The Omnibus Budget Reconciliation Act of 1981 (OBRA 1981 or Gramm-Latta II) and the Economic Recovery Tax Act of 1981 (ERTA 1981 or the Kemp-Roth Tax Cut) comprised the first budget of the administration of Ronald Reagan (for FY82). Together the two bills established Reagan's fiscal priorities as tax cuts, reductions in domestic discretionary spending, and increased military spending. OBRA 1981 was passed using the reconciliation process created by the 1974 Congressional Budget and Impoundment Control Act.
During his presidential campaign Ronald Reagan proposed three fiscal policies: 1) increased defense spending; 2) cuts in non-defense appropriations; and 3) tax cuts. In 1980 Reagan appointed David Stockman, a young Congressman from Michigan and committed supply-sider, to head the Office of Management and Budget. Soon after Reagan entered office Stockman proposed a budget for the 1982 fiscal year that would implement all three policies.
At the time the U.S. Senate was controlled by Republicans and the House by Democrats. However, the Democrats included a number of conservative southerners who agreed with many of Reagan's proposals. In response to Stockman's budget, Representative James Jones (D-Ok), chairman of the House Budget Committee, tried to draft his own budget to keep the Democratic coalition together. However, Representative Phil Gramm (D-Texas) leaked information to the Reagan administration about Jones' plan, which led the administration to propose a counter-budget, cosponsored by Gramm (he later lost his position on the Budget Committee, resigned his seat, and ran as a Republican for his vacant seat) and Representative Delbert Latta (R-OH), that passed Congress via reconciliation in the summer of 1981. Perhaps the centerpiece of Reagan's budget was the tax cut, officially known as the Economic Recovery Tax Act but better known as
the Kemp-Roth Tax Cuts, named after the bill's sponsors: Representative Jack Kemp (R-NY) and Senator William Roth (R-DE). The tax cuts slashed marginal rates for individuals and made deep cuts to corporate taxes.
The Omnibus Budget Reconciliation Act of 1981 included steep increases in military spending, steep cuts in non-defense expenditures, and a large tax cut (legislated through ERTA 1981). Although the Reagan administration predicted that the combination of spending and tax cuts would reduce the federal deficit, the deficit exploded under Reagan.
This was partially a result of slow economic growth, which was in turn precipitated by the Federal Reserve's moves to reduce the money supply so as to curb inflation. On the whole, however, the ballooning federal deficit was caused by declines in tax revenue. As a result of the tax cuts, revenues for the federal government dropped $200 billion by 1986 and contributed to consecutive budget deficits and a massive increase in the national during the Reagan and George H.W. Bush presidencies.
David W. Brady and Craig Volden, Revolving Gridlock: Politics and Policy from Carter to Clinton (Westview, 1998), 43-99.
John William Ellwood, "Congress Cuts the Budget: The Omnibus Reconciliation Act of 1981," Public Budgeting & Finance (Spring 1982): 50-64. http://onlinelibrary.wiley.com/doi/10.1111/1540-5850.00549/abstract
Iwan Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush (University of Kansas, 2009), 76-121.
David A. Stockman, The Triumph of Politics: Why the Reagan Revolution Failed (HarperCollins, 1986).
Joseph White and Aaron Wildavsky, The Deficit and the Public Interest: The Search for Responsible Budgeting in the 1980s (University of California, 1989).
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