The President's Hardest Sell

By Evan Thomas

Only Ronald Reagan could turn a speech on tax reform into a roaring, foot- stomping pep rally. But last week at steamy Reynolds Coliseum in Raleigh, N.C., the President inspired cheerleaders in red miniskirts to strut and squeal as 14,000 North Carolina State students chanted, "U.S.A.! U.S.A. !" Reagan happily egged them on. "Do you want America's tax plan--a fair share for everyone?" he asked rhetorically. The bellowed affirmation brought an election-night grin. Said Reagan: "Something tells me I came to the right place."

Less heartening were the noises coming from Washington, where a steady procession of Congressmen complained that tax reform is the wrong issue at the wrong time. Returning from the barbecues and fish fries of the August recess, the lawmakers insisted that voters were more worried about America's mounting trade woes and the federal budget deficit.

As Reagan launched his much heralded "fall offensive" to reform the tax code, he was faced with the hardest political test of his presidency: how, as an incipient lame duck, to translate his immense personal popularity into congressional support for his policies. Where legislators once feared his power to go over their heads to the voters, many have now grown restive and defiant.

The President "doesn't give a damn" about the issues really bothering the people back home, huffed House Speaker Tip O'Neill of Massachusetts. Even members of the President's own party questioned his political agenda. "Tax reform is certainly not the top priority in Kansas," said Senator Nancy Kassebaum. "There are too many other emotional fights."

The popular clamor, according to most Congressmen, is for legis lation to protect industries--and jobs--threatened by foreign competition. Reagan, an avowed free trader, tried to deflate congressional pressure last week by threatening to retaliate against several countries, including Japan, if they do not curtail unfair trade barriers against various U.S. products, ranging from leather shoes to canned fruit. But Congress will not be easily assuaged. Declares Louisiana Democrat Buddy Roemer: "My district says that America is Uncle Sam, not Uncle Sucker. Lead, Mr. President, or get out of the way."

Protectionism is but one diversion from tax reform. Before the fiscal year , ends on Sept. 30, Congress is supposed to pass 13 appropriations bills, and the President has already vowed to veto any that are "budget busters." At the same time, Congress must raise the federal debt ceiling from $1.8 trillion to $2 trillion. While Democrats sit back and enjoy the show, conservatives will seize on the issue to fulminate against runaway spending. Foreign affairs will intrude as well. Congressional leaders are eager to challenge the Administration's policy of "constructive engagement" with South Africa. Hoping to beat Congress to the punch, Reagan planned to announce this week a series of executive actions that would have essentially the same effect as the economic sanctions being considered on Capitol Hill (see WORLD). If Reagan gets into a veto war with Congress, he risks alienating some of the support he needs for tax reform. It is also possible that Congress will be too drained by veto struggles to take on a massive tax bill before going home for Christmas. Nonetheless, the House Democratic leadership is pledged to try. Democrats cannot afford to be publicly seen as opposing tax reform, for fear of casting themselves as the party of special interests.

In fact, Reagan's best ally on Capitol Hill is a Democrat, House Ways and Means Chairman Dan Rostenkowski. Bypassed or outflanked by the White House on earlier tax bills, Rostenkowski has made tax reform a test of his own political macho. "Danny has his neck out as far as the President," explains Ways and Means Member Bill Frenzel, a Republican from Minnesota. "It's important for him to put the Democratic stamp on the bill."

Rostenkowski and the 35 members of his tax-writing committee holed up last weekend at a private retreat in Virginia to thrash out the tax issue while soliciting the advice of various experts. The group was joined by Treasury Secretary James Baker, who last week announced that the Administration would seek to knock out another $25 billion in tax breaks to make the President's tax plan "revenue neutral." Some of the changes will also make the package harder to pass. Chief among them: abolishing the tax-deferred 401(k) corporate pension programs that shelter the retirement income of some 20 million workers. The Administration also backed off its plan to substitute a tax deduction for child care for the existing $4,800-maximum tax credit. Such a step was perceived as unfair, since deductions favor upper-income taxpayers. (A deduction for a family that could afford a $15,000-a-year "nanny," for instance, would be worth $5,000, while it would save a day laborer with a child in a $1,500-a-year day-care center only $225.)

Rostenkowski will try to shape a bill that gives the Democrats credit for making tax reform more equitable to lower- and middle-income taxpayers. He may, for instance, seek to increase the top tax bracket for high-wage earners from 35% to 40%. The White House has vowed to oppose any tampering with its proposed rate structure (15%-25%-35%). By the time Congress is through fiddling, some lawmakers believe, the President's original proposal will be gutted, leaving only a minimum tax on individuals and corporations and some loophole tightening. The Treasury plan's most controversial step--abolishing the deduction for state and local taxes--is already under heavy attack.

Rostenkowski may at least be able to bring tax reform, however watered down, to the House floor for a vote by year's end. Under a "closed rule," the House can ban amendments and force an up-or-down vote without protracted debate. Nonetheless, O'Neill predicts that House passage this year will come only with "great difficulty."

Tax reform is likely to have an even tougher go in the Senate. There the rules are more relaxed: a single Senator can tie up debate for days with almost unlimited amendments. What is more, the Senate Republican leadership is cool to tax reform. In part to further his own presidential ambitions for 1988, Senate Majority Leader Robert Dole is more determined to lead the fight to cut federal spending than to help Reagan with his pet cause. Senate Finance Committee Chairman Robert Packwood is feeling the pressure from special- interest groups, notably the timber industry back home in Oregon. The Senate almost surely will not turn to tax reform until 1986, an election year for 22 of the chamber's 53 Republicans. The need to fatten campaign chests makes those Senators prime targets for well-heeled lobbying groups scrambling to preserve cherished loopholes.

The White House is trying hard to convince Senate Republicans that if they do not hang together with the Administration on tax reform, they risk hanging separately at the polls. The President's men point out that Reagan's popularity remains astonishingly high. While the last four reelected Presidents (Nixon, Johnson, Eisenhower and Truman) dropped an average of 13 points in the polls during the first year of their second term, Reagan's already high approval rating rose from 62% in January to 65% this month, the highest ever during a comparable period for any President since World War II. Furthermore, opinion surveys show broad public support for the concept of tax reform.

Popular enthusiasm wanes, however, once voters are made to focus on specific provisions that would strip them of long-prized deductions. Congress is more attuned to the high-pitched howls of organized detractors than the silent nods of ordinary citizens.

No one, of course, can turn silent nods into letter-writing campaigns like Ronald Reagan. On the stump last week in Independence, Mo., hometown of Harry ("Give 'em Hell") Truman, the President goaded his adoring followers to rebel against the lobbying groups that "share a kind of self-righteous self- interest" and dwell in "fat city." Yet even Reagan's closest advisers admit that it was far easier for him to win re-election than it will be for him to intimidate balky Congressmen into doing his bidding. Winning the battle of tax reform, concedes White House Pollster Richard Wirthlin, "will challenge the President's powers of communication as much as anything he has ever done."

With reporting by ! Sam Allis and Barrett Seaman/Washington