CRS Describes Tax Limitation Proposals

                              97-372 E

[1] Restricting the ability of the federal government to tax has frequently been discussed both on its own merits and in conjunction with consideration of proposed balanced budget constitutional amendments. ¹ These proposed limits have been constructed in a variety of ways. Some would hold total revenues to a set percentage of some economic indicator, such as gross domestic product (GDP) or gross national product (GNP), while others would limit increases in taxes to a percentage of the growth of a particular economic indicator (such as national income). Support for such provisions is linked primarily to two premises: 1) the impact of the federal government on the economy has grown too large in recent decades; and 2) efforts to balance the budget should be biased in favor of spending cuts rather than revenues raised through tax increases. Proposals to impose a limit on taxes or tax increases apart from a balanced budget requirement generally focus on the impact of taxation on individuals, while the impact on the economy as a whole has been left as a significant, but secondary, issue.

[2] In the 104th Congress the House of Representatives adopted rules to circumscribe consideration of tax measures. These rules prohibit retroactive tax increases and require a three-fifths majority to increase federal income tax rates. Proposals for a constitutional provision to limit taxes have frequently been debated in conjunction with proposed balanced budget constitutional amendments.

[3] The final section of this report provides information on the major tax acts which have been enacted into law since 1980. Included in this information is the estimated revenue effects of these tax acts and the margin of votes by which these acts passed. These votes totals are provided for informational purposes only and are not intended to judge whether or not prior tax legislation would have become law if subject to a rule requiring that passage be either by a two-thirds or three-fifths majority rather than a simple majority. The popular title of each act is followed by its preamble, public law number, the House bill number, and the enactment date. The law's preamble is given so as to establish the stated intent of the legislation. Following the enactment date is a chronology of the legislation through the legislative process and includes the recorded vote totals. CRS has provided the actual revenue estimates made at the time of the enactment of the law.

CONTENTS

Legislative History

[4] This report describes various proposals to limit the federal government's taxing authority. Included are both proposals which would limit total revenues to a set percentage of an economic indicator and proposals which would limit increases in taxes to a percentage of the growth of an economic indicator. Information is provided which estimates the revenue effects of major tax legislation enacted since 1980 and the margin of votes by which these acts passed. Interest in voting patterns has developed from legislation which would require either a two-thirds or three-fifths majority rather than a simple majority to pass tax proposals.

LEGISLATIVE HISTORY

[5] In the 104th Congress, the House of Representatives adopted two changes to its rules concerning the consideration of tax measures. Rule XXI, clause 5(c) required that any federal income tax rate increase receive a vote of three-fifths in order to pass. Rule XXI, clause 5(d) prohibited the consideration of any federal income tax rate increase which was to be effective prior to the enactment of the provision (that is, any retroactive tax increases).

[6] These new rules were only rarely invoked in the 104th Congress (the provisions of clause 5(d) not at all), and only once was there a major ruling on its application. On April 5, 1995, during consideration of the Contract With America Tax Relief Act of 1995, it was ruled that the prohibition in Rule 21, clause 5(c) did not apply to a provision in the bill repealing a ceiling on total tax liability attributable to a net capital gain. ²

[7] The rule was also applied March 24, 1995, to an amendment offered by Representative Mink (D-HI), which would have increased the top corporate income tax rate from 35% to 36.25%. Application was in the form of the Chairman of the Committee of the Whole stating that inasmuch as "three-fifths of those present not having voted in the affirmative, the amendment . . . was rejected." However, because a majority had not voted in the affirmative, the application of the rule was moot and there was no opportunity for the Chairman to make a definitive ruling, limiting the precedential value of this instance.

[8] In addition, application of the rule was waived 5 times in the 104th Congress: ³

     o October 19, 1995, under H.Res. 238 (consideration of H.R.

     . . . while Chairman Archer [of the Ways and Means Committee]

     . . . the term 'Federal income tax increase' means any amendment

[12] On January 11, 1995, the House Judiciary Committee reported a balanced budget constitutional amendment (H.J.Res. 1, H.Rpt. 104-3) which included a provision which would have required a three-fifths vote to "increase revenues". During floor consideration of the proposed amendment, a substitute was offered by Representative Barton (R-TX), which included an identical tax limitation provision. The Barton substitute was adopted, 253-171. ⁵ However, this action was superseded when the House subsequently adopted a substitute offered by Representative Schaefer (R-CO), which did not contain the tax limitation provision, by a larger margin, 293-139. ⁶

[13] On April 15, 1996, the House considered a proposed constitutional amendment to limit tax increases (H.J.Res. 159, as amended to include text identical to H.J.Res. 169) under the terms of H.Res. 395. As modified, the proposed amendment would have required that:

     Any bill, resolution, or other legislative measure changing the

ISSUES AND OPTIONS

[15] In light of the experience with application of House Rule XXI, clause 5(c) in the 104th Congress, significant questions remain about the language of proposed tax limitation constitutional amendments, and how it might be interpreted. The term "revenue" appears in the Constitution, in this context in Article I, section 7, the so-called origination clause. As interpreted by the Supreme Court, the phrase "all bills raising revenue" has typically meant measures raising revenue to support government generally, but not necessarily those which raise funds to support a specific governmental program. ⁸ This constitutional understanding of the term "revenue" therefore may differ from that used, for example in relation to the jurisdiction of congressional committees or under budgetary statutes (such as the Congressional Budget Act of 1974).

[16] Another potential difficulty with the definition of revenue is that not all receipts to the federal government are currently treated equally in the budget process. Collections from the public based on the government's exercise of its sovereign powers are treated as revenues (e.g., personal income taxes). Collections by the government as a result of business-type or market-oriented activities are generally treated as offsets to outlays (e.g., various royalties and licensing fees). Offseting collections can be applied either to the outlays of a specific agency or program or to the government generally.

[17] Without further direction, through more explicit language in a proposed amendment, it is unclear how application of such a limitation might be imposed. It is possible that a limitation on tax increases could apply only to measures that affect money raised for the general fund of the federal government, but not to some funds raised for specific programs or for some types of fees paid to the federal government or government entities. For example, fees proposed by President Clinton which would be imposed by the Federal Deposit Insurance Corporation and the Federal Reserve for the examination of both FDIC-insured banks and bank holding companies might not be regarded as revenues for the purposes of this type of amendment.

[18] Conversely, the phrase "increasing revenue" as used in these proposals could be interpreted to apply these requirements broadly to a wide variety of measures. Such a provision might apply not only to measures which would increase revenues by increasing the rate of taxation, but also to those which would, for example, increase revenues by lowering the rate of taxation while increasing either the taxable base or the volume of taxable activity, or both. Broadly interpreted, it could have an impact on a large portion of the legislation considered by Congress. Indeed, any legislation that has the direct or indirect effect of stimulating economic (hence taxable) activity and thereby increasing revenues might be covered by a tax limitation provision. One example of increasing revenues by increasing taxable activity would be those proposals which advocate the introduction of back-loaded Individual Retirement Accounts. Current law provides that contributions to individual retirement accounts in certain instances may serve as an adjustment to income and not be taxable. Under the back-loaded IRA proposals, amounts "rolled-over" into such IRA accounts are taxed over the next several years when contributions are made to such plans. After 5 years, amounts withdrawn are free from federal income tax. Such a proposal would increase federal revenues in early years, but lose federal revenues in the "out" years.

[19] In order to overcome some of the imprecision in such definitions, several proponents have developed language which focuses more on the terms of the measure rather than their effect on revenues. During the 104th Congress, there was one such proposal would have required "Any bill to levy a new tax or increase the rate or base of any tax may pass only by a two-thirds majority of the whole number of each House of Congress" (H.J.Res. 159/S.J.Res. 49). Again, the language is such that interpretations will be required to fulfill the measure's mandate. For example, the President has proposed to limit exchanges of like kind property used in a trade or business or for investment to those exchanges located within the United States. Would this narrowing of the provision to exclude exchanges of property located outside the United States be seen as a change in the taxable base and therefore subject it to a super- majority requirement? Another of the President's proposals calls for the extension of the temporary unemployment surtax imposed on employers. Would the extension of a tax due to expire be seen as a new tax?

[20] It is not clear whether a limitation on increasing revenues could also be applied to measures which increase tax rates to a level intended to inhibit a taxable activity, such as an excise tax on distilled spirits products. The intended effect in such a case may be a reduction in revenues, due to the inhibitory effect, rather than an increase in revenues due to the higher rate. The question remains whether such a provision would be interpreted so that the intended effect of such a measure would exempt it from the restrictions of a tax limitation provision or whether the increased rate would be sufficient to place the measure in contravention of the provision.

[21] Proposals in this vein generally focus on the effect of revenue legislation. For example, one proposal "Prohibits a bill to increase receipts from becoming law unless approved by a three-fifths majority in each House" (S.J.Res. 12, 105th Congress).

[22] Questions concerning what rate would cause revenues to decrease could make revenue estimates a critical, and controversial, factor in determining the applicability of the Constitution. Who would make such estimates, (such as the Joint Tax Committee, the Congressional Budget Office, the Treasury Department or the Office of Management and Budget), whether estimates would focus on revenues generated in the next fiscal year or some longer period, and how to determine their reliability, remain as unsettled issues.

[23] A typical limitation on increases in revenues would limit the rate of increase in revenues to "the rate of increase in national income in the second prior fiscal year, unless a three-fifths majority of the whole number of each House of Congress shall have passed a bill directed solely to approving specific additional receipts and such bill has become law." This form of limitation is one of the most common in recent proposals. ⁹ National income (or any other measure or index) is dependent on a meaning defined either in a statute or in practice. While proponents argue that such a provision would preserve the current ratio of federal revenues to the economy as a whole, detractors suggest that the definition of any index would be subject to manipulation, and that tax policies would hinge on who controlled the definition. A similar approach would be to limit the impact on the economy of federal revenues. In the 104th Congress, a proposal provided that the "total revenue of the United States Government for each fiscal year shall not exceed 29% of the gross domestic product" (H.J.Res. 51, 104th Congress). While not discussed, questions might also arise when the gross domestic product amounts are revised from time to time.

[24] In theory such provisions could require the government to reduce taxes if revenues increased at a rate faster than the economy, even if the cause could not be traced to specific, direct congressional action. For example, inflation in the late 1970s caused personal incomes to increase at a greater rate than the economy as a whole. This resulted in increased federal revenues due to higher income taxes ("bracket creep"). Although the income tax rate structure is now indexed for inflation, its progressive structure means that increases in personal income due to economic growth could still result in revenues increasing at a more rapid rate than the economy. Under current law, it is expected that the number of taxpayers subject to the alternative minimum tax will rise in future years, and unless adjustments are made to compensate this would cause tax revenues to increase. Such a provision could also require a tax cut during or following a recession because of an associated downturn in national income.

[25] Significantly, the time lag between when change in national income is measured and fiscal policy is enacted could be an important factor. Such a lag could force the federal government to adopt a counter-productive fiscal policy.

[26] Another approach would require that measures to increase revenues be passed by a super-majority of three-fifths or two-thirds of the total membership of each House by a roll call vote. This would allow increases in taxes beyond the rate of growth of national income, but only under one of two circumstances. First, tax revenues could increase under existing tax laws as a result of economic upturns. Alternatively, they could increase as a result of any new law, if it were passed by super-majority.

[27] Under proposals to require a balanced federal budget, a three-fifths roll call vote is required for total outlays to exceed total receipts for a fiscal year. These proposals also require that a bill which increases revenues must be approved by a majority roll call vote of both Houses (H.J.Res. 1 and S.J.Res. 1, 105th Congress). ¹⁰ An amendment proposed by Representative Barton to H.J.Res. 1 would require a two-thirds majority vote to raise taxes or increase the debt limit. This amendment also requires that any tax increase passed under the waiver could last for no more than 2 years. The rationale is that a tax limitation provision is needed to assure that Congress would not be tempted to raise taxes rather than cut spending under a balanced budget requirement.

[28] Alternatively, some past proposals have been made which might limit taxes indirectly by limiting the level of expenditures (H.J.Res. 35, 104th Congress). While this method would not actually prohibit the federal government from taking action to increase revenues, it would inhibit such increases by removing the primary incentive for doing so. Even in the nineteenth century, the federal government did not historically operate with a sustained budgetary surplus, and it seems unlikely that a mandatory balanced budget would create an incentive to do so. If expenditures were limited, any increases in revenues beyond the level necessary for balance could be applied only toward repayment of debt principal. Because the repayment of debt principal, and particularly its scheduling, is dependent on the terms under which such funds were originally borrowed, it seems unlikely that this would provide a significant incentive for the federal government to operate at a sustained surplus. Without such an incentive, the indirect effect of an expenditure limit would be to limit taxation.

[29] The level of the expenditure limits commonly associated with such proposals is 19% or 20% of gross national product. As shown in table 1, the level of actual expenditures is higher than that. Therefore, such a limitation would require significant cuts in spending as well as an overall balance of expenditures and revenues.

       TABLE 1. Federal Outlays and Receipts as a Percent of GDP

TAX ACTS ENACTED SINCE 1980, VOTES AND REVENUE EFFECTS

[31] This section provides information on the major tax acts which have been enacted into law since 1980. Tariff acts are not covered in this listing. Included, however, is information on the estimated revenue effects of these tax acts and the margin of votes by which these acts passed. These vote totals are provided for informational purposes only. This section is not intended to assess whether or not prior tax legislation would have become law if it had been subject to a rule requiring passage either by a two-thirds or three-fifths majority rather than a simple majority.

[32] In the listing that begins on the following page, the popular title of each act is followed by its preamble, public law number, House bill number, and enactment date. CRS has provided the law's preamble so as to establish the stated intent of the legislation. Following the enactment date is a chronology of the legislation through the legislative process. The chronology is from the Library of Congress SCORPIO system and includes the recorded vote totals. CRS has provided the actual revenue estimates made at the time the law was enacted. The revenue estimates are typically those associated with the House conference report and are made by the Joint Tax Committee (but when not available from that source have been derived from the House and/or Senate reports on the tax bill). In those cases the estimates are taken from the report most closely akin to the finally enacted tax act, but may still differ marginally from what was actually enacted.

[33] Revenue estimates made in different years are derived from different bases and should not be added or subtracted. ¹² Because price level changes and growth in the economy tend to increase revenue effects in both absolute and nominal terms, the same tax provision would have different revenue effects if adopted in different years. Also, the projected revenue effects should not be added or subtracted because several acts contain provisions that were later modified or removed from the tax laws. An accurate tax revenue projection would require adjustment to reflect revenue effects in later years. ¹³ It should also be remembered that revenue estimates are just that -- estimates -- based on assumptions and projections of future activity rather than a compilation of data on events that have already transpired.

CRUDE OIL WINDFALL PROFIT TAX ACT OF 1980

[34] PREAMBLE An Act to impose a windfall profit tax on domestic crude oil, and for other purposes.

CHRONOLOGY OF P.L. 96-223 [H.R. 3919] ENACTED APRIL 2, 1980

OMNIBUS RECONCILIATION ACT OF 1980

[36] Preamble An Act to provide for reconciliation pursuant to section 3 of the First Concurrent Resolution on the Budget for fiscal year 1981.

CHRONOLOGY OF P.L. 96-499 [H.R. 7765] ENACTED DECEMBER 5, 1980.

ECONOMIC RECOVERY TAX ACT OF 1981

[38] PREAMBLE An Act to amend the Internal Revenue Code of 1954 to encourage economic growth through reduction of the tax rates for individual taxpayers, acceleration of capital cost recovery of investment in plant, equipment, and real property, and incentives for savings, and for other purposes.

CHRONOLOGY OF P.L. 97-34 [H.R. 4242] ENACTED AUGUST 13, 1981.

08/04/81 House agreed to conference report under suspension of the

TAX EQUITY AND FISCAL RESPONSIBILITY ACT OF 1982

[40] PREAMBLE An Act to provide for tax equity and fiscal responsibility, and for other purposes.

CHRONOLOGY OF P.L. 97-248 [H.R. 4961] ENACTED SEPTEMBER 3, 1982.

SOCIAL SECURITY AMENDMENTS OF 1983

[42] PREAMBLE An Act to assure the solvency of the Social Security Trust Funds, to reform the medicare reimbursement of hospitals, to extend the Federal supplemental compensation program, and for other purposes.

CHRONOLOGY OF P.L. 98-21 [H.R. 1900] ENACTED APRIL 20, 1983.

03/24/83 Senate agreed to conference report, roll call #54 (58-14)

DEFICIT REDUCTION ACT OF 1984

[44] PREAMBLE An Act to provide for tax reform, and for deficit reduction.

CHRONOLOGY OF P.L. 98-369 [H.R. 4170] ENACTED JULY 18, 1984.

06/27/84 Senate agreed to conference report, roll call #161 (83-15)

CONSOLIDATED OMNIBUS BUDGET RECONCILIATION ACT OF 1985

[46] PREAMBLE An Act to provide for reconciliation pursuant to section 2 of the first concurrent resolution on the budget for fiscal year 1986 (S. Con.Res. 32, Ninety-ninth Congress).

CHRONOLOGY OF P.L. 99-272 [H.R. 3128] ENACTED APRIL 7, 1986.

03/20/86 House receded and concurred in Senate amendments, roll call

OMNIBUS BUDGET RECONCILIATION ACT OF 1986

[48] PREAMBLE An Act to provide for reconciliation pursuant to section 2 of the concurrent resolution on the budget for fiscal year 1987.

CHRONOLOGY OF P.L. 99-509 [H.R. 5300] ENACTED OCTOBER 21, 1986.

10/17/86 Senate agreed to conference report, roll call #358 (61-25)

TAX REFORM ACT OF 1986

[50] PREAMBLE An Act to reform the internal revenue laws of the United States.

CHRONOLOGY OF P.L. 99-514 [H.R. 3838] ENACTED OCTOBER 22, 1986.

09/27/86 Senate agreed to conference report, roll call #296 (74-23)

OMNIBUS BUDGET RECONCILIATION ACT OF 1987

[52] PREAMBLE An Act to provide for reconciliation pursuant to section 4 of the concurrent resolution on the budget for the fiscal year 1988.

CHRONOLOGY OF P.L. 100-203 [H.R. 3545] ENACTED DECEMBER 22, 1987.

12/21/87 Senate agreed to conference report, roll call #419 (61-28)

TECHNICAL AND MISCELLANEOUS REVENUE ACT OF 1988

[54] PREAMBLE An Act to make technical corrections relating to the Tax Reform Act of 1986, and for other purposes.

CHRONOLOGY OF P.L. 100-647 [H.R. 4333] ENACTED ON NOVEMBER 10, 1988.

OMNIBUS BUDGET RECONCILIATION ACT OF 1989

[56] PREAMBLE An Act to provide for reconciliation pursuant to section 5 of the concurrent resolution on the budget for fiscal year 1990.

CHRONOLOGY OF P.L. 101-239 [H.R. 3299] ENACTED DECEMBER 19, 1989.

OMNIBUS BUDGET RECONCILIATION ACT OF 1990

[58] PREAMBLE An Act to provide for reconciliation pursuant to section 4 of the concurrent resolution on the budget for fiscal year 1991.

CHRONOLOGY OF P.L. 101-508 [H.R. 5835] ENACTED NOVEMBER 5, 1990.

10/27/90 Senate agreed to conference report, roll call #326 (54-45)

ENERGY POLICY ACT OF 1992

[60] PREAMBLE An act to provide for improved energy efficiency.

CHRONOLOGY OF P.L. 102-486 [H.R. 776] ENACTED OCTOBER 24, 1992.

10/08/92 Senate agreed to conference report

OMNIBUS BUDGET RECONCILIATION ACT OF 1993

[62] PREAMBLE An Act to provide for reconciliation pursuant to section 7 of the concurrent resolution on the budget for fiscal year 1994.

CHRONOLOGY OF P.L. 103-66 [H.R. 2264] ENACTED AUGUST 10, 1993.

08/06/93 Senate agreed to conference report, roll call #247 (51-50)

SMALL BUSINESS JOB PROTECTION ACT OF 1996

[64] PREAMBLE An Act to provide tax relief for small businesses, to protect jobs, to create opportunities, to increase the take home pay of workers, to amend the Portal to Portal Act of 1947 relating to the payment of wages to employees who use employer owned vehicles, and to amend the Fair Labor Standards Act of 1938 to increase the minimum wage rate and to prevent job loss by providing flexibility to employers in complying with minimum wage and overtime requirements under that Act.

CHRONOLOGY OF P.L. 104-188 [H.R. 3448] ENACTED AUGUST 20, 1996.

08/02/96 Senate agreed to conference report, roll call #265 (76-22)

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996

[66] PREAMBLE An Act to amend the Internal Revenue Code of 1986 to improve portability and continuity of health insurance coverage in the group and individual markets, to combat waste, fraud, and abuse in health insurance and health care delivery, to promote the use of medical savings accounts, to improve access to long-term care services and coverage, to simplify the administration of health insurance, and for other purposes.

CHRONOLOGY OF P.L. 104-191 [H.R. 3103] ENACTED AUGUST 21, 1996.

01/05/96 Senate agreed to House amendments

² See the discussion prior to the ruling in the Congressional Record (daily edition), v. 141, April 5, 1995, pp. H4315-4317.

³ U.S. Congress. House of Representatives. Survey of Activities. Committee on Rules. 104th Congress, 2d session. H.Rept. 104-868.

⁴ See remarks of Representative Solomon in the Congressional Record (daily edition), v. 142, May 22, 1996, p. H5433.

⁵ See vote no. 41 in the Congressional Record (daily edition), v. 141, January 26, 1995, p. H713.

⁶ See vote no. 49, Ibid, p. H770.

⁷ See vote no. 243 in the Congressional Record (daily edition), v. 142, April 15, 1996, p. H3304.

⁸ The Supreme Court, in United States v. Munoz-Flores 495 U.S. 385 (1990), held that a requirement on federal courts to impose a monetary "special assessment" on any person convicted of a federal misdemeanor was not a "bill for raising revenue." Previously, Justice Story, in Commentaries on the Constitution (Boston, 1833. section 880) wrote that only bills to raise taxes in the strict sense of the word are "bills for raising revenue;" bills for other purposes, which may incidently create revenue, are not included. The Supreme Court later held, in Twin City Bank v. Nebeker 167 U.S. 196 (1897) and Millard v. Roberts 202 U.S. 429 (1906), that a bill that creates, and raises revenues to support a particular governmental program, as opposed to a bill that raises revenue to support government generally, is not a "bill for raising revenue."

⁹ For example, limitation of this type were offered as substitutes for proposed balanced budget constitutional amendments considered in 1990, 1992, 1994 and 1996. See CRS Report 95-48 GOV, A Balanced Budget Constitutional Amendment.

¹⁰ For most actions, the Constitution currently requires only the approval of a majority of Members voting, a quorum being present.

¹¹ For additional information see U.S. Congress. Senate. Committee on the Budget. Tax Expenditures; Compendium of Background Material on Individual Provisions. Washington, U.S. Govt. Print. Off., 1996. 567 p. (Senate. 104th Congress, 2d session, S.Prt. 104- 69).

¹² For example, when the Tax Equity and Fiscal Responsibility Act of 1982 passed, both the Joint Tax Committee and the Congressional Budget Office predicted that approximately $18 billion would be raised in FY1983, $37.7 billion in FY1984, and $42.7 billion in FY1995 (their estimates for later years differed). However, due to the actual performance of the economy in FY1983, and revised economic projections for FY1984 and FY1985, the Congressional Budget Office (in February 1985) reduced its estimates of the revenue effects of the act. The Congressional Budget Office then estimated that $16 billion was raised in FY1983, and projected that $34 billion would be raised in FY1984, and $37 billion in FY1985.

¹³ Included in the Tax Equity and Fiscal Responsibility Act of 1982 was a provision to require withholding on both interest and dividend income. This provision was repealed by the Interest and Dividend Tax Compliance Act of 1983. Since the Interest and Dividend Tax Compliance Act is not considered "major tax legislation" it is not included. As such, the projected revenue collections from the Tax Equity and Fiscal Responsibility Act are not offset. Many acts have later technical corrections with offsetting revenue consequences.

¹⁴ These revenue estimates were prepared by the Congressional Budget Office when the bill was reported by the House Committee on Ways and Means on March 2, 1983.