Tax Reform Act of 1993

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.

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 percent 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.