Tax Equity and Fiscal Responsibility Act of 1982

Federal tax legislation passed in 1982 that modified some aspects of the Economic Recovery Tax Act of 1981 (ERTA). Both of these pieces of tax legislation took place during the Reagan Presidency.

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The ERTA was a piece of tax legislation that greatly lowered income tax rates, and all very high rates were given a maximum of 50%. The TEFRA modified aspects of the ERTA which caused concern over potential large budget deficits. TEFRA increased the tax received but not the tax rates. This was done by removing some of the tax breaks businesses received in the ERTA, such as the increase in the amount of accelerated depreciation that a company could deduct.

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Federal legislation to raise tax revenue, mainly through closing various loopholes and instituting tougher enforcement procedures. Among its major components:

1. Penalties for noncompliance with tax laws were increased, and various steps were taken to facilitate the collection of taxes by the Internal Revenue Service (IRS).

2. Ten percent of interest and dividends earned was required to be withheld from all bank and brokerage accounts and forwarded directly to the IRS. (This provision was later canceled by Congress after a major lobbying campaign to overturn it.)

3. Tax Preference Items were added to the old add-on minimum tax to strengthen the Alternative Minimum Tax.

4. The floor for medical expense deductions was raised from 3% to 5% of Adjusted Gross Income (AGI).

5. Casualty and theft losses were made deductible only if each loss exceeds $100 and the total excess losses exceed 10% of AGI.

6. Deductions for original issue discount bonds were limited to the amount the issuer would deduct as interest if it issued bonds with a face amount equivalent to the actual proceeds and paying the market rate of interest. This amount must be reduced by the amount of the deductions for any actual interest.

7. More rapid rates for recovering costs under the Accelerated Cost Recovery System (ACRS), which had been scheduled to go into effect in 1985 and 1986, were repealed.

8. Most of the rules providing for Safe Harbor leasing transactions authorized under ERTA were repealed.

9. Excise taxes were raised to 3% on telephone use, to 16 cents a pack on cigarettes, and to 8% on airline tickets.

10. The Federal Unemployment Tax Act wage base and tax rate were increased.

11. Numerous tax incentives for corporate mergers were reduced.

12. Net extraction losses in foreign oil and gas operations in one country were allowed to offset net extraction income from such operations in other countries in the computation of oil and gas extraction taxes.

13. Most bonds were required to be registered so that the government could ensure that bondholders are reporting interest.

14. As long as they are not prohibited by a Foreign Corrupt Practices Act, payments to foreign officials were authorized to be deducted as legitimate business expenses.

15. The basis of assets that generate tax Investment Credits was reduced by one-half the amount of the credit.

16. Pension and profit-sharing qualified plans were curtailed with a series of new rules that restricted plan loans, required withholding on plan distributions, limited estate-tax exclusions on certain plan distributions, and restricted "top-heavy" plans, those tilted to benefit mostly the top-earning employees of a company.

17. Changes were made in the way life insurance companies were taxed.

Legislation (Public Law 97-248) affecting health maintenance organizations and the Medicare and Medicaid programs. Provides regulations for the development of HMO risk contracting with the Medicare program and, through an amendment, establishes new provisions for the foundation and operation of peer review organizations.

The Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324 (Sept. 3, 1982) (TEFRA), a United States federal law, rescinded some of the effects of the Economic Recovery Tax Act of 1981 (ERTA, colloquially known as the Kemp-Roth Tax Cut) passed the year before.

The scheduled increases in accelerated depreciation deductions were repealed, a 10 percent withholding on dividends and interest paid to individuals was instituted, and the Federal Unemployment Tax Act wage base and tax rate were increased. Excise taxes on cigarettes were temporarily doubled, and excise taxes on telephone service temporarily tripled, in TEFRA.^[1]

President of the United States Ronald Reagan agreed to the tax hikes on the promise from Congress of a $3 reduction in spending for every $1 increase in taxes. Some conservatives^[who?] claim that the promised spending reductions never occurred. One week after TEFRA was signed, H.R. 6863 - the Supplemental Appropriations Act of 1982 which Ronald Reagan claimed would "bust the budget" ^[2] was passed by both houses of Congress over his veto^[3]. Four years later, then-budget director David Stockman, however, stated that Congress substantially upheld its end of the bargain, and cites the Administration's failure to identify management savings and its resistance to defense spending cuts as the key impediments to greater outlay savings.^[4]

The original TEFRA bill as passed by the House lowered taxes^[5]. The Democrat-controlled Senate replaced the text of the original House bill with a number of tax increases, and the bill became law after Ronald Reagan signed it. A lawsuit was filed by Garrison R. Armstrong claiming that TEFRA violated Article One of the United States Constitution which requires all revenue bills to originate in the House. The United States Court of Appeals for the Ninth Circuit ruled against Armstrong, saying

We therefore conclude that the Senate did not exceed its authority under the origination clause when it proposed the extensive amendments that ultimately became TEFRA.

In 1988, libertarian political writer Sheldon Richman described TEFRA as "the largest tax increase in American history".^[6] In 2003, former Reagan adviser Bruce Bartlett wrote in the National Review that

"TEFRA raised taxes by $37.5 billion per year", elaborating, "according to a recent Treasury Department study, TEFRA alone raised taxes by almost 1 percent of the gross domestic product, making it the largest peacetime tax increase in American history."^[7]

A chart from the United States Department of the Treasury study^[8] showing the bill's effect on government revenues is reproduced below. As it shows, the TEFRA increased tax revenues by almost 1% (0.98%) of GDP, in marked contrast to the 1981 tax cuts and the milder effects of the other Reagan-era tax bills. The study makes note that these government revenue estimates do not take into account the effect of the bills on GDP, and therefore, are not inclusive of resulting increases in revenue that would occur from an increase in GDP^[9]:

Revenue effects of major tax bills enacted under Reagan (as percentage of GDP)^[8]

	Number of years after enactment
Tax bill	1	2	3	4	First 2-yr avg	4-yr avg
Economic Recovery Tax Act of 1981	-1.21	-2.60	-3.58	-4.15	-1.91	-2.89
Tax Equity and Fiscal Responsibility Act of 1982	0.53	1.07	1.08	1.23	0.80	0.98
Highway Revenue Act of 1982	0.05	0.11	0.10	0.09	0.08	0.09
Social Security Amendments of 1983	0.17	0.22	0.22	0.24	0.20	0.21
Interest and Dividend Tax Compliance Act of 1983	-0.07	-0.06	-0.05	-0.04	-0.07	-0.05
Deficit Reduction Act of 1984	0.24	0.37	0.47	0.49	0.30	0.39
Omnibus Budget Reconciliation Act of 1985	0.02	0.06	0.06	0.06	0.04	0.05
Tax Reform Act of 1986	0.41	0.02	-0.23	-0.16	0.22	0.01
Omnibus Budget Reconciliation Act of 1987	0.19	0.28	0.30	0.27	0.24	0.26
Total	0.33	-0.53	-1.63	-1.97	-0.10	-0.95

References

1. ^ Congressional Budget Office, "The Economic and Budget Outlook: Fiscal Years 1984-1988" (February 1983).
2. ^ [1]DEFICIT POLITICS AND DEMOCRATIC UNITY: THE SAGA OF TIP O’NEILL, JIM WRIGHT, AND THE CONSERVATIVE DEMOCRATS IN THE HOUSE OF REPRESENTATIVES DURING THE REAGAN ERA
3. ^ [2] thomas.loc.gov
4. ^ Stockman, David A., "The Triumph of Politics: Why the Reagan Revolution Failed" (Harper and Row, 1986), pp. 368-369.
5. ^ [3]Armstrong v. United States 759 F.2d 1378
6. ^ The Sad Legacy of Ronald Reagan
7. ^ Bruce Bartlett (2003-10-29). "A Taxing Experience". National Review. http://www.nationalreview.com/nrof_bartlett/bartlett200310290853.asp. 
8. ^ ^{a b} Office of Tax Analysis (2003, rev. September 2006) (PDF). Revenue Effects of Major Tax Bills. United States Department of the Treasury. Working Paper 81, Table 2. http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf. Retrieved 2007-11-28. 
9. ^ Office of Tax Analysis (2003, rev. September 2006) (PDF). Revenue Effects of Major Tax Bills. United States Department of the Treasury. Working Paper 81, Page 8. http://www.ustreas.gov/offices/tax-policy/library/ota81.pdf. Retrieved 2009-10-08. 

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