PL 101-508: Tax Provisions of the 1990 Budget Act

Enacted on November 5, 1990, Public Law 101-508 is formally known as the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90). The statute was a legislative effort to address the growing United States federal budget deficit. It represented a compromise between the administration of President George H.W. Bush and Congress, aiming to achieve nearly $500 billion in deficit reduction over the subsequent five-year period.

The law’s mechanism for this goal was a combination of federal spending cuts and revenue increases. The revenue provisions were wide-ranging and impacted individuals, businesses, and consumers through various tax code modifications. The act’s passage was a notable political event, as it involved tax increases that ran counter to a major 1988 campaign promise.

Individual and Corporate Income Tax Revisions

The Omnibus Budget Reconciliation Act of 1990 restructured the individual income tax brackets, introducing a new top marginal tax rate of 31 percent. This new bracket replaced a more complex system from the Tax Reform Act of 1986. That system had featured a 33 percent “bubble” rate designed to phase out the benefits of the 15 percent bracket and personal exemptions for higher-income individuals.

The act implemented two provisions that targeted high-income taxpayers. The first was the Personal Exemption Phase-out (PEP), which gradually reduced the value of personal exemptions for taxpayers with adjusted gross income (AGI) above certain thresholds. For 1991, the phase-out began at an AGI of $150,000 for joint filers. The total amount of personal exemptions was reduced by 2 percent for every $2,500 that a taxpayer’s AGI exceeded the threshold amount.

The second provision was a limitation on itemized deductions, commonly referred to as the “Pease” limitation. This rule reduced a taxpayer’s total allowable itemized deductions once their AGI surpassed a specific threshold, set at $100,000 for 1991. The reduction was calculated as 3 percent of the AGI amount above the threshold.

This limitation had a cap, ensuring that a taxpayer’s specified deductions could not be reduced by more than 80 percent. Certain deductions were exempt from the Pease limitation, including medical expenses, investment interest, and casualty or theft losses. While both the PEP and Pease provisions were eventually made permanent, they were suspended by the Tax Cuts and Jobs Act of 2017. This suspension is in effect through 2025, with the provisions scheduled to be reinstated in 2026.

Beyond individual taxes, the act also adjusted corporate taxation by increasing the corporate alternative minimum tax (AMT) rate. This broadened the application of this parallel tax system designed to ensure that corporations with significant economic income paid a minimum amount of tax. This version of the corporate AMT was later repealed by the Tax Cuts and Jobs Act of 2017.

New and Modified Excise Taxes

A revenue-generating component of the 1990 act was the introduction of new and increased federal excise taxes. The most prominent of these was a new 10 percent luxury tax imposed on the retail sale of specific high-value items. This tax was structured to apply only to the portion of the sales price that exceeded certain statutory thresholds.

The luxury tax applied to several categories of goods:

• Automobiles on the retail price exceeding $30,000
• Boats and yachts with a threshold of $100,000
• Aircraft with a price over $250,000
• Jewelry and furs with prices exceeding $10,000

This luxury tax proved to be short-lived for most items and was repealed for boats, aircraft, jewelry, and furs in 1993. The tax on automobiles was phased out more gradually, expiring at the beginning of 2003.

The act also implemented substantial increases in existing federal excise taxes. The federal tax on motor fuels was increased by 5 cents per gallon. Taxes on tobacco products were also raised, with the federal excise tax on a standard pack of cigarettes increasing by 8 cents. Federal taxes on alcoholic beverages were increased across the board, with the tax on beer effectively doubled.

Payroll Tax and Social Insurance Adjustments

The Omnibus Budget Reconciliation Act of 1990 changed the structure of federal payroll taxes affecting the financing of Medicare. Prior to the act, the Federal Insurance Contributions Act (FICA) tax, which funds both Social Security and Medicare, was subject to a single, unified wage base cap. This meant both components of the tax applied only to earnings up to a certain annual limit.

The 1990 law decoupled the wage base for these two components. While the taxable wage base for Social Security continued its scheduled indexing to $53,400 for 1991, the act established a new, much higher wage base cap of $125,000 for the Medicare HI portion of the tax. This change meant that the 1.45 percent employee and 1.45 percent employer Medicare tax applied to a larger portion of an individual’s earnings.

This structural modification increased the payroll tax liability for higher-income earners. By subjecting a much larger portion of wages to the Medicare tax, it provided a substantial infusion of revenue to the program. This separation of the wage bases laid the groundwork for a subsequent change in 1993, which removed the Medicare wage cap entirely.

The legislation also increased financial obligations for beneficiaries of Medicare Part B, which covers physician services and outpatient care. For example, the annual deductible was increased to $100. The act also legislated specific monthly premium rates for Part B beneficiaries for the years 1991 through 1995.

Business and Investment Tax Provisions

The 1990 act contained provisions that altered the tax landscape for businesses and investors. One change involved the tax treatment of acquired intangible assets. For years, the Internal Revenue Service and taxpayers were frequently in disputes over the ability to amortize the value of intangibles like goodwill and customer lists that were acquired as part of a business purchase.

While the Omnibus Budget Reconciliation Act of 1993 ultimately created Internal Revenue Code Section 197 to resolve this issue, the 1990 law was a precursor. It began the legislative process of clarifying the rules and directed the U.S. Treasury to study the issue, setting the stage for the comprehensive solution that would follow.

Another provision was the expansion and modification of the Earned Income Tax Credit (EITC), a refundable tax credit for low- to moderate-income working families. The law restructured the credit by creating a separate, more generous benefit schedule for families with two or more qualifying children. This adjustment provided a larger tax credit to bigger families, shifting the EITC’s policy goals more toward family poverty reduction. The act also required the Treasury Department to establish a taxpayer awareness program to ensure eligible individuals knew about the credit and its advance payment option.