A Flock of Fine-Tuned Favors

Even by Senate standards, the provision was a triumph of devious verbosity. It granted a special tax break on corporate debts “if such indebtedness was originally incurred before May 30, 1985, by a domestic corporation which was incorporated on March 18, 1983, in Delaware, and which indebtedness was subsequently transferred to a domestic affiliate which was incorporated on October 17, 1890, and whose principal place of business is in California . . .” and so on and on through 131 words. The purposes of this lush verbiage: 1) to make certain that the favor would go to just one company, Unocal, an oil giant that figured to escape $50 million in taxes by getting credits for interest payments on the $4.4 billion debt it piled up last year fighting off a takeover attempt; 2) to hide that fact behind a nearly impenetrable screen of words.

The maneuver failed: the full Senate two weeks ago knocked the benefit for Unocal out of the mammoth tax bill prepared by the Senate Finance Committee. But the Unocal provision was one of only a handful of such goodies that bit the dust. Some 170 others were in the 1,489-page bill, and late last week Senators struggled to add more breaks for specific constituents by floor vote.

The debate over special favors got caught up in a larger squabble that kept the Senate from passing the tax bill last week. When floor action began, Finance Committee Chairman Bob Packwood, the bill’s manager, tried to enforce a no-amendments stand in order to preserve the delicate balance of the measure, which lowers and simplifies tax rates in return for wholesale elimination of exemptions and deductions. But fellow Senators, their tempers frayed by two late-night sessions, offered 62 amendments, mostly general but minor. A few, however, were phrased in the confusing Unocal style to offer favors to specific companies, industries or projects (Walt Disney Productions, the makers of cellular telephones and the Houston Astrodome, to cite three examples from the Finance Committee bill). Finally, with lawmakers lining up to introduce 60-odd additional amendments, the Senate put off a final vote on the whole bill until Tuesday.

Special benefits have been a feature of tax law for generations. They were long known as Louis B. Mayer rules because one of the first applied only to that Hollywood mogul. Nowadays they go by the name of transition rules, because they mainly keep open for a while, and for specific companies, tax loopholes that Congress is closing for everybody else. Collectively, the transition rules proposed by the Finance Committee would cost the Federal Government $5.5 billion in lost taxes, a relative pittance compared with the $25 billion of special favors in the bill passed by the House last year.

Transition rules are especially prominent in the present tax bill, which, unlike previous legislation, sharply raises business taxes. Many companies are crying for relief, and Packwood believes that some have a case. Businesses would be “unfairly disadvantaged,” he explains, if they had planned long- term projects on the basis of present tax law and were to lose benefits while those projects are in midstream. The makers of commercial communications satellites, for example, are hardly to blame for the U.S. space disasters that have prevented them from getting the satellites launched. Some have been exempted from a provision ending investment tax credits on equipment that is not “placed in service” by a specific date.

But critics rightly complain that the decision on which transition rules get into a tax bill is made not on the merits of the claims but according to the ancient rule of who-you-know. Says one Senate aide: “People with access and power and money get them, and those without don’t.” In particular, the rules are prime trading currency that a broker like Packwood needs to win the support of key legislators, who are thus able to please powerful constituents. The present tax bill might never have cleared the Senate Finance Committee without rules benefiting a slew of projects in the New Orleans area, like the Riverwalk shopping-and-office development, that were added by ranking Democrat Russell Long of Louisiana.

On the Senate floor, the transition rules faced a rare attack, mounted by Ohio Democrat Howard Metzenbaum, who branded many of them “greed rules.” Metzenbaum got the Unocal rule deleted with Packwood’s support. One reason: Packwood had a score to settle with California Republican Pete Wilson, the rule’s co-sponsor. But otherwise, Senators were of a mind to add rather than subtract. Alaska Republican Ted Stevens complained that the privilege of inserting transition rules in the bill was being hogged by Finance Committee members.

Still more horse trading can be expected later in House-Senate conference. Some of the far more generous transition rules kneaded into the House version of the bill will doubtless be bartered away, but others are sure to be affirmed in order to keep the support of influential Representatives for a sweeping overhaul of the tax code. Some of the deliberate obfuscation may clear up, however; the Senate last week piously passed a nonbinding resolution asking that the conference committee report the reason for each transition rule adopted, exactly who will profit and by how much–information that is still lacking on many of the Senate’s own transition rules. If the conference committee complies, the unprecedented publicity might just make such blatant favors a bit harder to enact.