PL 103-66: A Breakdown of Its Major Tax Provisions

Public Law 103-66, the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93), was signed into law on August 10, 1993. Its primary goal was to achieve deficit reduction over a five-year period through a combination of spending cuts and tax increases. Proponents believed this fiscal discipline would encourage lower interest rates and foster economic growth. The act altered the tax landscape for individuals and businesses, setting the stage for the budget surpluses of the late 1990s.

Impact on Individual Taxation

The Omnibus Budget Reconciliation Act of 1993 impacted the taxation of high-income individuals by introducing new marginal tax brackets. The law established a 36% tax rate for taxable income exceeding $115,000 for individuals and $140,000 for married couples filing jointly, creating a new tier of taxation above the previous 31% rate. A 10% surtax was also introduced on taxable incomes over $250,000, which created a top marginal rate of 39.6%. These new rates were applied retroactively to the beginning of 1993.

Another change for high-wage earners was the removal of the wage cap for the Medicare hospital insurance tax. Previously, earnings up to $135,000 were subject to the 1.45% Medicare tax for both employees and employers. By eliminating this ceiling, the law ensured all wages and self-employment income would be subject to the tax, increasing the liability for those with earnings above the previous cap.

The act also altered the tax treatment of Social Security benefits. Before OBRA ’93, a maximum of 50% of benefits could be included in taxable income. The law introduced a second tier of taxation, making up to 85% of benefits taxable for individuals with higher provisional incomes.

Changes to Business and Corporate Taxation

The act implemented adjustments to corporate taxation, starting with an increase in the top corporate income tax rate from 34% to 35%. This new rate applied to corporate taxable income in excess of $10 million, targeting the nation’s largest corporations.

A change affecting many businesses was the reduction in the deductibility of business-related meals and entertainment expenses. Before the act, businesses could deduct 80% of these costs, but OBRA ’93 reduced this figure to 50%. The reasoning was that such expenses contain an element of personal consumption that should not be fully subsidized by the tax system.

The law also eliminated the tax deduction for lobbying expenses. Previously, businesses could deduct costs associated with influencing federal or state legislation. The 1993 law disallowed deductions for lobbying activities, which included the portion of dues paid to trade associations used for such purposes.

New Rules for Intangible Assets and Expensing

The 1993 act changed the tax treatment of acquired intangible assets by creating Internal Revenue Code Section 197. Before this law, the tax rules for intangibles often led to costly disputes between taxpayers and the IRS over whether an asset had a determinable useful life for depreciation. Goodwill, for example, was not amortizable.

Section 197 Intangibles

This new rule established a uniform system to resolve these conflicts and streamline tax compliance. It defined a category of “Section 197 intangibles” that must be amortized on a straight-line basis over a 15-year period. This applies regardless of their actual expected useful life and provides certainty for both taxpayers and the government, reducing litigation. Assets covered include:

• Goodwill
• Going-concern value
• Workforce in place
• Patents and copyrights acquired in a business acquisition
• Covenants not to compete acquired in a business acquisition

For assets like goodwill, this rule provided a new opportunity for cost recovery. For other assets that might have justified a shorter amortization period, the 15-year life represented a deferral of the tax benefit.

Section 179 Expensing

The act also increased the amount small businesses could immediately expense for tangible property under Section 179. This provision allows businesses to deduct the full purchase price of qualifying equipment in the year it is placed in service instead of depreciating the cost over several years. OBRA ’93 raised the annual expensing limit from $10,000 to $17,500 to stimulate investment and simplify tax accounting for smaller enterprises.

Creation of Tax Incentives and Credits

Beyond its tax-raising measures, the 1993 act established tax incentives to foster economic growth in distressed areas through the creation of Empowerment Zones and Enterprise Communities. This program was designed to revitalize impoverished urban and rural areas by providing tax benefits to businesses that located and hired within these zones, encouraging private investment and job creation.

Businesses operating within an Empowerment Zone could access several incentives intended to lower the costs of labor and capital. These included a wage credit of up to $3,000 per year for each employee who was also a resident of the zone. The program also allowed for a further increased Section 179 expensing deduction, permitting businesses in these zones to write off more of their capital investments in the first year.

The 1993 act also extended several tax credits that were set to expire. It retroactively and permanently extended the low-income housing tax credit, which encourages the construction and rehabilitation of affordable rental housing. The law also extended the targeted jobs tax credit, which provided an incentive for businesses to hire individuals from certain disadvantaged groups.