In 1990, Washington, D.C., was in a panic. The deficit would kill us all. The Japanese (the Chinese of the era) would eat our lunch. Foreign creditors would own America within a decade. Democrats and Republicans in Washington just had to do something, said the mainstream media. Wars, natural-disaster relief, and bailouts were handled without regard to looming entitlement crises. Tax increases were obviously on the table for anyone with half a brain. Sound familiar?
Back then, the solution was practical and obvious to Beltway types, who had been here before in 1982’s TEFRA (Tax Equity and Fiscal Responsibility Act) tax hike: Democrats would promise future spending cuts in exchange for Republicans’ agreeing to immediate tax increases.
That’s exactly what happened. In October of 1990, Pres. George H. W. Bush agreed to a five-year, $137 billion tax increase. In exchange, House speaker Tom Foley (D., Wash.) and Senate majority leader George Mitchell (D., Me.) promised to cut spending by $274 billion over the FY1991–1995 period. In total, this $2-for-$1 deal was supposed to cut the budget deficit by $411 billion over this budget window. Almost three-quarters of the House GOP conference — 126 representatives — voted against their president’s deal, citing the promise they had made to their constituents when they signed the then-new “Taxpayer Protection Pledge” maintained by Grover Norquist of Americans for Tax Reform. It was not enough. Washington had won, and taxpayers had lost.
The deal turned out to be a disaster for President Bush. By breaking his “read my lips” promise at a summit with Congressional Democrats (famously held at Andrews Air Force Base), he lost his political support and likely the 1992 election. Undoing the seminal Tax Reform Act of 1986, he raised the top marginal income-tax rate from 28 percent to 31 percent — and also phased out some deductions and exemptions. He hiked Medicare payroll taxes. He raised excise taxes on gasoline, cigarettes, beer, wine, and other common goods. He famously added a 10 percent “luxury tax” on yachts, which had to be repealed three years later since all it served to do was put boat makers out of business, causing layoffs.
These tax hikes became a setup for the 1993 Clinton tax hikes, the cornerstone of which was raising the top individual rate to 39.6 percent, the level President Obama wants to return to after the 2012 elections. In many ways, the conservative movement is still paying the price for Papa Bush’s stupid mistake.
Surely, though, all those spending cuts must have done some good; after all, the deal promised twice as much in spending cuts as it delivered in tax increases. Think again. The Congressional Budget Office (CBO) projected before the deal that 1991–1995 spending would total $7.07 trillion. In fact, total spending for this period was $7.09 trillion. In other words, in return for agreeing to tax hikes, Republicans got $22 billion in extra spending rather than the promised $274 billion in cuts. This was despite the fact that there was another “spending cut” deal in 1993 — the Clinton tax-increase budget.
Sadly, this wasn’t even the first time this happened. Back in 1982, President Reagan agreed to $3 in spending cuts for every $1 in tax hikes. Inflation projections make the analysis difficult, but it seems clear (and President Reagan believed) that almost none of the promised spending cuts materialized in real terms.
There is a clear lesson from these budget deals: Tax increases are real — they become law immediately — but promised spending cuts are illusory. There is always an S&L bailout, a Hurricane Andrew, or a Gulf War — or a financial meltdown, a string of tornadoes, and a three-front War on Terror. After a while, the spending-cut promises are forgotten, and all that remains is higher taxes on the American people.
This should be obvious to anyone who knows the history, including thinking Republicans in Washington. For the most part, it is. All but six of the 239 Republican representatives — including Speaker John Boehner (Ohio) and the rest of the House GOP leadership — have signed the Taxpayer Protection Pledge, in which they rule out net tax hikes. Even in the more moderate Senate, 40 out of 47 GOP senators, including Minority Leader Mitch McConnell (Ky.) and whip Jon Kyl (Ariz.), have taken the pledge.
Yet there are several GOP senators who don’t quite get it. Formerly known as the “Gang of Six” (now known as “Five Guys” because Tom Coburn left), this group includes Sens. Saxby Chambliss (Ga.) and Mike Crapo (Idaho) — both pledge signers. The point of this group was to put legislative meat on the bones of President Obama’s “Simpson-Bowles” debt commission. Bragging of at least a $3-to-$1 spending-cuts-to-tax-hikes ratio (sound familiar?), this plan was a ten-year net tax hike of either $1 trillion (the commission estimate), $2 trillion (House Budget Committee chairman Paul Ryan’s estimate), or $3 trillion (the Heritage Foundation’s estimate). The political strategy of the Democrats is to get GOP fingerprints on a tax hike, and ultimately to do a repeat of 1982 and 1990 — real tax hikes coupled with spending-cut promises that don’t come to fruition.
Official Washington is shocked that the old playbook isn’t working this time. For all but a few Republican senators, the reason is obvious: “I promised my constituents that I would not raise their taxes, and I’m honoring that promise.” Lucy has pulled the football away from Charlie Brown twice already, but congressional Republicans have finally gotten the message that tax hikes are a sucker’s bet.
— Ryan Ellis is tax-policy director of Americans for Tax Reform.