What Is the Omnibus Budget Reconciliation Act?

An Omnibus Budget Reconciliation Act (OBRA) is a class of legislation used by the United States Congress to implement broad changes to federal spending and revenue. These acts are the primary vehicles for conforming existing laws with the fiscal goals outlined in a congressional budget resolution. Because their purpose is to reconcile the budget, the contents of each OBRA are diverse and reflect the economic and political priorities of the time it was passed.

Over the years, these legislative packages have simultaneously altered tax law, adjusted spending on entitlement programs like Medicare and Medicaid, and introduced new regulations. The omnibus nature of these bills means they bundle many distinct policy changes into one large piece of legislation, allowing Congress to make comprehensive adjustments to the nation’s fiscal direction in a single vote. The impact of these acts is far-reaching, and understanding any specific OBRA requires examining the unique set of laws it enacted and the policy objectives it was designed to achieve.

The Budget Reconciliation Process

The budget reconciliation process, created by the Congressional Budget Act of 1974, is an expedited procedure for passing legislation that aligns federal spending and revenue with a congressional budget resolution. This process is powerful because it allows a bill to pass the Senate with a simple majority of 51 votes, rather than the 60 votes needed to overcome a filibuster. This feature makes reconciliation an attractive tool for the majority party to enact policy changes without needing bipartisan support.

The process begins when Congress adopts a budget resolution with “reconciliation instructions.” These instructions direct specific congressional committees to develop legislation that changes laws within their jurisdiction to meet budgetary targets. Each instructed committee then drafts its legislative proposals and votes on them.

Once the committees have approved their respective pieces of legislation, they are packaged by the Budget Committees into a single omnibus bill. Debate on a reconciliation bill is limited to 20 hours in the Senate, which prevents the minority party from using extended debate to block the legislation.

A constraint on this process is the “Byrd Rule,” which prohibits the inclusion of “extraneous matter” in a reconciliation bill. A provision is considered extraneous if it does not produce a change in outlays or revenues, if its budgetary effect is “merely incidental” to the policy change, or if it increases the deficit beyond the years covered by the reconciliation instructions.

Any senator can raise a point of order against a provision they believe violates the Byrd Rule. If the Senate’s presiding officer, advised by the nonpartisan Senate Parliamentarian, sustains the point of order, the provision is stricken from the bill unless 60 senators vote to waive the rule.

Key Tax Provisions of OBRA 1990

The Omnibus Budget Reconciliation Act of 1990 enacted tax changes aimed at increasing federal revenue amid rising deficits. A central component was the increase in taxes for higher-income individuals, raising the top marginal income tax rate from 28% to 31%.

OBRA 1990 also introduced two provisions that raised taxes on high-income households. The first was the “Pease” limitation, which reduced the value of most itemized deductions for taxpayers whose adjusted gross income (AGI) exceeded a certain threshold. The second provision was the Personal Exemption Phase-out (PEP), which gradually eliminated the tax benefit of personal exemptions as income rose above a specified level, meaning high-income families received a smaller tax benefit.

The act also created a 10% luxury excise tax on the portion of the retail price of certain goods that exceeded specific thresholds. The tax applied to:

• Cars over $30,000
• Boats over $100,000
• Aircraft over $250,000
• Jewelry and furs over $10,000

This tax was repealed for most goods in 1993, and the tax on automobiles was fully eliminated by 2003. The act also raised the cap on earnings subject to the 1.45% Medicare hospital insurance tax to $125,000 for 1991, requiring high-income earners to contribute on a larger portion of their income.

Major Tax Changes from OBRA 1993

The Omnibus Budget Reconciliation Act of 1993 continued deficit-reduction efforts with another round of tax increases targeting high-income individuals and corporations. The act created two new marginal income tax brackets: a 36% rate for taxable income over $115,000 for individuals ($140,000 for married couples) and a 39.6% rate for taxable income exceeding $250,000.

OBRA 1993 also made the Pease limitation and the Personal Exemption Phase-out permanent. However, the Tax Cuts and Jobs Act of 2017 suspended the Pease limitation and eliminated personal exemptions, rendering the PEP provision irrelevant. These changes are scheduled to expire at the end of 2025.

A change in the act affected Social Security recipients with higher incomes. For individuals with provisional income above $34,000 and married couples above $44,000, the portion of Social Security benefits subject to income tax was increased to 85%.

The top corporate income tax rate was raised from 34% to 35%. The act also increased the federal transportation fuels tax by 4.3 cents per gallon. Finally, the act completely removed the income cap on the Medicare payroll tax, meaning the 1.45% tax applied to all wages and self-employment income starting in 1994.

Impact on Healthcare and Entitlement Programs

Omnibus Budget Reconciliation Acts have been a primary tool for enacting reforms in healthcare and entitlement programs, particularly Medicare and Medicaid. One of the most impactful of these was the Nursing Home Reform Act, a component of the Omnibus Budget Reconciliation Act of 1987 (OBRA ’87). This legislation was passed in response to widespread reports of neglect and abuse in nursing facilities.

The Nursing Home Reform Act changed the legal expectations for nursing homes participating in Medicare and Medicaid. It established a comprehensive set of statutory rights for nursing home residents, including the right to be free from physical and chemical restraints used for disciplinary purposes, the right to privacy, and the right to participate in their own care planning. The law mandated that facilities provide services to maintain the “highest practicable physical, mental, and psychosocial well-being of each resident.”

To enforce these new standards, OBRA ’87 required states to conduct unannounced surveys of nursing homes to assess compliance. It also mandated comprehensive assessments of each resident’s functional capacity upon admission and periodically thereafter, creating a framework for individualized care plans.

Other OBRAs have frequently been used to make financial adjustments to Medicare and Medicaid to control federal spending. These acts often contain provisions that alter how healthcare providers, such as hospitals and physicians, are reimbursed for their services. For example, an OBRA might reduce the annual update to payment rates for hospital services.

These legislative packages have also been used to expand eligibility or benefits, such as when OBRA ’90 required states to cover the Medicare premiums for certain low-income individuals known as Qualified Medicare Beneficiaries.

Corporate and Business-Specific Provisions

Several Omnibus Budget Reconciliation Acts have introduced provisions with lasting consequences for corporate finance, separate from general tax rate changes. One of the most significant was included in OBRA 1993, which created Internal Revenue Code Section 197. This section changed the tax treatment of acquired intangible assets, providing a uniform and simplified method for their amortization. The change brought clarity to an area of tax law that had previously been a frequent source of disputes between taxpayers and the IRS.

Before the enactment of Section 197, the ability to amortize an acquired intangible asset depended on a taxpayer’s ability to prove that the asset had a determinable value and a limited useful life. This was a difficult standard to meet, particularly for assets like goodwill and going-concern value, which the IRS generally considered non-amortizable.

Section 197 resolved this by establishing a mandatory 15-year, straight-line amortization period for a broad category of acquired assets defined as “Section 197 intangibles.” This category includes goodwill, going-concern value, customer lists, patents, and copyrights acquired as part of a business purchase.

This change had a profound impact on the financial modeling of mergers and acquisitions. The ability to amortize goodwill and other previously non-deductible intangibles created a tax shield for acquiring companies, reducing the after-tax cost of an acquisition. The rule also simplified the accounting process following an acquisition, as companies could group all Section 197 intangibles and amortize them over the single 15-year period.