Lessons from last tax reform
The impossible happened three decades ago. Congress passed and President Ronald Reagan signed into law the first and only rewrite of the federal income tax. This year, Republican leaders want to repeat the feat.
If history is an indication, the road to full-scale reform will be tortuous and lengthy. The Tax Reform Act of 1986 was debated in concept long before taking two years to wend its way through Congress. It died several times before public opinion and extraordinary political leadership revived it. Few veterans of ’86 believe Treasury Secretary Steven Mnuchin’s prediction that tax reform will be completed by this fall.
Tax reform is complicated, painful and personal by design. Popular breaks must be eliminated or diminished to pay for lower rates. The deeper the rate cuts, the more benefits need to be removed. Alternatively, an entirely new tax would have to be imposed or else deficits would have to be increased. No matter what, some will win while others lose. The losers will complain a lot. Every person, business and organization will be impacted.
What follows are lessons that the last tax reform can teach policymakers this time around.
Partisanship is the least of tax reform’s worries. The biggest fights in 1986 were between interests, not political parties. Dust-ups developed between high- and low-tax states; between manufacturers and service providers; and between companies that paid large amounts in taxes and those that paid little. The bill was dubbed the “Lobbyists’ Relief Act of 1986” because every organized group clamored for narrow relief.
To prevent this atomization, reform advocates highlighted notable supporters among business executives and focused on the plan’s overall fairness and contributions to economic growth. This split and weakened its many vocal opponents. They also asked taxpayers to overlook reform’s many tax hikes and concentrate on the bottom line—the effective tax rate, which is the amount actually paid in taxes after rates are reduced and preferences removed. Similar broad thinking is needed for reform to succeed again.
Cooperation and leadership are essential. Tax reform was launched in 1985 with a scene that’s almost unimaginable today: a televised speech by Reagan, a Republican, followed by a Democratic response by Dan Rostenkowski, the chairman of the House Ways and Means Committee, endorsing the president’s initiative. Rostenkowski even asked citizens to “Write Rosty” to support the idea. Seventyfive thousand letters and postcards soon arrived.
This bipartisanship wasn’t just for show. Reagan’s personal intervention was essential to saving reform from a Republican revolt in the House. Then as now, the congressional majorities were too small to permit one party to pass so contentious a measure alone. Cooperation was and is a mathematical necessity.
At the same time, competition between the parties can be good for reform. In the 1980s, the Republican administration offered two proposals, all but daring the Democratic House to come up with its own. The House rose to the challenge and managed to send a bill to the Republican-controlled Senate. Republicans there believed they couldn’t be perceived as falling short of the Democrats. So they pushed through their own version with Democratic help. A bill became law because neither party wanted to be blamed for allowing reform to die.
In other words, public opinion must strongly favor tax reform for so difficult a measure to pass. In the mid-1980s, polls showed that most citizens believed that “special interests” had infected the income tax, and they demanded that Congress cure the disease. Candidates amplified horror stories about the rich not paying taxes. The president and senior lawmakers made reform a top priority, turbocharging the effort.
The tax code is facing similar outrage in 2017. A recent Fox News poll found that 55 percent of voters think their taxes are too high and nearly three-quarters believe the tax system should be reformed this year. The problem is that somebody will pay more taxes so that others can pay less. When President Donald Trump calls for a tax cut, he may be signaling that he wants something less than comprehensive reform.
The fate of tax reform will rest on policymakers’ ability to find acceptable revenue raisers. In 1985 and 1986, multiple tax hikes were touted, defeated and ultimately replaced. The Ways and Means Committee had to jettison a plan to end the deduction for state and local tax payments before the legislation could advance. In the end, lawmakers chose to boost corporate taxes by $120 billion over five years and to transfer those savings to individuals. That was the tough-love trade-off arrived at through the harsh crucible of the legislative process.