What Is the Tax Reform Act of 1993?

The Tax Reform Act of 1993 was a federal law that was enacted by the 103rd United States Congress and signed into law by then-President Bill Clinton. The Act was aimed at reducing the federal deficit through a combination of increased taxes and reduced spending.

The Tax Reform Act of 1993 was one of then-President Bill Clinton’s first tax packages; it led to a lot of significant changes in tax law for both individuals and businesses. Clinton sought a mix of tax increases and spending reductions that would cut the deficit in half by 1997. This piece of legislation is also referred to as the Revenue Reconciliation Act of 1993.

Key Takeaways

  • The Tax Reform Act of 1993 was a federal law that was enacted by the 103rd United States Congress and signed into law by then-President Bill Clinton.
  • The Act was aimed at reducing the federal deficit through a combination of increased taxes and reduced spending; it led to a lot of significant changes in tax law for both individuals and businesses.
  • In 1998, the effects of the bill helped the U.S. government to experience its first budget surplus since the 1960s.

Understanding the Tax Reform Act of 1993

The Clinton Administration created the Tax Reform Act in 1993 to contain several major provisions for individuals, such as the addition of the 36% tax bracket, an increase in gasoline taxes and an additional tax of 10% on married couples with income above $250,000. It also raised taxation on Social Security benefits and eliminated the tax cap on Medicare. The Act also included $255 billion in spending cuts over a five-year period. In 1998, the effects of the bill helped the U.S. government to experience its first budget surplus since the 1960s.

Individuals were not the only ones affected by this legislation. For instance, the corporate tax rate was raised as well, along with a lengthening of the goodwill depreciation period and the elimination of deductibility for congressional lobbying expenses. Many other taxes were raised and deductions reduced or eliminated as well. The Act was also one of the first bills to retroactively raise the tax rate, effectively making the increased tax rates law for taxpayers for the beginning of the year, despite the fact that the act was signed into law on August 10.

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 targeted job credit to incentivize hiring qualified participants in school-to-work programs.

Small Business

The Act gave small businesses regular tax credit of five 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 piece of the act that remains in effect today is the reduction of business deductions for meals and entertainment from 80% to only 50%.