Many people are saying that since the Republicans now control Congress, we’ll finally see tax reform. But don’t get your hopes up that the changes in Congress this November will cause action. As Forbes demonstrated in a recent article, a look back at history shows that control of Congress doesn’t really play a role in tax reform.
The Tax Reform Act of 1986
The Tax Reform Act of 1986 was passed by a divided Congress. In the 99th Congress, the Senate was controlled by the Republicans and the House was controlled by the Democrats. The Tax Reform Act of 1986 was a significant change. It almost halved the top federal income tax rate from 50% to 28% and raised the bottom tax rate from 11% to 15%. Long-term capital gains rates were also changed to be taxed the same as ordinary income, meaning that most taxpayers at the bottom would pay more in tax.
The Taxpayer Relief Act of 1997
In 1997, with Republicans controlling both the House and the Senate, the Taxpayer Relief Act of 1997 was passed. Under that law, capital gains rates were capped at 20% (down from a top rate of 28%) and the 15% rate was lowered to 10%. Also, the treatment of capital gains on the sale of a personal residence was radically altered: under the Tax Reform Act of 1986, up to $500,000 of gain on for married couples filing jointly ($250,000 for individuals) was permanently exempt from capital gains treatment, if the home met the two of five year rules for residency and ownership.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
A Democrat-controlled Senate and a Republican-controlled House passed the EGTRRA in 2001, which changed the tax brackets by introducing a new 10% bracket and lowering the other brackets over time. Capital gains rates also dropped to 8% for taxpayers in the 15% bracket. For taxpayers in the upper brackets, limits for itemized deductions and personal exemptions were phased out and the Alternative Minimum Tax (AMT) exemption was increased. Many of the changes (including the lower tax rates and increased federal estate tax exemption amounts) weren’t permanent, and were meant to fade away in 2010.
The American Taxpayer Relief Act of 2012
Then in 2012, with Democrats controlling the Senate and the Republicans controlling the House, the American Taxpayer Relief Act of 2012 was passed. Tax rates, for the most part, remained at the “Bush tax cut” levels, except for those at the very top. Phaseouts for tax deductions and credits were reinstated as the Bush tax cuts expired and weren’t renewed. New taxes attached to the Health Care Act, and the Alternative Minimum Tax was finally indexed for inflation.
It’s logical to assume that the political party of the President serving with Congress would play a role, but it doesn’t. Party affiliation for who was in the White House when these laws were passed varies without pattern. What is true is that reform tends to happen during second-term presidencies, regardless of who is in office. History also shows that significant reform doesn’t happen twice during a presidency.
It doesn’t hurt to stay optimistic, but if history holds true, we probably won’t see any serious changes with this Congress.