The Tax Equity and Fiscal Responsibility Act of 1982 (Pub.L. 97–248), also known as TEFRA, is a United States federal law that rescinded some of the effects of the Kemp-Roth Act passed the year before. Between summer 1981 and summer 1982, tax revenue fell by about 6% in real terms, caused by the dual effects of the economy dipping back into recession (the second dip of the "double dip recession") and Kemp-Roth's reduction in tax rates, and the deficit was likewise rising rapidly because of the fall in revenue, and the rise in government expenditures. The rapid rise in the budget deficit created concern among many in Congress. TEFRA was created in order to reduce the budget gap by generating revenue through closure of tax loopholes, introduction of tougher enforcement of tax rules, rescinding some of Kemp-Roth's reductions in marginal personal income tax rates that had not yet gone into effect, and raising some rates, especially corporate rates. TEFRA was introduced November 13, 1981 and was sponsored by Representative Pete Stark of California. After much deliberation, the final version was signed by President Ronald Reagan on September 3, 1982.
|Long title||An act to provide for tax equity and fiscal responsibility, and for other purposes.|
|Enacted by||the 97th United States Congress|
|Statutes at Large||96 Stat. 324|
Summary of provisionsEdit
The Act includes certain provisions related to the US Health Care System. The Act:
- Established the prospective payment system for inpatient hospital care using the Diagnosis-related group (DRG) coding system
- Established authority for certain payments for hospice care
- Recognized Medicare as the "secondary payer" for health services to individuals covered by another private health insurance plan
- Established the provisions for Utilization Review as "....reviews of the pattern of quality of care, in an area of medical practice where actual performance is measured against, objective criteria which define acceptable and adequate practice"
- Allowed for the contracting of health maintenance organizations to provide services to Medicare recipients (Part C of Medicare)
- Established the Katie Beckett waiver (also called the TEFRA waiver), a Medicaid waiver concerning the income eligibility for home-based Medicaid services for children under the age of nineteen. It is also called a TEFRA waiver because it was passed as a provision of the Tax Equity and Fiscal Responsibility Act of 1982.
The Office of Tax Analysis of the United States Department of the Treasury summarized the tax changes as follows:
- repealed scheduled increases in accelerated depreciation deductions
- tightened safe harbor leasing rules
- required taxpayers to reduce basis by 50% of investment tax credit
- instituted 10% withholding on dividends and interest paid to individuals
- tightened completed contract accounting rules
- increased FUTA wage base and tax rate
Effects and controversiesEdit
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.
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, led by then-Congressman Jack Kemp, 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"  was passed by both houses of Congress over his veto. 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.
The original TEFRA bill as passed by the House would have lowered taxes. The Republican-controlled Senate replaced the text of the original House bill with a number of tax increases, and the bill became law after President Ronald Reagan signed it.
A lawsuit was filed by an individual named Garrison R. Armstrong, claiming that TEFRA violated the Origination Clause in 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." In 2003, former Reagan adviser Bruce Bartlett wrote in 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." However, this "increase" was achieved primarily through the cancellation of future tax cuts scheduled by ERTA the year before that had yet to take effect at the time of TEFRA's passage. Taxpayers still receive $375 billion in tax cuts in the 3 years following TEFRA.
A chart from the United States Department of the Treasury study 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 could occur from an increase in GDP:
The bill also created a hospice benefit to the Medicare program for the terminally ill with a 1986 sunset provision. It allowed States to add a hospice benefit to the Medicaid program.
|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|
- Pub.L. 97–248, 96 Stat. 324, enacted September 3, 1982
- Medicare Benefit Policy Manual Chapter 9 - Coverage of Hospice Services Under Hospital Insurance on cms.gov
- Office of Tax Analysis (September 2006) . "Revenue Effects of Major Tax Bills" (PDF). United States Department of the Treasury. Working Paper 81, page 12. Retrieved 2009-07-18.
- Congressional Budget Office, "The Economic and Budget Outlook: Fiscal Years 1984–1988" (February 1983).
- "Policy Archive - A Digital Archive of Public Policy Research" (PDF).
- Stockman, David A., "The Triumph of Politics: Why the Reagan Revolution Failed" (Harper and Row, 1986), pp. 368–369.
-  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
-  Archived 2015-10-15 at the Wayback Machine thomas.loc.gov
- Appeals, United States Court of; Circuit, Ninth (1969-12-31). "759 F2d 1378 Armstrong v. United States". OpenJurist. F2d (759): 1378.
- Armstrong v. United States 759 F.2d 1378
- Bruce Bartlett (2003-10-29). "A Taxing Experience". National Review.
- Jodie T. Allen (16 August 1996). "The Biggest Tax Increase in History". Slate.