Hell Do It His Way

By GEORGE J. CHURCH

Reagan decides he does not want a compromise on tax reductions after all

Deal or fight? Ronald Reagan had pondered the question for weeks, as his aides and Democratic congressional leaders warily circled one another, trying to determine whether they could agree on some compromise tax-cutting bill. But last week the ritual came to an end, and the President made his decision: fight.

The bargaining process had brought the Democratic leaders who supposedly control the House of Representatives to meet him more than halfway. In particular, the Democrats had dropped their insistence on a one-year bill and offered him a reduction in income tax rates of 5% on Oct. 1 and another 10% on July 1,1982. But Reagan, after retreating from his original 30% plan, held firm for a 25% cut over three years, with the final 10% taking effect July 1, 1983. Moreover, as in the April battle that ended with Congress approving sweeping cuts in federal spending on domestic social programs, Reagan had found a conservative Democrat--in this case, Texas Congressman Kent Hance--to co-sponsor his bill, thus giving it a bipartisan coloration.

And so, late Thursday afternoon, Reagan descended the White House steps leading to the Rose Garden and stepped before waiting television cameras.

Flanked by Hance and leading Republicans, he announced his support of a bill to be introduced by the Texas Democrat and New York Congressman Barber Conable, ranking Republican on the tax-writing House Ways and Means Committee.

As Treasury Secretary Donald Regan stepped to the microphone to answer technical questions about the Administration's tax bill, the President, on his way out, whispered in Regan's ear: "Barber said, 'If we don't have them [the votes], we'll get them.' " To win those votes, however, the White House will have to wage an intense campaign. Reagan clearly recognized that in his opening gambit. In hopes of soothing widespread fears that the tax cuts will produce huge inflationary deficits, he reduced the savings to be offered to business, prompting some howls of betrayal from his own corporate supporters.

He also made what Hance interpreted as a pledge not to campaign in 1982 against any Democrat who voted for the tax bill.

Nonetheless, both sides expect the House floor vote, possibly in early July, to be close. The stakes are enormous: the prosperity of the economy, the prestige of the Administration and the effectiveness of the Democratic opposition.

It was, in fact, the prospect of a bruising battle, with an outcome neither side could predict, that prompted the long compromise negotiations. Those talks began fairly promisingly. Though the President had campaigned for the "10-10-10" plan--10% cuts in income tax rates in each of the next three years--Republican and Democratic congressional leaders and Treasury Secretary Regan readily agreed to reduce the initial cut to 5%, and to delay it from July 1 to Oct. 1, the start of a new fiscal year. That will hold down the deficit for fiscal 1981, which is already estimated to be as high as $65 billion.

They also agreed to add to the rate cuts a string of special tax-saving provisions advanced by the Democrats (see box).

That, however, was no big deal: the Administration would have probably introduced most of these provisions later anyway. The negotiations remained deadlocked, with the Republicans insisting that only deep, multiyear tax reductions could prompt the savings and investment needed for noninflationary growth and, on the other side, the Democrats arguing that any cuts going beyond one year would only bring more inflation. Party ideologies complicated the dispute. Republicans demanded across-the-board cuts that would reduce rates by the same percentage in every income bracket; Democrats saw that as a windfall for the rich and proposed "targeting" the cuts to favor middle-income taxpayers--specifically, people who earn $20,000 to $50,000 a year.

By the beginning of last week the impasse had hardened into one that only the President had a chance of breaking. To that end, Reagan invited five top Democratic congressional leaders to the White House for a Monday morning meeting. Senate Democratic Leader Robert Byrd suggested a "trigger" plan: 10% tax cuts would go into effect the second and third years only if inflation rates and deficits were declining.

Reagan flatly rejected it. House Majority Leader Jim Wright asked about a 5-5-5 plan. Reagan did not reply at all. House Speaker Thomas P. O'Neill grumpily dismissed the meeting as "a media event" and said of Reagan: "I felt he was setting us up."

As the Democrats were leaving the Cabinet Room, however, White House Chief of Staff James Baker took Ways and Means Committee Chairman Dan Rostenkowski aside and asked, "Don't close the door." Rostenkowski took that request as a signal that the President still wanted a compromise. He met with the Democratic members of his committee trying to arrange one. On Tuesday evening, he phoned Treasury Secretary Regan to report that the Democrats seemed ready to go beyond a one-year reduction--but not so far as three years. The Treasury Secretary replied unenthusiastically: "Well, I'm not sure we can work with you, Danny." On Wednesday morning, however, Presidential Counsellor Edwin Meese, breakfasting with reporters, said that the Administration would at least "look at" a two-year plan.

That afternoon, Rostenkowski produced one. He persuaded all 21 Democratic Ways and Means Committee members attending a special meeting to vote for a 5-10 cut and, moreover, to make it across the board rather than targeted. At that point the Democrats had agreed to give Reagan about three-quarters of what he wanted. But the White House had already decided, Meese notwithstanding, to go for the remaining onequarter.

Told by Baker about the 5-10 plan, Reagan replied: "That's not good enough." The next day, Reagan met with Republican congressional leaders to reassure waverers, and received strong pledges of support. More important, he closeted himself for 45 minutes in the Roosevelt Room with 30 of the 47 members of the Conservative Democratic Forum, often called the Boll Weevils because nearly all of them are Southerners. They hold the balance of power in the

House, and gave Reagan the votes he needed to win the budget fight.

The Boll Weevils fear big deficits and are thus not enthusiastic about major tax cuts: Reagan so far can count on support from no more than 20 of the 27 Democrats he will need to swing the vote for 5-10-10, assuming all House Republicans hold firm.

Even in the Republican-controlled Senate, the White House had been counting on canny Louisiana Democrat Russell Long to hold the line against a potential flood of damaging amendments; despite the blandishments of Congressional Liaison Chief Max Friedersdorf, Long's support in the absence of a compromise is no longer assured.

To win doubters over, Reagan by Thursday night had made several moves.

He agreed to a new investment tax credit for the rehabilitation of existing buildings, a move that could benefit the older --and mostly Democratic--cities of the Northeast and Midwest. He also pledged to reduce the windfall profits tax on people who receive royalties from oil wells.

Treasury Secretary Regan explained candidly: "There are a lot of votes in Louisiana, Oklahoma, Texas, Kansas"--the home states of legislators whom the Administration is wooing.

The President trimmed back the depreciation deductions offered to business to lower corporate taxes and spur investment. That change might reduce the tax savings to business by as much as $50 billion over the next five years. "Out of the blue . . . just doesn't make sense!" exclaimed Richard Rahn, chief economist of the U.S. Chamber of Commerce. Added Jack Albertine, president of the American Business Conference: "The Administration is gambling that business has to support the Reagan-Boll Weevil compromise. They're probably right." There were indications too that the Administration might restore some help to business.

Further, Reagan told the Boll Weevils: "There is no way I can look myself in the mirror and go out and campaign against you"--that is, against those conservative Democrats who vote for his tax bill. White House aides asserted later that the President had not intended a flat pledge to abstain from opposing their reelection, but the carrot certainly was dangled in front of them.

Passions are running high among the non-Southern Democrats too.

Their congressional leaders feel that the White House deliberately misled them into agreeing on more extensive tax cuts than they wanted, before the fight even began, in hopes of effecting a compromise that Reagan never had any intention of making. White House aides reply that the Democrats were so splintered on taxes that no fruitful negotiations were possible. The fight will just about reverse traditional party roles: the Democrats will warn stridently against inflationary deficits; the Republicans will argue that economic stagnation is a greater danger than red ink.

If the Administration loses, it will suffer a stunning reverse. If it wins, the victory could make Reagan's political momentum seem daunting. As for the economy, cutting taxes at all during a period of giant deficits and menacing inflation could be perilous. The risk increases with the length and depth of the reductions. The nation is about to try Reagan's experiment, but the question of how far to go promises a bitter battle. --By George J. Church. Reported by Douglas Brew and Neil MacNeil/Washihgton

With reporting by Douglas Brew, Neil MacNeil/Washihgton

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