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Tax reforms of 1986 offer lessons



Published: Tue, October 24, 2006 @ 12:00 a.m.



By JEFFREY H. BIRNBAUM

WASHINGTON POST

WASHINGTON -- Twenty years ago Sunday, President Ronald Reagan signed into law the broadest revision of the federal income tax in history. The Tax Reform Act of 1986 -- the biggest and most controversial legislative story of its time -- had lawmakers, lobbyists and journalists in Washington in an uproar for two years. Despite nearly dying several times, the measure eventually passed, producing a simpler code with fewer tax breaks and significantly lower rates. The changes affected every family and business in the nation.

In the years since, however, rates have gradually risen and Congress has voted nearly 15,000 changes to the tax law. Many of the loopholes that disappeared two decades ago are back. Now, as then, politicians (including President Bush) are branding the income tax as unfair and calling for reform. And now, as then, few expect it to happen.

Lessons

But what lessons from the tax revisions of 1986 might apply to a similar effort today?

1) Fair or simple -- take your pick. Politicians claim to desire a tax system that is both fair and simple, but one goal precludes the other. The tax code can be fair -- meaning that the government offers taxpayers incentives to do meritorious deeds such as buy houses and give to charity. Or it can be simple -- devoid of those exceptions and complications. But it can't be both. In '86, Congress bought off state and local governments by keeping their pet tax breaks alive, clearing the way for the elimination of hundreds of less resilient benefits and the creation of a much simpler code.

2) Divide and conquer. Divided government is a boon to reform, not an obstacle. In 1986, Republicans controlled the White House and the Senate while Democrats held the House. Neither party wanted the blame for killing a bill that the public favored, so the measure kept moving forward. If the Democrats take back the House, Senate or both in next month's elections, that could be good news for advocates of Tax Reform II.

3) Block K Street. Any tax-reform effort will be doomed if lobbying groups are united against it. In 1986, light industries such as wholesalers and consumer-products companies supported reform because they wanted lower tax rates, whereas heavy industries such as steel makers and oil refiners wanted to hold on to their tax breaks and thus tried to squash the bill. (In fact, the bill spurred so much lobbying on both sides that pundits called it the Lobbying Relief Act of 1986.) A new tax reform would have to create -- or hope for -- a similar rift. However, K Street has grown much more powerful since then. Having learned the hard way 20 years ago, lobbyists are wise to that game now.

4) Stick it in neutral. Tax reform passed 20 years ago in part because its drafters decided early on that the measure should be "revenue neutral," that is, neither raise nor lower overall taxes. However, today's already stressed system doesn't raise enough money to fund the federal government and will soon be deeper in the hole thanks to the exploding costs of Social Security and Medicare. Any future reform probably would have to increase tax revenue, whether through rejiggering the code or by introducing new taxes -- making reform efforts that much more difficult and unlikely.

5) Don't lose those hedge clippers. The tax code is like shrubbery. The more severely it's pruned, the bigger and stronger it will grow back. Whatever changes a new bout of tax reform might bring, interest groups will almost certainly persuade Congress to clutter the code once again. If a second tax reform act comes to pass, rest assured that a third one will be needed a couple of decades later.

Jeffrey H. Birnbaum, a Washington Post staff writer, is co-author of "Showdown at Gucci Gulch: Lawmakers, Lobbyists and the Unlikely Triumph of Tax Reform" (Vintage Books).




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