“Read my lips: no new taxes.” Those few words, uttered by then-American presidential candidate George H. W. Bush at the 1988 Republican National Convention on August 18, became a hallmark of Bush’s presidency. When taxes did go up – a move made by Congress – voters were angry and blamed the President. But how much influence do most U.S. Presidents have over taxes? On Presidents Day, here’s the scoop on the President, tax policy and how the two often intersect.
The power to tax is found in the U.S. Constitution. The word tax appears at least ten times in the Constitution, but we typically focus on Article I, Section 8, Clause 1, the so-called “Tax and Spend Clause.” It begins:
The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;
And the explanation for how that begins is laid out in Article 1 in Section 7, Clause 1:
All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.
Every bill which shall have passed the House of Representatives and the Senate, shall, before it become a law, be presented to the President of the United States…
In other words, the President isn’t tasked with drafting tax legislation – that’s Congress’ job. The President signs the bill into law. So why do we assume that the President drives tax policy?
One, the President is typically surrounded by a group of advisors with some expertise in economic and tax policy who advise on these issues. That leads taxpayers to believe that the President will offer a measure of tax advice to Congress. And two, the President may set the tone for tax policy with the submission of the federal budget request (we’re assuming, of course, that spending should have some relationship to revenue).
In recent years, however, Presidents have become more aggressive in taking the lead on tax policy. According to Mark Luscombe, a Principal Analyst for Wolters Kluwer Tax & Accounting, Presidents have made tax policy proposals a significant portion of their campaign platforms, and when elected, have frequently worked to obtain passage of those proposals relatively quickly.
“Congress,” he says, “especially when controlled by the same party as the new president, seem most willing to work to enact those tax proposals early in the new presidency during the “post-election honeymoon” and before mid-term elections two years later.”
That allows presidents a great deal of leeway to shape tax policy. Of all of the presidents, Luscombe, a key member of the Wolters Tax Legislation team that tracks, reports and analyzes tax legislation before Congress, believes that President Ronald Reagan had the most significant influence, “especially given the number of significant pieces of tax legislation enacted during his presidency.”
According to Luscombe, Reagan started off his first year in 1981 with very large tax cuts – the very ones he had campaigned on. However, he subsequently worked with a Democratic House in 1982 and 1984 to increase taxes to counter the deficit. In 1986, Luscombe says, Reagan again worked with a Democratic House again to enact fundamental tax reform legislation.
(You can read more about Reagan and his tax policy here)
That tax reform legislation remains in place today. In fact, the changes under the Reagan Tax Reform Act were so dramatic that the Tax Code was renamed the Internal Revenue Code of 1986. Despite additions, deletions, and modifications to the Code, you’ll still see it written that way today: it’s the Internal Revenue Code of 1986, as amended.
The 1986 reform under Reagan is widely considered the most significant tax reform legislation in history. Since that time, most tax policy – including the most recent tax reform – has been short-term. Today, it’s not uncommon for changes to our tax laws, including the lowering of tax rates, remain in place for only a few years before they sunset (meaning they go back to the way that they were before). In other words, tax policy now feels tied to a particular presidency, which means that tax policy can change from administration to administration.
Is that a good thing? Luscombe says that it is probably good to review tax policy at least every four years to see if goals are being achieved. Tax policy, he explains, has come to mean not only raising needed revenue but also working to achieve various societal goals through tax policy as well.
That was clear, for example, during World War II. Tax rates hit levels as high as 94% to help fund the war. Luscombe notes that those rates “stuck around at similar levels until 1963, probably due to the continuing Cold War after World War II.” In fact, he points out, the top tax rates didn’t dip below 91% until 1963 and not below 70% until 1981.
But while regular review is good, regular, temporary changes are not necessarily desirable. “What is probably not good tax policy,” he says, “is to have so many temporary provisions and phase-ins and phase-outs in the tax code.” Tax legislation now revolves too much around ten-year budget projections that make long-term planning difficult and actually tends to frustrate some of the goals that the legislation is seeking to promote.
Ten years isn’t just a random figure. Under the Byrd rule, named after former West Virginia Senator Robert Byrd, any legislation that would significantly increase the federal deficit beyond the ten-year budget window (or is otherwise “extraneous”) can be blocked. The result is that instead of a simple majority to push it through Congress, any such legislation would need 60 votes. When Congress can’t agree beyond a simple majority on tax policy, for example, they necessarily must frame it to only last for a few years. With respect to the last tax reform efforts, the current provisions which were effective in 2018 will expire after 2025.
(You can read more about the Byrd rule and our most recent tax reform here.)
So what does that mean for the future? Luscombe doesn’t have a crystal ball and of course, can’t predict the future, but suggests that with the current split government, “it is possible Congress may not be quick to make permanent the temporary provisions of the Tax Cuts and Jobs Act enacted in 2017.” In other words, don’t count on those tax cuts being made permanent.