A recent history of tax reform: It doesn't always go as planned
Fall isn't just about the trees changing color and pumpkin-spiced lattes this year. Major changes are potentially afoot in Washington.
On Thursday, Nov. 2, House Republicans are set to unveil what could be the most comprehensive tax reform effort we've seen in a long time. Based on a campaign pledge from President Trump to lower taxes for consumers and corporations alike, the GOP bill should feature a simplification of the individual tax code, along with a marginal tax-rate drop for middle-class Americans, as well as a major cut to the corporate income-tax rate, which currently peaks at 35%.
While tax reforms proposals may sound great on paper, they're not always a slam-dunk. Some work as planned, while other proposals fall flat on their face and fail to become law. Below are five such instances of congressional tax reform efforts in recent years and how they eventually panned out.
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act, or ARRA, was successfully passed in 2009 by a Congress and president looking to lessen the effects of the worst recession Americans had seen in seven decades. The bill was designed to protect jobs, as well as reinvest in the U.S. through infrastructure projects, education, and renewable energy.
In total, ARRA granted $288 billion in tax incentives, including payroll tax credits for workers, a one-year increase to the alternative minimum tax, and a provision that allowed companies to use current losses to offset profits from the previous five years, as opposed to the two years they'd typically been allowed. Despite the severity of the recession and the struggles of working Americans, the later-revised $831 billion bill wound up receiving virtually no support from Republicans. Some 177 of 188 GOP members in the House voted against it, along with all but three of the GOP's senators. Nevertheless, the ARRA passed, thanks in part to Democrats controlling the legislative branch of government, much as Republicans do now.
Though the results are debatable, the ARRA appears to have helped save jobs. In 2014, the White House proclaimed that it saved or created an average of 1.6 million jobs annually between 2009 and 2012. Of course, it may not have worked quickly enough for some critics, with unemployment exploding to as high as 10% in October 2009, an increase of more than 2% following the bill becoming law in January 2009.
2010 Tax Relief Act
One of the few times in recent memory where Democrats and Republicans worked together is the 2010 Tax Relief Act (or as it's officially known, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act), which passed in Dec. 2010.
The purpose of the 2010 Tax Relief Act was simple: extend two key Bush-era tax cuts that were about to expire. Republicans could get onboard with this idea since they supported Bush-era tax reductions, while Democrats were somewhat in favor as well considering that the U.S. economy was still in poor shape, and the bill came with extensions to certain ARRA provisions. It wound up passing with 81 of 100 possible "yea" votes in the Senate, and 277 "yea" votes in the House out of a possible 435.
This bill ended up extending the Bush-era cuts for an additional two years, which meant the 2001 income-tax rates, and dividend and capital gain rates, remained unchanged through 2012. It also extended some key ARRA provisions, including the treatment of the Earned Income Tax Credit, which helps tens of millions of low- and middle-income individuals and families. Working Americans probably also noticed a 2%, one-year reduction to their FICA payroll tax as a result of this bill becoming law. While costly, the 2010 Tax Relief Act is attributed with helping to save or create jobs during a rough patch for the U.S. economy.
American Taxpayer Relief Act of 2012
The last major tax reform bill to become law occurred on Jan. 2, 2013, when now-former President Barack Obama signed the American Taxpayer Relief Act (ATRA) into law. It is the last time we saw true bipartisan cooperation on tax reform in Congress.
Passed with a landslide vote of 89-8 in the Senate and 256-171 in the House, the ATRA was a needed reform given the expiration of the Bush-era tax cuts. Republicans and Democrats worked together to formulate a plan that allowed individuals and couples earning less than a respective $400,000 and $450,000 a year at the time to retain their Bush-era income-tax, capital gains, and dividend rates. Conversely, the highest income earners reverted to the pre-Bush-era marginal tax peak of 39.6%. In other words, Republicans got to keep lower tax rates for middle-class Americans, Democrats got to remove some of the tax breaks for the wealthy, and the two parties actually found a middle ground. Imagine that?
The income-tax schedule working Americans are familiar with today is a direct result of the ATRA, along with some inflation that's occurred since it was signed into law.
Tax Reform Act of 2014
Of course, not every reform plan made it to the president's desk. Some fell flat on their face, like the Tax Reform Act of 2014, which was a plan released by then-Ways and Means Committee Chairman Dave Camp. Though a rough outline of the plan was released in Feb. 2014, the official bill didn't reach Capitol Hill until Dec. 2014, in the waning weeks of 113th Congress.
The Camp plan, as it was also known, sought to simplify the individual tax brackets from the current seven, ranging from a low of 10% to a high of 39.6%, to just three (10%, 25%, and 35%). It would have also completely repealed the alternative minimum tax, eliminated the head of household filing status, and repealed the personal exemption while boosting the standard deduction. If this is all sounding a bit familiar, it's because the current Trump outline takes some of these provisions to heart.
The Tax Reform Act of 2014 primarily failed to gain traction because Congress was split between a GOP-controlled House and a Democrat-controlled Senate. It could also be argued that President Obama stood ready to veto any attempt to majorly overhaul the U.S. tax code after so recently passing the ATRA.
2016 House Republican Tax Reform Plan ("A Better Way")
As recently as last year, House Republicans attempted to bring major tax reforms to the table, again to no avail. Known as the "A Better Way" tax cuts, the GOP looked to reduce the number of individual income-tax brackets to three (12%, 25%, and 33%) from seven, while also altering capital gains and dividend tax rates, eliminating the personal exemption, and nearly doubling the standard deduction. This proposal also aimed to reduce the corporate income-tax rate to 20% from 35%.
Déjà vu, right? This sounds remarkably like the current Trump tax reform plan because it was spearheaded by Speaker of the House Paul Ryan (R-WI) last year. Ryan has been instrumental in putting together tax-reform legislation for the GOP over the years, so it's not surprising to see that a number of the proposals that Trump adopted were more or less included in last year's A Better Way proposal.
The failure of A Better Way can pretty much be summed up by having President Obama and Congress butting heads with one another. Though the GOP had a majority in both houses of Congress, there was next to no chance Obama would have signed any GOP tax legislation into law. And with virtually no support from Democrats, there was no way of overriding a presidential veto. Thus, A Better Way failed to gain traction.
What will be the fate of the GOP's tax reforms?
If we can learn anything about the recent history of tax reform in Washington, it's that bipartisan cooperation breeds a considerably higher chance of getting legislation passed, barring an economic crisis or recession. With no recession, and no sign of bipartisan cooperation anywhere to be found on Capitol Hill, the GOP could be facing an uphill battle in its efforts to overhaul the individual and corporate tax schedule.
We should hopefully know more about what that reform will entail shortly.