The 1986 Tax Reform Effort Shows that Republicans Have a Tough Road Ahead
By Rob Oldham
If there is one thing that unites Republicans as different as Donald Trump, Paul Ryan (WI), and Susan Collins (ME), it is a general sense that taxes should be lower than their current levels. For all its changes on social issues and foreign policy over the years, tax cuts have consistently been the GOP’s guiding light. We are about to see that consensus tested though. President Trump and the Big Six—administration and congressional leaders on tax policy—have proposed a tax reform bill on a scale that has not been seriously considered since Ronald Reagan and a divided Congress pushed through a reform bill in 1986.
With the endorsement of the Big Six and the likely passage of a budget resolution with reconciliation instructions allowing 50 senators and Vice President Mike Pence to advance the bill, the Republican tax plan is developing a sense of inevitability around it. After bungling the long-promised Affordable Care Act repeal, a losing effort on tax reform would seriously harm congressional Republicans’ credibility with the party faithful and may even trigger a revolt. If there was ever a time for Ryan and Mitch McConnell to get their caucuses together, it is now.
Despite the clear political incentives for Trump and congressional Republicans to deliver, the bill that the president introduced faces trouble ahead. While it’s likely that Republicans will pass some bill that affects taxation, a major tax reform bill is a long shot. Reforming the tax code usually means decreasing tax expenditures and closing loopholes in individual and corporate taxes while lowering rates. Unfortunately for congressional Republicans, it is only the lower rates they agree on.
Once the thorny issue of loopholes comes up, members will find it difficult to come to a consensus. In fact, the 1986 Reagan bill is essentially the only time Congress has ever been able to enact a loophole closing and rate lowering tax reform measure. As recounted in Showdown at Gucci Gulch (Vintage, 1988), the 1986 bill was nothing short of a miracle. What started out as a “ideal tax plan” from then-Treasury Secretary Don Regan was morphed by politics from the Reagan administration, the Democratic-controlled House, and the Republican-controlled Senate until it eventually limped across the finish line and became law.
The final product established a two-rate structure for individuals, a 34 percent rate for corporations, and repealed individual deductions for state and local sales taxes and corporate tax breaks like the investment tax credit. However, as Gulch authors Jeffrey Birnbaum and Alan Murray note, the bill was a hodgepodge and groups with clout, like the oil and gas industry, beat out those with less influence to keep the loopholes that mattered to them. Furthermore, the two-rate structure was a sham as the bill included a surtax or “phantom rate” that was applied to top earners. Still, it did end many loopholes and helped ensure that companies and the wealthy couldn’t avoid their tax bills altogether. Moreover, many members bucked lobbyists and parochial interests from their districts to support a bill that was in the general interest. Political scientists like David Mayhew have found that the general interest is usually not what sways members of Congress to support bills. According to tax scholars with similarly pessimistic views on the incentives for legislative action, the 1986 bill was an anomaly and tax policy will usually be made incrementally rather than in sweeping changes.
In her essay on tax reform in The Evolving Congress (Congressional Research Service, 2014), Jane Gravelle lists the conditions necessary for a reform bill to pass. The first is strong presidential leadership which ideally should come from a popular president. Reagan was extremely popular in 1985 and 1986, having just been re-elected in a 49-state landslide (it wasn’t until after the tax reform effort that the Iran-Contra scandal reared its head and his numbers began to slide). Although Reagan was not very immersed in the details of the plan, he did provide mostly consistent public support and gave tax reform major billing in his 1985 State of the Union. The second condition is that the first draft should be free from political pressures. This allows the draft to set the agenda and use popular provisions like the state and local tax deductions as bargaining chips to garner support. Don Regan led the Treasury Department in drafting the “ideal tax plan” and his successor as Treasury Secretary, James Baker, also put together draft legislation that was mostly free from political pressure. The third condition is that the plan must be large and sweeping enough that it looks like “real reform.” This gives members an incentive to support it as they do not want to be seen as beholden to special interests. The 1986 bill certainly did this, especially once Senate Finance Chairman Bob Packwood (R-OR) introduced the radical two-rate structure that showed senators who had been more focused on preserving their slice of the pie that reform was serious business.
The 1986 bill also benefitted from the fact that control of Congress was split between Democrats and Republicans, and the parties were not yet so polarized that they could not work together. A particularly strong alliance formed between relatively liberal tax reformers like Senator Bill Bradley (D-NJ) and Republican adherents to supply-side economics who believed that lower rates must be achieved at any cost, even eliminating popular tax breaks. The fact that both parties had an interest in seeing the bill passed encouraged its shepherds to face the wrath of special interests in unison rather than try to score political points by blaming the other side. It also showed that, despite relatively weak public support for tax reform (which persists today), members do not want to oppose a bill that pings special interests in favor of the everyday taxpayer.
So, keeping in mind the lessons of 1986, what should we expect in 2017 or 2018? The good news for Republicans is that tax reform was on the agenda during the Obama presidency and, thus, has received some attention from political elites. During his second term Obama wanted to work on reforming corporate loopholes while Ways and Means Chairman Dave Camp (R-MI) was interested in dropping the top rate into the 28 to 25 percent range by eliminating a large swath of individual loopholes. However, the two proposals mostly stayed in their respective partisan enclaves and never gained traction. The troubles of tax reform in the Obama years shows one of the key weaknesses for the Trump plan: a lack of bipartisan consensus on what to do. Right now, Republicans are focused on giving corporations a tax cut. That is not in the interest of congressional Democrats, which means the GOP must use the reconciliation process to pass a bill on partisan lines. The last time this happened was early in the George W. Bush administration, an effort that focused more on tax rate reductions than tax code reforms.
So, if the partisan roadblock can be bypassed with reconciliation, what about the other 1986 conditions?
President Trump is historically unpopular at this point in his term, so that likely won’t boost the chances of reform passing. The effort might be hurt by the optics of an extremely wealthy president is trying to pass a bill that could give him or members of his family tax cuts. The worry that the current proposal is too favorable to the rich already has Republicans talking about keeping the top rate above 39 percent. Trump’s unpopularity could feed into the already lackluster support for tax reform. This is not necessarily detrimental (remember, it was not popular in 1986 either), but having public opinion firmly behind a legislative initiative is never a bad thing.
The second condition for passing the bill is that it be drafted away from political pressures. The contents of the Trump bill are still somewhat unknown as the Republicans only released a framework, which is specific in some areas and lacking detail in others. So, we cannot make a judgment on the second condition quite yet. One of the most difficult political sells for Republicans will be the elimination or limitation of the deduction for state and local taxes. These are particularly important for Republicans from high tax states like New York and California. Their appeal goes beyond that though. When working on the 1986 bill, a New York coalition to preserve the state and local incentives teamed up with oil and gas interests from Texas to change the bill when it was going through the House. The coalition gained the support of other members too because, as it turned out, the state and local incentives had widespread support, even in low tax states. The coalition received 208 pledges from members who said they would not vote for a bill that eliminated the deduction. If widespread opposition like this emerges to provisions in the general framework or in the actual bill, it could spell doom for reform. One of the difficulties for tax reform that Gravelle mentioned was that the 1986 bill eliminated most of the low-hanging fruit for loopholes. The ones that remain are popular and will probably have fierce advocates organizing opposition against their repeal.
The third condition is that the bill is wide-ranging enough and appears to be “real reform” instead of a thinly-veiled effort to benefit some narrow constituency. This will force members to either vote for it or incur the wrath of the average taxpayer. As of now, it does not appear that the Trump bill has that quality. For one thing, Republicans have very different ideas about what they want out of the bill. Bob Corker (R-TN), who is retiring after the 2018 elections, has said that he will not support any bill that increases the deficit, a tough sell when initial estimates show the Trump proposal losing trillions. Another recalcitrant Republican is Kentucky Senator Rand Paul, who claims the Trump plan does not help middle-class voters enough. He showed on the Graham-Cassidy rendition of the ACA repeal that he is not afraid to buck his party, even when it comes to long-standing goals or core principles like tax reform. Arizona Senator John McCain is demanding that the bill go through regular order and might even lean toward a bipartisan package rather than the 50-vote deal that Republican leaders appear to be eyeing. He opposed the Bush tax cuts in the early 2000s, so his vote is by no means guaranteed. We have not heard much from moderates like Susan Collins (ME) and Lisa Murkowski (AK), both of who come from poorer states and might not be keen on a bill that favors the rich. Whatever these individual senators might be thinking, the bill has clearly not yet reached the point of inevitability that the 1986 bill did when Packwood released his two-rate structure.
If history is any guide, the Trump tax reform plan has rough sailing ahead. It seems more likely that Republicans use the reconciliation process to enact tax cuts without targeting many of the deductions or corporate loopholes that could offset some of the revenue losses. If anything, 1986 showed us what a herculean effort it is to overhaul the tax code. It’s not impossible, but Republicans will probably need to give more thought to selling the effort to skeptical members and the public before they are able to pass the most sweeping changes the tax code has seen in over 30 years. It might take two years (or two terms and a few more seats in the Senate) before President Trump is able to achieve anything like Ronald Reagan and the 99th Congress did.
Rob Oldham is a political writer interested in legislative politics at the state and national levels.