Omnibus Budget Reconciliation Act of 1993

Based on Wikipedia: Omnibus Budget Reconciliation Act of 1993

The Budget Battle That Changed America

In August 1993, the United States Senate found itself deadlocked at fifty votes to fifty. Vice President Al Gore walked onto the Senate floor to cast the tie-breaking vote on one of the most consequential pieces of economic legislation in modern American history. Not a single Republican had voted in favor. Six Democrats had defected. The bill passed by the thinnest possible margin.

Five years later, the federal government recorded its first budget surplus since 1969. The New York Times would later describe the end of budget deficits as "the fiscal equivalent of the fall of the Berlin Wall."

This is the story of the Omnibus Budget Reconciliation Act of 1993, a law that reshaped American fiscal policy and set the stage for the economic boom of the late 1990s.

The Deficit Problem Clinton Inherited

When Bill Clinton took office in January 1993, he inherited a federal government hemorrhaging red ink. The fiscal year that had just ended showed a $290 billion deficit—the gap between what the government collected in taxes and what it spent. To put that in perspective, that's roughly equivalent to $600 billion in today's dollars.

This wasn't a new problem. It had been building for over a decade.

The deficits traced back to the Reagan administration's combination of large tax cuts and increased military spending in the 1980s. The theory had been that tax cuts would stimulate so much economic growth that revenues would actually increase—a concept critics dubbed "voodoo economics." Instead, deficits ballooned. President George H.W. Bush had tried to address the problem with a 1990 budget deal that included tax increases, breaking his famous "read my lips, no new taxes" pledge. It cost him politically but only partially stemmed the bleeding.

Clinton arrived in Washington having promised both a middle-class tax cut and deficit reduction. He quickly discovered these goals were in tension. His economic team—including Treasury Secretary Lloyd Bentsen, Office of Management and Budget Director Leon Panetta, and economic adviser Robert Rubin—presented him with a stark choice.

The Economic Theory Behind Deficit Reduction

Why did Clinton's advisers believe deficit reduction should take priority over tax cuts? The answer involves understanding how government borrowing affects the broader economy.

When the federal government runs a deficit, it must borrow money by issuing Treasury bonds. These bonds compete with private borrowers—businesses and individuals—for available capital. Economists call this "crowding out." The more the government borrows, the less capital remains available for private investment, and interest rates tend to rise as a result.

Bentsen, Panetta, and Rubin argued that if Clinton could credibly commit to reducing deficits, something remarkable would happen. Federal Reserve Chairman Alan Greenspan might lower interest rates, since he would no longer need to keep them elevated to combat the inflationary pressure of government borrowing. Lower rates would stimulate private investment. Business confidence would improve. The economy would grow faster than it would with deficit spending.

This was not the traditional Democratic approach to economics. For decades, liberals had championed government spending as a tool for stimulating growth and helping working families. The idea of prioritizing deficit reduction felt more like Republican economics.

Secretary of Labor Robert Reich pushed back. He argued that stagnant wages were the bigger problem facing American workers—not federal deficits. But Clinton sided with his deficit hawks. The promised middle-class tax cut was quietly abandoned.

The Structure of the Bill

Clinton presented his budget plan to Congress in February 1993. The proposal aimed to cut the deficit in half by 1997 through a combination of tax increases and spending cuts—roughly equal parts of each.

On the tax side, the bill made several significant changes:

The top individual income tax rate rose from 31 percent to 39.6 percent, but only for the highest earners. Previously, everyone earning more than $51,900 paid that same 31 percent rate on income above that threshold. The new law created a tiered system: 36 percent for income above $115,000 and 39.6 percent for income above $250,000. This meant the tax increase hit only the wealthiest Americans.

Corporate taxes also increased, though the structure was complicated. Previously, corporate income above $335,000 was taxed at a flat 34 percent. The new law created brackets of 35 percent and 38 percent for corporations earning between $10 million and $18.33 million, settling at 35 percent for income above that level.

The Medicare tax—a 2.9 percent levy split between employers and employees that funds the health insurance program for seniors—had previously applied only to the first $135,000 of income. The cap was eliminated entirely, meaning high earners would now pay this tax on every dollar they earned.

Gasoline taxes rose by 4.3 cents per gallon.

The portion of Social Security benefits subject to income tax increased from 50 percent to 85 percent for higher-income retirees.

The Alternative Minimum Tax, a parallel tax system designed to ensure wealthy taxpayers couldn't use deductions to avoid taxes entirely, saw its rate increase from 24 percent to tiered rates of 26 percent and 28 percent.

But the bill wasn't only about raising taxes. It also expanded the Earned Income Tax Credit, which provides cash assistance to low-income working families. This expansion represented one of the largest anti-poverty initiatives of the Clinton years, putting more money in the pockets of the working poor.

On the spending side, the bill included $255 billion in cuts over five years, much of it coming from Medicare (the health program for seniors) and military spending.

The Political War Over the Bill

Republican leaders made a strategic decision: they would unite in total opposition. Not a single Republican vote would go to Clinton's budget. This was unusual—budget deals typically attracted at least some bipartisan support. But Republicans calculated that if the economy soured, they wanted no ownership of Clinton's policies. And if the economy improved, they believed voters would credit the private sector, not Washington.

Senate Minority Leader Bob Dole and House Minority Whip Newt Gingrich enforced strict party discipline. Republicans argued that Clinton was breaking his campaign promises by raising taxes rather than cutting them for the middle class. They predicted the tax increases would strangle economic growth.

Representative John Kasich of Ohio offered an alternative that would have reduced the deficit through spending cuts alone—$355 billion worth, including $129 billion from entitlement programs like Social Security and Medicare. His amendment would have eliminated all tax increases. It failed by a vote of 138 to 295, with many Republicans voting against it. Pure spending cuts proved too painful even for the anti-tax party.

Senator David Boren of Oklahoma, a Democrat, proposed a compromise that would keep most of the tax increases on upper-income earners but eliminate energy tax increases and scale back the Earned Income Tax Credit expansion. He attracted some bipartisan support from senators like Republican Bill Cohen of Maine, but his proposal never made it out of committee.

Clinton made one significant concession during negotiations. His original proposal had included a new energy tax based on the heat content of fuels, measured in British Thermal Units. Senate Democrats, worried about the impact on their constituents, forced him to replace it with a simpler increase in the gasoline tax. But Clinton held firm on the Earned Income Tax Credit expansion, refusing to let it be scaled back.

The Closest of Close Votes

The House of Representatives passed its version of the bill on May 27, 1993, by a vote of 219 to 213. Just six votes separated passage from defeat.

The real drama came in August, as Congress prepared to leave for its month-long summer recess.

The House passed the final conference report on August 5, 1993, by an even narrower margin: 218 to 216. Every single vote mattered. Two hundred seventeen Democrats voted in favor, along with one independent—Bernie Sanders of Vermont, who was then serving in the House. Forty-one Democrats joined all 175 Republicans in opposition.

The next day, the Senate took up the bill. The vote was scheduled for Friday, August 6—the last day before vacation. Senators would have to choose: vote yes, vote no, or go home without resolving the issue.

The count came in at 50 to 50.

Six Democratic senators had voted against their own party's president: Frank Lautenberg of New Jersey, Richard Bryan of Nevada, Sam Nunn of Georgia, Bennett Johnston of Louisiana, David Boren of Oklahoma, and Richard Shelby of Alabama. Shelby would later switch parties entirely, becoming a Republican.

Vice President Gore, in his constitutional role as President of the Senate, cast the deciding vote. The bill passed 51 to 50.

Four days later, on August 10, 1993, President Clinton signed the bill into law.

What Happened Next

Republicans predicted disaster. They had argued the tax increases would slow economic growth, kill jobs, and fail to reduce the deficit.

The opposite occurred.

The economy entered one of the longest expansions in American history. Unemployment fell. Wages eventually began to rise. The stock market soared.

And the deficit shrank—not gradually, but dramatically. Each year brought smaller deficits than the year before. In 1998, the federal government recorded a surplus of $69 billion. It was the first time the government had taken in more than it spent since 1969, nearly three decades earlier.

What caused this turnaround? Economists still debate the relative contributions of various factors.

The 1993 budget deal itself played a significant role. The White House's Office of Management and Budget projected that the bill would reduce deficits by about $505 billion over five years, split almost evenly between tax increases ($250 billion) and spending cuts ($255 billion). The Congressional Budget Office offered a more conservative estimate of $433 billion, disagreeing about how to count certain indirect effects like lower interest payments on reduced government debt.

But the economic boom of the 1990s generated even more revenue than expected. As incomes rose, tax collections rose with them. As unemployment fell, spending on safety-net programs declined. The technology revolution created enormous wealth, much of which flowed to the Treasury through capital gains taxes.

Interest rates did fall, as Clinton's advisers had predicted. Whether this was because of the deficit reduction or other factors remains debated. But the combination of lower rates, increased business confidence, and the technology boom produced spectacular economic results.

The Political Aftermath

In the short term, the budget battle cost Democrats dearly. Because the spending cuts and economic benefits took time to materialize while the tax increases took effect immediately, Clinton could not claim victory by the 1994 midterm elections. Republicans hammered him for breaking his tax promises.

Combined with other factors—including the failed attempt at health care reform and controversies surrounding the administration—Democrats lost control of both the House and Senate in 1994. Newt Gingrich became Speaker of the House, and Republicans held the majority in both chambers for the first time in forty years.

But the long-term vindication came. By 1998, the surpluses had arrived, and Clinton could claim he had presided over the end of an era of deficits. In 1997, a Republican Congress even worked with Clinton to cut the capital gains tax rate from 28 percent to 20 percent—a bipartisan deal made possible by the surplus.

Clinton himself later expressed mixed feelings. In 1995, he said he believed taxes had been raised too much. But the results spoke for themselves: the combination of fiscal discipline and economic growth had produced something that had seemed impossible just a few years earlier.

The Broader Lessons

The Omnibus Budget Reconciliation Act of 1993 offers several lessons for understanding fiscal policy.

First, the relationship between tax rates and economic growth is more complicated than simple slogans suggest. Republicans predicted that raising the top marginal rate from 31 percent to 39.6 percent would devastate the economy. Instead, the economy boomed. This doesn't prove that higher taxes cause growth—correlation is not causation—but it does demonstrate that moderate tax increases on high earners need not prevent prosperity.

Second, deficit reduction can create virtuous cycles. Lower deficits meant lower government borrowing, which contributed to lower interest rates, which stimulated private investment, which generated economic growth, which produced higher tax revenues, which further reduced deficits. Once the cycle started, it fed on itself.

Third, the political timing of economic policy rarely aligns with electoral cycles. The benefits of the 1993 budget deal didn't fully materialize until years later. Politicians who make difficult choices often don't reap the rewards—and sometimes pay immediate political costs for long-term gains.

Fourth, bipartisanship is not always necessary for good policy. The 1993 budget deal passed without a single Republican vote, yet it achieved its goals. Sometimes one party must act alone when the other refuses to participate.

The story of the 1993 budget deal reminds us that economic policy choices matter. The decisions made in that contentious August vote—passed by the slimmest possible margin, with the Vice President breaking a tie in the Senate—helped shape the trajectory of the American economy for the rest of the decade. When politicians argue about taxes and deficits today, they are continuing a debate that this law helped define.