What Was the Omnibus Budget Reconciliation Act of 1990?

The Omnibus Budget Reconciliation Act of 1990 was a response to the substantial federal budget deficits of the late 1980s. These deficits grew from prior tax cuts and increased defense spending, creating a need for legislative action. The political environment was shaped by President George H.W. Bush’s 1988 campaign promise, “Read my lips: no new taxes.”

The escalating deficit, however, forced the administration to negotiate with a Democrat-controlled Congress that favored raising taxes on higher earners. In June 1990, President Bush acknowledged that “tax revenue increases” might be necessary, reversing his campaign pledge. This decision was met with criticism from conservatives but paved the way for a budget agreement.

The resulting act was signed into law in November 1990 after a brief government shutdown. Its primary goal was to cut the federal deficit by nearly $500 billion over five years through a combination of spending cuts and revenue increases. The legislation was a major compromise that altered the country’s fiscal landscape.

Major Tax Increases on Individuals

A component of the 1990 act was an increase in income taxes for higher-earning individuals. The law raised the top marginal tax rate from 28% to 31%, subjecting the highest income bracket to a greater tax.

The act also phased out certain tax benefits for high-income households. The Pease limitation reduced the value of most itemized deductions for taxpayers whose adjusted gross income (AGI) surpassed a specific threshold. For every dollar of AGI above this threshold, a taxpayer’s total itemized deductions were reduced by 3%, effectively increasing their taxable income. The Tax Cuts and Jobs Act of 2017 suspended the Pease limitation through the end of 2025.

Similarly, the Personal Exemption Phaseout (PEP) rule eliminated the tax benefit of personal exemptions for high-income individuals. Personal exemptions were deductions taxpayers could claim for themselves, spouses, and dependents. The Tax Cuts and Jobs Act of 2017 also eliminated personal exemptions, with this change scheduled to expire after 2025.

While increasing taxes on the wealthy, the act expanded the Earned Income Tax Credit (EITC), a refundable credit for low- to moderate-income workers. The 1990 law enhanced the EITC by adjusting it for family size, providing a larger credit to families with more than one child. This expansion offered targeted tax relief to support working families.

New and Increased Excise Taxes

The 1990 act introduced new and increased excise taxes on specific goods and services. A prominent feature was a new federal luxury tax on high-priced items like cars, boats, aircraft, jewelry, and furs. The tax was 10% on the portion of the retail price that exceeded set thresholds.

The thresholds were:

• $30,000 for automobiles
• $100,000 for boats
• $250,000 for aircraft
• $10,000 for jewelry and furs

For example, a $40,000 car would incur a $1,000 tax on the $10,000 exceeding the threshold. The tax was intended to capture revenue from those with high disposable incomes but was repealed on most items in 1993 due to its negative impact on the affected industries.

The act also increased federal excise taxes on tobacco and alcohol. The tax on a standard pack of 20 cigarettes was raised, as were taxes on alcoholic beverages. The federal excise tax on beer doubled, while taxes on wine and distilled spirits also saw notable hikes.

Another revenue-raising measure was a 5-cent-per-gallon increase in the federal gasoline tax. This raised transportation costs for individuals and businesses. The revenue was dedicated to the Highway Trust Fund to finance transportation infrastructure projects.

Changes to Business and Payroll Taxes

The 1990 act changed taxes affecting businesses and employment, particularly payroll taxes. The law modified the wage base cap for the Medicare portion of the Federal Insurance Contributions Act (FICA) tax. Previously, the Social Security and Medicare components of FICA were subject to the same annual wage limit.

This legislation raised the maximum earnings subject to the Medicare tax to $125,000 for 1991, while the Social Security wage base saw a smaller, inflation-based adjustment. This meant high-income earners paid the 1.45% Medicare tax on a much larger portion of their income. This policy made the Medicare tax more progressive and was a step toward the complete elimination of the cap by the Omnibus Budget Reconciliation Act of 1993.

The act also increased the top corporate income tax rate from 34% to 35%. This increase ensured that the corporate sector would also contribute to the deficit reduction effort.

Medicare and Social Security Provisions

The 1990 act included programmatic reforms to control spending growth in Medicare and Social Security. A major reform in Medicare was the introduction of a new system for physician reimbursement called the resource-based relative value scale (RBRVS). Previously, Medicare paid physicians based on their historical charges, leading to payment variations.

The RBRVS system rationalized payments by basing them on the resources required to provide a service, including physician work, practice expense, and malpractice insurance. This new methodology was intended to correct payment imbalances between specialists and primary care physicians, slow spending growth, and encourage preventive care.

The act also increased costs for Medicare beneficiaries. The Medicare Part B premium, which covers physician services and outpatient care, was set to cover 25% of the program’s costs, raising the monthly payment for seniors. The annual Part B deductible was also raised from $75 to $100, shifting a greater share of costs to beneficiaries.

A notable administrative change was the establishment of the Social Security Administration (SSA) as an independent agency. Previously part of the Department of Health and Human Services, this move was intended to insulate the SSA from short-term political pressures. The change took effect in 1995.

Budget Enforcement and Procedural Reforms

A lasting legacy of the 1990 act was the establishment of new budgetary rules to enforce fiscal discipline, known as the Budget Enforcement Act of 1990. These reforms created a framework to prevent future legislation from worsening the deficit.

The first concept was the “pay-as-you-go” (PAYGO) rule, which applied to new legislation affecting mandatory spending or revenues. Under PAYGO, any new law projected to increase spending or decrease revenues had to be offset by corresponding cuts or revenue increases elsewhere. This ensured new legislation would not add to the deficit. If the net effect of legislation was a projected deficit increase, it could trigger automatic, across-the-board spending cuts, known as sequestration.

The second reform was the implementation of statutory caps on discretionary spending. This is the portion of the budget Congress determines annually for areas like defense, education, and transportation. The act set separate, legally binding limits for three categories: defense, international, and domestic.

These spending caps were also enforced by sequestration. If an appropriations bill caused spending to exceed the cap in any category, an automatic cut would be triggered within that category to bring spending down to the legal limit. This created an incentive for lawmakers to prioritize spending within the established limits.