April 24, 2019

by Eric Smith, associate dean and associate professor

Two years ago, the Tax Cuts and Jobs Act of 2017 substantially overhauled the Internal Revenue Code.  Previous reform of this magnitude last occurred in the mid-1980s with promulgation of the Tax Reform Act of 1986.  The circumstances surrounding the enactment of these two pieces of legislation present a case study for contrasting political philosophies and underscore why the 1986 law lasted for more than 30 years and put taxpayers on notice that the 2017 law’s days may already be numbered. 

Deliberation leading up to the Tax Reform Act of 1986 occurred in the wake of the early 1980s recession.  Ronald Reagan was the president.  The Republicans controlled the Senate and the Democrats the House.  The political tone was one of begrudging cooperation.  All recognized that the Internal Revenue Code needed reform and both sides of the aisle were willing to compromise to achieve that greater good.  To be sure, scoring political points was key for both parties, but was not the end, in and of itself. 

On the day that President Reagan signed the Tax Reform Act into law, the New York Times ran the headline: “A Tax Bill for the Textbooks,” and commented that “[f]or years to come, students of politics will look to the odyssey of the new tax law as a prime example of how the American system of government gets things done.”  It was a protracted and belabored legislative process.  The House Democrats considered the initial reform bill (after 33 days of public hearings in the House Ways and Means Committee involving more than 450 witnesses), though without support from every party member. It also lacked support from Republicans, and the bill could have been dead on arrival, but for President Reagan, who promised that he would veto the bill if it arrived on his desk “without significant changes.”  Around the President’s promise, House Republicans coalesced and the bill passed the House.

The Republican-controlled Senate began consideration of its version of the reform bill with an agreement that all amendments would be revenue-neutral.  That is, any proposal that would lose revenue for the government, (e.g. a new deduction or credit) would have to be offset by a corresponding increase in revenue elsewhere (e.g. raising rates or eliminating another deduction or credit).  On this basis and after three weeks of floor debate, the Senate approved the bill on bipartisan terms: 97-3.  In a grudge match of political will and substantial give-and-take, 11 Senators and 11 House Representatives from both parties hashed out the final version of the bill during conference committee.  President Reagan signed the bill into law on October 22, 1986, surrounded by leaders from both parties.  He called it “the best antipoverty bill, the best pro-family measure and the best job-creation program ever to come out of the Congress of the United States.”

The setting for deliberation of the bills giving rise to the Tax Cuts and Jobs Act of 2017 was very different.  A Republican in the White House and a Republican-controlled Congress meant that impetus for negotiation and compromise was no longer present.  The political environment was polarized and even while most would agree that updates and revisions to the tax law were needed, motivation for reform seemed to be driven more by a desire to score a political win for the President leading up to the mid-term elections, and less to engage in meaningful tax reform that would last another thirty years.

Time was not a luxury lawmakers could enjoy in 2017.  The President set an arbitrary deadline for Congress to give the American people “a giant tax cut for Christmas.”  This put tax reform on a rushed and partisan path.  The 400-page House bill was introduced on Nov. 2, 2017.  It passed through the Ways and Means Committee on a party-line vote just a week later.  After another week, the House passed the bill without a single Democrat’s vote and with 13 Republicans voting against it.  Not a single hearing was held.

The Senate bill was similarly rushed through without a single hearing.  It passed out of the Senate Finance Committee on a straight party line and narrowly passed the Senate as a whole on a 51-49 vote.  No Democrat voted for the bill and one Republican, Bob Corker of Tennessee, voted against it.  After a hastened conference committee reconciled the two bills, the final version passed on December 15, 2017, and President Trump signed the bill into law on December 22, 2017, surrounded only by Republican lawmakers. 

The Tax Reform Act of 1986 was a bi-partisan effort that demanded sacrifice from all.  If a good compromise leaves nobody happy, it left lawmakers happy enough at the cooperative result.  No, it was not perfect, but it was good enough to remain largely intact for a generation.  The Tax Cuts and Jobs Act is feebly propped up and will likely come undone when the pendulum of political power returns to the Democrats.  Now that precedent is set for strictly partisan tax reform, the Democrats will be all too happy to engage in their own unilateral version, which will set the stage for a generation of uncertainty in the tax laws.

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