Juggling Budget Numbers and Votes: How the Tax Reform Act of 1986 Made It Through the Finance Committee

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Tax Legislation

In the first of three articles that detail the congressional maneuvering required for passage of the Tax Reform Act of 1986, then Senate Finance Committee Chairman Bob Packwood (R-Ore.) explains how he formed a bipartisan “core group” of senators who worked behind closed doors to fashion a bill the panel would pass unanimously. The measure the committee received in the spring of 1986 had barely passed the House, Packwood writes. “There was no enthusiasm for what we were doing.”

Bob Packwood

By Bob Packwood

Former Sen. Bob Packwood (R-Ore.) was chairman of the Finance Committee from 1985 to 1987.

The concept of tax reform is quite simple. If you assume that a country has an income of $1,000 and that the government needs $100 to run, then a 10 percent tax will produce the $100 needed.

But now suppose that the government also allows taxpayers to take all kinds of deductions for things like charitable contributions and home mortgage interest. After all of the deductions are taken what remains is called the “taxable income.” In our hypothetical country, let us say that is now only $500. If the government still needs $100 to run, the tax rate now has to be 20 percent to raise the needed funds.

Early in 1985, the House Ways and Means Committee started having extensive public hearings on tax reform. They were numerous and extended over a long period of time, giving opponents of tax reform plenty of opportunity to gather, plot, organize and attempt to kill the bill.

As a result, not long after the bill entered the floor of the House it had to be pulled before it could fail. But President Ronald Reagan contacted the Republicans and urged them to vote for the bill, saying that while he would veto it in its current form the Senate should have a chance to work on it.

Acquiescing to their party leader, Republicans rallied and the bill passed the House; albeit by a voice vote—no one wanted their fingerprints on it.

In the spring of 1986, the Senate Finance Committee started working on the bill sent to us by the House. There was no enthusiasm for what we were doing. It wasn't big enough. Not strong enough. There was no grandeur. Support dwindled to the point that at noon on Friday, April 18, 1986, I exercised the chairman’s prerogative and adjourned the committee, saying that we were permanently done with this bill!

Friday, April 18—Noon

I was dispirited. I asked my chief of staff, Bill Diefenderfer, to go to lunch with me at the Irish Times. Bouyed by two pitchers of beer, my spirits improved and I said, “To hell with it. If they want tax reform, I'll give ‘em tax reform!”

Balancing the Numbers
Friday, April 18—1:30 p.m

I called David H. Brockway, chief of staff of the Joint Tax Committee. I asked him to come back with a bill with a 25 percent top rate. He said we would have to get rid of the mortgage interest deduction. I said what about 26 percent or 27 percent.

Friday, April 18—2:30 p.m

I met with Treasury Secretary James Baker and his principal aide, Undersecretary of the Treasury Richard Darman. I had nothing but theory to give them at the moment. They, of course, liked the theory, but more or less said “where do we go from here?”

Tuesday, April 22—6 p.m

Brockway stopped at the office with his figures. His briefing gave me the outlines of what I needed to present to the committee.

Thursday, April 24—7:30 a.m

I went over the figures once more. I asked myself how low a tax rate we could get, and what were the major deductions we would have to eliminate to get there? Over and over and over, I played with numbers balancing the attraction of the low rates versus the opposition we would get from eliminating certain deductions. I wanted a balance that would achieve the following:

  •  Bring Democrats onboard by getting rid of loopholes. This would bring in lots of money.
  •  Bring the Republicans onboard by using the money raised to lower rates.
  •  Bring economists, editorialists and others onboard who wanted to both get rid of deductions and lower rates. They would also applaud the simplicity of the plan, an added bonus.

Diary, Thursday, April 24—9:30 a.m

I called the committee together and presented the outline of what was possible. I still had no bill to show them, just concepts: “[Sen. John] Chafee [R-R.I.] thought it was wonderful. [Sen. Lloyd] Bentsen [D-Texas] spoke approvingly. [Sen. “Bill”] Bradley [D-N.J.] spoke eloquently and forcefully. [Sen. Jack] Danforth [R-Mo.] said it was the only chance for reform. [Sen. Malcolm] Wallop [R-Wyo.] said he liked the idea.”

Diary, Thursday, April 24—1:30 p.m

After the meeting, as I worked I recalled how the House had almost floundered because of the yearlong public meetings allowing time for opponents to gather and oppose. They were already organized and I didn't want to give them time to try and kill the Senate bill as well. If we wanted to pass this bill, it would have to be bipartisan, and work would need to be done secretly and quickly. I thought to myself, how can this be done?

A small closed meeting with a bipartisan group of senators was our only chance. I wanted the intellectual leaders of the committee on both sides. If I got them with me, I’d have the rest of the committee.

Core Group

Over the weekend, I made some calls to explain what I was thinking. On the Democratic side, Patrick Moynihan, of New York and my closest friend in the Democratic Party, Bradley, the guru of tax reform in the Senate, and George Mitchell, of Maine, a relatively newer member of the committee, but one I found so sharp that you could see “leadership” written all over him. On the Republican side, Danforth and Chafee, both liberal Republicans, and Wallop, a very conservative Republican and well regarded by other conservatives.

I asked each if they would be willing to participate in the group that would craft this bill. They all said yes, and I said, “Let's start Tuesday morning.”

Tuesday, April 29—7:30 a.m

To stay ahead of the curve, starting Tuesday, April 29, I met with staff at 7:30. We discussed the details of whatever portions of the bill were to be discussed with the core group of the committee I had put together. It was a schedule we would follow every day for the next week.

Tuesday, April 29—8:30 a.m

First meeting of the core group. We agreed that from time to time we might invite some other senator in if we wanted him for a specific purpose, but that the seven of us would form the loyal band. We decided that if any four of us could agree on something to be put in the bill, all of us would agree. A smart decision, and one never used unfairly, I don’t recall that there was ever a vote that broke four Republicans and three Democrats. I do, however, remember a couple of votes where I fell in the minority.

Diary, Tuesday, April 29—6:45 p.m

“Met with Baker and Dick Darman, Bill Diefenderfer …. Darman loves the plan. Baker is worried about the elimination of passive losses and what about those oil rigs and what about those limited partnerships in drilling for oil. Bill and I in essence said, oh, Jim, shut up. Here we are talking to the Treasury Secretary—shut up. Here you’ve got a plan. All we need you to say is we think it is wonderful. We’ll get it to the President. Jim, we’re going to wrap this up by Sunday. Don’t [f**k] it up. … You put in one pro forma appearance before the Senate Finance Committee Republicans and get your little tail out to Tokyo or wherever it is the President is going to be meeting. And leave Darman here to take care of the strategy and the details and we’ll have this done before you get back, but don’t start niggling and quibbling over minuscule details. Well they left pretty happy because it is a victory if we get it. It is like [British politician Benjamin] Disraeli and the Corn Laws. It doesn’t matter what you win. It is that you won.”

Diary, Wednesday, April 30—8:30 a.m

“I’ve still got to solve Bentsen’s problem about passive losses …. With that I can get Lloyd.” I can go to a 27 percent tax on capital gains and hang on to Malcolm Wallop. Beyond that, he's got to have capital gains and if we have capital gains, that screws it up entirely in terms of income distribution.

Diary, Wednesday, April 30—7:30 p.m

“… Talked with Norm Winningstad [founder of Floating Point Systems Inc.] who is terribly upset about the elimination of capital gains and had a note from Tom Bruggere [founder of Mentor Graphics Inc.]. … He is terribly upset about the elimination of capital gains … two of our more successful high-tech firms. God, leadership exacts a toll, but I don’t mind the flak. I’ll mind it if I can’t get the result. I’m willing to stop the buck here, but I want to get a result.”

Diary, Thursday, May 1—8:30 a.m

“A downer—The core group. Boy, was it exciting. Moynihan, Bradley, Chafee, Danforth, Wallop, Mitchell—we’re on our way. We are agreed and with Bentsen onboard we were sensational. Lloyd came in and said he couldn’t agree to the passive income provisions. Nobody said a word. There were 20 seconds of silence. Lloyd said, boy, I wished I had never come in. It did take all of the wind out of our sails. I went from Mt. Everest to Death Valley in 20 seconds.”

The problem with what Bentsen wants is two-fold:

  •  In this bill we have eliminated for everybody the very provision that Lloyd wants us to put back in solely for oil and gas.
  •  If we put it back in for oil and gas alone, it isn't a big revenue loser. If all the others who are losing this kind of provision get wind of it, they will want to be included again and that loses so much money that the bill would be dead.

Assurance From Rostenkowski
Thursday, May 1—2 p.m

If the Senate agreed on our version of the bill, we would need to come together with the House to create one document to pass both chambers. Rep. Dan Rostenkowski (D-Ill.) was chairman of the House Ways and Means Committee. It would be Rostenkowski that I would work with in conference. I had never worked closely with him before and didn’t know what to expect. He quelled some of my fears by making a generous gesture.

Diary, Thursday, May 1—2 p.m

“Back again to tax reform in closed session. Was interrupted by a phone call from Danny Rostenkowski. Bless his soul. He said, ‘Pal, I’ve been thinking of coming over there, without fanfare, without press, just to say I’ve been through it. I know every day you go through troughs and you’re on hills and I’ve been bleeding for you but I think what you’ve got in terms of tax reform is the best thing this Congress has seen in ten years. You get that through the Senate and between the two of us, we’re going to put out a bill that for a generation or longer America will look to as a pinnacle.’ God, I appreciated it.”

Diary, Friday, May 2—7:30 a.m

“Brockway, et al. God are these sessions valuable for me so I can be one jump ahead of the core group.”

Diary, Friday, May 2—8:30 a.m

“The core group. And are these sessions valuable, so that the core group can be one jump ahead of everybody else.”

Diary, Friday, May 2—10:30 a.m

“Back to the backroom with all of the members …. I ducked into Bill D[iefenderfer]’s office to call Jack Rosenthal at The New York Times. He is my old friend from Grant High School. I said, Jack, do you have any idea what we’re doing on tax reform. He said, well, kind of a vague idea and I sensed that the vague idea he had was where we were several weeks ago and he didn’t like what we were doing, but was polite enough he didn’t want to say it. I said, Jack, I don’t know if you are up to speed, but as I recall from your editorials you like Bradley-Gephardt [the tax simplification plan previously proposed by Bradley and Rep. Richard Gephardt (D-Mo.)]. What we are now working on is Bradley-Gephardt and I need some help from The New York Times with a good editorial. He said, well, I first need to find out from my people what it is you’re doing. I said fine. If you need to find out anything here, call Bill Diefenderfer and here’s the number. I then called Steve Rosenfeld at The Washington Post and told him roughly the same thing. He was a little more up to speed in what we’re doing, but not much more. He didn’t seem too receptive, but at least I made my pitch.”

Shortly thereafter, “Bill D. had gotten back to me and said he had talked with Rosenthal. They are going to do a New York Times editorial Sunday, called Packwood-Bradley-Gephardt. I think even Bill was surprised that I was able to pull that off.”

The staff at 7:30 and the core group at 8:30 continued to meet in my office in secret every morning. The open Finance Committee meetings followed later, but basically all the full committee did was mark time while the core committee worked. Even though we tried to keep our work secret, there are no secrets in Washington. Word was getting out. You could tell it by turnout of spectators at the committee meetings. On Monday, attendance was spare. By Friday, so many people jammed into the committee room that speakers had to be set up in the hallway so the overflow could hear.

Late Friday afternoon I announced, “We’re done for the day. In fact we’re done for the weekend. The Finance Committee is not going to meet this weekend. It’s too nice of a day. You all ought to be out sailing or playing golf.” Raucous cheers. I said, “We’ll see you all next week.”

I told everyone except the core group. I told them we would meet Saturday. I didn’t want the other committee members, or anybody else, to know we planned to meet however.

Not a lobbyist or committee member, other than the core group, showed up Saturday. A success.

Oil Exception

It was on that long, hot day that we made all the final decisions. Brockway needed two days to get the final draft back to us and we took that and touched it up knowing we could finish by Tuesday or Wednesday.

I thought we were done—but not quite—the oilies wanted another bite of the apple.

Diary, Tuesday, May 6—2:30 p.m

“The oil state Senators led by [David] Boren [D-Okla.], Bentsen, Russell Long [D-La.], and accompanied by Bob Dole [R-Kan.] and [John] Heinz [R-Pa.] … joined together to [Max] Baucus [D-Mont.], [David] Pryor [D-Ark.], and Malcolm Wallop. Just enough to demand that we give an exception for working interest for oil.”

We’d worked hard to eliminate this type of exception for all other businesses. They wanted it back for oil and gas.

I had no doubt I could beat the oilies in committee at worst 12-8, probably 13-7, and if I leaned on people 14-6.

“… they were willing to give away immense quantities of money to get their little working interest provision which costs $700 million if you give it to those who are active in the oil industry or $1.4 billion if you allow non-active partners …. I could see this whole thing becoming unraveled. We were going to give up great things for small things. We were going to give up closing loopholes worth $50 billion, lower rates, better corporate depreciation and a lower corporate rate. Everything for the sake of $1.4 billion and I resolved that at this stage the time for compromise had come. I called Lloyd Bentsen and said, Lloyd, let me lay out a deal for you. You get working interests and you support the rest of the package. He said it sounded like a good deal to him.”

He then added as an aside, “If there’s a vote on this, Bob, I’m sure I can count on your vote.” I said, “Lloyd, you absolutely cannot count on my vote. I’m going to vote against it, but I will get you votes to pass it.”

IRAs the Achilles' Heel

I knew—or at least sensed—something that the other members hadn't yet grasped. Our problem wasn't going to be in committee. The bill would pass. The problem would come on the floor. Our Achilles’ heel in this bill was going to be the individual retirement accounts—IRAs.

Through several years of research, we had discovered that IRAs didn't increase the total savings in the country, they simply resulted in upper-middle- and upper-income people shifting their savings to the slightly more profitable, tax-preferred individual retirement account.

IRAs were immensely popular and I knew that on the floor there would be a very close vote to restore what we had taken out. If this happened and IRAs remained the same, our bill would lose so much money it would die. To keep IRAs out, I needed the oilies in. I made the trade.

Diary, Tuesday, May 6—8 p.m

“I called the members together at 8:00 p.m. in the backroom and we stayed in that backroom until 11:30 p.m.” It was in this three-and-a-half-hour period that all of the final important decisions were made.

“We gradually hammered it down to the end. It's clear. We voted on working interest in the group. I voted with Bradley. The oil people won 11-9, fortunately, because we would have had no deal without them. I had the best of all possible worlds. I was opposed to them and yet they won so we could have the deal. I rapped the gavel and we went out to the committee room.”

Just before the final vote started, however, Sen. Mitchell—one of the strongest members of my cabal—wanted to make a statement:

Mr. Chairman, I think it ought to be clear that what we are doing here is establishing one rule for every American business, every American interest except oil and gas, and then a special rule for those in the oil and gas business. An American who invests in a project involving real estate, under legal circumstances identical to those with another person who invests in oil and gas, will be treated differently and to his disadvantage. An American who invests in an extractive industry, an American who invests in any other business but oil and gas, even though under identical circumstances, will be treated in a wholly different fashion, and those who invest in oil and gas will be treated in a preferential fashion even though the circumstances are identical.I can see no justification for that. No rational basis has been offered. No standards by which such a distinction can be made has been suggested. All we are saying is that we are going to give special treatment to one industry and one category of persons and everybody else will be treated differently.

Of course Mitchell was right. Without speaking to any of the core group of six who so fully supported me, I made a deal with Bentsen and I had yet to explain to the others why. They would later learn my reasons, but I couldn’t tell them yet.

Committee Unanimous

After 11 secret meetings over seven days, finally final passage came—20-0!

When the bill passes, the room erupts in applause, then a long standing ovation. Even the press applauding and standing. I have never seen that in my career before. You could see the pride in the senators' faces because of what they had accomplished.

We concluded with a champagne party in Diefenderfer’s office. At the celebratory party, while having champagne, Darman placed a phone call to Treasury Secretary Baker, who was in Tokyo with Reagan at one of those multination economic meetings. I, of course, heard only Darman’s end of the conversation:

Jim, just tell him to shut up. He’s going to like this bill, but he’s got friends who aren’t going to like a lot of this bill. Don’t let them get to him before I have a chance to get to you and explain everything that has happened. Let me emphasize again. He is going to like this bill.

We reduced the top corporate rate from 48 percent to 34 percent, and at the same time raised taxes on business by about $140 billion—with the support of 80 percent of the business community.

Using the money raised from business, we lowered the top personal rate from 50 percent to 27 percent.

We released from any personal tax liability about 6 million low-income people.

And the bill was revenue neutral.

Not a bad result for only eight days work.

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