The politics of taxation has deep roots in American history. Our forefathers took on one of the greatest military powers of the 18th century in order to gain independence, largely driven by anger over unfair tax policies. It should be no surprise then that our country didn’t have a permanent federal personal income tax until over a century later. Today, debates centered on taxes and spending are ubiquitous in our elections and in our legislatures.
Even the passage of the 16th Amendment to the United States Constitution, which created the permanent federal income tax, was rooted in politics and political miscalculation. Around the time of the Civil War, the federal government needed more income so it implemented temporary income taxes, and the United States Supreme Court even handed down conflicting decisions, once upholding a federal income tax and later rejecting it. At the turn of the century, some more progressive members of Congress sought to implement another federal income tax. Conservative politicians who opposed the tax noted the conflicting Supreme Court decisions and took the political gamble of offering the 16th Amendment, assuming it was unlikely to be ratified by a sufficient number of states. They ultimately lost that gamble in 1913 when the amendment took effect.
Since then, the tax rates as well as business tax rates have fluctuated significantly, particularly in the first half of the 20th century amid the U.S. involvement in both World Wars. While the prospect of raising taxes on Americans has always had some level of political risk, that too has shifted over time. Revenue and spending increases under President Franklin Roosevelt’s administration, while not universally welcomed, were not villainized as much as many proposals to raise income taxes are today. FDR himself was reelected in a landslide victory just a year after the Revenue Act of 1935 passed, and then twice more subsequently prior to his death in 1945.
Reagan Tax Cuts
Fast forward a few decades, in the 1980 and 1984 elections, Ronald Reagan used tax cuts as the foundation of modern conservative orthodoxy. In 1984, for example, Reagan’s Democratic challenger, Walter Mondale, seemed to sink any chances he had to win the election when he said that the only difference between him and Reagan on taxes is that Reagan would not admit that he was going to raise them. The comments were reported as Mondale admitting he would raise taxes, without much mention that he accused Reagan of being likely to do the same.
The presidential election of 1992 laid the groundwork for some of the current tax debates. Four years prior, while serving as vice president and campaigning for the presidency, George H.W. Bush famously uttered the line “Read my lips: No new taxes!” Unfortunately for him, as president he ultimately signed into law legislation, passed by Democratic majorities in both houses of Congress, that did in fact raise some tax rates. During the ’92 campaign, Bush’s failure to adhere to that pledge became a factor in his loss to the Democratic governor of Arkansas, Bill Clinton, who often reminded voters of Bush abandoning his own pledge.
Many convenience retailers operating as pass-throughs would be looking at a significant tax increase.
Tax and spend policies would become central arguments in each presidential election since then. Republican presidents George W. Bush and Donald Trump made tax cuts for everyone central pieces of their campaigns, and both ultimately delivered across-the-board tax cuts. In both cases though, subsequent Democratic Presidents Barack Obama and Joe Biden argued that those tax cut deals were too heavily weighted toward large corporations and wealthy individuals and didn’t do enough for middle- and lower-income Americans.
After winning the election to succeed George W. Bush, President Obama ultimately rolled back some of the Bush tax cuts, particularly on higher earning Americans. President Obama’s moves overturned much of the political conventional wisdom that had stood since the Reagan days that candidates pushing for higher taxes could not win national elections.
That political change, however, did not alter Republican priorities on taxes. President Trump successfully ushered another significant tax cut into law in 2017, lowering rates across the board as well as the corporate income tax rate. While the cuts to the individual rates passed during the Trump Administration are scheduled to expire in 2025, the cuts to the business rates are permanent—although Congress can always pass a new law to change that.
Biden Rollback
President Biden and his allies in Congress are seeking to roll back aspects of the Trump tax cuts. Echoing the stances of many Democrats over the years, Biden contends that the 2017 tax cuts didn’t do enough for anyone other than large corporations and very wealthy individuals. Biden’s campaign included a pledge of rolling back many of these cuts, but only on Americans earning more than $400,000 per year. It is those plans that are central to the debate over the reconciliation package Congress was debating at the time of this writing. Democrats have proposed significant increases in upper income tax rates and business tax rates in order to pay for increased spending on social programs they have deemed “soft infrastructure.”
Their plan would return the top income tax bracket to 39.6%, while lowering the threshold for entering that bracket to $400,000 per year. What’s more, the Democrats’ plan would cap the deduction of business income available to pass-through businesses, the 199A deduction, at $400,000 per year. As a result, many convenience retailers operating as pass-throughs would be looking at a significant tax increase. The Democrats’ plan also would increase the tax rate up to 26.5% from the current 21% rate on corporations earning more than $5 million.
Tobacco Tax
Other proposals in the package would more directly impact lower income taxpayers. One that is concerning to convenience retailers is the proposal to dramatically increase and expand the federal excise tax on tobacco products. As tobacco products continue to be one of the biggest-selling categories in the convenience channel, this tax, which will predominantly be borne by those who are decidedly not rich, could have a significant negative effect on our industry by pushing tobacco sales to the black market.
If passed, the political ramifications of these tax increases will not be known until at least the 2022 midterm elections, and it will be instructive to follow how the public reacts. Clearly, arguing that at least some tax rates should be increased did not prove fatal to President Obama’s political career. He cruised to reelection in 2012 and soon after signed a law that raised some tax rates. Whether or not it proves fatal to Democratic majorities in the House and the Senate or to Biden’s presidency is yet to be determined.