Reagan Says All Aboard

By Ed Magnuson

But his ark faces rough sailing on the tax hike

In a whirlwind of high-pressure politics, Ronald Reagan was waging the most perilous and difficult fight of his presidency. The stakes were high. If he failed to persuade Congress to pass a deficit-checking $99 billion three-year tax hike, the already swollen tide of red ink in the federal budget would rise even higher, swamping hopes for economic recovery and threatening deeper recession. Politically, a President who seemed to have a magic wand for passing major legislation would have shown that he could no longer control even his own party on Capitol Hill. The myth of the Great Communicator's persuasive powers would be punctured and his leadership gravely impaired.

No one was more aware of the risks than Reagan. He drafted a prime-time TV speech to be delivered this week if the House and Senate are ready for a showdown vote on a tax and spending-cuts package that no one really likes. He postponed a vacation trip to California so he could have chummy chats with more than 150 legislators in the Oval Office and at Camp David. He sent letters to some 5,000 business leaders across the nation, seeking their support. He had the Republican National Committee dispatch some 30,000 pleas in his name for local party leaders to rally behind him. He taped TV spots to be aired in 30 regions in a $400,000 ad campaign by the committee. Overzealous aides even hinted that Republican campaign funds might be withheld from G.O.P. legislators who bucked the President. Reagan disavowed the threats, but the warning hung in the air.

The tax increase, Reagan argued, is a bitter pill the nation must swallow to keep economic ills from worsening. He conceded at a Republican rally in Billings, Mont., that budget deficits are at the core of the problem. (Even if Congress approves the tax bill and adds $21 billion in fiscal 1983 revenue, the deficit is expected to be as high as $150 billion.) "For a conservative President like me to have to put his arms around a multibillion-dollar deficit is like holding your nose and embracing a pig," the President admitted. But the way to get a grip on the "slippery" deficit, he declared, was to raise revenues. It is "the price we have had to pay" to get more spending cuts through Congress. Reagan placed the blame on past Administrations, declaring, "If I could correct 40 years of fiscal irresponsibility in one year, I'd go back to show business as a magician. You know, that might be more fun, pulling rabbits out of a hat than jackasses out of the way in Washington."

Unlike last year, when he had to win the support of liberal and moderate Republican "Gypsy Moths" for his tax and spending cuts, Reagan this time was busy wooing rebellious conservatives. He quickly turned around Lyn Nofziger, his former political aide, who had instigated a meeting with New York Republican Congressman Jack Kemp and various New Right ideologues to plot against the tax increase. But Reagan could not budge Kemp, whose political future seems tied to the fate of the supply-side economics that he has long championed. "Jack," the President told him last week, "I wish you were with us on this." Said Kemp later: "We've just agreed to disagree."

The President's sales tactics were sorely tested as he tried to lure other Republican conservative Congressmen back into the fold. When eight of them were invited to the White House, Reagan was solemn. He passed up his usual jokes and stories but employed what one participant called "a lot of eye contact." Reagan claimed that he had no qualms about the bill and had not been talked into supporting it by aides. He insisted that only about 17% of the revenue in the package would come from tax increases (chiefly on cigarettes, telephone bills and airline tickets). The rest would come from closing tax loopholes and getting payment from tax evaders, mainly by withholding taxes on their interest and stock dividends. It was true, as he said in Montana, that "the tax bill . . . will not raise income taxes on the average American." If the bill does not pass, Reagan warned the balky Congressmen, the deficit would soar, and interest rates might reach "16% in November"--when all House members face reelection. That might be rough for them, but it would be "disastrous" for the economy, Reagan said. "He's a very persuasive man," observed Delaware Republican Thomas Evans after the meeting. "I could see some of us coming back on."

It appeared that Reagan had succeeded in keeping the conservative rebellion from spreading and had begun to turn the tide of opposition. His all-out fight had "slowed the erosion" of support for the bill, New York Republican Congressman Barber Conable told TIME Correspondent Neil MacNeill. "The rebellion isn't feeding on itself now. His strong intrusion has made people cautious."

The critical test would come in the House, where many Republicans were outraged at a Democratic tactic that the President had nothing to do with. After the Senate on July 23 had passed the tax bill without a single Democratic vote, House Democratic leaders refused to take the bill to the House floor. Instead, they went directly into a Senate-House conference committee, where the package was being prepared for probable consideration in both chambers this week. Most House Republicans refused to commit themselves to support a bill that they had not been allowed to shape.

The President's problem was compounded by the probability that House Democrats would not provide the votes for passage of the tax bill unless a majority of Republicans also bit the political bullet. The Democrats, in other words, were willing to push the bill over the top as long as the Republicans got the blame. That meant that Reagan needed support from about 100 of the 192 House Republicans. At week's end White House aides could count only 43 firmly committed and another 20 who seemed likely to join him. While the bill seemed safe in the Republican-controlled Senate, Reagan's friend, Nevada Senator Paul Laxalt, observed, "This is the most difficult legislative challenge this President has had to face. It's tight as hell." Still, Reagan's clout and the obvious need for new federal revenue may prove decisive. Reagan had one advantage in the struggle: many of the dissidents in his party came from the South and West, where he remains extremely popular with voters. With Reagan's prestige on the line, Representatives from those areas might hesitate to vote against him.

Incredibly, the race to forge a final bill before the House begins its August recess at the end of this week was stalled for two days by a deadlock over what Democrats claim was a mere $145 million out of some $17 billion in spending cuts that are also part of the package. At issue was a limitation on how much money a mother on welfare can earn without losing her benefits. Democrats, led by House Ways and Means Chairman Dan Rostenkowski, argued that the cap was needless and cruel. Republicans, led by Senate Finance Chairman Robert Dole, contended that lifting the cap actually would cost up to $1 billion and the limit was necessary. He was forcefully backed by Democratic Senator Russell Long of Louisiana, a longtime critic of welfare programs and former chairman of the Finance Committee. As tempers rose, Rostenkowski accused Dole in a telephone call of giving Long a virtual veto power in the conference committee. Angry, Dole hung up the phone.

The personality clashes were finally smoothed over in private meetings, and the vital deliberations of the committee resumed. The huge Ways and Means Committee room of the House was jammed with lobbyists, staff assistants and reporters as the conferees, eight from the House and seven from the Senate, agonized over each line of the Senate-passed bill. Dole presided at a 60-ft.-long walnut table engraved with a giant eagle. Working long into the nights, the legislators decided to:

-- Require the withholding for tax purposes of 10% of the income individuals earn in interest and dividends. Lobbyists for banks and brokerage houses fought the provision bitterly. But the IRS contends that much of this income is not reported now. Anyone earning less than $100 in such income would be exempt from the requirement, as well as many poor and elderly people. Estimated three-year gain in revenues: $12 billion.

-- Eliminate a tax change that would have cut deductions for business entertainment, including the celebrated "three-martini lunch," to only half of the amount spent. This was a victory for restaurant owners, who preferred the alternative adopted by the committee. It requires that restaurants with more than ten employees must estimate the tips waiters and waitresses receive and withhold part of the sum to meet their tax obligation. The IRS claims that 84% of tip income is never reported. Estimated revenue gain: $2.1 billion.

-- Require that any tax deductions claimed for medical expenses must exceed 5% of adjusted gross income, rather than the current 3%. In addition, the deduction of up to $150 for medical insurance now claimed by some 16 million taxpayers, regardless of overall medical expenses, was eliminated. Estimated revenue gain: $3.4 billion.

As the week drew to an end, the conferees struggled toward agreement on whether to close various loopholes benefiting businesses, including the "safe harbor" leasing of tax credits, and just how much cigarette, telephone and air-ticket taxes should be raised. Whatever the outcome, it was clear that Washington's well-heeled lobbyists generally were taking a beating. They will get another crack at the bill when final floor votes are taken on the package. But if Ronald Reagan prevails, the battered U.S. Treasury and the nation's precarious economy just might emerge as winners.

-- By Ed Magnuson.

Reported by Douglas Brew and Evan Thomas/ Washington

With reporting by Douglas Brew, Evan Thomas

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