The Tax Equity and Fiscal Responsibility Act of 1982, 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United States federal law that rescinded some of the effects of the Kemp-Roth Act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. As a result of ongoing recession, a short-term fall in
tax revenue generated concern over the budget deficit. TEFRA was created in
order to reduce the budget gap by generating revenue through closure of
tax loopholes and introduction of tougher enforcement of tax rules, as
opposed to changing marginal income tax 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. Summary of provisions
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 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 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repealed scheduled increases in accelerated depreciation deductions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 controversies 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depreciation deductions were repealed, a 10 percent withholding on dividends and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.
http:www.policyarchive.org102079126.pdf 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% 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 Medical program.
References