber of Commerce were opposed. The Republican talk was that the bill would hurt the investment climate and push the economy toward recession. Jack Kemp, as a longtime advocate of tax reform, was a notable exception; in 1984, he had
proposed a flat tax—a top rate of twenty-four percent—claiming tax reform would attract millions of new middle-class voters to the Republican party.

Reagan’s constancy and strong engagement was the main difference between the failure of the 1985 budget coalition and the perilously narrow success of the tax-reform coalition in 1985. Reagan did not fight hard for the budget, but he put down his marker on the tax issue and he stuck to his position.

The success of the tax bill had other critical ingredients: Rostenkowski’s shrewd bargaining to line up a sizable majority of Democrats; the patient legislative politics of Jim Baker and Deputy Treasury Secretary Dick Darman, whose stroking of Congress and the White House kept the coalition alive when it frayed from tension; and finally, the backing of Speaker O’Neill. In the Senate in 1986, Reagan’s bill was literally saved by the ingenuity and astonishing legislative skill of Bob Packwood of Oregon, Senate Finance Committee chairman, who formed an even more genuine bipartisan coalition. In the House coalition, Reagan wheedled Republican votes, and Rostenkowski bargained for Democratic votes; but in the Senate, Packwood engineered support on both sides.

It was Reagan who put the ball in play and kept the game alive at the critical moment in December 1985. His goal was to bring down the top tax rates. In 1981, he had lowered them from seventy to fifty percent and now was pushing to thirty-five percent or below. That helped the rich the most. But Baker and Darman were smart enough to craft a bill with populist appeal—by removing six million poor people from the tax rolls, lowering most individual rates, and taxing corporations more. That made the Reagan bill as “populist a piece of legislation as Democrats could have written,” John Sherman, Rostenkowski’s press secretary, said admiringly.
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Stumping from Oklahoma City to Concord, New Hampshire, Reagan pushed his bill as a tax cut (though some people would pay more). But Reagan’s main appeal was an attack on the existing tax code, for the engine that drove tax reform through Congress was tapping anger against the tax system. What made it hard for other politicians to let tax reform die was that killing reform became equated with protecting the despised status quo. As opinion polls showed, most voters did not trust promises of a tax cut. But they could identify with Reagan’s savaging the rancid inequalities of the existing tax system as “complicated, unfair, cluttered with gobbledygook and loopholes designed for those with the power and influence to hire high-priced legal and tax advisers.”

Reagan’s pitch was more likely to move congressional Democrats than Republicans.
Reform
has a ring that appeals to Democrats traditionally; in this case, it had special appeal because
reform
was taken as a code word for shifting a bigger tax burden to business and closing tax loopholes. In fact, the model for Reagan’s package had been conceived by Democrats Bill Bradley and Richard Gephardt, back in 1982; Tip O’Neill had urged Walter Mondale to adopt it for his 1984 campaign, but Mondale foolishly declined. But the Bradley-Gephardt bill opened the way to a bipartisan coalition and to Reagan’s rough partnership with Rostenkowski, who got Reagan to promise not to interfere with his committee or to comment publicly until the work was done.

In short, the White House and Treasury Department harnessed themselves to Rostenkowski’s wagon. They squirmed while Rostenkowski took Reagan’s outline and revised it to give it Democratic flavor and to pick up Democratic votes. He raised the corporate tax rate from thirty-three to thirty-six percent and toughened depreciation rules on industry; he added a fourth personal tax bracket at thirty-eight percent (Reagan’s top bracket was thirty-five percent) and upped the capital gains tax two points; and he imposed a tough minimum tax on individuals and corporations to prevent them from paying no taxes through deals allowed under Reagan’s 1981 bill.

These changes sorely tried Republicans; they had not been happy with Reagan’s original plan and they were more unhappy with Rostenkowski’s. Moreover, Republicans felt shunted aside, excluded from helping write the tax bill because of Reagan’s reliance on Rostenkowski’s way of building support mainly among his own Democrats. This strained the coalition, and twice the administration nearly bailed out.

On October 24, the Treasury Department got wind that Rostenkowski had bartered away a $65 billion tax plum (over five years)—full federal tax deductions for state and local income taxes. With the tax bill dying, Rostenkowski used that concession to revive it—to corral New Yorkers and other big-state Democrats to construct a committee majority. Jim Baker had expected Rostenkowski to make only a partial concession, because Baker wanted some of that money to ease the tax burden on business and to appeal to moderate Republicans. Angered by Rostenkowski’s secret maneuver, Baker phoned to protest. He chased down Rostenkowski, traveling in North Carolina, and they got into a shouting match. The coalition was in peril.
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