The Tax Equity and Fiscal Responsibility Act of 1982 (),
also known as TEFRA, is a
United States federal law
The law of the United States comprises many levels of codified and uncodified forms of law, of which the most important is the nation's Constitution, which prescribes the foundation of the federal government of the United States, as well as va ...
that rescinded some of the effects of the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
Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
on September 3, 1982.
Summary of provisions
The Act includes certain provisions related to the
US Health Care System
The United States far List of countries by total health expenditure (PPP) per capita, outspends any other nation on health care, measured both in ''per capita'' spending and as a percentage of GDP. Despite this, the country has significantly wo ...
. The Act:
* Established the prospective payment system for inpatient hospital care using the
Diagnosis-related group
Diagnosis-related group (DRG) is a system to classify hospital cases into one of originally 467 groups, with the last group (coded as 470 through v24, 999 thereafter) being "Ungroupable". This system of classification was developed as a collaborat ...
(DRG) coding system
* Established authority for certain payments for
hospice care
Hospice care is a type of health care that focuses on the palliation of a terminally ill patient's pain and symptoms and attending to their emotional and spiritual needs at the end of life. Hospice care prioritizes comfort and quality of life by ...
[Medicare Benefit Policy Manual Chapter 9 - Coverage of Hospice Services Under Hospital Insurance](_blank)
on cms.gov
* Recognized Medicare as the "secondary payer" for health services to individuals covered by another private
health insurance
Health insurance or medical insurance (also known as medical aid in South Africa) is a type of insurance that covers the whole or a part of the risk of a person incurring medical expenses. As with other types of insurance, risk is shared among ma ...
plan
* Established the provisions for
Utilization Review
Utilization management (UM) or utilization review is the use of managed care techniques such as prior authorization that allow payers, particularly health insurance companies, to manage the cost of health care benefits by assessing its appropriaten ...
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 organization
In the United States, a health maintenance organization (HMO) is a medical insurance group that provides health services for a fixed annual fee. It is an organization that provides or arranges managed care for health insurance, self-funded heal ...
s to provide services to Medicare recipients (Part C of
Medicare)
* Established the
Katie Beckett waiver (also called the TEFRA waiver), a
Medicaid waiver
Medicaid Waiver programs help provide services to people who would otherwise be in an institution, nursing home, or hospital to receive long-term care
Long-term care (LTC) is a variety of services which help meet both the medical and non-medic ...
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 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
The Federal Unemployment Tax Act (or FUTA, ) is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. ...
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
The president of the United States (POTUS) is the head of state and head of government of the United States of America. The president directs the executive branch of the federal government and is the commander-in-chief of the United Stat ...
Ronald Reagan
Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician, actor, and union leader who served as the 40th president of the United States from 1981 to 1989. He also served as the 33rd governor of California from 1967 ...
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.
[Stockman, David A., "The Triumph of Politics: Why the Reagan Revolution Failed" (Harper and Row, 1986), pp. 368–369.] 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
David Alan Stockman (born November 10, 1946) is an American politician and former businessman who was a Republican U.S. Representative from the state of Michigan (1977–1981) and the Director of the Office of Management and Budget (1981–1985 ...
, 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
The Origination Clause, sometimes called the Revenue Clause,Wirls, Daniel and Wirls, Stephen. The Invention of the United States Senate', p. 188 (Taylor & Francis 2004). is Article I, Section 7, Clause 1 of the U.S. Constitution. The clause says ...
in
Article One of the United States Constitution
Article One of the United States Constitution establishes the legislative branch of the Federal government of the United States, federal government, the United States Congress. Under Article One, Congress is a bicameral legislature consisting of ...
which requires all revenue bills to originate in the House. The
United States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit (in case citations, 9th Cir.) is the U.S. federal court of appeals that has appellate jurisdiction over the U.S. district courts in the following federal judicial districts:
* District ...
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
Libertarianism (from french: libertaire, "libertarian"; from la, libertas, "freedom") is a political philosophy that upholds liberty as a core value. Libertarians seek to maximize autonomy and political freedom, and minimize the state's e ...
political writer Sheldon Richman described TEFRA as "the largest tax increase in American history." In 2003, former Reagan adviser
Bruce Bartlett
Bruce Reeves Bartlett (born October 11, 1951) is an American historian and author. He served as a domestic policy adviser to Ronald Reagan and as a Treasury official under George H. W. Bush. Bartlett also writes for the New York Times Economi ...
wrote in
National Review
''National Review'' is an American conservative editorial magazine, focusing on news and commentary pieces on political, social, and cultural affairs. The magazine was founded by the author William F. Buckley Jr. in 1955. Its editor-in-chief i ...
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.
[Slate
Slate is a fine-grained, foliated, homogeneous metamorphic rock derived from an original shale-type sedimentary rock composed of clay or volcanic ash through low-grade regional metamorphism. It is the finest grained foliated metamorphic rock. ...]
"> Taxpayers still receive $375 billion in tax cuts in the 3 years following TEFRA.