v 

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Excise Taxes 
VA 

COMMUNICATIONS TAX REPEAL 

Present Law 

Amounts paid for certain communication services are 

subject to a communications excise tax. The rate of this tax 

for 1978 is 4 percent. The tax is being phased out by 

reducing the rate by one percentage point a year. As of 

January 1, 1982 the tax will be repealed. 

Services subject t o tax are local telephone service, 

long distance toll telephone service including WATS, and 

teletypewriter exchange service. Private communication 

services which are charged for separately are exempted from 

the tax. 

Reasons for Change 

In the Excise Tax Reduction Act of 1965, Congress 

instituted a comprehensive overhaul of the excise tax system. 

The only uncompleted step in this overhaul is repeal of the 

communications tax. 

In addition to completing the overhaul of the excise 

tax system planned in 1965, repeal of the communications tax 

will help to reduce inflation. Repeal of the tax will reduce 

the cost of living both directly and by lowering business 

costs. As the resulting reductions in business costs are 

passed through in the form of price cuts, they will reduce 

inflation through lower consumer prices and through the 

effect of these lowe r prices on cost-of-living adjustments in 

wages. Repeal of the communications tax will be particularly 

beneficial to lower and middle income persons, who bear a 

disproportionately heavy share of the tax. 

Between 40 and 50 percent of this tax reduction will be 

reflected in lower prices of communications services paid by 

business firms. The rest will be reflected in lower prices 

paid by individual telephone users. 

General Explanation 

The Administrat1on proposes to repeal the communications 

tax as of October 1, 1978. Repeal will be effective for 

service for which bills are first rendered on or after such 

date, except that the tax will continue to apply to services 

supplied before August 1, 1978 even though a bill is first 

render ed on or after October 1. 

- 327 -
Revenue Estimate 

1978 

Change In Tax Liability 

($ millions) 

Calendar Years 

1979 1980 1981 

-355 -1,200 -900 -500 

- 328 -

1982 1983 
VB 

UNEMPLOYMENT TAX RATE REDUCTION 

Present Law 

The unemployment compensation program is financed by a 

combination of Federal and State employer payroll taxes. In 

general, the Federal tax effectively is equal to 0.7 percent 

of the first $6,000 of each worker's annual earnings. The 

nominal Federal tax rate is 3.4 percent: it is generally 

offset by a credit of 2.7 percent for State unemployment tax 

payments. 

Unemployment benefits can be provided for up to 65 

weeks. The first 26 weeks is referred to as "regular 

coverage," the next 13 weeks is referred to as "extended 

benefit coverage,• and the final 26 weeks is referred to as 

"supplemental benefit coverage." State unemployment taxes 

are used to finance the regular coverage plus half of the 

extended benefit coverage. The Federal government through 

the Federal Unemployment Insurance Fund ("FUIF") finances the 

other half of extended benefit coverage plus all of the 

supplemental benefit coverage. In addition, States which 

have run out of money to pay unemployment benefits may borrow 

from the FUIF. 

Federal unemployment taxes are deposited in the FUIF. 

Federal general revenues are loaned to · the FUIF to the extent 

it does not otherwise have sufficient funds to meet its 

obligations. 

Reasons for Change 

The 1974-1975 recession had a severe impact on the 

unemployment insurance system. As shown in the following 

table, as of December 1977 the Trust Fund had borrowed about 

$8.9 billion from general revenues to finance those 

unemployment benefits which are a Federal responsibility. 

- 329 -
Table VB-1 

Federal UI Costs Costs Htt B:i 

Extended Federal :Loans from 

Benefits :Supplemental :Total:Payroll:General 

Benefits Tax :Revenue 

($ mill ions) 

Prior to CY 1975 661 661 661 

CY 1975 1,306 2,271 3,577 130 3,447 

CY 1976 1,237 2,946 4,183 160 4,023 

CY 1977 Estimate 946 620 1,566 750 816 

4,150 5,837 9,987 1,040 8,947 

Office of the Secretary of the Treasury January 18, 1978 

Office of Tax Analysis 

Moreover, about half the States have exhausted their 

insurance reserves and have borrowed an additional $4.4 

billion from the Trust Fund. The Trust Fund in turn has 

borrowed this money from the general revenues. Further, 

between 1979 and 1981, Federal unemployment tax revenues are 

expected to fall short of outlays by $600 million. 

Congress has taken two steps in response to this extraordinary financing problem. The rate of Federal unemployment 

tax was effectively increased from 0.5 to 0.7 percent as of 

January 1, 1977. This increased rate is scheduled to remain 

in effect until the FUIF has repaid all general revenue 

advances other than those which financed loans to the States. 

Also, costs of the Federal supplemental benefit program 

incurred after April 1, 1977, are being funded directly out 

of general revenues. 

The January 1977 increase in the rate of Federal 

unemployment tax has raised business costs, thereby 

increasing inflationary pressures. The Administration is 

committed to financing normal unemployment benefits out of 

employer payroll taxes. However, the Administration believes 

it is inappropriate for the extraordinary expenses resulting 

from the severe 1974-1975 recession and the continuing rate 

of high unemployment to be financed solely out of payroll 

taxes. 

- 330 -
General Explanation 

The Administration proposes to restore the Federal 

unemployment payroll tax to its normal effective rate of 0.5 

percent, a reduction of 0.2 percentage points. 

In addition, the Administration plans to consider 

whether further use of general revenues is necessary to 

strengthen the present financial positio~ of the FUIF, or to 

ensure the financial strength of the FUIF for the future. 

Analysis of Impact 

The reduction in the effective rate of Federal unemployment tax will assist in reducing inflation. As the resulting 

reductions in employer wage costs are passed through in the 

form of price cuts, they will reduce inflation directly 

through lower consumer prices and, indirectly, as the lower 

prices result in lower cost-of-living wage adjustments. 

(As the employer cost reductions are passed through in the 

form of price cuts, the reduction in wage costs will 

eventually translate into a reduction in the GNP deflator of 

approximately 0.1 percent.) 

The impact of the rate reduction, in terms of percentage 

of wages, will be greatest for costs associated with the 

employment of low-wage workers. Thus, the reduction will 

partially offset the increased employer costs associated with 

recent minimum wage legislation and will increase the demand 

for low-skilled labor. 

Effective Date 

The reduction in the rate of Federal unemployment tax 

will be effective as of January 1, 1979. 

Revenue Estimate 

1978 1979 

-850 

Change in Tax Liability 

($ millions) 

Calendar Years 

1980 1981 1982 

-900 -950 -1,000 

- 331 -

1983 

-1,050 

U.S. (lOVE!INMI:NT PIIII>'Tll'iO Of"lo'lCE ' Jtl8 0 - 254-671