Impact of recent tax law changes.

Ziemer, Richard C.

TABLE 1 presents the direct impact on Federal Government receipts of major tax law changes enacted after 1980. These estimates are integrated conceptually and satistically with the national income and product accounts. The data shown in the table update estimates of the Economic Recovery Tax Act, the Tax Equity and Fiscal Responsibility Act, and other legislation that appeared in the February 1984 SURVEY OF CURRENT BUSINESS and estimates of the Deficit Reduction Act that appeared in the August 1984 SURVEY (referred to then as the Tax Reform Act of 1984).

The Economic Recovery Tax Act of 1981. -- The Economic Recovery Tax Act (ERTA) was enacted in August 1981; a complete description of ERTA is in the August 1981 SURVEY. Major provisions are:

* An across-the-board reduction in individual income tax rates over 33 months--5 percent on October 1, 1981, 10 percent on July 1, 1983. These reductions compound to a reduction of 23 percent. Starting in 1985, income tax brackets, the zero bracket amount, and the personal exemption will be adjusted annually for inflation as measured by the Consumer Price Index.

* An accelerated cost recovery system tha provides substantially faster depreciation write-offs for business. The news system assigns depreciable lives of 3 years for most vehicles, 5 years for most equipment, 10 years for certain public utility property, and 15 years for most depreciable real estate and some long-lived public utility property.

* Incentives for persons who put savings in specified savings accounts and repeal of the exclusion from gross income of interest and dividends.

* A substantial reduction in estate and gift taxes.

* An increase in the windfall profit tax credit for qualified royalty recipients.

The Tax Equity and Fiscal Responsibility Act of 1982. -- The Tax Equity and Fiscal Responsibility Act (TEFRA) was enacted in September 1982; a complete discussion of TEFRA is in the September 1982 SURVEY. Major provisions are:

* Withholding of 10 percent on interest and dividend payments, effective July 1, 1983. (This provision was repealed by the Interest and Dividends Tax Compliance Act of 1983, summarized later.)

* Strengthening of compliance provisions, such as the reporting of State and local government income tax refunds.

* Modification of the deductions for medical expenses and casualty losses, generally effective January 1, 1983.

* Repeal of modified coinsurance transactions, effective January 1, 1982, and introduction of other changes that reduce insurance industry taxes.

* Repeal of safe-harbor leasing, effective January 1, 1984 and enactment of various other modifications and restrictions for leasing that are generally effective July 1, 1982.

* Modification and tightening of regulations governing long-term contract accounting, effective January 1, 1983 for new contracts.

* Temporary increases in airport and airway taxes, cigarette taxes, and telephone taxes.

* An increase in the wage base and tax rate for unemployment taxes, effective January 1, 1983.

* Extension of hospital insurance coverage under medicare to Federal employees, effective January 1, 1983.

The Deficit Reduction Act of 1984. -- The Deficit Reduction Act of 1984 (DRA) was enacted in August 1984; a complete description of DRA is in the August 1984 SURVEY. Major provisions that increase taxes are:

* Tax freezes that delay, reduce, or repeal tax reductions--such as a net interest exclusion provided for by ERTA--that were to take effect in 1984 or later years.

* Modification of the income averaging provisions.

* Restrictions on depreciation allowable on assets leased to tax-exempt entities.

* Increasing to 18 from 15 the number of years over which real property (other than low-income housing) can be depreciated under the accelerated cost recovery system of ERTA.

* Modification of provisions relating to deferred payments for use of property and services.

* Although the purpose of DRA is to increase taxes, the act does provide for some tax reductions for both individuals and corporations. Major provisions that reduce taxes are:

* A 20-percent reduction in the tax liability of insurance companies.

* A 4- year extension, through 1987, of the tax exemption for mortgage bonds issued by State and local governments.

* A 1-year extension, through 1985, of the targeted jobs tax credit.

* A 6-month reduction (from 1 year), through 1987, in the length of time an asset must be held before the proceeds from its sale can qualify for capital gains tax treatment.

* A technical correction of the percentage depletion rules for secondary and tertiary oil and gas production.

The Highway Revenue Act of 1982. -- This legislation was enacted in January 1983. Its major provision was to increase the existing excise tax on gasoline and diesel fuel by 5 cents per gallon (from 4 cents to 9 cents) from April 1, 1983, through September 30, 1988. Other provisions are:

* Repeal of taxes on automobile tires, small truck tires, nonhighway-use tires, inner tubes, and tread rubber.

* Repeal of taxes on lubricating oil and on retail sales of lightweight trailers and trucks.

* An increase in taxes on heavy-duty trucks and trailers.

The Social Security Amendments of 1983. -- This legislation was enacted in April 1983; a more complete discussion is in the February 1983 and April 1983 issues of the SURVEY. Major provisions, effective January 1, 1984, are:

* A 0.3-percentage-point reduction in the employee share of the rate increase in 1984.

* An increase in the self-employed tax rate to 100 percent of the combined employer-employee rate for Social Security and medicare. Previously the rate had been 75 percent and 50 percent, respectively, of the combined rates. A 2.7-percentage-point reduction was, in effect, provided in 1984; a reduction of 2.3 percentage points was provided in 1985 and 2.0 percentage points in 1986-89.

* Mandatory coverage of new Federal civilian employees and employees of nonprofit organizations. Participating State and local governments will no longer be allowed to withdraw.

* Taxation of 50 percent of Social Security benefits when income exceeds $25,000 for single taxpayers and $32,000 for married couples. Previously, these benefits had been exempt from Federal income tax.

The Interest and Dividends Tax Compliance Act of 1983. -- This legislation was enacted in August 1983. The major provision of this act was repeal of the 10-percent interest and dividend withholding provision of TEFRA. This act replaced the 10-percent withholding provision with a "backup withholding" of 20 percent for recipients who fail to provide accurate taxpayer identification information to specified payers of interest and dividends. Other provisions provided for tax incentives on expenses incurred in attending business conventions in qualifying Caribbean Basin countries.

The Railroad Retirement Revenue Act of 1983. -- This legislation was enacted in August 1983. This legislation was necessary, as were the Social Security amendments, to provide for the long-term financial soundness of the employee retirement system. Major provisions are:

* An increase in railroad retirement payroll taxes for employers and employees.

* An increase in railroad unemployment insurance taxes effective January 1, 1984.

* Taxation of retirement benefits in excess of contributions.