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What Is the Tax Reform Act of 1993?
The Tax Reform Act of 1993 was a federal law passed by the 103rd Congress and signed into law by President Bill Clinton. The Act aimed to cut the federal deficit through increased taxes and reduced spending. It is also known as the Omnibus Budget Reconciliation Act of 1993.
The Tax Reform Act of 1993 was one of Clinton’s first tax packages, introducing significant changes in tax law for individuals and businesses. Clinton sought a mix of tax increases and spending reductions that would allow him to achieve the first balanced budget since 1969.
Key Takeaways
- The Tax Reform Act of 1993 was passed by the 103rd Congress and signed into law by President Bill Clinton.
- The act aimed to reduce the federal deficit through increased taxes and reduced spending and led to significant changes in tax law for individuals and businesses.
- In 1998, the federal government produced its first budget surplus since the 1960s.
Understanding the Tax Reform Act of 1993
The Tax Reform Act of 1993 contained several major provisions for individuals. It created a 36% and 39.6% marginal tax bracket for filers, eliminated the tax cap on Medicare taxes, increased taxes on Social Security benefits, and raised gasoline taxes by 4.3 cents per gallon. It also curtailed itemized deductions and raised the corporate tax rate to 35%.
The Act was also one of the first bills to retroactively raise taxes, effectively making the increases apply to taxpayer incomes from the beginning of the year. By 1998, the effects of the bill helped the U.S. government to produce a budget surplus, its first since 1969.
Special Considerations
The Tax Reform Act of 1993 contained several special provisions. It focused on areas such as education, small businesses, energy, and depreciation adjustments. Some of the provisions in the bill included:
Education and Training
The Tax Reform Act of 1993 made tax-exclusions of employer-provided educational assistance permanent after June 30, 1992. It also allowed a targeted job credit to incentivize hiring qualified participants in school-to-work programs.
Small Business
The Act gave small businesses a regular tax credit of 5% of their qualified investment in depreciable property. The credit also offset a percentage of the minimum tax and allowed a taxpayer that is not a corporation to exclude 50% of the gain of a sale of a small business stock held for more than five years from their gross income.
Business Deductions
One element of the act that remains in effect today is the limit on business deductions for meals. Prior to 1993, business people could deduct 80% of meals and entertainment. Now, business people are permitted no deduction for entertainment, and can deduct just 50% for business meals.
Impact of the Tax Reform Act
The Tax Reform Act of 1993 had a wide-ranging impact on tax collection. In 2006, U.S. Treasury analysts estimated tax receipts had increased by $42 billion annually (in 1992 dollars) in the four years following its passage. By 1998, the Federal government produced its first budget surplus in almost 30 years.
Economic models suggest the Act had a mildly negative impact on GDP growth, but this was minor compared to the relatively strong, overall economic growth of the period.
When Was the Last U.S. Tax Reform?
The most recent major overhaul of the U.S. tax code took place in 2017, when Congress passed the Tax Cuts and Jobs Act. The legislation included provisions to reduce tax for both individuals and businesses. TCJA was signed into law by President Donald Trump. It took effect on January 1, 2018.
What Is the Top Tax Rate?
Of the seven federal income tax brackets, the top tax rate is 37%.
What State Has the Highest Income Tax Rate in U.S.?
New York has the highest state income tax rate, at 10.9%. The next highest state income tax rates include New Jersey at 10.75%, Oregon at 9.9%, and Minnesota at 9.85%.
What States Have Lowest Taxes?
Nine states do not levy state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In the case of New Hampshire, while earned income isn’t taxed, interest and dividends are. In Washington, there is a capital gains tax for high earners.
The Bottom Line
The Tax Reform Act of 1993 aimed to cut the federal deficit by increasing taxes and reducing spending. It was signed into law by President Bill Clinton in 1993. The Act raised the top federal income tax rate to 39.6%, as well as many other taxes including corporate taxes, fuel taxes, and more. By 1998, it allowed Clinton’s administration to achieve the first balanced budget in three decades.