What Is the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)?

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is a law passed in 1982 that was designed to reduce the federal budget deficit through a combination of tax increases, spending cuts, and tax reform measures. The legislation reversed some elements of the Economic Recovery Tax Act of 1981 (ERTA), also known as the Kemp-Roth Act. Both pieces of legislation were passed early in the presidency of Ronald Reagan.

Understanding the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)

Shaped by Republican Senator Robert Dole, then chair of the Senate Finance Committee, TEFRA was meant to raise more revenue by closing loopholes in the tax system, introducing stricter compliance and tax-collection measures, increasing excise taxes on cigarettes and telephone services, and increasing corporate taxes.

Adjusted for inflation, TEFRA remains the biggest tax increase in U.S. history. It was largely a repudiation of the ERTA, which had passed a year earlier and remains the largest tax cut in U.S. history.

At the time TEFRA was being debated in Congress, the U.S. economy was in the middle of a recession. Some called it a "double-dip" recession because the economy fell to recessionary levels, recovered, and then fell again into recession, all in the single 12-month period between the summer of 1981 and the summer of 1982. Government revenues fell by about 6% due to a combination of ERTA tax cuts and normal recessionary effects.

The result was a budget deficit that grew to a then-record $110.7 billion in 1982. (In 2021, the federal budget deficit was $2.8 trillion.)

TEFRA also rescinded some ERTA reductions in personal income-tax rates that had not yet gone into effect.

Other Elements of TEFRA

TEFRA ultimately touched a vast number of Americans in its efforts to reduce federal spending and increase government revenues.

For example, many of the reimbursement rules for the Medicare and Medicaid programs were revised to rein in their costs. Procedures for payments of Social Security and unemployment compensation were altered.

The bill temporarily doubled the federal cigarette tax and tripled the telephone service tax.

It also had an impact on businesses and investors. TEFRA abolished some of the tax breaks businesses received under ERTA, such as accelerated depreciation. It also instituted a 10% withholding tax on dividends and interest paid to individuals who did not have certified tax identification numbers.

Historic Tax Increase Under TEFRA

President Ronald Reagan had campaigned on tax cuts and limited government. Early in his first term, he had won a then-substantial $28.3 billion in tax cuts for business through the passage of ERTA.

Many were puzzled that he would agree to undo some of the tax breaks created in ERTA, which had been a significant legislative achievement. But he could not ignore the growing deficit.

In fact, Reagan resisted any tax increases for a time but eventually relented in exchange for a pledge for even bigger spending cuts as part of the deal. When he finally signed the bill into law on Sept. 3, 1982, Reagan stressed that the measure increased taxes largely by closing loopholes and that it would raise more than $98 billion over three years while cutting spending by $280 billion during the same period.

That figure was disputed. The Heritage Foundation claimed at the time that the bill would actually increase spending by 21 cents for every dollar brought in through tax increases.

The Bottom Line

The Tax Equity and Fiscal Responsibility Act was an attempt to raise government revenue without raising income taxes. Its focus was on toughening tax enforcement to close the so-called "tax gap" of unreported and under-reported income. Ultimately, TEFRA had a broad impact on the incomes of millions of Americans, from waitresses dependent on tips to retirees dependent on pensions.