Reducing the Federal Budget:

Strategies and Examples,

Fiscal Years 1982-1986

A CBO Study

February 1981

Congress of the United States

Congressional Budget Office

NOTICE

There Should Be No Release

of This Document Until

10 a.m. (E.S.T.)

Tuesday, February 3, 1981

REDUCING THE FEDERAL BUDGET:

STRATEGIES AND EXAMPLES,

FISCAL YEARS 1982-1986

The Congress of the United States

Congressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402

PREFACE

This report was written in response to a request by 12

members of the House Budget Committee—Robert N. Giaimo, Chairman

of the Committee during the 96th Congress, James R. Jones,

Chairman of the Committee for the 97th Congress, Barber B.

Conable, Jr., Bill Frenzel, Richard A. Gephardt, Delbert L. Latta,

Norman Y. Mineta, Bill Nelson, Leon E. Panetta, Ralph S. Regula,

Paul Simon, and Timothy E. Wirth—for a report on the possible

strategies that could lead to a reduction in the size of the

federal budget.

The report was prepared by all divisions of the Congressional

Budget Office under the supervision of Alfred B. Fitt. Robert L.

Faherty, Francis S. Pierce, and Patricia H. Johnston edited the

manuscript and coordinated its preparation for publication. The

final drafts were typed by Mary A. Anders, Linda Brockman, Jill

Bury, Shirley Hornbuckle, Norma Leake, Andy McDonald-Houck, Kathleen M. Quinn, Janet Sale, and Janet Stafford. Barry J. Holt,

Pierce J. Johnson, John D. Shillingburg, and Martin L. Skutnick

also provided valuable assistance in the preparation of this

report.

In keeping with CBO's mandate to provide objective analysis,

the report contains no recommendations.

Alice M. Rivlin

Director

February 1981

iii
NINETY-SIXTH CONGRESS

JIM WRIGHT, TKX.

NORMAN Y. MINETA. CAUF.

'• COMMITTEE ON THE BUDGET

TIMOTHY K, WIRTH, COCO.

UtOH K. PANKTTA. CALJF.

RICHARD A. GEPHARDT. MO.

MU. NELSON, FLA.

WILJLJAM H. GRAY III. PA.

of &epre*entattbe*

E ON THE BUDGET

SBaa&fogton, &C. 20515

September 30, 1980

Dr. Alice M. Rivlin

Director

Congressional Budget Office

Washington, D. C. 20515

Dear Dr. Rivlin:

On December 20, 1979, we requested a report from the Congressional Budget

Office on possible strategies that could lead to a reduction in the size

of the federal budget.

The CBO report that we received proved to be of substantial assistance

in shaping Congressional budget decisions for Fiscal Year 1981. We believe

that a second edition of such a report could be equally useful to the next

Congress when it takes up Fiscal Year 1982 budget issues. We request that

CBO make a thorough examination of programs and program areas that may have

outlived their usefulness, may be beneficial but could be better targeted,

or may fund functions more appropriately handled by other levels of government,

or by the private sector, or may simply not be affordable if the budget is

tight.

We suggest that for each example you show the outlay savings, not only

from the CBO five-year current law projection, but also, where applicable,

from the President's Fiscal Year 1982 budget recommendations as well.

We believe it would be useful if you would meet with staff members of

our Committee prior to instituting this study so that the findings and recommendations can be of maximum use to us.

Thank you for your assistance.

Sincerely,

^ *6e^«_

DELBERT L. LATTA
-2-

BARBER B. CONABLE, JR RICHARD A. GEPHARDT

PAUL SIMON

BILL FRENZEL

L NELSON

CONTENTS

Page

PREFACE iii

LETTER OF REQUEST iv

CHAPTER II. INTRODUCTION 1

CHAPTER II. BUDGET REDUCTION EXAMPLES 13

Continued Restructuring of Military Bases ... 15

Increase in Joint Service Advertising 17

Streamlining of Military Recruiting Support

Operations 18

Ending of Certain Social Security Credits

for Military Personnel 19

Continued Restructuring of Active-Duty

Military Retirement 20

Restructuring of Reserve Retirement Pay .... 22

Increase in the States1 Share of Army

National Guard Costs 24

Substitution of KC-10 Procurement for KC-135

Re-engining 25

Termination of E-4B Aircraft Procurement ... 27

Accelerated Buyout of Aircraft 29

Limiting of Defense Investment Increases to

3 Percent Real Growth 30

Increased Efficiency in Defense Procurement . . 32

Reform of Federal Wage-Setting Provisions ... 34

Elimination of Dual Pay for Reservists Who

Are Federal Employees 36

Sale of Surplus Silver 38

Reduction of P.L. 480 Title I Sales 39

Phasing Out of DISCs . 41

Increased Interest Charges on Development

Loans 43

Elimination of One Space Shuttle Orbiter ... 45

Elimination of DOE Funding for Synthetic

Fuel Development 46

Termination of the Clinch River Breeder

Reactor Project 48

vii
Private Financing of the Strategic Petroleum

Reserve 50

Reduced Funding for the Economic Regulatory

Administration 52

Increased Waterway User Charges . 53

Elimination of the States1 Share of Land and

Water Conservation Fund 55

Elimination of Urban Park Grants 57

Increased Charges for Outdoor Recreation and

Topographic Maps 58

Reduced Funding for EPA Construction Grants . . 59

Elimination of Tax Exemption for Pollution

Control Bonds 61

Elimination of Farm Deficiency Payments .... 63

Reduction in Dairy Price Support Levels .... 65

Increased Interest Rate on Rural Housing

Loans 67

Discontinuance of Postal Service Subsidies . . 69

Change in Timing of Payments to the Postal

Service 71

Elimination of Tax Exemption on Small-Issue

IDBs 72

Limiting of Home Mortgage Interest

Deduction 74

Reduction of Capital Gains Exclusion on

Home Sales 76

Repeal of Consumer Interest Deduction 77

Reduced Funding for Amtrak ..... 79

Phasing Out of Conrail Funding 81

Reduction in New Subway Commitments 83

Reduced Spending on Highways 85

Repeal of Davis-Bacon Requirements 88

Shifting Certain Airways Costs 90

Elimination of Maritime Industry Subsidies . . 92

User Charges for Certain Coast Guard

Activities 94

User Charges for Deep-Draft Navigation .... 96

Reduced Funding for Urban Development

Action Grants 98

Elimination of Energy Impact Assistance .... 100

Increased Interest Rates on Disaster Loans . . 102

Reduced Funding for Vocational Education . . . 104

Reduced Funding for Impact Aid 106

Reduced Funding for Emergency School Aid . . . 108

Reduced Student Loan Subsidies 109

viii
Limit on Parental Personal Exemption for

Students Ill

Elimination of Two Youth Employment and

Conservation Programs ..... 113

Phasing Out of CETA Title VI 115

Limiting of Eligibility for Targeted Jobs

Tax Credit 117

Lowering of the Federal Share for State

Medicaid and AFDC Programs 118

Reimbursement Rates 120

Incentives to States for Hospital Cost

Containment 122

Elimination of Merchant Seaman Health Care

Entitlement 124

Termination of Some Federal Medicaid Funding. . 126

Tightening of the Medical Expense Deduction . . 128

Taxation of Some Employer-Paid Health

Insurance 130

Limiting of Hospital Bond Tax Exemption .... 132

Termination of Certain Social Security

Benefits 134

Repeal of Extra Personal Exemption for the

Elderly 138

Delay in Social Security Cost-of-Living

Adjustment 140

Elimination of Earnings Test and Taxation

of Benefits for Some Social Security

Recipients 141

Changes in Social Security Indexing 143

Changes in Civil Service and Military

Retirement Benefits 146

Taxation of All Unemployment Benefits 148

Elimination of National Trigger for Unemployment Insurance Extended Benefits .... 149

Change in Computing Insured Unemployment

Rates 151

Modification in Trade Adjustment Assistance . . 153

Charging of Interest on Loans to States

for Unemployment Compensation 155

Reduced Funding for Lower-Income Rental

Assistance 156

Repeal of the Casualty Loss Deduction 159

Limitation on Federal Disability Benefits ... 161

Funding for AFDC and Medicaid with a Block

Grant 163

ix
Reduced Funding for Child Nutrition

Programs 165

Funding of Child Nutrition Programs with

a Block Grant 166

Changes in Food Stamp Program 168

Recoupment of Food Stamp Benefits 171

Change in the Low Income Energy Assistance

Program 173

Administrative Improvements in AFDC 176

Standardizing of the AFDC Work Expense

Disregard 176

Changes in VA Pension Benefits for Surviving Spouses 179

Limitation of VA Burial Benefits 180

Elimination of Dual Living Expenses Paid

by Unemployment Insurance and GI Bill

Benefits 182

Increase in IRS Resources 183

Strengthening of Agency Debt Collection

Activities 184

Repeal of Tax Credit for "Possessions

Corporations" . 186

APPENDIX: SUMMARY TABLES OF ILLUSTRATIVE EXAMPLES

CATEGORIZED BY BUDGET FUNCTION 189
TABLES

Page

TABLE 1. CBO BASELINE OUTLAY PROJECTIONS, FISCAL YEARS

1982-1986 1

TABLE 2. OUTLAYS FOR BENEFITS TO INDIVIDUALS, FISCAL

YEAR 1980 9

TABLE A-l. ILLUSTRATIVE SAVINGS IN BUDGET AUTHORITY

FROM CBO BASELINE PROJECTIONS, BY BUDGET

FUNCTION, FISCAL YEARS 1982-1986 191

TABLE A-2. ILLUSTRATIVE SAVINGS IN OUTLAYS FROM CBO

BASELINE PROJECTIONS, BY BUDGET FUNCTION,

FISCAL YEARS 1982-1986 197

TABLE A-3. ILLUSTRATIVE SAVINGS IN BUDGET AUTHORITY

FROM CARTER BUDGET PROJECTIONS, BY BUDGET

FUNCTION, FISCAL YEARS 1982-1986 203

TABLE A-4. ILLUSTRATIVE SAVINGS IN OUTLAYS FROM CARTER

BUDGET PROJECTIONS, BY BUDGET FUNCTION,

FISCAL YEARS 1982-1986 209

TABLE A-5. ILLUSTRATIVE REVENUE INCREASES FROM CBO

BASELINE PROJECTIONS, BY BUDGET FUNCTION,

FISCAL YEARS 1982-1986 215

xi

CHAPTER I. INTRODUCTION

Federal spending has been growing steadily in recent years,

both in absolute amounts and in relation to the Gross National

Product (GNP). Spending grew from an average of 20,1 percent of

GNP during the first half of the 1970s to 21.7 percent in the

second half. In fiscal year 1980, unified budget outlays of $579.6

billion amounted to 22.6 percent of GNP, the highest proportion

ever in peacetime. Projected fiscal year 1981 outlays of $660

billion will be an even higher proportion, 23.8 percent.

If current policies were to continue unchanged, with no new

programs at all, federal spending would still go on growing during

the next five years (see Table 1). This growth would not be as

fast as the projected growth in the economy, so spending as a percent of GNP would decline by fiscal year 1986 to 21.7 percent —

still a high figure by historical standards.

TABLE 1. CBO BASELINE OUTLAY PROJECTIONS, FISCAL YEARS 1982-1986

(In billions of dollars)

Outlays 1982 1983 1984 1985 1986

In Current Dollars 740 819 906 996 1,088

In Constant 1972 Dollars 307 310 314 315 316

As Percent of GNP 23.4 22.8 22.5 22.1 21.7

The areas of spending growth from any one year to the next are

easy to identify. In fiscal year 1981, just four budget functions—defense, health, income security, and interest—will account

for a rise in outlays of $88 billion. Federal spending in the

aggregate for all other purposes will actually decline in 1981

(although within that aggregate there will be pluses to offset some

of the minuses).
The reasons for spending growth are also easy to state. The

Congress and the nation are evidently committed to large real

increases for defense. Past Congresses have legislated other

commitments as well: to the aged, the sick, the poor, the jobless,

and the disabled, among others. Demographic forces drive up the

costs of Social Security, Medicare, and other federal programs for

the aged. A recession increases the cost of unemployment compensation, food stamps, Medicaid, welfare, and similar programs.

Furthermore, the payments in many of the programs are adjusted at

least once a year for inflation; the July 1980 cost-of-living

increase mandated by law for Social Security has alone added $17

billion to fiscal year 1981 federal spending.

While it may be easy to identify the areas of federal spending

growth and the reasons for that growth, what to do about it is

another matter. The Congressional Budget Office (CBO) does not

take a position on how much the federal government ought to spend,

or on which activities of the government should be continued,

expanded, contracted, or eliminated. The size of the government

and its programs are for the Congress and the President, and ultimately for the voters, to decide. But if the Congress decides to

cut back the size of the federal government, or slow down the

growth of spending, it has many available strategies to achieve

those ends, and within those strategies an even wider variety of

specific actions. The rest of this report discusses those strategies and contains examples of possible actions.

BACKGROUND

Federal outlays in fiscal year 1980 can be divided into five

broad categories:

Billions Percent

of Dollars of Total

National Defense 124.0

Benefits to Individuals 285.1

Grants to States and Localities 57.1

Net Interest 52.5

All Other Federal Operations 60.9

Total 579.6 100.0

Projected spending for fiscal year 1981 will be distributed

about the same way. Interest on the public debt must be paid, and
defense spending will rise rather than fall (although some savings

within the defense total are possible). Hence, restraint, if it is

to occur, must take place in the remaining 70 percent of the

budget. Because more than four-fifths of that 70 percent is

governed by statutory formulas and entitlements, instead of by an

annual appropriations decision, significant savings must depend on

the alteration of those formulas and entitlements.

The 1980 Experience with Reconciliation

The Congressional Budget Act of 1974 contemplated that the

Congress would occasionally need to amend permanent legislation in

order to achieve its annual budget goals. The reconciliation

process, so called because the underlying laws are changed to bring

about spending and revenue results consistent with the adopted

budget, was carried out for the first time in 1980 as part of a

Congressional effort, ultimately frustrated by inflation and the

1980 recession, to balance the fiscal year 1981 budget.

The Omnibus Reconciliation Act of 1980 contained provisions

amending scores of statutes. Its estimated effects for fiscal year

1981 were to reduce spending by $4.6 billion and to increase

revenues by $3.6 billion. Over the five years 1981-1985, those

totals were projected to be $50.3 billion and $29.2 billion,

respectively.

The savings achievements through reconciliation did not come

easily. More than 100 conferees met off and on for more than two

months. The bill that finally cleared the Congress on December 3,

1980, legislated reductions in airport and highway spending, in

child nutrition programs, in Medicare and Medicaid reimbursement

formulas, in eligibililty for Social Security disability payments

and for extended unemployment insurance benefits, in various

veterans1 entitlements, and in many other federal programs.

The Second Session of the 96th Congress made other changes

that were not technically part of the reconciliation process but

were consistent with its spirit. For example, it ended the states1

entitlements under general revenue sharing, saving $2.3 billion in

1981 alone, and it began phasing out most of the grant programs of

the Law Enforcement Assistance Administration, saving about $150

million in 1981.

While the Reconciliation Act fell short of achieving all the

savings contemplated in the First Concurrent Budget Resolution for

1981, the Congress nevertheless demonstrated that reconciliation
can be accomplished. The mechanism for securing comprehensive

Congressional decisions about ending or lowering federal spending

commitments is in place, and it works.

Tax Subsidies and User Charges

On the revenue side of the budget, the Congress used the reconciliation process to make a number of changes in the Internal

Revenue Code. In particular, the act restricted the use of

tax-exempt bonds to finance a below-market interest rate for home

mortgages, thereby limiting a rapidly growing tax subsidy.

Such tax subsidies are often called tax expenditures because,

in principle, their purposes could also be achieved by the appropriation of budget authority to be expended in the form of grants

or loans. They influence the size of the federal deficit (or

surplus) in just the same fashion as direct spending programs.

When a tax subsidy is halted, the resulting savings can be used to

fund some other program, or to reduce the national debt, or to

help finance a tax cut.

By restricting the use of tax-exempt bonds for home mortgages,

the Reconciliation Act avoided an estimated $21.5 billion revenue

loss during the next five years. That sum eventually will be

devoted to direct spending programs, or to reducing the deficit, or

to cutting taxes, as the Congress decides.

User charges for particular government services present the

same issues. For example, if national park visitors and private

plane owners are required to pay more of the costs of the federal

services they receive, funds will be freed up for other purposes,

possibly for more parks and more air safety, but also possibly for

lowering the burden on taxpayers generally. This report therefore

includes not only a number of examples of changing tax subsidies,

but also several involving higher user charges.

STRATEGIES FOR RESTRICTING GROWTH

Achieving Management Efficiencies

It is probably true that every agency of the federal government could manage its resources better than it does. Savings could

unquestionably be achieved through efficiencies, reducing paperwork, simplifying procurement, lessening the number of consultants

employed, increasing the proportion of competitive procurements,
and the like. Though the desirability of such efforts cannot be

overstated, this report does not treat them in detail, for they are

mainly matters in which the Executive Branch must take the lead.

Until specific management efficiency proposals are advanced by the

Administration, it will be difficult to estimate the benefits that

might accrue in the form of lower spending or a less cumbersome

federal government.

Taking Short-Run Actions

The government can take a number of actions to put an immediate brake on spending. Imposing federal hiring freezes, pay

caps, limits on official travel, and the like, bring prompt savings, as do delaying projects and deferring maintenance. Such

actions also provide a clear signal of the government's determination to economize and to cut back. But by their nature they are

pauses rather than policy changes; for the long haul, the Congress

will still have to find a way to cope with the ongoing pressures

that have driven federal spending steadily upward.

Setting Across-the-Board Rules

The Congress could adopt a number of general rules for itself

that, if followed, might achieve very large and continuing savings.

Less Indexing. If the Congress repealed all automatic indexing of entitlements, and instead made an annual across-the-board

decision about the degree to which the government can afford to

protect citizens against inflation, the largest and least controlled upward pressure on federal spending would be brought under

the discipline of the budget process. The rule might resemble that

now followed for adjusting federal white-collar pay, under which

the President recommends a stated percentage that becomes effective

unless the Congress acts to alter it.

Annually Adjusted Charges. Another general rule the Congress

could enact would be to key the price of all services for which the

government makes a charge to the cost of the provided service, and

adjust that charge annually. To involve large sums, the rule would

have to apply to more than such things as park fees and publication

sales; it would have to include the user charges for highways,

waterways, air travel, and the like.

Variable Interest Subsidies. When the government borrows

money at one rate and lends it to a person or a firm at a lower

rate, someone must pay the difference. The government makes

84-656 0-81- 2
millions of such loans, amounting to billions of dollars, every

year. But there is often no regular procedure for adjusting the

interest rate charged by the government to reflect changes in the

interest rate the government must pay.

The Congress could enact a rule that interest subsidies in

every federal credit program be keyed to the government's borrowing

costs at the time the loan is made. If the interest charged in a

given program was fixed at 6 percent when the legislation was

passed and the federal borrowing rate was 9 percent, a loan made

now, when the government borrows at 15 percent, would have an

interest rate of either 10 or 12 percent depending on whether the

Congress had prescribed a proportionate or a three-percentage-point

subsidy.

The Congress could go further and require that all future

federal loans bear interest at least equal to the government's

borrowing costs, with the further subsidy, if any, to take the

form of an annually appropriated amount for the forgiveness of

principal. The grant now hidden in most federal lending programs

would thus become explicit and subject to frequent review.*

Consolidating and Reducing Grants to the States

Definite outlay savings can be achieved if the Congress combines multiple and related categorical grant programs into a single

block grant and appropriates a new total that is less than the sum

of the parts.

There are several arguments for such a course. One often made

is that the states are closer to the actual problems and can do a

better job than the Congress in allocating the dollars involved.

This raises the prospect that program goals might not suffer even

though the dollars were fewer. State and local officials have

occasionally expressed a willingness to accept lower totals in

return for the greater flexibility and lesser complexity inherent

in a block grant.

1. The estimated present value of the interest subsidy from new

federal lending activity in 1980 alone was $23.7 billion; see

Budget of the United States Government, Fiscal Year 1982,

Special Analyses, Table F-ll, p. 193.
Another argument for combining categorical into block grants

is that doing so will necessarily reduce the amount of paper to be

processed, while at the same time eliminating the vexing inconsistencies in funding cycles, application due dates, grantee eligibility rules, and the like, that are the hallmarks of related categorical grant programs.

Combining multiple categorical grant programs into a block

grant will also probably result in some administrative savings at

the federal level, but the amount is unlikely to be large or capable of precise prediction. Furthermore, what is saved at the

national level may be lost at the state level; someone must make

the plan, approve the proposal, write the check, audit the books,

and do the other detailed work for each program.

The federal government would also pay a price for the savings

that might come from this strategy. Block grant funds would certainly not be spent for the identical purposes, or in the same

proportions, or by the same localities, or for the same beneficiaries, as the funds previously targeted by the Congress in the

categorical grants that made up the new block grant. If this were

not so, there would be little point to the consolidation. It is

almost equally certain that those who were disappointed with the

manner in which block grant funds were distributed would return to

the Congress seeking a new set of arrangements.

For example, the Community Development Block Grant (CDBG)

program legislated in 1974 combined seven separate categorical

programs. CDBG funds ($3.9 billion in 1980) can be spent for the

same purposes as the previous programs, which includes encouraging

private economic development. Even so, the Congress in 1977 targeted a new $400 million categorical program for private economic

development, Urban Development Action Grants (UDAG), and subsequently raised its authorized level to $675 million.

In summary, the consolidation of categorical programs into

block grants can lead to a reduction in federal spending, but the

savings will be significant only if the Congress appropriates less

for the single new program than it did for all the old programs,

and only if it resists future claimants who do not like the outcome

of state and local allocation decisions under the block grant

system.

Reducing Growth in Entitlement Programs

About half of all federal spending is for benefits to individuals, so the Congress must examine this broad category if it
wishes to restrain the federal budget. But practically all such

benefits are entitlements, meaning that those who meet the eligibility rules get prescribed payments (in cash or in services); the

payment does not depend on an annual appropriations decision by the

Congress. Even where the Congress has technically retained control

over the annual funding level of a benefit program, as it has with

food stamps, in practice the costs are still driven by the numbers

of people who meet the eligibility rules.

The largest category of federal spending for payments to individuals is in connection with Social Security and other retirement and disability programs. Benefits of this kind amounted to

28 percent of all 1980 outlays (see Table 2). Because more people

will qualify for these programs in 1981, and because their compensation will have been higher than that of the people who have left

the rolls because of death, 1981 outlays will be about $6 billion

more than in 1980.

Real growth of the kind just described will be dwarfed by the

nominal growth stemming from the indexation of benefit levels for

inflation. Every major federal income support program—defined to

include any program accounting for at least 1 percent of 1980

spending—is automatically indexed by law at least once a year,

with the following exceptions: unemployment compensation, Aid to

Families with Dependent Children (AFDC), and service-connected

disability payments to veterans.

Even when not explicitly indexed by law, most of the benefit

programs are indexed in fact. This is true, for example, of veterans' service-connected disability payments, which the Congress has

increased every year in line with inflation; and of health programs

like Medicare, which perforce rise in cost as health care charges

rise; and of the Guaranteed Student Loan program, as students

borrow more to meet higher tuitions and as the interest subsidy

they receive rises along with government borrowing costs.

It follows that restraining growth in entitlement programs

will require some combination of less generous benefit levels, less

generous indexing, stricter eligibility rules so that fewer people

qualify, and phasing out of whole programs.

As an example of deciding on less generous benefit levels, the

Congress could impose an actuarial reduction on the pensions of

federal employees who retire at an early age, just as it has

imposed such a reduction on early Social Security retirees; or it

could increase the 7 percent retirement contribution paid by most

federal civilian employees to some higher rate.

8
TABLE 2. OUTLAYS FOR BENEFITS TO INDIVIDUALS, FISCAL YEAR 1980

Program

Retirement and Disability

Armed forces

Federal civilian

Railroad

Miners

Veterans

Social Security

Subtotal

Health

Medicare

Medicaid

Federal civilian retirees

Veterans1 hospital & medical

All other

Subtotal

Education

College student aid

Guaranteed loan interest

subsidy

Social Security student

benefits

Veterans1 education benefits

Subtotal

Unemployment Compensation

Public Assistance

Subsidized housing

Nutrition programs

Food stamps

SSI for aged, blind, and

disabled

AFDC and other welfare

Earned income tax credit

Low-income energy assistance

Refugees

Subtotal

Miscellaneous

Grand Total

Outlays

(millions of

dollars)

12,127

14,739

4,737

1,840

11,689

116,573

161,705

35,025

13,957

631

6,276

2,694

58,583

3,683

1,408

1,976

2,342

9,409

18,004

5,377

4,802

9,117

6,411

7,308

1,275

1,564

368

36,222

1,155

285,078

Percent of

All Outlays

2.09

2.56

0.82

0.32

2.02

20.13

27.93

6.05

2.41

0.11

1.08

0.47

10.12

0.64

0.24

0.34

0.40

1.63

3.11

0.93

0.83

1.57

1.11

1.26

0.22

0.27

0.06

6.26

0.20

49.24

MeansTested?

No

No

No

No

Partially

No

No

Yes

No

Partially

Partially

Yes

No

No

No

No

Yes

Mostly

Yes

Yes

Yes

Yes

Yes

Yes

SOURCE: Congressional Budget Office.
Less generous automatic indexing might take the form of

dropping the automatic provision entirely, as described earlier in

this report, or of adjusting benefits by the lesser of price or

wage index changes, as described later.

Stricter eligibility ruleg could take the form, for example,

of gradually raising the "normal" Social Security retirement qualification age from 65 to 68, or of limiting the medical expense

income tax deduction to those whose expenses of that kind exceed 10

percent of income, instead of 3 percent as now.

Phasing out some entitlement programs could be done according

to specific criteria:

Is the program obsolete? U.S. merchant seamen have been entitled since 1798 to free, all-inclusive health care from the federal government, at a current annual cost of about $170 million.

Arguably the reasons for the commitment have long since vanished,

but the program continues.

Is the program duplicative? Social Security benefits for

unmarried dependent students aged 18 to 21 were enacted in 1965,

when the government had no college student grant program. Since

then the Congress has put in place a comprehensive set of student

aid programs to ensure that no one's access to college will be

barred by financial need; but Social Security student benefits

continue as before, at an annual cost of nearly $2 billion.

Is the entitlement justified by need but not awarded according

to need? In 1948, the Congress enacted an extra income tax

exemption for people aged 65 and over, on the general theory that

the elderly were likely to have suffered an income loss. But the

entitlement includes all elderly taxpayers, with the result that

the 7.4 percent with incomes over $50,000 receive 17 percent of the

$2.2 billion in tax relief provided by the extra exemption.

Is the entitlement well designed to achieve the stated purpose? Trade Adjustment Assistance benefits go to American workers

laid off because of foreign competition, at a likely cost of about

$2.5 billion in 1981. But the program seems to have small effects

in helping the affected workers to seek or obtain less vulnerable

employment, so that little "adjustment" may be occurring.

All of the measures discussed in this report involve exceedingly difficult and contentious political value judgments. The

10
inclusion of illustrative examples is not meant as an assertion

that any ought to be carried out, or that arguments against the

described changes may not outweigh those for the changes. But if

the Congress is to bring down federal spending as a percent of the

Gross National Product, something of the sort described here will

have to happen.

11

CHAPTER II. BUDGET REDUCTION EXAMPLES

This chapter contains brief descriptions of 105 possible

actions to affect the federal budget. They are listed in the same

order as the budget function categories to which they apply. A few

affect more than one function; these have been assigned to the

function on which the proposal has the largest dollar impact.

The list of 105 potential changes is by no means exhaustive;

many others could be added. The inclusion of an item on the list,

or its omission from it, does not imply a recommendation by the

Congressional Budget Office (CBO). The items discussed are simply

illustrative examples.

The savings estimates contained in this chapter for direct

spending programs are calculated against CBO's preliminary fiveyear budget projections (the "CBO baseline") for fiscal years 1982-

1986, unless a different source is specifically cited. The CBO

baseline is not a forecast of what will happen. Rather, it is

intended to answer the question: What might the federal budget

look like in each of the next five years if the policies embodied

in the budget actions taken by the Congress through December 31,

1980, were continued unchanged—except for adjustments to reflect

inflation and demographic changes?

Each item also includes estimated savings resulting from the

CBO option, using President Carter's fiscal year 1982 budget recommendations as the base for the calculation. If the resulting

estimate is the same as that derived from the CBO baseline, only

one estimate is given. In those cases where savings from the

Carter budget differ from those against the CBO baseline, both are

displayed and the difference is accounted for in the text.

When the item involves revenue rather than spending changes,

the revenue gain of the CBO option applies both to the CBO baseline

and to the Carter Budget. If President Carter has made a related

proposal, the item shows the gain against the CBO baseline from

both the CBO option and the Carter budget proposal.

The estimated savings or revenue gains shown for the separate items cannot be added to a grand total because some of the

13
proposals are alternatives to others, and because some may affect

the expenditures of other federal programs in ways that are difficult to estimate precisely.

In general, the savings estimates assume that the proposal

under discussion will take effect on October 1, 1981. If a different effective date is assumed, it is stated in the discussion of

the item. This is particularly the case with those proposals

involving reductions in tax subsidies; there the date used is the

earliest feasible one that is consistent with fairness and

practicality.

All of the savings estimates in this report are preliminary.

They will be updated in mid-March 1981 to reflect any changes to

the CBO baseline projections stemming from possible revisions in

economic assumptions, and from detailed analysis of new programmatic information in President Carter's fiscal year 1982 budget, or

as it may be amended by President Reagan.

14
CONTINUED RESTRUCTURING OF MILITARY BASES

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

0

0

38

32

135

118

150

144

166

161

489

455

NOTE: Preliminary estimates, subject to change.

The Department of Defense manages over 5,000 installations

and properties worldwide. The cost of operating and maintaining

these facilities in fiscal year 1981 will be about $16 billion.

Since 1969, the department has taken more than 4,000 realignment

and closure actions designed to provide a more efficient defense

structure and to reduce base operating costs. Further actions are

possible.

Proponents of further base restructuring point to the wide

variation in base operating support costs as an indication of the

potential savings from such actions. For example, the cost per

person assigned to a mission task at the most expensive base often

exceeds that at an average base by three to one and sometimes much

more—even after adjusting for base size and type of mission.

While many factors influence such cost comparisons, the wide

variation suggests that further efficiencies are possible. Proponents also contend that changes in the nation's strategic needs,

force levels, and weapons technology demand modifications in the

existing basing structure. Such realignments need not eliminate

places for reserve unit training or reduce mobilization potential,

since bases can be put in caretaker status.

CBO has no independent estimate of the total savings possible

from further base realignments, because such estimates depend

critically on detailed reviews of the situation at each base. One

basis for an estimate is the Department of Defense's March 1979

base realignment proposals affecting 157 military installations

and activities. If the department pursues and the Congress allows

the remaining realignments in this proposal, total savings over

15
the next five years would amount to $455 million. These savings

would result primarily from a reduction of 2,700 military and 2,800

civilian positions. There would be few if any savings in 1982

because of the added costs of construction, transferring employees,

and avoiding economic dislocation.

The major opposition to base realignments stems from the

economic dislocation they might produce in communities near the

bases—often a cause of intense local concern. Measures can be

taken, however, to mitigate this. The Department of Defense states

that its Office of Economic Adjustment has been relatively successful in providing planning assistance and ensuring that federal

grants and loans are directed to affected communities.

16
INCREASE IN JOINT-SERVICE ADVERTISING

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

18

15

21

20

24

23

26

26

29

29

118

113

NOTE: Preliminary estimates, subject to change.

Since the transition to an all-volunteer force began in 1973,

advertising budgets for military recruiting have grown from almost

nothing to over $140 million for fiscal year 1981. Less than 10

percent of these funds have been dedicated to joint advertising in

which two or more services appear in the same advertisement.

Yet the Department of Defense has found that, for certain purposes,

joint-service advertising would be more cost-effective. Tests

show, for example, that joint-service magazine advertising yields,

per dollar spent, 1.5 times the number of applicant leads for

recruiting as does single-service magazine advertising. Jointservice advertising may also help to avoid undesirable interservice

competition for recruits.

If these findings hold for all advertising media, the services

could cut advertising costs substantially and still obtain the same

number of qualified leads. For example, if Congressional appropriations actions mandated conversion of one-half the single-service

media budgets into joint advertising, savings could amount to $15

million in fiscal year 1982 and $113 million over the next five

years.

The principal argument against joint-service advertising

is that it provides a popular service, such as the Air Force, with

more leads than others like the Army, even though the Army's

manpower requirement is far greater. Also, single-service advertising is useful in publicizing occupations such as armor crewman

or nuclear propulsion specialist that are unique to a specific

service. Under the option described above, however, the services

could use the half of their advertising funds not devoted to joint

advertising to meet these specialized objectives.

17
STREAMLINING OF MILITARY RECRUITING SUPPORT OPERATIONS

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1^82 1983 1984 1985 T986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

66

59

73

71

80

79

88

87

96

95

403

391

NOTE: Preliminary estimates, subject to change.

The transition to an all-volunteer force during the 1970s

spawned a dramatic growth in military recruitment costs, which

rose from about $125 million in fiscal year 1970 to nearly $1

billion in 1981. These expenditures pay for recruiting, examining,

advertising, cash enlistment bonuses, and education incentives for

active and reserve recruits. About two-thirds of the total is for

the pay and support of some 18,000 production recruiters working in

7,000 recruiting offices nationwide.

A decade of experience suggests possible ways of reducing

these costs without reducing productivity. For example, the

Department of Defense could consolidate a number of logistical

and administrative support functions common among the services,

including the training of recruiters, the development and operation

of computerized recruit information systems, the leasing of vehicles and recruiting offices, and specialized functions such as

education and occupational guidance counseling. The services, and

particularly the Army, could also streamline their recruiting

management structures and search for other opportunities to consolidate and standardize operations in this field.

If Congressional appropriations action mandated these changes,

CBO estimates savings of $391 million would be possible over the

next five years, primarily from personnel reductions. The Congress

might well require a detailed plan from the services for minimizing

transition difficulties and the risk of recruiting shortfalls

before mandating the changes described here.

18
ENDING OF CERTAIN SOCIAL SECURITY CREDITS FOR MILITARY PERSONNEL

Annual Savings Annual Long-

(millions of dollars) Run Savings

Savings from 1982 1983 1984 1985 1986 (1982 dollars)

CBO Baseline and

Carter Budget

BA

Outlays

0

0

0

0

0

0

0

0

0

0

30

30

NOTE: Preliminary estimates, subject to change.

Since 1957, military personnel have contributed to the Social

Security System and received benefits in proportion to their

basic military pay. But some military personnel receive additional

Social Security benefits based on credits of as much as $1,200 a

year for which they do not contribute. The noncontributory

credits are given to personnel whose basic pay is less than the

maximum earnings subject to Social Security taxes—in 1980, over 95

percent of those in uniform.

According to a 1980 General Accounting Office (GAO) study, the

Congress intended the noncontributory credits to provide added

disability and survivor benefits for those who spend only a few

years in the military. GAO concluded, however, that today's

noncareer personnel generally receive disability and survivor

benefits from several sources and in adequate amounts. Moreover,

the Congress apparently did not anticipate that career military

personnel would benefit from the noncontributory credits, although

recent increases in the maximum earnings subject to Social Security

taxes ensure that most will.

If the Congress eliminated noncontributory credits for future

service, the Social Security System would begin to experience

savings in about 15 years. These savings would eventually grow to

about $30 million a year (in 1982 dollars). Elimination of the

noncontributory credits would, of course, slightly reduce military

compensation. Any adverse effect on retention should be small,

however, since the benefits based on the noncontributory credits

are small and are received many years after military reenlistment

decisions are made.

19
CONTINUED RESTRUCTURING OF ACTIVE-DUTY MILITARY RETIREMENT

Annual Savings Annual Long-

(millions of dollars) Run Savings

Savings from 1982 1983 1984 1985 1986 (1982 dollars)

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

900

900

0

0

NOTE: Preliminary estimates, subject to change.

The active-duty military retirement system provides benefits

for about 1.2 million retirees at a cost of about $13 billion in

fiscal year 1981. Under this system, nondisability retirees earn

benefits after 20 or more years of service irrespective of their

age or whether they subsequently find employment in the private

sector. Those serving for fewer than 20 years earn no benefits.

Five major studies, plus a legislative proposal from the Carter

Administration, have recommended providing more of the total

military compensation package "up front" rather than in retirement

years. This would provide raid-career personnel with increased

incentives to remain in the service, while reducing the incentive

to leave the military immediately after completion of 20 years'

service. In 1980, the Congress moved in this direction by requiring that retirement pay for new recruits be based on the three

years when their pay was highest, rather than their pay on the day

of retirement.

The Congress could continue to change the military retirement

laws along lines recommended in various studies. It could implement a Social Security "offset" for nondisability retirees in order

to integrate military retirement benefits with Social Security.

The offset would equal the portion of the Social Security pension

attributable to military service, but not more than 40 percent of

military benefits. This formula was enacted last year for the

military survivor benefits program. In order to move some of the

savings from this offset up front, the Congress could also provide

a deferred benefit, beginning at age 60, for those leaving the

military with between 10 and 19 years of service. This deferred

benefit would be based on the same formula as the annuities provided those serving longer careers.

20
The deferred benefit for those serving 10 to 19 years would

increase the rate of reenlistments by first-term personnel. This

would offset the decline in retention resulting from the Social

Security offset. This package would thus increase the numbers of

career personel with five to 12 years of service, a shift most of

the services think desirable. The changes would also save money.

Savings would eventually reach $0.9 billion a year, or about 7

percent of long-run nondisability retirement costs. Although the

savings would probably not begin for at least 20 years, the liability that the government is accruing for future retirement costs

would be adjusted immediately.

The Social Security offset might be opposed by the services as

an erosion of benefits, especially if it was applied to personnel

currently on active duty. There is also some uncertainty with

respect to CBO's estimates and there could be a net decline in

retention.

President Carter's fiscal year budget recommendations include

proposals similar to the foregoing. Therefore, this option would

not produce substantial savings relative to the Carter budget.

84-656 0-81- 3 21
RESTRUCTURING OF RESERVE RETIREMENT PAY

Annual Savings Annual Long-

(millions of dollars) Run Savings

Savings from 1982 1983 1984 1985 1986 (1982 dollars)

CBO Baseline and

Carter Budget

BA

Outlays

0

0

0

0

0

0

0

0

0

0

300

300

NOTE: Preliminary estimates, subject to change.

Under current law, military reservists with 20 or more years

of satisfactory service are eligible for a retirement annuity

beginning at age 60. About 113,000 former reservists are drawing

retirement pay, at a cost to the federal government of $687 million

in fiscal year 1980.

Numerous studies have criticized the military compensation

system for providing too great a proportion of benefits upon

retirement, and not enough compensation in earlier years. This

may tend to produce a shortage of junior personnel and an excess of

senior careerists. An informal 1978 study by the Department of

Defense of the reserve compensation system contained data showing

the fraction of reservists with 20 or more years of service to be

more than 50 percent above the level desired.

The Congress could take account of these criticisms and

reduce reserve retirement benefits for senior careerists by integrating them with Social Security. The reserve retiree's annuity

might be reduced by the portion of his Social Security pension

attributable to his military earnings, but by not more than 40

percent of military benefits. This formula was enacted in 1980

for the military survivor benefits program. In addition, the

Congress could provide an annuity at age 60 for enlisted reservists

separating with between 10 and 19 years of service, using the same

formula applied to those with longer careers. Currently, those who

leave with fewer than 20 years of service receive nothing.

Net savings from these changes would eventually reach about

$300 million a year (in 1982 dollars), or about 20 percent of

22
reserve retirement costs. Significant outlay savings under this

option would not begin for 10 to 40 years, depending upon the

treatment of those now in the reserves, but the liability that the

government is accruing for future reserve retirement costs would be

adjusted immediately.

The incentives provided by these changes could improve the

composition of the reserve forces, as well as overall reserve

manning. On the other hand, such major changes in the long-established reserve compensation system might have a detrimental impact

on manning in some reserve components.

23
INCREASE IN THE STATES' SHARE OF ARMY NATIONAL GUARD COSTS

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

210

210

230

230

250

250

270

270

300

300

1,260

1,260

NOTE: Preliminary estimates, subject to change.

The 344,000 members of the Army National Guard serve two

functions. They are part of the nation's reserve military forces,

and they are used by the states to keep order when other police and

security forces are inadequate, for assistance after natural

disasters, for holiday traffic patrols, and for other state purposes. The states pay salary costs only when the Guard is actively

performing a state mission; they pay nothing else toward the cost

of the insurance role the Guard fulfills. This option would

require the states to pay 10 percent of the operating cost of

the Army Guard.

The argument in favor of the change, aside from the federal

savings that would occur, is that it is reasonable to ask state

governments to bear at least a part of the ongoing costs of

military units that are primarily used for state purposes; and

that, if the states had to pay some part of the costs, they would

examine more carefully the desired size and capability of their

Guard units. Opponents might well argue that the Guard's size is

determined by federal mobilization requirements and that the

Guard's state functions are simply auxiliary duties.

24
SUBSTITUTION OF KC-10 PROCUREMENT FOR KC-135 RE-ENGINING

Annual Savings

(millions of dollars)

Savings from

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1982

-353

-36

0

0

1983

507

-105

N.A.

N.A.

1984

701

169

N.A.

N.A.

1985

764

536

N.A.

N.A.

1986

1,715

813

N.A.

N.A.

Cumulative

Five-Year

Savings

3,334

1,377

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

For several years, the Air Force has sought to expand its

aerial refueling capacity through two programs: first, procurement

of the new KC-10 advanced tanker, already begun; and second,

development of a program to replace the old, noisy, and less

efficient engines of the existing KC-135A tanker with modern

engines. The CBO baseline includes funds to re-engine 288 KC-135A

tankers during the next five years, which would increase aerial

refueling capacity by the equivalent of 144 KC-135A aircraft. This

is because the new engines would permit the KC-135A to carry more

fuel while consuming less for its own flight.

On the other hand, it would be less expensive to purchase more

KC-10 tankers. On missions for which either tanker is suitable,

the KC-10 is estimated to be roughly equivalent to three KC-135As.

Consequently, 48 additional KC-10 aircraft would equal the capabilities offered by re-engining 288 KC-135As. Buying these extra

KC-10 aircraft, and not re-engining any KC-135A aircraft or

developing the program, would save a total of $1,377 million over

the next five years. These savings assume that the 48 KC-10

aircraft would be purchased at a rate of one per month under

terms comparable to those of the current contract, which offers

substantial discounts for purchases of this size and rate.

In addition to providing roughly equal capability for many

missions for which either tanker is suitable, this option would

also increase the number of large KC-10 tankers, which are particularly efficient refuelers on long, nonstop transits like those

25
to the Persian Gulf. The option would, however, mean keeping in

operation noisy and less efficient KC-135A aircraft. Their

noise causes problems for the Air National Guard, which sometimes

operates them near heavily populated areas. Moreover, operating

expenses under this option could be expected to increase—mostly in

years beyond 1986—because of the manpower needed to support the

extra KC-10 aircraft, though the life-cycle increases in operating

costs would be substantially less than the procurement savings over

the next five years.

President Carter's fiscal year 1982 budget recommendations

contain no KC-10 procurements and no substantial funds for KC-135

re-engining. Consequently, there is no opportunity for the tradeoff proposed in this option.

26
TERMINATION OF E-4B AIRCRAFT PROCUREMENT

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

0

0

N.A.

N.A.

0

0

N.A.

N.A.

388

39

N.A.

N.A.

320

204

N.A.

N.A.

0

281

N.A.

N.A.

708

524

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

The E-4B is a 747 aircraft modified to function as an airborne military command post during a nuclear war. The planes are

intended to serve both as a National Emergency Airborne Command

Post (NEACP) for the President and his advisors and as support

for the Strategic Air Command's "Looking Glass" mission, which

provides a command post on continuous airborne alert over the

central United States.

The Department of Defense has four E-4 aircraft that are

sufficient to support the NEACP role; all have been or will be

upgraded to the E-4B configuration. The department plans to buy

two more E-4B aircraft for the Looking Glass mission. If the

Congress did not buy these two aircraft, savings over the next five

years would total $524 million.

If no further E-4B aircraft were purchased, Looking Glass

missions would continue to be flown by the EC-135 aircraft (707-

type) that have been used over the past 20 years and are now being

modernized. The savings figure cited above includes the added

costs needed to enhance this modernization. Many of the advantages

of the E-4B have been incorporated into the modernization program.

The E-4B and EC-135 will have comparable computer capabilities.

Very low frequency (VLF) communications, a key type of communications, will be improved on the EC-135 and will substantially

match VLF coverage on the E-4B. Satellite terminals for EC-135

aircraft are currently under development and could be fielded

quickly.

27
The E-4B does have several advantages over the modernized

EC-135. The E-4B could carry a larger battle staff (41 versus 17),

have greater endurance in an emergency, and be hardened against

certain nuclear effects. Even if Looking Glass was not routinely

flown by the larger E-4B aircraft, however, some of the four

existing E-4Bs could be used to complement current operations if

there was sufficient warning of an emergency.

President Carter's fiscal year 1982 budget recommendations

do not contain sufficient detail to permit calculating the effect

of the proposal relative to his budget.

28
ACCELERATED BUYOUT OF AIRCRAFT

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

-790

-126

N.A.

N.A.

502

-374

N.A.

N.A.

540

-7

N.A.

N.A.

0

408

N.A.

N.A.

0

264

N.A.

N.A.

252

165

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

The Department of Defense is planning to phase out the production of the F-14, F-15, and A-10 aircraft over the next three

years. By ending the production of each aircraft one year earlier,

but buying more aircraft in the remaining years, so as to buy the

same total number of aircraft, savings of approximately $165

million could be achieved. These savings result from economies of

scale in production and the elimination of one year of factory

overhead costs for each aircraft program.

Under this modified program, each of the production lines

would close one year earlier, thereby reducing the fighter aircraft

production base, with a loss of tooling and skilled factory labor.

Thus, in case of an unexpected war, it would take a considerable

period of time to restart production of these aircraft, as compared

with the expansion of an ongoing production line. However, ongoing

production lines for other similar combat aircraft exist in both

the Air Force and the Navy.

President Carter's fiscal year 1982 budget deletes further

procurement of A-10 aircraft beginning in 1982. Additional information about outyear programs is not available at this time.

Consequently, there is no present basis for estimating savings

relative to the Carter Budget from an accelerated buyout.

29
LIMITING OF DEFENSE INVESTMENT INCREASES TO 3 PERCENT REAL GROWTH

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

3,000

400

1,600

900

6,500

1,700

N.A.

N.A.

8,800

3,100

N.A.

N.A.

6,300

4,200

N.A.

N.A.

-7,900

2,500

N.A.

N.A.

16,700

11,900

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

In fiscal year 1981, the Congress provided for an increase of

15 percent in the real value of budget authority for the investment

accounts of the Department of Defense: research and development

(R&D), procurement, and military construction. The Congress could

decide, however, that real increases in investment budget authority

over the next five years should be limited to the 3 percent annual

rate of growth that is the NATO standard for overall defense expenditures. This would reduce investment budget authority by almost

$17 billion over the five-year period 1982-1986 relative to the CBO

baseline, and result in outlay savings of about $12 billion in the

same period.

Such a strategy would not affect Congressional commitments to

increases in defense expenditures for pay or operating expenses.

It would, however, slow modernization of the armed forces in a

period when some believe that rapid modernization is needed. It

might also send the wrong signal to U.S. allies, whom many believe

need to do more, but are only likely to do so with strong U.S.

leadership.

A cut of this magnitude would require some substantial changes

to current plans. Several suggestions have already been offered

elsewhere in this report; if all of these were pursued, five-year

savings would total more than $4 billion relative to budget

authority in the CBO baseline.

30
One way to achieve the remaining $13 billion in savings would

be to proceed more slowly with those programs whose schedules are

jeopardized by technological and other concerns, and to reduce or

cancel programs for which cheaper substitutes might be available.

A list of examples is provided below that would save $13 billion

over the 1982-1986 period, although the annual pattern of savings

might differ from the table above.

Delaying development of the MX missile basing system by one

year, to permit resolution of current environmental concerns, would

save $8 billion relative to baseline budget authority, although

this would also delay initial deployment of MX by a year. Delaying

the manned bomber for a year, to provide additional time for

deciding among competing alternatives, could save at least $1 billion during the 1982-1986 planning period, and perhaps as much as

$7 billion, although again at the potential cost of delaying initial deployment of the aircraft.

To respond to escalating costs in the F/A-18 program and the

Navy's preference for the F-14 fighter, F/A-18 procurement could be

limited to enough aircraft to equip nine Marine fighter squadrons.

This would save $2.5 billion even after allowing for purchase of

150 additional F-14s, 198 additional AV-8Bs, and 180 A-7s to make

up the deficit in Navy and Marine aircraft. Limiting procurement

of the AEGIS cruiser to three in 1982, versus the four assumed in

the CBO baseline, would permit a more orderly buildup of the program and save $0.9 billion. Limiting procurement of the XM-1 tank

to equipping the divisions that would deploy to Europe in the first

ten days following mobilization, while developing a two—man tank as

a follow-on that would be less expensive to operate, would save

$0.8 billion.

President Carter's fiscal year 1982 budget authority recommendations propose more R&D and military construction, and less procurement than the CBO baseline contains. Consequently, the pattern

of cuts relative to President Carter's budget request would be

somewhat different, but insufficient information is available to

make calculations at this time.

31
INCREASED EFFICIENCY IN DEFENSE PROCUREMENT

Annual Savings

(millions of dollars)

Savings from 1982 1983 1984 1985 1986

CBO Baseline and

Carter Budget

BA N.A. N.A. N.A. N.A. N.A.

Outlays N.A. N.A. N.A. N.A. N.A.

Cumulative

Five-Year

Savings

N.A.

N.A.

In fiscal year 1982, the Department of Defense will buy over

$100 billion in goods and services from the private sector. This

cost could possibly be reduced, without eliminating any purchases,

by more efficient procurement procedures.

The department could, for example, use more than one company

to manufacture a weapon. Particularly for weapons like missiles

that are bought in large quantities, such "second sourcing" maintains competition and may cut long-term costs substantially. Also,

the department could buy weapons at more economic rates, which may

often be higher than today's procurement rates. If these buy rates

are consistent with defense needs, they would minimize overhead

costs that must be paid to producers. Many questions must, of

course, be considered in deciding on second sourcing and the buy

size for weapons. The Congress could focus attention on these

questions by requiring that the department submit a statement with

each proposed buy of weapons. The statement would assess the

desirability of second sourcing or changing the buy size, and estimate the costs and savings associated with such actions.

The Congress might also want to grant the department more

authority to enter into multiyear contracts for selected weapons

systems. Such multiyear contracts reduce the uncertainty about

future buys. This may cut costs by prompting producers to stockpile needed raw materials that are likely to increase in price,

encouraging investments in tooling that cut long-run costs, and

facilitating efficient scheduling by prime contractors and their

subcontractors. The Congress could increase the opportunities for

multiyear contracting, while also retaining leeway to terminate a

program, by increasing the payments that can be made to a company

if its multiyear contract is terminated early.

32
Finally, the Department of Defense might be able to cut down

on procurement red tape. The Defense Acquisition Regulations

encompass 3,000 pages and are supplemented by over 27,000 pages of

additional procurement regulations issued by major Defense Department commands. The regulations mandate highly specific and exacting material standards, manufacturing processes, quality assurance,

contract supervision'procedures, and documentation. Studies of the

costs of applying these regulations to major defense systems

suggest that they add between 20 percent and 100 percent to the

costs of goods, for little or no gain in effectiveness. Contracting could be simplified by more use of commercial products as well

as more use of performance standards instead of detailed process

and material standards, as recently directed in the Office of

Management and Budget's Circular A-109. These changes could be

mandated by the Congress in a revision of the federal procurement

codes.

Specific savings are not shown above because there is no way

to estimate them accurately. Nonetheless, if such efficiencies

resulted in a reduction of 5 percent in the cost of purchases for

procurement and research and development—and case studies suggest

that, at least in certain instances, such savings could be

achieved—then savings over the next five years would total over

$22 billion in budget authority and $16 billion in outlays.

These efficiencies might, however, create problems. Reductions in red tape assume less direct federal supervision of contract operations. Unless this shift is accomplished carefully,

both quality and accountability could be degraded. Multiyear

contracting requires the Congress to surrender some control over

programs once they are initially approved. Second sourcing, while

promising for certain types of weapons, may involve increases in

initial costs as the government pays new contractors to become

qualified to produce complex weapons.

33
REFORM OF FEDERAL WAGE-SETTING PROVISIONS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

370

370

0

0

890

890

0

0

1,090

1,090

0

0

1,200

1,200

0

0

1,310

1,310

0

0

4,860

4,860

0

0

NOTE: Preliminary estimates, subject to change.

The hourly pay rates of blue-collar workers under the Federal

Wage System (FWS) are adjusted annually in an attempt to maintain

comparability with wage rates paid by the private sector in the

same locality. Under certain provisions of current laws and

regulations, however, the 400,000 FWS employees may receive about

10 percent more than their nonfederal counterparts in similar

jobs, with a few receiving as much as 20 percent more. Recent

limits on federal pay raises have reduced these differentials,

but the laws and regulations remain.

The Carter Administration and previous Administrations have

repeatedly recommended changes in the law governing FWS paysetting

provisions in order to eliminate the differentials. The changes

have also been recommended by a presidential commission and the

General Accounting Office. If the changes were enacted, the

five-year savings through 1986 could exceed $4.8 billion. This

estimate of savings assumes, however, that FWS workers would

be granted a catch-up raise in fiscal year 1982 to make up for

past limits on federal pay raises, and that no further limits

would be imposed over the next five years. About 80 percent of the

savings would accrue to the Department of Defense.

Proponents of the proposed changes argue that the present

system is overgenerous to FWS workers and unfair to federal taxpayers. Labor unions and others opposing the changes assert

that private-sector practices vary greatly, and that some are

similar to the federal system. They also contend that the reforms

34
would be selective, dealing only with those aspects of the wagesetting mechanism favorable to employees, while continuing those

aspects of the system tending to depress federal wage rates.

President Carter's budget recommendations for fiscal year

1982 include proposals similar to the foregoing. Thus, there are

no savings relative to the Carter budget.

35
ELIMINATION OF DUAL PAY FOR RESERVISTS WHO ARE FEDERAL EMPLOYEES

Savings from

Annual Savings

(millions of dollars)

1982 1983 1984 1985

Cumulative

Five-Year

1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

53

52

23

22

58

58

28

28

63

63

33

33

69

69

39

39

75

76

45

46

318

318

168

268

NOTE: Preliminary estimates, subject to change.

Federal civilian employees who are reservists in the armed

forces receive both civilian and military pay during their twoweek annual period of active duty for training. They also receive

their regular vacation entitlement. The Carter Administration

and earlier Administrations have recommended paying such employees

the greater of their civilian or reserve salaries, rather than

both. This initiative was included in the House version of the

Omnibus Reconciliation Bill for 1980, but was taken out in conference. Adopting it would save more than $300 million over the

next five years. Savings could all be in defense if the change

were implemented by reducing reserve pay, or they could be spread

throughout the federal budget under other shcemes.

Those who favor such a change point out that the dual pay

practice is generally not followed by private employers, nor

by the federal government itself when a reservist is called up

for state duty. Under those circumstances, the employee receives

only the higher salary. Moreover, the practice may attract

disproportionately large numbers of federal employees to the

reserves, despite the greater likelihood that their civilian

jobs would excuse them from a military mobilization. The counterargument is that the change could have an adverse effect on

recruiting and retention of reserves—in a force already falling

short of its enlisted manning goals. (If the Congress limited the

change to officer reservists—who are not in short supply—the

earnings over the next five years would still exced $100 million

relative to the CBO baseline.)

36
President Carter's budget recommendations for fiscal year

1982 assume enactment of this proposal. The Carter budget, however, apparently does not include savings for reservists employed

outside the Department of Defense.

37
SALE OF SURPLUS SILVER

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

229

229

0

0

229

229

0

0

229

229

0

0

229

229

0

0

229

229

0

0

1,145

1,145

0

0

NOTE: Preliminary estimates, subject to change.

The federal government currently holds 139.5 million troy

ounces of surplus silver, valued at approximately $2.1 billion in

January 1981 prices. Silver has not been required for the national

strategic stockpile since 1976, because supplies in the United

States, Mexico, and Canada are considered adequate for defense

needs. But the silver inventory, stored in the form of ingots,

cannot be disposed of without authorizing legislation. If the

Congress were to approve the disposal of 15 million troy ounces of

silver a year, receipts to the government—assuming the average

January 1-15, 1981 price of $15.24 per troy ounce—would accumulate

to about $1.1 billion through fiscal year 1986.

To the extent that disposal might lower silver prices, the

legislation would be opposed by domestic mining and metal processing industries, and by foreign countries relying heavily on silver

exports. Other opponents fear that U.S. defense preparedness

might be weakened. The disposal of surplus silver could also be

viewed as an artificial budget reduction measure in that the sale

of assets does not reduce federal purchases of goods and services.

Proponents argue, however, that the silver inventory is unnecessary

and could best be used as a source of federal revenue.

President Carter's fiscal year 1982 budget recommendations

assume the sales described above, beginning in fiscal year 1981.

Consequently, enactment of this item will result in no savings

relative to the Carter budget.

38
REDUCTION OF P.L. 480 TITLE I SALES

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

100

100

53

53

214

214

102

102

347

347

260

260

499

499

373

373

673

673

433

433

1,833

1,833

1,221

1,221

NOTE: Preliminary estimates, subject to change.

Agricultural exports are subsidized under the Agricultural

Trade Development Act of 1954 (P.L. 480), which was enacted in a

period when the inconvertibility of foreign currencies and the lack

of foreign exchange held by potential customers inhibited commercial exports of large domestic surpluses of agricultural commodities. Sales for foreign currencies and, under later amendments to

the law, dollar credit and convertible local currency credit

provided a mechanism for developing markets, disposing of surplus

commodities, and furthering U.S. foreign policy interests. (Humanitarian feeding programs are financed through Title II, Foreign

Donations.)

In fiscal years 1956 through 1965, the P.L. 480 program

financed between one-quarter and one-third of all agricultural

exports. Since the mid-1960s, the value and tonnage of Title I

shipments have declined as commercial exports have grown. In

fiscal year 1980, Title I concessional sales represented only

3 percent of total agricultural exports, although they still

accounted for a larger share of exports of particular crops

(for example, 6.5 percent of wheat and 13.0 percent of rice).

Moreover, conditions in the agricultural marketplace have

changed significantly since the 1950s. Disposing of surpluses is

no longer a primary concern. In fact, in the early 1970s and

again in 1980, poor crops and strong commercial export demand have

driven up domestic food prices, contributing to inflation. Another

year of poor harvests may even bring pressure for export controls.

39
Subsidized sales may be inimical to long-run U.S. interests

if cheap food discourages local investment in agricultural production and discourages other countries from building local stockpiles of commodities. On the other hand, concessional sales

through Title I are used to further U.S. foreign policy. Responding to the 1977 Congressional mandate, 75 percent of concessional

sales now go to low-income countries (per capita GNP of $625 or

less). Concessional sales also provide budget support to selected

countries for purposes related to U.S. national security. About

half the dollar volume of sales in the 1981 allocation is to

countries receiving assistance through the security-oriented

Economic Support Fund.

Since two of the three original objectives of Title I sales

have been satisfied, the Congress might decide to limit Title

I sales to countries in which the United States has a strong

foreign policy interest, which are suffering from foreign exchange

and food shortages, and which have a history of effective use of

U.S. aid. In that case, Title I sales could gradually be cut in

half over the next five years, for a saving of $1.8 billion. The

net budget savings could be smaller in some years because of

domestic farm support payments that might increase in the absence

of Title I sales.

President Carter's fiscal year 1982 budget recommendations

assume lower funding levels than those in the CBO baseline, thus

acounting for the differences in estimated savings shown in the

table.

40
PHASING OUT OF DISCs

Loss under Current Law

Increase from Phasing

out of DISC

Increase under Carter

Budget

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

1.8 2.1 2.4 2.8 3.0

0.2 0.8 1.7 2.4 3.0

(no proposal)

Cumulative

Five-Year

Increase

8.1

NOTE: Preliminary estimates, subject to change.

A Domestic International Sales Corporation (DISC) is a special

corporation, established as a conduit for export sales, that is

allowed to defer payment of corporate income tax on a portion of

its profits.

In many cases, the DISC is a paper corporation with no

employees and no actual operations. The DISC tax subsidy actually

goes to the parent or an affiliated corporation, since the exportrelated profits of this corporation can be allocated to the DISC.

One-half of the tax liability on these profits (over a base level)

can be deferred indefinitely. Special intercompany pricing rules

governing the allocation of income between the DISC and its

related suppliers enhance the tax subsidy.

The principal objective of the legislation establishing DISCs

in 1971 was to increase exports as a way of improving the U.S.

balance of trade and increasing domestic employment. The statute

was intended to help offset existing tax incentives, both U.S. and

foreign, that encourage U.S. companies to favor production abroad

over production at home for sale abroad.

Some evidence suggests that the level of exports increased

modestly during the 1973-1978 period because of the DISC provisions. Most of this increase took the form of one-time expansions

of exports during the first few years of each DISC's operation.

Treasury Department estimates indicate that, because of competition

between DISC and non-DISC exports, the net increase in exports

attributable to DISCs is at most equal to the tax receipts forgone,

and probably is less.

41
Critics of DISCs contend that this type of tax subsidy is

inefficient. They maintain that it is not flexible enough to

respond to changes in the overall U.S. trade position; in particular, that it cannot easily be retargeted as prospects for growth in

the exports of more competitive commodities improve or as the need

for export support for ailing industries increases. In addition,

other countries see DISCs as illegal tax subsidy vehicles as

defined by the General Agreement on Tariffs and Trade.

The tax benefits of DISCs could be reduced in a variety of

ways. One method, similar to a 1978 Administration proposal, would

be to phase out the tax benefits over a three-year period, beginning January 1, 1982. This would increase federal revenues by

about $8.1 billion over the 1982-1986 period.

The accumulated tax on past earnings of DISCs could continue

to be deferred as long as the earnings remain invested in exportrelated assets. Alternatively, some or all of the accumulated tax

liability could be recaptured over a specified period.

42
INCREASED INTEREST CHARGES ON DEVELOPMENT LOANS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

8

8

N.A.

N.A.

24

24

N.A.

N.A.

41

41

N.A.

N.A.

59

59

N.A.

N.A.

75

75

N.A.

N.A.

207

207

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

The United States makes loans to developing countries to

assist their development through functional assistance, food aid,

and the Economic Support Fund. Currently, the same rates of

interest are charged on loans to the least-developed countries as

on most loans to middle-income developing countries. Interest on

these loans is set at 2 percent during implementation of a project

(when only repayments of interest are made) and 3 percent once the

project is operating (when repayments of both interest and capital

are required). In contrast, the World Bank—another major international lender—requires only a service charge on loans to the

poorest countries but currently charges about 8 percent on loans to

middle-income countries. If development loans to such countries

were subject to 8 percent interest over the term of the loan, net

savings to the United States would total about $207 million over

the next five years. The savings would take the form of offsetting

receipts rather than a decline in the development loan budget.

One argument in favor of this option is that, as long as the

interest rate is below the market rate, the charges should reflect

a nation's level of development or ability to pay. As wealth

increases, the need for highly subsidized loans presumably diminishes. The World Bank uses this reasoning in determining eligibility for certain of its loans.

Opponents of this proposal might argue that development

projects tend to help the poorest people within the middle-income

countries, thus making lower interest rates appropriate. Increased

43
interest rates would also reduce the net aid provided by the United

States, and hence decrease assistance to some less developed

countries. Higher interest charges could also increase pressure on

the Congress to provide larger amounts in outright grants, which

has been a trend in recent years.

President Carter's fiscal year 1982 budget recommendations

for programs affected in this option do not include the country-bycountry detail necessary to permit calculating the savings relative

to his budget.

44
ELIMINATION OF ONE SPACE SHUTTLE ORBITER

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

199

147

262

240

122

157

0

36

0

3

583

583

NOTE: Preliminary estimates, subject to changeThe space shuttle program calls for four shuttles, with the

fourth orbiter to be completed and delivered by 1984. The first

three orbiters are capable of reliably performing 27 shuttle

flights per year. The fourth orbiter, estimated to cost $979

million, would provide program flexibility, enabling additional

and/or multiple flights for either civilian or military purposes.

Eliminating the fourth orbiter would save less then its estimated cost of $979 million. About $51 million has already been

authorized for fiscal year 1981. Moreover, part of the cost of the

fourth orbiter cannot be separated from the common costs of manufacturing all the shuttles and from subcontractor overhead costs.

Some of these costs would be redistributed over the remaining three

orbiters if the fourth was eliminated. When NASA deleted its planned fifth orbiter, it estimated the savings to be $365 million, or

63 percent of the estimated total costs for that shuttle. A

realistic total savings estimate for deletion of the fourth orbiter

would be 63 percent of the $979 million, or $583 million over the

1982-1986 period.

There might be some offsetting costs in the defense budget if

any of the three orbiters was rendered inoperable and the planned

flight schedule was maintained. In this event, the Department of

Defense would need to purchase expendable launch vehicles, each

costing about $100 million, to execute its critical missions; or

military missions might be given priority over civilian flights

with the remaining orbiters.

45
ELIMINATION OF DOE FUNDING FOR SYNTHETIC FUEL DEVELOPMENT

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

545

250

802

697

690

465

1,285

1,085

600

605

838

1,074

710

710

352

546

700

725

425

371

3,245

2,755

3,702

3,773

NOTE: Preliminary estimates, subject to change.

The 96th Congress established the Synthetic Fuels Corporation

to fund production of commercial-scale plants for synthetic fuel

production processes. The plants must have passed an initial stage

of development. Some processes that are not as far along are to be

demonstrated on a smaller scale by the Department of Energy (DOE).

Five plants are now scheduled for small-scale demonstration.

Two involve making synthetic liquids from coal: Solvent Refined

Coal-1 (SRC-1), and Solvent Refined Coal-2 (SRC-2). Two would make

high-BTU gas from coal, and a fifth would make medium-BTU gas. The

plants are to demonstrate these technologies on a scale large

enough to provide assurances that a full-size plant employing them

is feasible. The demonstration plants will be funded through DOE.

Such demonstration plants may assist in eliminating technological uncertainties that deter private investment in full-scale synthetic fuel plants. Yet they need not be funded through the DOE

budget. There is reason to believe that sufficient private capital

is available in the energy industry to develop new energy technologies. Moreover, the funding of any technology through DOE undermines the competition among technologies for fixed funds within the

Synthetic Fuels Corporation, and reduces the long-term effectiveness of federal expenditures to develop synthetic fuels production. Eliminating DOE funding of the five demonstration plants

would save approximately $2.8 billion in outlays over the next five

fiscal years.

46
President Carter's budget recommendations for fiscal year

1982 include the deferral of one of the high-BTU gas plants. This

will not significantly affect the savings given above. The

President's budget also assumes a faster rate of plant completion

than does the CBO baseline.

47
TERMINATION OF THE CLINCH RIVER BREEDER REACTOR PROJECT

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget:

BA

Outlays

300

175

0

0

350

275

0

0

350

325

0

0

300

330

0

0

200

275

0

0

1,500

1,380

0

0

NOTE: Preliminary estimates, subject to change.

Breeder reactors are nuclear reactors that produce more fuel

material than they consume. Public debate over the commercialization of breeders has centered on the dangers of theft and diversion

of nuclear materials, proliferation of nuclear weapons, increased

accidents, and hazards to health. The economic efficiency of

breeder reactors is also debatable, as are the questions of if and

when they will be needed.

The federal government has been supporting breeder reactor

research and development to ensure that, if the country moves forward with breeder reactors, the safest and most efficient technologies will be used. Approximately $750 million was appropriated in

each of fiscal years 1979 and 1980 for programs supporting breeder

research and development.

One part of these efforts, the Clinch River Breeder Reactor

Project, has caused particular controversy. The Clinch River

project was originally intended to demonstrate that a liquid-metal

fast breeder reactor could be operated reliably and safely as part

of a public utility electric supply system. This demonstration

project is considered by some authorities to be outdated and

unnecessary. Their objections are based, in part, on the project's

escalated costs and engineering and technical uncertainties. In

addition, France has made a strong commitment to the breeder

reactor and appears to have more advanced technologies at later

stages of development. The need for the Clinch River demonstration

reactor may therefore be obviated by the possibility of licensing a

French design. Terminating the project could save the government

approximately $1.4 billion over the five-year period 1982-1986.

48
The need for this project has been debated extensively. The

General Accounting Office has, for example, argued that the general

breeder programs need the direction and focus provided by such a

demonstration facility. From 1977 onward, the Carter Administration tried to terminate the project, although the Congress continued to fund it. The project was not included in the President's

1980 budget recommendation, but $172 billion was nevertheless

appropriated for that purpose. The President's 1981 budget recommendation was once again to stop funding it, which could have

saved the federal government a total of about $1.7 billion—the

cost of completing the project. Nevertheless, the Congress

continued funding for the project through June 5, 1981, at the

fiscal year 1980 levels.

Terminating the Clinch River project would not necessarily

imply permanent rejection of the fast breeder reactor program.

It would indicate only that this specific project was deemed no

longer appropriate. In fact, the Congress has provided over $490

million in fiscal year 1981 for continued research and development

in other breeder reactor programs. If in the future another demonstration facility should be deemed necessary, spending on such a

project might exceed the savings from terminating the Clinch River

Breeder Reactor.

President Carter's budget recommendations for fiscal year 1982

again assume no funding for the Clinch River project, so adoption

of this item will not result in any savings relative to the Carter

budget.

49
PRIVATE FINANCING OF THE STRATEGIC PETROLEUM RESERVE

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

3,780

4,100

3,898

3,660

4,600

4,850

3,645

4,050

3,815

4,395

2,517

2,703

3,740

4,030

2,948

2,425

2,820

3,020

7,127

4,491

18,755

20,395

20,135

17,329

NOTE: Preliminary estimates, subject to change.

Now that the price of domestically produced crude oil has been

decontrolled, the purchase of oil for the Strategic Petroleum

Reserve (SPR) will be funded entirely through direct appropriations. The benefits of the SPR would be sizable if oil supplies

should be disrupted in the future. CBO analysis suggests that each

barrel of Strategic Reserve oil might save up to several hundred

dollars in lost GNP. The Energy Security Act of 1980 mandated that

the reserve be filled at a minimum average rate of 100,000 barrels

per day. This proposal assumes a fill rate of approximately

180,000 barrels per day over the next five fiscal years, which

would result in outlays of $20.4 billion for the period. Filling

the reserve at these rates will be expensive.

An alternative would be to finance the Strategic Reserve

through private funds. Since the price of oil will almost certainly rise in real terms over the next decade, shares in the

reserve could be made attractive to investors. One option would

allow the public to buy shares of the reserve in the same way that

any other speculative asset is bought. Holders of reserve barrels

could sell the titles to them on an open market. When the reserve

was drawn upon during a disruption in foreign supplies, the holders

of titles to the oil in the reserve would be compensated at the

market price.

Another option would entail directing (through regulation) or

inducing (through tax incentives) refiners and major oil users to

hold excess inventories—an Industrial Petroleum Reserve, as it has

50
been called. Under the Energy Policy and Conservation Act of 1975,

the Secretary of Energy has the right to direct such firms to hold

up to 3 percent of their average annual use of oil in special

inventories that cannot be depleted without government approval.

This would place a financial burden on the firms involved. If the

inventory requirement were reduced to 1 percent, however, this

would still be the equivalent of a fill rate of 170,000 barrels per

day for one year.

President Carter's budget recommendations for fiscal year 1982

contemplate a slightly different SPR five-year funding pattern from

that in the CBO baseline. The savings relative to the Carter

budget, if this item is enacted, are thus also slightly different.

51
REDUCED FUNDING FOR THE ECONOMIC REGULATORY ADMINISTRATION

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

62

60

51

53

69

67

27

27

77

74

18

18

84

82

12

12

93

90

12

12

385

373

120

122

NOTE: Preliminary estimates, subject to change.

The Department of Energy's Economic Regulatory Administration

(ERA) implements regulatory laws, intervenes in regulatory procedures, plans for energy emergencies, and exercises emergency

responsibilities. Almost half of the $177 million 1981 ERA budget,

however, is associated directly with the price controls on crude

oil and petroleum products. The recent decontrol of domestic oil

prices reduces the need for many of these oil pricing and allocation functions. Eliminating the funds for these oil-related activities could save about $373 million between 1982 and 1986. In

addition, an immediate reduction in the funding for these activities could save about $25 million in fiscal year 1981. This

proposal allows about $60 million for resolving outstanding cases.

Although many of its activities concern the pricing and allocation of crude oil and petroleum products, the ERA has begun

concentrating more heavily on the implementation of the Fuel Use

Act and the Public Utilities Regulatory Policies Act. The ERA is

also responsible for maintaining standby fuel rationing plans and

participating in other emergency preparedness activities. Therefore, budget cuts reflecting the decreased need for oil pricing and

allocation activities might limit the ERA's ability to shift its

resources to these other areas.

President Carter's budget recommendations for fiscal year 1982

include $65 million in 1982 outlays for ERA activities related to

oil price controls. This represents a $19 million reduction from

1981 spending levels, and allows for ongoing audits and litigation. The budget request proposed further reductions in these

programs through 1986, reflecting implementation of this proposal,

although more gradually than assumed here.

52
INCREASED WATERWAY USER CHARGES

Annual Added Revenues

(millions of dollars)

CBO Baseline

No subsidy

50 percent

subsidy

Carter Budget

No subsidy

50 percent

subsidy

1982

1,170

560

1,210

580

1983

1,280

610

1,590

770

1984

1,400

660

1,650

790

1985

1,530

710

1,640

760

1986

1,650

760

1,630

750

Cumulative

Five-Year

Increase

7,030

3,300

7,720

3,650

NOTE: Preliminary estimates, subject to change.

The federal government has subsidized inland waterway transportation through construction, operation, and maintenance of

inland waterway facilities. Over the next five years, the Army

Corps of Engineers will spend an estimated $7.5 billion for inland

navigation purposes. Approximately $440 million of these expenditures will be recovered through the existing waterway user charges,

leaving a federal subsidy of about $7.0 billion over the 1982-1986

period.

Current waterway user charges, in the form of a fuel tax, were

established under the Inland Waterways Revenue Act of 1978. These

charges take effect in 1981 and will be phased in over the next

five years, rising from 4 cents a gallon at the outset to 10 cents

in 1986 and thereafter. The estimated $440 million in receipts for

the five-year period 1982-1986 will cover only 6 percent of projected federal expenditures for waterway navigation purposes during

the period.

Full recovery of these costs through a fuel tax would require

a tax equal to about $1.30 a gallon. Such a high tax is impractical and unlikely to be imposed because of administrative problems

and because fuel consumption does not necessarily reflect the benefits received by a given waterway user. The same revenues could be

raised through fees or tolls that reflect the actual costs of constructing, maintaining, or operating a particular waterway seg53

84-656 0-81- 5
merit. The use of segment tolls would mean that some marginal projects would riot be built and others might be closed down. Thus,

the estimated savings would consist of two parts—increased revenues through user fees and reduced outlays by the Corps of Engineers as certain projects were dropped.

The full recovery of total federal expenditures for inland

waterways would result in taxpayer savings of approximately $7.0

billion in 1982-1986. Most of the costs of increased user charges

would be passed along to shippers and ultimately to consumers in

the form of higher prices. The cost burden of waterway facilities

would thus be shifted from the general taxpayer to the beneficiaries of these facilities—specifically, the barge industry,

shippers, and. consumers.

Shifting the full cost of waterway navigation facilities to

the beneficiaries (or users) of such facilities would promote more

efficient resource allocation. The rates charged to shippers would

more nearly reflect the true economic costs of this form of transportation. Distortions in the choice among forms of transportation

resulting from taxpayer subsidies would thus be reduced.

Users of waterway facilities might object to the imposition of

charges to cover the full costs on the grounds that other forms of

transportation are still subsidized. If charges were imposed to

cover half of the costs of these projects, the cumulative savings

over the 1982-1986 period would be approximately $3.3 billion.

President Carter's budget proposal for fiscal year 1982 recommends a slightly higher program level for waterway projects than

assumed in the CBO baseline. Thus, the savings from increased

charges are even larger relative to the Carter budget.

54
ELIMINATION OF THE STATES' SHARE OF LAND AND WATER CONSERVATION

FUND

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

290

135

185

85

315

185

220

125

345

255

240

170

370

315

255

220

400

345

270

240

1,720

1,235

1,170

840

NOTE: Preliminary estimates, subject to change.

The Land and Water Conservation Fund (LWCF) has two components: at least 40 percent of the fund is for federal purchases of

land for parks, wildlife refuges, and recreation facilities; the

balance is allocated to the states on a 50-50 matching basis for

the acquisition and development of outdoor recreation facilities.

If the portion allocated to the states was reduced in 1982 and

ended thereafter, the annual savings would exceed $300 million by

1985. In fiscal year 1981, the Congress appropriated $229 million

for the state share of the LWCF, compared with $300 million in

fiscal year 1980.

Grants to state governments for state park land acquisition

and similar purposes were not a federal responsibility until the

mid-1960s. Since the program's inception, with virtually no exceptions, the states have provided the required matching funds, and

the program enjoys wide support. In a sample of eight states, LWCF

grants accounted for 18 to 37 percent of the state land acquisition

and development budgets.

The argument for ending federal support for state recreation

programs is that state facilities mainly serve state residents.

Each state has the right to select whatever level and type of

recreation it chooses, but it has no claim on taxpayers nationwide.

The case for continuing the federal grant program is based on

two assumptions: first, that development of state facilities

reduces public dependence on federal facilities; second, that

55
national benefits, even if not directly measurable, accrue from

expansion of state-managed outdoor recreational facilities. If

such facilities were not available, the public use of federal

parks and refuges would increase substantially. The unique nature

of certain federal facilities could be lost if they were overused.

President Carter's budget recommendations for fiscal year 1982

contemplate a lower LWCF share for the states than that assumed in

the CBO baseline. This accounts for the differences in savings

shown above.

56
ELIMINATION OF URBAN PARK GRANTS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Out lays

Carter Budget

BA

Outlays

70

5

75

5

80

30

75

25

85

50

75

45

90

70

75

60

100

70

75

65

425

225

375

200

NOTE: Preliminary estimates, subject to change.

In 1978, the Congress enacted a five-year grant program for

the rehabilitation of urban park and recreational facilities. The

program matches 70 percent federal to 30 percent local funds to

rehabilitate urban recreational facilities that have deteriorated.

Local communities will continue to operate and maintain the facilities after rehabilitation. The savings from ending the program

(assuming that it would otherwise be renewed on expiration of the

current authorization) would total about $225 million during the

next five years.

The argument for eliminating the urban park grant program is

the same as that for ending the state share of the Land and Water

Conservation Fund. In both cases, federal funds simply substitute

for local funds. It is not clear that the national taxpayer should

support a level of local recreational opportunity that local taxpayers are unwilling or unable to support.

The counterargument holds that there is a national interest in

preserving or improving the "quality of life" for urban residents.

Furthermore, it is argued that some urban facilities serve many

more than local users—that in fact some are national resources and

should receive federal support.

President Carter's budget recommendations for fiscal year 1982

contemplate a slightly lower 1983-1986 funding level for this program than that assumed in the CBO baseline. This accounts for the

differences in savings shown above.

57
INCREASED CHARGES FOR OUTDOOR RECREATION AND TOPOGRAPHIC MAPS

1982

Annual Added Revenues

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Increase

CBO Baseline and

Carter Budget

Recreation fees

Map charges

45

5

65

10

70

10

70

15

75

20

325

60

NOTE: Preliminary estimates, subject to change.

State and local parks support much of their programs through

entry and user fees, yet the U.S. Park and Forest Services collect

only about $35 to $40 million a year in user fees—far less than 10

percent of their budgets for recreational services. The Services

collect fees from only a portion of their users for several reasons: collecting is often not cost effective; the Services face a

number of legislative restrictions on fees; the Services are not

allowed to retain their receipts; and there is some sense that

public facilities should be free. As a result, many visitors pay

no entry fees, and most user fees are little more than nominal

charges. For example, hook-up fees for camping vehicles have been

so low—about $2.00 a night—that neighboring private facilities

cannot compete with the federal facilities. Visitors are thus

given an extra incentive to use park facilities, often overcrowding

them. The savings estimates given here assume a doubling of existing entry fees and the imposition of fees at more facilities. Furthermore, they assume that service or user fees would be increased

until they covered all costs of the Services. Total added collections in the 1982-1986 period would be about $325 million.

The Geological Survey produces topographic maps at different

scales for a wide variety of users. In fiscal year 1981, receipts

for sales/of maps were about $7 million, while program costs were

about $75 million. By law, the Geological Survey is now only

allowed to recover only printing and distribution costs through its

charges for maps. This option assumes that fees would be increased

during the next five years until about one-third of all program

costs were recovered.

58
REDUCED FUNDING FOR EPA CONSTRUCTION GRANTS

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1,260

70

1,240

70

1,390

260

1,330

250

1,530

600

1,470

590

1,670

1,030

1,570

1,010

1,820

1,360

1,670

1,320

7,670

3,320

7,280

3,240

NOTE: Preliminary estimates, subject to change,

The Environmental Protection Agency (EPA) makes grants to

municipalities for the planning, design, and construction of wastewater treatment facilities. EPA provides 75 percent of the allowable construction costs, or 85 percent if the project employs

alternative or innovative technology. Funding levels have averaged

almost $4 billion a year, making it by far EPA's largest program in

terms of direct budgetary outlay. EPA estimates that $106 billion

(in 1978 dollars) will be needed for construction and repair of

municipal wastewater treatment facilities and sewers between 1978

and 2000. An additional $62 billion will be needed for control of

storm water runoff.

The program has three principal problems. First, because of

the 75-85 percent federal payment for capital costs with no assistance for operating and maintenance costs, overly expensive and

needlessly sophisticated treatment plants are built, which are then

poorly maintained. Second, because the Congress has repealed the

section of the 1977 Clean Water Act that allows industrial plants

to be charged for the portion of wastes they generate, the program

does not change the incentives of waste generators. Third, because

the states must use their allocated funds within a specified period

or lose them through reallocation, many projects receiving funding

are those "ready to go," rather than those that may be of higher

priority but are not yet ready.

One possible change would reduce the federal share of construction costs (perhaps to 50 percent, and to 55 percent for

59
innovative technology), with corresponding funding reductions. The

estimated savings from this action are shown in the table above.

Additional outlay reductions of $10 million in fiscal year 1982,

and totaling $950 million over the five-year period, could be

achieved by a 25 percent reduction in the building program. Still

further savings could be achieved by removing the current two-year

time limit on the obligation of funds. While these changes were

being considered by the Congress, EPA could institute controls so

that the $6 billion currently appropriated but not obligated would

be spent in a more cost-effective manner.

A reduced federal role in the construction of treatment

facilities would increase the burden on municipalities and states.

This could be partially offset if the reduced federal payment for

construction costs was coupled with a partial federal payment for

operations and maintenance costs, perhaps leading to more efficient

wastewater treatment than the present system.

Deferrals in the building program would be made up in later

years, but the delay would permit capturing future improvements in

technology and in understanding of measures for dealing with toxic

pollutants. However, long-run costs could be greater than the

short-run savings, if construction costs continue to increase

faster than general inflation, and some short-run gains in water

quality would be lost.

President Carter's fiscal year 1982 budget recommendations

assume slightly lower program levels for EPA construction grants,

thus accounting for the small differences in estimated savings

shown.

60
ELIMINATION OF TAX EXEMPTION FOR POLLUTION CONTROL BONDS

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

Loss under Current Law

Increase from Elimination of Exemption on

New Issues

Increase under Carter

Budget

0.8 0.9 1.0 1.1 1.2

0.1 0.2 0.3 0.4 0.5

(no proposal)

1.5

NOTE: Preliminary estimates, subject to change.

Industrial development bonds for pollution control (PCBs)

finance 40 percent of all pollution control investments. In the

past few years, annual sales have amounted to approximately $2.5

billion.

The use of PCBs raises two questions: Should the subsidy be

continued? If so, are tax-exempt bonds the best way to provide

it? Like all tax-exempt bonds, PCBs have several beneficiaries—

the recipient of the subsidy, the purchaser of tax-exempt bonds,

and intermediaries. An alternative subsidy, such as a tax credit,

would be less costly because it would provide benefits only to the

recipient of the subsidy. If the tax exemption on new issues of

PCBs was eliminated effective July 1, 1981, federal revenues would

be increased by $1.5 billion in the 1982-1986 period.

If the subsidy is to be continued, then its form and the regulations governing it warrant reexamination. At present, PCBs

encourage technological inefficiency because they are available

only for "end of pipe" capital expenditures, thereby discouraging

selection of other, possibly more effective, solutions to the

underlying pollution problem, such as use of less-polluting raw

materials or adoption of production processes that produce less

pollutants.

The availability of PCBs—or any other subsidy for pollution

control—can have only limited influence on a company's decision to

invest in pollution control equipment. This is because federal

61
pollution control regulations are highly prescriptive, so that an

existing firm must choose between making the required improvement

or closing.

The main argument for eliminating the subsidy is that private

industry should pay its own pollution control bills, just as it

pays for complying with other requirements imposed by law. On the

other hand, some argue that industry's efforts to avoid contaminating the environment confer a public benefit and thus warrant some

subsidy from the public.

62
ELIMINATION OF FARM DEFICIENCY PAYMENTS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

0

90

0

131

90

187

131

117

187

122

408

647

NOTE: Preliminary estimates, subject to change.

Until the mid-1960s, the principal objective of federal agricultural policy was to maintain domestic prices for wheat, feed

grains, upland cotton, and rice above world prices in order to

increase the incomes of farmers. This was accomplished through

high domestic price supports and supply controls that took about 15

percent of all U.S. cropland out of production. The government

accumulated huge stocks of commodities.

In 1965, federal policy began to shift away from high domestic

price supports and rigid supply controls, allowing domestic commodity prices to adjust gradually to world price levels. To assist in

the adjustment process, farmers producing these major commodities

have been given deficiency payments whenever the market price for a

commodity falls below its target price. These direct payments protect farm income without directly affecting market prices.

Farm deficiency payments have now largely fulfilled their

function and could be eliminated without detriment to domestic

agriculture. Elimination of deficiency payments could result in

savings of $647 million over the next five years. Most of the

savings would stem from the elimination of deficiency payments to

rice growers, since demand for wheat, feed grains, and cotton is

expected to keep their market prices substantially above their

likely target prices through 1985.

Those who support elimination of deficiency payments argue

that other provisions of existing commodity programs—price support loans, a multiyear grain reserve, and acreage diversion payments—could be used, if needed, to hold farm production and marketing within reasonable bounds and prevent large drops in farm

63
income. Further, they argue that deficiency payments are concentrated on a few large-scale farmers and tend to be capitalized into

land values, making it more difficult for others to enter farming

and resulting in higher food prices.

Proponents of deficiency payments argue that they are needed

to induce farmers to take land out of use during periods of surplus

production. In their judgment, the other provisions of commodity

programs would not, by themselves, offer a sufficient incentive to

encourage farmer participation and thereby stabilize agricultural

prices and supplies.

64
REDUCTION IN DAIRY PRICE SUPPORT LEVELS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

0

400

0

0

0

700

0

0

400

900

0

0

700

1,200

0

0

900

1,400

0

0

2,000

4,600

0

0

NOTE: Preliminary estimates, subject to change.

The federal government maintains a nationwide support price

for milk by purchasing manufactured dairy products. Under laws

passed in 1977 and 1979, the Secretary of Agriculture is required,

first, to set the support price for milk between 80 and 90 percent

of its parity price at the beginning of the marketing year (October

1), and second, to adjust the support price six months later (April

1) to account for changes in the index of prices paid by farmers.

Since 1978, the level of support has been set at 80 percent of

parity on October 1.

If the Congress does not act to extend the 1977 law, the minimum level of dairy price support will revert under permanent legislation to 75 percent of parity on October 1, 1981. The Secretary

then would have discretion to set the support price between 75 and

90 percent of parity, and a semiannual adjustment would not be

mandated.

With steady escalation in both the parity price of milk and

the index of prices paid by farmers, current policy mandates two

milk price support increases each year regardless of supply and demand conditions. When farm milk prices are near the support price,

increases in the support price tend to raise farm and retail milk

prices, encourage additional milk production, discourage commercial

consumption, and increase federal outlays for the purchase of manufactured dairy products. Net support outlays for the purchase of

surplus dairy products were $1.3 billion in fiscal year 1980 and

are estimated to be $1.7 billion in 1981. Current government

stocks are about twice as high as average stocks during 1975-1979.

65
The dairy price support program has increased farm milk prices

at the expense of consumers and taxpayers, but it has also helped

to stabilize the dairy industry, resulting in a reliable supply of

milk and dairy products. However, continuation of current policy

(price support at 80 percent of parity with semi-annual adjustments) will further increase milk production and government purchases beyond what is needed to assure relatively stable supplies.

If the price support was set at 75 percent of parity on

October 1, 1981, and maintained at that level through September 30,

1986, without semiannual changes, the estimated savings over the

five years would be $4.6 billion compared to a continuation of

current policy. Milk production would increase at a slower rate,

commercial consumption would increase moderately, and consumer

expenditures would decline. Dairy farmers' incomes would be

reduced by over 5 percent. After the current surplus was eliminated, the support price could be increased, if necessary, to

provide relatively stable supplies and prices.

President Carter's budget recommendations incorporate the

proposal described above, so its adoption would not produce savings

relative to the Carter budget.

66
INCREASED INTEREST RATE ON RURAL HOUSING LOANS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

30

30

25

30

85

85

80

85

145

150

140

145

215

220

205

210

290

295

280

285

765

780

730

755

NOTE: Preliminary estimates, subject to change

The Farmers Home Administration (FmHA) makes reduced-interest

housing loans to rural residents. The annual volume of lending is

set by the Congress. Families with incomes up to 80 percent of

their area's median may obtain mortgages with effective interest

rates as low as 1 percent. Under regulations to take effect March

20, 1981, families with incomes between 80 and 110 percent of the

area's median will pay an interest rate ranging from a minimum of

3.5 percent to a maximum tied to the government's long-term borrowing costs. While loans written at the maximum rate are characterized as "unsubsidized," the interest rate charged is generally below prevailing rates on private mortgages.

Homeownership loans totaling about $3.1 billion—enough to

fund 81,000 mortgages—are expected to be written in 1981. Approximately three-fourths of the funds will go for heavily subsidized

loans at interest rates expected to average 3 percent or less. The

annual interest-subsidy cost for all subsidized 1981 loans will

exceed $200 million—some share of which may be recaptured when the

homes are resold.

If the minimum interest rate on FmHA housing loans was raised

to 5 percent for new borrowers beginning in 1982, the savings to

the federal government would be about $780 million through 1986,

assuming an annual number of loans equal to the 1981 level. Additional savings could be realized by raising the maximum interest

rate and by reducing the number of loans made.

67
Raising the minimum interest rate would increase monthly mortgage payments by up to $22 per $10,000 borrowed, but would leave

financing charges well below prevailing market rates. The higher

interest costs would work hardships on some borrowers and would

make it impossible for others to qualify.

President Carter's budget recommendations for fiscal year 1982

contemplate a slightly different program level from that assumed in

the CBO baseline, thus accounting for the small differences in

savings shown above.

68
DISCONTINUANCE OF POSTAL SERVICE SUBSIDIES

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1,756

1,756

1,050

1,050

1,727

1,727

800

800

1,761

1,761

738

738

1,746

1,746

726

726

1,760

1,760

758

758

8,750

8,750

4,072

4,072

NOTE: Preliminary estimates, subject to change.

The federal government currently supports the U.S. Postal

Service through two types of payments—one for revenue forgone

because of reduced postage for certain mailers, and another for

public services that are not cost effective. If these annual

payments were eliminated in fiscal year 1982, through either

appropriation or authorization action, cumulative budget savings

could total about $8.8 billion by 1986.

The revenue forgone payment reimburses the Postal Service

for providing free postage to blind and handicapped persons and

for reducing second, third, and fourth class postage for certain

mailers—mainly religious and other nonprofit organizations,

small newspapers, libraries, and educational institutions. Proponents maintain that such reduced rates promote the flow of news

and educational, cultural, literary, and charitable, materials.

Opponents argue, with respect to nonprofit institutions, that

the subsidy is not well targeted, results in overuse of solicitations by mail, and increases the volume of junk mailings; with

respect to small newspapers, they contend that it serves no interest except to subsidize publication profits and the rates paid

by advertisers.

The public service payment helps finance operations, such as

postal facilities in remote areas and Saturday mail delivery, that

are not cost effective. Elimination of this payment could require

either an increase in postage rates or a cut in the services

the payment supports. The General Accounting Office is analyzing

69
the postal transportation network in the belief that significant

potential exists for cost reduction. If that potential should in

fact be realized, the savings could be used to support some services the Congress would cease to subsidize.

The Omnibus Reconciliation Act of 1980 authorizes payment of

$1.2 billion rather than the $1.6 billion requested by the U.S.

Postal Service. But, the continuing resolution making appropriations for fiscal year 1981 included $1.6 billion for the Postal

Service.

President Carter's budget recommendations for fiscal year 1982

assume a phased discontinuance of the public service payment (but

continuation of the revenue forgone payment), thus accounting for

the lower savings shown, relative to the Carter budget.

70
CHANGE IN TIMING OF PAYMENTS TO THE POSTAL SERVICE

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

64

64

50

50

62

62

40

40

65

65

38

38

57

57

32

32

58

58

35

35

306

306

195

195

NOTE: Preliminary estimates, subject to change.

The Postal Reorganization Act of 1970 requires that the annual

appropriation for the U.S. Postal Service (USPS) be paid in a

lump sum shortly after the Congress enacts the appropriation. In

this respect, it differs from disbursements to other off-budget

federal corporations, which are made on a periodic basis. If the

Congress mandated quarterly disbursements of USPS payments, the

U.S. Treasury would save $306 million in the 1982-1986 period.

Quarterly payments to USPS would be consistent with federal

financial management practices, which are designed to prevent

investment of federal funds by off-budget federal enterprises,

state and local governments, and other grant recipients. Interest

earned on federal funds represents an unrecognized subsidy, which

in the case of USPS amounts to about 0.5 percent of its revenues.

Even so, the Postal Service might argue that quarterly disbursements of federal payments could mean higher postage rates.

President Carter's fiscal year 1982 budget recommendations

propose a smaller payment to the USPS than that assumed in the

CBO baseline, thus accounting for the differences in the estimated

savings shown. This option would, of course, be irrelevant if the

Congress entirely discontinued the USPS subsidy.

71
ELIMINATION OF TAX EXEMPTION ON SMALL-ISSUE IDBs

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law 1.6 1.9 2.4 2.8 3.3

Increase from Elimination of Exemption on

New Issues 0.3 0.6 1.0 1.5 2.0 5.4

Increase under Carter

Budget 0.1 0.2 0.3 0.5 0.6 1.7

NOTE: Preliminary estimates, subject to change,

Industrial Development Bonds (IDBs) are tax-exempt bonds that

state and local governments issue to provide low-cost financing to

private firms. Since interest from the bonds is exempt from

federal taxation, private businesses are enabled to borrow funds at

below-market interest costs. In general, the bonds are backed only

by project revenues, so their issuance is unrestrained by state

constitutional or other limitations on "full faith and credit"

borrowings.

IDBs were used infrequently until the 1960s, when a growth in

sales led the Congress to limit their use. Since 1968, IDBs have

been taxable unless they are issued for specific purposes such as

pollution control, or are eligible for the so-called "small

issues" ($10 million or less) exemption.

Small issues are being used with increasing frequency to

finance a wide range of facilities including manufacturing plants,

fast-food franchises, and country clubs. In 1968, sales of IDBs

for all purposes amounted to $1.8 billion; by 1979, small-issue

sales alone amounted to $7 billion.

The widespread use of IDBs raises the question of under what

circumstances the federal government should incur revenue losses,

particularly of a kind that it cannot supervise or control, to

subsidize the borrowing costs of private industry. Unlike direct

federal expenditure programs to assist private business, IDBs are

targeted neither to specific locations nor to specific kinds of

72
businesses. If the tax exemption on new IDE issues was eliminated

effective July 1, 1981, federal tax revenues would increase by

about $5.4 billion over the 1982-1986 period.

The advocates of continued use of small-issue IDBs maintain

that the bonds stimulate investment and promote job development.

Those who would restrict their use argue that the bonds often

finance investment that would take place in any event, and that

their public purpose is ambiguous.

President Carter's fiscal year 1982 budget recommendations

would limit, but not end, the exemption on small-issue IDBs. This,

along with a six-month earlier effective date, accounts for the

differences shown above in revenue increases.

73
LIMITING OF HOME MORTGAGE INTEREST DEDUCTION

Annual Revenue Effect

(billions

1982

Loss under Current Law

Increase

Increase

Increase

Budget

from $5,000 Cap

from $10,000 Cap

under Carter

25

4

0

.3

.3

.8

1983

31

5

1

.8

.4

.0

of

1984

39

6

1

(no

.8

.8

.2

dollars)

1985

49.7

8.5

1.6

1986

62

10

1

.2

.6

.9

Cumulative

Five-Year

Increase

35.6

6.5

proposal)

NOTE: Preliminary estimates, subject to change.

Home mortgage interest payments have always been deductible

under the federal income tax, thus providing a large and popular

subsidy for homeownership. Because the deduction stimulates homeownership, it is often said to promote better home maintenance and

greater civic involvement. Moreover, the subsidy it provides has

been widely incorporated into prices and investment decisions

throughout the economy and could not be eliminated without causing

significant short-term losses and economic dislocation.

Recent economic studies, however, suggest that the deduction

may have important adverse consequences both for housing markets

and for the economy as a whole. Besides creating substantial

losses of federal revenues, it appears to have contributed both to

a serious decline in the construction of rental housing and to the

conversion of rental housing into condominiums and cooperatives.

In addition, the deduction has promoted the rapid rise of home

prices and encouraged the flow of individual savings into housing

rather than into productive capital.

Many homeowners receive little or no benefit from the deduction. Almost 60 percent of all homeowners either have no mortgage

or use the standard deduction and thus gain no direct benefit from

the deductibility of home mortgage interest. While taxpayers with

incomes over $50,000 save on average more than $2,400 a year in

taxes from the deduction, the great majority of homeowners with

incomes below $20,000 save little or nothing.

If the Congress wished to reduce the revenue loss from the

deduction, the simplest option would be to limit the amount of

74
mortgage interest that could be deducted. If the ceiling were set

high enough, most homeowners would not be affected. At the same

time, price increases for more expensive homes would tend to moderate and the incentives for condominium conversion would decrease.

For example, if a ceiling of $5,000 was set effective January 1,

1981, the savings would be about $4.3 billion in fiscal year 1982.

This ceiling would affect only 4.6 percent of all taxpayers. Homeowners with a 12 percent mortgage would be affected only if their

mortgage principal was over $41,700. Homeowners with a 7 percent

mortgage would be affected only if their mortgage principal was

over $71,750. A $10,000 ceiling would save about $800 million in

fiscal year 1982, but it would also affect many fewer persons—only

homeowners with a mortgage principal of over $83,500 at a 12 percent interest rate. Under this ceiling, many recent purchasers of

homes costing up to $100,000 could be shielded from a tax increase.

The current deduction could be converted to a tax credit to

extend the subsidy to all homeowners, including those who do not

itemize. Under a flat-rate credit, tax savings would be a constant

percentage of all mortgage interest paid. Under the current deduction, by contrast, the savings range from 14 percent to 70 percent

of all interest payments, depending on the taxpayerfs marginal tax

rate. Converting the current deduction to a 25 percent tax credit

would increase revenues by about $3.5 billion in fiscal year 1982,

while at the time targeting more financial assistance on low- and

moderate-income homeowners.

Applying these changes only to newly purchased homes, rather

than to all outstanding mortgages, would prevent tax increases for

some homeowners but lead to a variety of perceived inequities among

those purchasing homes at different times. It could also force

some homeowners to maintain their present homes, and thus delay

significant revenue gains for a number of years. Applying the

changes to all outstanding mortgages would avoid these problems.

Most people's taxes would not be sharply increased, since the proposed changes would involve fairly modest departures from present

law.

One problem with limiting the mortgage interest deduction is

that the limit could be circumvented by using a business or some

other asset as collateral for the loan. This problem could be

alleviated by adopting a broader limit on all nonbusiness interest

deductions, similar to the $12,000 limit approved by the House of

Representatives in 1975.

75
REDUCTION OF CAPITAL GAINS EXCLUSION ON HOME SALES

Annual Revenue Effect

Loss under Current Law

Increase from Reducing

Exclusion to $50,000

Increase under Carter

Budget

(billions of

1982 1983 1984

0.7 0.7 0.8

a 0.1 0.2

dollars)

1985 1986

0.8 0.9

0.2 0.2

Cumulative

Five-Year

Increase

0.7

(no proposal)

NOTE: Preliminary estimates, subject to change,

a. Less than $50 million.

Persons 55 and older are allowed a one-time exclusion from

capital gains tax of up to $100,000 of profit on the sale of their

principal residence. This tax provision, enacted in 1978, replaced

a far more limited provision that applied only to less expensive

homes and only to persons aged 65 or over.

The provision encourages older homeowners either to become

renters or to move to less expensive homes, thus freeing up some

larger homes for younger, larger families. On the other hand, it

may also discourage some homeowners just below the current age

limit from moving. The provision probably helps to raise housing

prices, as buyers become willing to pay more in the expectation of

future tax-free gains. While this increases the investment value

of homes, it also diverts funds away from other, possibly more

productive investments, such as business plant and equipment.

If the $100,000 exclusion was cut back to $50,000 effective

July 1, 1981, and if taxpayers were allowed to use it cumulatively,

rather than for just one sale, the revenue loss would be reduced.

A homeowner would continue to be able to shelter gain on a home

sale by purchasing another residence costing at least as much as

the home sold. Moreover, since the 1978 decrease in capital gains

taxes, no gain is taxed at more than 28 percent.

76
REPEAL OF CONSUMER INTEREST DEDUCTION

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law

Increase from Repeal

of Deduction

Increase under Carter

Budget

6.0 6.8 7.8 8.9 10.1

6.0 6.8 7.8 8.9 10.1

(no proposal)

39.6

NOTE: Preliminary estimates, subject to change«

Interest payments have been deductible ever since the federal

income tax was enacted in 1913, at a time when nonbusiness credit

transactions were virtually unknown. Over the years, however, the

use of consumer credit has become widespread, and the interest

deduction now has the effect of providing more than $6 billion a

year in tax relief to those who pay for their goods on credit

instead of in cash. Only a small fraction of borrowers share in

the $6 billion, however; the consumer interest deduction was

claimed by just 17 percent of all taxpayers in 1979. If the deductibility of consumer interest was ended effective January 1, 1981,

federal income tax receipts would increase by $39.6 billion over

the 1982-1986 period.

The argument for repeal of this deduction is that it is a

policy accident which discourages saving and promotes consumption,

is very costly in terms of lost revenue, and provides more financial assistance to an upper-income borrower than to a lower-income

borrower making the identical purchase. The 2 percent of taxpayers

with incomes over $50,000 receive 22 percent of the tax relief

provided by this deduction.

An argument in favor of retaining the deduction is that it is

sometimes difficult to distinguish interest paid for business or

other purposes from interest paid on consumption purchases (for

example, when a small business or a home serves as the collateral

for a loan). This problem could be dealt with by putting a limit

on all nonbusiness interest deductions, such as was done in

77
legislation passed by the House in 1975 which limited nonbusiness

interest deductions to $12,000.

There may also be a national interest in encouraging some

kinds of borrowing for consumption, such as for education, medical

expenditures, automobile purchases, and the like. But selective

retention of the consumer interest deduction would make for administrative complexity, and other actions that the Congress could

take would be more efficient and more equitable than this deduction, if it wished to subsidize particular kinds of consumption.

78
REDUCED FUNDING FOR AMTRAK

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

200

200

120

120

340

340

270

270

400

400

335

335

425

425

370

370

550

550

480

480

1,915

1,915

1,575

1,575

NOTE: Preliminary estimates, subject to change.

Amtrak currently operates passenger railroad trains along

36 intercity routes and in the Northeast Corridor between Boston

and Washington. The system serves cities in 45 states but accounts

for less than 1 percent of intercity passenger traffic. Nevertheless, Amtrak receives over one-third of all federal subsidies for

intercity passenger travel. Amtrak passenger mileage increased

about 8 percent between 1977 and 1980, but the federal subsidy for

its operating losses rose 35 percent over the same period, from

$483 million in fiscal year 1977 to $650 million in 1980, and it is

projected to increase to approximately $1.2 billion in 1986 if the

present system is maintained. The federal government also provides

all of Amtrak's capital funding, which was approximately $200

million in fiscal year 1981.

If 40 percent or more of the Amtrak routes—those with the

poorest ridership, the highest deficits, and the least potential—

were dropped by the beginning of fiscal year 1982, the annual

federal subsidy could be reduced by over $500 million by fiscal

year 1986. Additional savings, not shown in the table above, could

be achieved by ending federal support for routes now subsidized

jointly by federal, state, and local authorities, and by reducing

Amtrak's support of routes that operate principally as a commuter

service.

Three main arguments are made for reducing the Amtrak subsidy.

First, most routes outside the Northeast Corridor hold little

79
or no promise for either increased patronage or reduced costs,

thus presenting continually increasing demands for federal subsidies. Second, the federal subsidy for Amtrak—roughly 18 cents per

passenger mile in fiscal year 1980, or almost $40 per passenger—

already far exceeds that provided other transportation modes.

Commercial aviation receives less than 1 cent per passenger mile in

federal subsidies. The intercity bus industry, a more direct

competitor with Amtrak, receives even less—approximately one-tenth

of a cent per passenger mile. Third, there is little evidence that

the return on the federal investment in Amtrak, expressed in such

terms as environmental benefits or energy savings, justifies the

subsidy. A 1979 CBO report suggested that the nation would

actually save energy if all Amtrak service outside the Northeast

Corridor were halted. Department of Transportation studies contain

similar evidence.

The argument for maintaining the current Amtrak system is that

it provides reliable transportation to many areas that have no air

service and where bus service is often subject to weather interruptions. Also, some persons argue that Amtrak ridership will

increase dramatically when new equipment is introduced and service

is improved.

President Carter's fiscal year 1982 budget recommendations for

Amtrak are lower than those assumed in the CBO baseline thus

accounting for the savings differences shown in the table.

80
PHASING OUT OF CONRAIL FUNDING

Annual Savings

(millions of dollars)

Savings from

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1982 1983

0 250

0 250

N.A. N.A.

N.A. N.A.

1984

300

300

N.A.

N.A.

1985

300

300

N.A.

N.A.

1986

300

300

N.A.

N.A.

Cumulative

Five-Year

Savings

1,150

1,150

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

Since its organization in 1976, Conrail has received $3.3

billion in federal funds, mostly for capital improvements. Conrail

will probably seek at least another $2 billion from the government

during the next five years to cover operating deficits and to make

further capital improvements. Conrail is a consolidation of eight

bankrupt northeastern railroads; it operates 17,000 miles of track,

serves 15 states, carries 270 million tons of traffic a year, and

hauls 4.5 million carloads annually. The system continues to lose

money ($178 million in 1979) and thus cannot generate the funds it

needs to rehabilitate the system and finance new capital

facilities.

If federal support for Conrail were gradually phased out,

Conrail would have an opportunity to negotiate a sale of some of

its routes, to abandon uneconomic secondary and branch lines

(possibly more than one-third of the 17,000-mile syst€>m), to impose

surcharges on light-density lines, to arrange for state or local

subsidies in some instances, and to negotiate downward adjustments

in current collective bargaining agreements. It is also possible

that some capital improvements could be postponed.

The Congress could begin reducing Conrailfs funding level in

1983 (by one-half) and eliminate it after that, resulting in

savings of $1.15 billion over the next five years. Conrail would

thus have a short transition period in which to enact major changes

in rail service in the northeast, but this should not mean the

abandonment of basic rail service.

81
Critics of this proposal make several arguments. Operating

efficiencies necessary for a reduction in costs may not materialize

without additional track work and general physical upgrading. If

these are not done, Conrail may be unable to attract additional

traffic or even to maintain present levels of traffic, and will

have to return to the Congress for assistance. Moreover, in the

absence of federal support, many of the states, counties, and

cities served by Conrail would have to provide higher subsidies

themselves to assure continued service; and Conrail employees would

face possible wage cuts and layoffs.

President Carter's fiscal year 1982 budget recommendations do

not contain a specific proposal for Conrail funding. Instead, the

issue is deferred pending the outcome of studies scheduled to be

completed by April 1, 1981.

82
REDUCTION IN NEW SUBWAY COMMITMENTS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Out lays

Carter Budget

BA

Outlays

290

20

400

20

910

120

970

130

1,120

300

1,140

340

1,230

560

1,210

580

1,310

800

1,230

880

4,860

1,800

4,950

1,950

NOTE: Preliminary estimates, subject to change.

The Urban Mass Transportation Administration (UMTA) will have

unfunded commitments of about $200 million at the end of fiscal

year 1981 for new subway systems under construction in Atlanta,

Baltimore, Buffalo, and Miami, and for a downtown people-mover for

Los Angeles. If these commitments are met, but no additional ones

undertaken, the outlay and budget authority savings over the next

five years will be about $750 million and $3.2 billion, respectively. These savings would represent a 6 percent cut in total UMTA

obligations for 1982 and 11 percent for 1986. If, in addition,

construction of Washington, B.C.'s subway system was halted at the

69 miles of track for which funds are now available, federal outlay

savings would total $1.0 billion through 1986. This would eliminate almost all new federal construction funds for the Washington

subway after 1982.

The argument against starting new subway systems is based on

doubts about their cost effectiveness. Typically, they save little, if any, energy; have only transitory effects on congestion and

pollution; incur very large operating deficits; and, by themselves,

have only a minor effect on land use. Funds spent on alternatives

such as buses, exclusive lanes for high-occupancy vehicles, and

coordinated traffic signals appear much more efficient.

A counterargument is that new subway systems are important,

job-creating public works projects that enjoy considerable popularity. Most state and local governments would probably be unable to

finance large new systems on their own»

83
President Carter's fiscal year 1982 budget recommendations

propose a higher 1982 funding level for new subway commitments than

assumed in the CBO baseline, but a somewhat lower level in the

outyears. This accounts for the differences in savings estimates

shown in the table.

84
REDUCED SPENDING ON HIGHWAYS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1,200

95

1,240

90

1,300

475

1,290

490

1,500

885

1,330

900

1,600

1,145

1,360

1,090

1,800

1,340

1,390

1,220

7,400

3,940

6,610

3,790

NOTE: Preliminary estimates, subject to change

The federally aided highway system is composed of 42,500 miles

of Interstate System roads and 824,000 miles of primary, secondary,

and urban system roads. Although this federal highway system

represents only 22 percent of the nation's total 3.9 million highway miles, it accounts for about 79 percent of vehicle miles

traveled.

Of the approximately $9.1 billion in budget authority for

highways in fiscal year 1981, $3.5 billion is allocated to the

Interstate System; $1.3 billion to the repair, rehabilitation, and

replacement of unsafe bridges; $3.2 billion to the primary, secondary, and urban system roads; and the remaining $1.1 billion to a

variety of programs.

If federal responsibility were limited to the Interstate

System, the bridge program, and the primary, secondary, and urban

systems roads, the 1982-1986 budget authority savings would be

approximately $7.4 billion with outlay savings of approximately

$3.9 billion over the five years. These savings could not, however, be obtained through the appropriations process. The federalaid highway program is not subject to regular appropriations review

because of its special status as a self-financed trust fund—known

as the Highway Trust Fund. The spending authority for 1982 was

provided in the Surface Transportation Assistance Act of 1978

(Public Law 96-599), which authorized the highway programs for

fiscal years 1979 through 1982. Thus, any reduction in fiscal year

1982 would require a specific rescission, while reductions in

85

84-656 0-81- 7
subsequent years could be accomplished by not reauthorizing the

affected programs.

The effect of this cut would be to shift back to the states

the full responsibility for a variety of highway programs, including pavement marking, removal of hazards, rail-highway crossings

projects, and the 3-R program (resurfacing, restoration, and

rehabilitation).

Federal aid could also be concentrated on important national

routes by redefining completion of the Interstate System to include

only those gaps needed for interstate commerce. While this would

reduce the federal costs to complete the system from over $50

billion (in 1979 dollars) to $20-25 billion, it would also place

greater responsibility on the states. No budget savings are likely

from this proposal over the next five years, although it could

produce important long-run savings.

Another approach would be to cut back the federal matching

share except in the Interstate System program. Current matching

rates are at historic highs. The non-Interstate match was 50

percent from 1916 to 1973, when it was raised to 70 percent. In

1978, it was changed to 75 percent, with the bridge program set at

80 percent. If the match was two-thirds in all non-Interstate

categories, the savings would be about the same as those estimated

under the CBO baseline for the first option.

One argument for such a change is that the Highway Trust Fund

is currently disbursing more funds than it takes in, and with

declining gasoline consumption this condition is likely to persist

unless state claims on the fund are cut back. The states can, of

course, increase their own highway user fees in order to replace

any lost federal funding.

Opponents of such a proposal argue that all the nation's roads

contribute to national commerce, that the federal government should

protect its already large investment in the highway system, and,

finally, that the federal government is best able to raise revenue

and fund the highway system in a uniform and comprehensive manner.

They point out that the present federal excise tax on motor fuels

of four cents a gallon has not been increased since 1959. Each

additional one cent in fuel taxes applied nationwide would raise

almost $1 billion in revenues. Therefore, an excise tax increase

of 1.5 cents would finance continuation of the current programs.

Other fees (truck, bus, and trailer taxes, and tire and rubber

86
taxes) could be allocated among users according to their proportionate share of highway costs.

President Carter's budget recommendations for fiscal year 1982

assume a slightly higher program level than that in the CBO baseline, but the President's budget also assumes that the program will

grow more slowly than does CBO in later years. Thus, the savings

shown above appear slightly larger under the Carter budget: relative

to the CBO baseline in early years, and substantially smaller in

later years.

87
REPEAL OF DAVIS-BACON REQUIREMENTS

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Out lays

Carter Budget

BA

Outlays

130

124

160

125

155

140

179

147

172

149

194

168

199

170

210

180

215

193

228

199

871

776

971

819

NOTE: Preliminary estimates, subject to change.

The 1931 Davis-Bacon Act and 77 related federal statutes

require that wages paid on most federal and federally assisted

construction projects equal the prevailing wage in the local area

of a project. Where there is no majority of workers paid at an

identical rate, the wage scale paid to at least 30 percent of local

workers is used. The practical effect, particularly in urban

areas, is that workers on federal projects receive the union scale,

instead of an average locality rate. In 1979, the value of new

construction put in place totaled almost $230 billion. Nearly 13

percent of that amount ($29 billion) was federally assisted construction, and hence potentially covered by Davis-Bacon. Of the

$29 billion, approximately one-third was paid in wages.

Repeal of Davis-Bacon might result in cumulative outlay

savings of $776 million by 1986 in just the three largest federal

construction programs: military construction, Environmental Protection Agency construction grants, and ground transportation

construction. An alternative to outright repeal would be to raise

the dollar volume threshold required to activate the coverage from

the current level of $2,000 set by the original act. The raised

threshold could be indexed to some measure of construction costs,

such as the Department of Commerce's Composite Cost Index, to

ensure that inflation did not erode its impact. To result in

significant savings, however, the new threshold would have to be

raised considerably since contracts of less than even $100,000

account for only a small fraction of federal construction outlays.

88
The estimated cost of the Davis-Bacon requirement, as given

above, is based on recent studies by the General Accounting Office

and the Council on Wage and Price Stability. Those studies have

been criticized for using limited data and failing to adjust for

asserted productivity differences between high- and low-paid

workers. To the extent that higher-paid workers are more productive, higher wages need not translate directly into higher costs,

thus reducing the potential for federal savings.

Defenders of Davis-Bacon argue that it saves the government

money by excluding unqualified contractors and by preventing labor

relations problems at construction sites. They also contend that

the law's requirements add stability to the construction industry,

thereby making it less difficult to recruit, train, and maintain

skilled labor. While there are probably some offsetting costs of

this kind, their magnitude cannot be calculated.

President Carter's budget recommendations for fiscal year 1982

assume slightly different construction program levels from those in

the CBO baseline, thus accounting for the difference in projected

savings.

89
SHIFTING CERTAIN AIRWAYS COSTS

The federal government spent about $3.1 billion in fiscal year

1980 for capital and operating expenses of the nation's air traffic

system. General aviation (mainly, planes owned by firms and

individuals for their own business and personal use) accounted for

an estimated $740 million of the total but paid only $80 million in

the form of user charges, primarily through a 7 cents per gallon

tax on aviation fuel. On the other hand, commercial airline

travelers, through ticket taxes and other fees, paid about 90

percent of the costs attributable to them, and under current

projections will be paying approximately 100 percent, or possibly

more, by 1982.

Increasing User Fees. If general aviation user fees were

increased in line with their associated costs, about $5 billion

would be generated over the next five years. The taxes paid by

private plane owners would increase 600 percent, although their

overall operating costs would increase by less than 15 percent.

The rest of the nation's taxpayers would continue to subsidize the

one-quarter of expenditures that represent costs not attributable

to any one class of air traveler.

Annual Added Revenue Cumulative

(millions of dollars) Five-Year

1982198319841985198 6 Increase

CBO Baseline 800 900 1,000 1,100 1,200 5,000

Carter Budget 510 490 480 470 450 2,400

NOTE: Preliminary estimates, subject to change

An argument for this proposal is that having users of the

airway system pay their own way would encourage more efficient use

of airports and airways, and would be more fair as well. An

argument against it is that greatly increased taxes might disrupt

the general aviation industry, though transition effects could be

cushioned by using the approximately $3 billion surplus in the

Airport and Airways Trust Fund to introduce increased user charges

gradually.

90
President Carter's 1982 budget recommendations for fiscal year

1982 propose user charges for general aviation that by 1982 would

recover about 50 percent of their associated costs, instead of 100

percent as in the proposal described above, thus accounting for the

revenue differences shown in the table.

Ending Grants-in-Aid* The Congress might also consider ending

grants-in-aid for capital improvements at large and medium hub

airports. This action is suggested because such airports are

already close to financial self-sufficiency, and the federal grants

are now so thinly spread that their replacement by local user

charges should be possible. If grants to large airports were

eliminated, the five-year savings would be about $1.1 billion, as

shown in the following table.

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

260

50

250

50

300

180

260

170

330

250

280

230

360

300

300

260

390

350

320

290

1,640

1,130

1,410

1,000

NOTE: Preliminary estimates, subject to change

The reduction in grant support for large and medium hub

airports was passed by the Senate in 1980, but the 96th Congress

did not complete action on Airport and Airways Trust Fund, reauthorizations. The savings estimates given above assume that it will do

so in 1981. President Carter's 1982 budget recommendations assume

slightly lower program levels for the airport grant program than

those in the CBO baseline, accounting for the somewhat different

savings estimates shown.

91
ELIMINATION OF MARITIME INDUSTRY SUBSIDIES

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline

BA 168 206 245 292 339 1,250

Outlays 33 83 154 241 300 811

Carter Budget

BA 128 176 232 295 369 1,200

Outlays 29 77 143 223 292 764

NOTE: Preliminary estimates, subject to change.

The Maritime Administration (a unit of the Department of

Commerce) pays an annual subsidy of roughly $150 million to U.S.

shipyards so that they can meet the competition of foreign shipbuilders. Foreign shipyards can build ships for about half the

cost at U.S. shipyards. The subsidies for ship construction

administered by the Maritime Administration reduce this differential so that U.S.-built ships are priced only slightly higher than

foreign-built ships. Further subsidies of about $350 million a

year are paid to offset the higher operating costs of U.S. shipping

companies, again for the purpose of meeting competition from

foreign ships that operate for about two-thirds of the costs of

U.S. ships.

If the Congress ended the two subsidy programs, the savings in

the first five years would be about $800 million. Because the

operating subsidy is a contractual obligation tied to a particular

ship, typically for 20 years, full savings from eliminating it

would take about that long to capture.

The argument for eliminating the construction subsidy rests on

the fact that only three or four ships a year are built with the

subsidy, so that it has minimal effects in maintaining shipbuilding

capacity. If the two subsidies were ended, there would be some

loss of shipbuilding capacity, some possible adverse effects on

U.S. export and import prices, and some loss of employment in shipbuilding regions and in the industries that furnish shipbuilding

materials.

92
Discontinuance of the two subsidies would eliminate most of

the expenditures of the Maritime Administration, whose other programs include research and development for ship, ship operating,

and maritime technology, and funding for maritime operations and

training, including the Merchant Marine academies. If those

remaining functions were transferred to the Department of Transportation, eliminating the Maritime Administration, some additional

administrative savings would probably result*

President Carter's budget recommendations for fiscal year 1982

assume a lower level of construction subsidy commitments than that

in the CBO baseline. This accounts for the differences in

estimated savings shown above.

93
USER CHARGES FOR CERTAIN COAST GUARD ACTIVITIES

Annual Added Revenues

(millions of dollars)

CBO Baseline

Carter Budget

1982

680

710

1983

730

760

1984

780

800

1985

830

830

1986

880

870

Cumulative

Five-Year

Increase

3,900

3,970

NOTE: Preliminary estimates, subject to change.

Over the next five years, the Coast Guard will spend about

$1.5 billion on short-range aids to navigation and $2.4 billion on

search-and-rescue activities. The cost of both of these programs

could be recovered through user charges.

Without short-range navigational aids—such as buoys and other

channel markings—commercial shipping in U.S. inland and coastal

waters would be substantially more hazardous, difficult, and

costly. The capital and operating costs of these aids could be

recovered from the shipping 4ndustry, just as highway users pay for

the cost of highways. The potential five-year savings for the

general taxpayer from such us^r charges total about $1.5 billion,

or about 11 cents per ton of domestic and foreign cargo.

The Coast Guard also engages in search-and-rescue operations

for private mariners who are lost or otherwise in trouble. About

70 percent of such missions involve recreational boaters. With

almost 9 million large recreational boats registered by the states,

an annual registration fee of about $30 would recover the searchand-rescue costs attributable to recreational boaters. The potential five-year savings for the general taxpayer total about $2.4

billion.

The argument for charging the shipping industry for navigational aids is that efficiency is enhanced when users of various

modes of transportation pay the costs of each mode. The argument

for charging recreational boaters is simply that the beneficiaries

of this special service, who by and large have higher than average

incomes, ought to bear the cost.

An argument against imposing such user charges is the difficulty of establishing fair cost allocations among the various kinds

94
of users. The charges might also cause some slight reduction in

domestic shipping, and possibly temporary reductions in the sales

and use of recreational boats.

President Carter's budget recommendations for fiscal year 1982

did not include this item. The revenues shown above for the Carter

budget are in fact the spending levels he has recommended for navigational aids and search-and-rescue activities, and thus the amount

that would be saved if the costs of these programs were covered by

user charges.

95
USER CHARGES FOR DEEP-DRAFT NAVIGATION

Annual Added Revenues

(millions of dollars)

CBO Baseline

Carter Budget

1982

540

590

1983

600

730

1984

650

810

1985

710

820

1986

770

850

Cumulative

Five-Year

Increase

3,270

3,800

NOTE: Preliminary estimates, subject to change.

The Army Corps of Engineers and the Coast Guard spend about

$560 million a year improving and maintaining ports and channels to

accommodate oceangoing vessels and Great Lakes shipping. Full

recovery of these costs from users would total about $3.3 billion

between 1982 and 1986.

Except: for the military, all deep-draft vessels are engaged in

for-profit shipping. If the federal government recovered all deepdraft expenditures from international shipping alone, shipping

costs would increase by only about 30 cents a ton, or less than 0.2

percent. Such a level seems unlikely to harm the general economy

or divert significant traffic to other ports or transportation

modes.

Several different taxing mechanisms are available to recover

costs. The most common approach used in other countries is a

harbor and channel use fee, under which a charge is assessed each

time a ship uses a particular channel or harbor. Another possibility is a fuel tax, but in international shipping it can easily be

avoided. Costs could also be recovered through taxes based on the

value, volume, or weight of the cargo. The U.S. Customs Service

already collects a small tonnage tax on international shipping.

Receipts from this tax, which go into the general fund, totaled $14

million in 1980, an effective rate of about one cent a ton. Further study would be required to evaluate the effectiveness of these

alternatives and to determine the proper allocation of costs among

various classes of users and among different types of facilities.

One argument in favor of this option is that the Congress has

broadly applied the user charge principle to other modes of

transportation, including highways, airports, and to some extent

inland shipping.

96
Arguments against this proposal include the administrative

difficulty of allocating the relevant expenditures by the Corps of

Engineers and the Coast Guard, and the possibility of some small

reductions in international trade and coastal trade.

President Carter's fiscal year 1982 budget recommendations

assume a slightly different program level for improving and

maintaining deep-draft ports and channels from that assumed in the

CBO baseline, thus accounting for the small savings differences

shown in the table.

97
REDUCED FUNDING FOR URBAN DEVELOPMENT ACTION GRANTS

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985

Cumulative

Five-Year

1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

135

15

135

15

135

50

135

50

150

120

135

115

165

140

135

135

180

155

135

135

765

480

675

450

NOTE: Preliminary estimates, subject to change*

The Urban Development Action Grant (UDAG) program was established in 1977 to help severely distressed communities finance

part of the costs of private commercial, industrial, and housing

development projects. The Congress extended UDAG eligibility

in 1979 to the deteriorated areas of otherwise healthy cities

("pockets of poverty"), and in 1980 the program was reauthorized

through fiscal year 1983 at an annual level of $675 million.

UDAG funds are intended to generate additional private employment and tax revenues. Through October 1980, 937 grants

totaling $1.7 billion were provided to 562 cities and counties.

Over half the funds supported commercial projects, mostly in retail

and wholesale trade.

If UDAG appropriations were cut 20 percent, the savings

would total $480 million over the five years from 1982 to 1986.

One way to make such a reduction without affecting the most distressed cities would be to eliminate the "pockets of poverty"

provision and otherwise to narrow grant eligibility standards. If

this course were taken, the impact would be greatest in the South

and Southwest, where there are fewer jurisdictions in the upper

ranks of the Department of Housing and Urban Development (HUD)

distress ratings.

Some of the cities losing UDAG eligibility would still be

able to fund economic development projects with their own revenues or perhaps from Community Development Block Grant funds. But

98
some projects would probably be delayed or dropped entirely,

resulting in postponement or loss of prospective jobs, housing

units, and local tax receipts.

President Carter's budget recommendations assume that UDAG

will receive $675 million a year through 1986. CBO's baseline

projection assumes that the program will be funded at a higher

level when reauthorized for the years from 1984 to 1986, thus

accounting for the differences in the savings shown above.

99
ELIMINATION OF ENERGY IMPACT ASSISTANCE

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

46

3

50

31

51

25

50

50

56

38

50

50

61

50

50

50

67

58

50

50

281

174

250

231

NOTE: Preliminary estimates, subject to change.

In 1978, the Congress authorized a five-year grant program to

help states and localities develop plans to deal with the problems

created by sudden increases in coal- and uranium-related energy

development. Localities apply for grants through their state

governments to the Farmers Home Administration. Grants are issued,

on a need basis, to cover the cost of developing plans to cope with

anticipated energy-related growth. Appropriations for the planning

grant program totaled $20 million in fiscal year 1979, $42 million

in fiscal year 1980, and $62 million in fiscal year 1981. Elimination of the planning assistance program in 1982 would result in

savings of about $174 million in the 1982-1986 period.

Proponents of the Energy Impact Assistance program argue that

the bulk of new energy development will occur in rural areas that

lack the necessary planning capacity, governmental infrastructure,

and tax base to cope with the rapid increases in population associated with new energy development. They argue that, since the

country as a whole benefits from additional energy production,

the federal government should provide some assistance so that the

affected communities can develop plans for coping with the problems

associated with rapid energy-related development.

Opponents of the federal Energy Impact Assistance program

argue that these problems should be resolved at the state and local

level. While there may be an initial mismatch between the expenditure needs of affected governments and the tax receipts generated

by the energy-related development, state and local tax revenues

100
over the long run should be more than adequate to offset the public

expenditures associated with the projects. Whatever mismatch

arises can be overcome through traditional means, such as the

issuance of bonds. If the federal government does play a role,

there is no reason why the program should take the form of grants

as opposed to loans.

President Carter's budget recommendations for fiscal year

1982 assume a slightly different funding level for this program

from that assumed in the CBO baseline. This accounts for the

differences in savings shown above.

101

84-656 0-81- 8
INCREASED INTEREST RATES ON DISASTER LOANS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

75

75

25

25

225

225

75

75

375

375

150

150

500

500

200

200

625

625

250

250

1,800

1,800

700

700

NOTE: Preliminary estimates, subject to change.

In fiscal year 1980, the Farmers Home Administration and the

Small Business Administration made about $3 billion in loans to

firms and farmers located in designated disaster areas. Borrowers

without access to private sources of credit receive subsidized

loans at 5 percent, while others receive loans at an interest rate

tied to the average rate paid on outstanding federal obligations of

comparative terms and maturities. Although these latter loans are

characterized as "unsubsidized," the interest rate charged is

currently below both the prevailing rates on private loans and the

current interest rates on long-term federal borrowing at the time

the loans are made. (The latter subsidy, however, would be much

lower if interest rates were to decline from their recent high

levels.) About 55 percent of the 1980 loans were at 5 percent, and

the remainder were tied to the Treasury borrowing rate.

Tying interest rates on all loans to the Treasury borrowing

rate could save $625 million annually by fiscal year 1986, assuming

that disasters continue to occur about as they have in recent

years.

The argument for the change is that eligibility for the subsidized interest rate does not depend on demonstrated need, but

rather on inability to obtain credit from private lenders. As a

result, borrowers who would be able to afford insurance against

disasters receive large benefits from these loans. According to a

recent General Accounting Office report, generous disaster loan

programs may destroy the incentive to purchase insurance against

loss, and also may deter relocation to less hazardous areas.

102
An argument against change is that to raise disaster loan

interest rates would place added burdens on borrowers who may find

it particularly difficult to purchase adequate insurance without

federal subsidies.

President Carter's fiscal year 1982 budget recommendations

assume a lower future incidence of disasters than does the CBO

baseline, and make no allowance for inflation in the cost of those

disasters, thus accounting for the savings differences shown in the

table.

103
REDUCED FUNDING FOR VOCATIONAL EDUCATION

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

343

34

257

180

379

347

266

334

421

383

265

290

466

426

272

303

516

471

261

294

2,125

1,661

1,321

1,401

NOTE: Preliminary estimates, subject to change.

The federal government began funding state vocational education programs in 1917 as part of a World War I manpower training

effort. Federal expenditures for vocational education have risen

gradually over the years to a total of $784 million in fiscal year

1980, a level the Congress maintained for 1981. This sum is about

10 percent of nationwide spending for vocational education.

About 40 percent of the fiscal year 1981 funds, $309 million,

are untargeted Basic Grants that the states distribute to localities for any vocational education purpose. The remaining funds

have been targeted by the Congress to support specific services,

such as the Basic Grant set-aside for disadvantaged populations

($112 million) and program improvement efforts ($125 million).

If the nontargeted portion of the Vocational Education Basic

Grants was eliminated beginning with the 1982-1983 school year, the

cumulative savings through fiscal year 1986 would be about $1.7

billion. Savings in the initial year would be modest because the

program is advance-funded.

Proponents of such a change argue that untargeted federal

vocational education spending should be eliminated in a time of

fiscal restraint and that the federal contribution, while welcomed

by state education agencies, is not essential to the continuation

of local programs. The argument against eliminating untargeted

support is that the states and school districts may in some cases

104
not pick up the slack, thereby lessening access to vocational

education for some students.

President Carter's fiscal year 1982 budget recommends a lower

level of funding in 1982 than that assumed in the CBO baseline,

thus accounting for the different savings shown above for that

year. The differences in 1983-1986 arise because of variations in

the economic assumptions used.

105
REDUCED FUNDING FOR IMPACT AID

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

451

361

-26

-44

498

488

-37

-39

553

542

-53

-57

613

601

-76

-80

678

665

-106

-108

2,793

2,657

-298

-328

NOTE: Preliminary estimates, subject to change.

For many years, Administrations and the Congress have argued

over so-called impact aid (School Assistance for Federally Affected

Areas) . The aid is paid for two kinds of children: those whose

parents both live and work on federal property (3a children), and

those whose parents either live or work on such property (3b

children). The principal controversy has been over 3b children,

but Presidents have sought to reduce funding for 3a children as

well. Although impact aid appropriations have been reduced in

recent years, the aid still goes to about 4,000 school districts.

If impact aid payments were eliminated except for 3a children

in the 323 school districts that have significant concentrations of

such children (where 3a children exceed 20 percent of enrollments),

savings over the next five years would approach $2.7 billion.

Arguments in support of such a cut are that federal funds

should not be used for general school expenditures, that in some

instances the impact aid merely reduces state aid under equalization formulas, and that the federal presence enhances property

values and hence school district tax receipts. Arguments against

the cut are that the federal presence removes property from the tax

rolls, while imposing real service burdens on the schools, and that

any fiscal benefits from the federal presence are captured primarily by sales and income taxes, which only partially support

local school districts.

changes

President Carter's fiscal year 1982 budget proposes the same

;es as described above except that heavily impacted 3a

106
districts would receive only 90 percent of their entitlement (20

percent for children living in low-rent housing), instead of 100

percent as in the CBO option. The Carter budget also proposes a

rescission of $148 million in fiscal year 1981 funds, a year to

which the CBO option does not apply.

107
REDUCED FUNDING FOR EMERGENCY SCHOOL AID

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

52

5

41

5

58

53

40

36

64

59

34

34

71

65

25

26

78

72

14

20

323

254

154

121

NOTE: Preliminary estimates, subject to change.

The 1972 Emergency School Aid Act (ESAA) authorized basic

grants to school districts undergoing desegregation to assist them

in such activities as staff training, community relations, and the

provision of guidance counselors. In general, the funds may not be

used for busing or remedial education programs. Actual ESAA basic

grant appropriations have declined from $134 million in 1973 to

$108 million in fiscal year 1981. An estimated 330 school districts will receive ESAA funds in 1981. About 60 percent will have

been receiving such support for at least six years.

If program eligibility was limited to six years, and the funds

so saved not reapportioned, the five-year savings would be about

$254 million. Savings in the first year would be modest because

the program is advance-funded. Most southern states would lose

funding under this change, as well as certain districts with

histories of desegregation problems, such as Boston and Detroit.

The argument for such a change is that six years is long

enough to be classified as an "emergency," and that expenses

associated with desegregation should by that time be incorporated

in a school district's regular operating budget. Opponents of the

proposal argue that such a strategy is flawed because desegregation difficulties persist for more than six years.

President Carter's budget recommendations for fiscal year 1982

assume a lower funding level for this program than that in the CBO

baseline; thus, the savings relative to the Carter budget are

lower.

108
REDUCED STUDENT LOAN SUBSIDIES

Savings from

Annual Savings

(millions of dollars)

1982 1983 1984 1985

Cumulative

Five-Year

1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

124

96

-735

-66

539

429

N.A.

N.A.

1,070

945

N.A.

N.A.

1,772

1,602

N.A.

N.A.

2,057

1,993

N.A.

N.A.

5,562

5,065

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

In the fall of 1978, the Congress removed the family income

ceiling on college students seeking loans under the Guaranteed

Student Loan (GSL) program. Such loans are interest-free while the

student is in school. Since then, the program has become the

fastest growing, most expensive form of federal postsecondary

student assistance. Estimates suggest that, in fiscal year 1982,

3.4 million students will borrow $7.9 billion, and the program1 s

interest costs will be $2.9 billion, as compared with 1978 when 1.1

million students borrowed $2.0 billion and interest costs were $0.4

billion.

The government does not gather information on the characteristics of GSL borrowers, but much of the surge in loan volume appears

to have been caused by upper-income families taking advantage of

the favorable interest rate and repayment terms.

If the in-school GSL interest was deferred, rather than

forgiven, and added to principal when the loans became payable,

GSLs would be far less attractive. This would probably reduce

demand by about 25 percent in the first year. Savings would be

small at the outset (because the government would still be paying

the deferred interest to the lenders), but as the loans entered

repayment the savings would mount. By 1986, projected program

costs would be down by an estimated $2 billion—32 percent below

what they would be under a continuation of current policy.

Other approaches would preserve the in-school interest

subsidy but target it so that upper-income families would no

109
longer automatically be eligible. One method would be to reimpose

a family income ceiling: $40,000 would approximate the inflationadjusted value of the ceiling that was in effect until the fall of

1978. Another would be to limit GSLs to the amount by which the

borrower's educational costs exceeded the expected family

contribution. Depending on the details of how such changes were

structured, the savings could be prompter and larger than those

shown above.

Any of these three changes would add complexity to the GSL

program, arid thus could deter banks from participating.

Restricting borrowing to the amount by which the educational costs

exceeded the expected family contribution would reduce the lenders'

yield because the average loan amount would decline. For that

reason, banks might become less willing to participate and the

number of loans available to eligible borrowers could be reduced.

Some students, particularly the most needy who are generally less

preferred borrowers, could have difficulty obtaining loans.

This problem could be overcome, however, by assuring that the

need-based direct federal loan program administered by colleges was

adequately capitalized.

Options similar to the three described above were considered

and rejected by the Congress in the course of enacting the Higher

Education Amendments of 1980.

President Carter's fiscal year 1982 budget proposes several

changes in the GSL program, including eliminating federal payments

for the in-school interest subsidy and limiting student borrowing

to the amount: of assessed need. The proposals in the Carter budget

therefore would achieve substantially greater savings than those

shown for the CBO option.

110
LIMIT ON PARENTAL PERSONAL EXEMPTION FOR STUDENTS

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

Loss under Current Law

Increase from Limit on

Parental Exemption

Increase under Carter

Budget

1.1 1.1 1.1 1.1 1.1

1.1 1.1 1.1 1.1 1.1

(no proposal)

5.5

NOTE: Preliminary estimates, subject to change.

Under current law, a parent can claim an exemption of $1,000

for a dependent aged 19 or over if the dependent is a student. If

an over-18 dependent is not a student, the parent also receives an

exemption provided the dependent earns no more than $1,000 in the

year. The rule allowing a parental personal exemption for students, even if they earn more than the amount of the exemption, was

adopted in 1954. The main reason for the rule was to avoid the

"notch" problem that resulted when a dependent's earnings were

close to the exemption amount; an extra few dollars in earnings

could deprive the parents of the exemption, costing them hundreds

of dollars in extra taxes. The exemption was also justified as a

way of taking into account the added costs parents incur for

students.

If the exemption for students aged 19 and over was repealed

effective January 1, 1981, the increased federal revenues over the

1982-1986 period would total about $5.5 billion.

The main argument for repeal of the parental exemption for

students is that it is not well designed as a measure to assist

parents in meeting the costs of educating their children. Its

value in tax savings is greatest for those in the highest marginal

tax brackets, and it is unrelated to the costs of a child's education. With the great expansion of federal student aid in recent

years, it can be argued that the relatively modest and not very

well targeted assistance provided by the extra exception is no

longer needed.

The main argument for retaining the exemption arises from the

notch problem that prompted the 1954 change. Even though parents

111
of nonstudents over 18 face this problem under present law, most of

these nonstudents earn well over $1,000 a year so that the question

normally does not arise. Students, who often work only part time,

are much more likely to have earnings for the year that come close

to the $1,000 dividing line.

112
ELIMINATION OF TWO YOUTH EMPLOYMENT AND CONSERVATION PROGRAMS

Savings from

Annual Savings

(millions of dollars)

1982 1983 1984 1985

Cumulative

Five- Year

1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

277

223

118

79

295

291

60

60

318

314

60

60

342

338

60

60

366

362

60

60

1,598

1,528

358

319

NOTE: Preliminary estimates, subject to change.

The Young Adult Conservation Corps (YACC) and the Youth Conservation Corps (YCC) are two federally funded youth employment

programs that are not targeted on economically disadvantaged young

people. YACC is a year-round program administered by the Department of Labor, while the YCC is a summer program operated by the

Department of the Interior. Both programs employ young people in

conservation projects on federal land. In fiscal year 1981, they

will provide about 51,000 jobs. If funding was discontinued for

both programs, the five-year savings would exceed $1.5 billion.

The argument for eliminating these programs is that they are

not targeted on people in financial need, and that their long-term

effectiveness in improving the employment opportunities of participants has not been demonstrated. Furthermore, if the work performed in the programs is worth doing, it should be financed in the

regular budgets of the state and federal agencies involved. The

argument against the cut is that conservation yields real benefits

and that the young people may gain useful work habits and

experience from the programs.

The immediate consequence of eliminating the programs would be

a loss of jobs and income. The number of youths served in federal

youth employment programs would decline by about 5 percent, but the

youth unemployment rate would rise by less than one percentage

point. Some useful conservation work that would have been done

through YACC and YCC would probably not be picked, up in other

programs.

113
The savings relative to President Carter's fiscal year 1982

budget recommendations are smaller because his budget phases out

YACC in 1982, although it continues YCC at $60 million annually

through 1986.

114
PHASING OUT OF CETA TITLE VI

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1,030

980

1,060

980

1,180

1,170

1,230

1,180

1,250

1,240

1,330

1,280

1,320

1,310

1,440

1,380

1,360

1,350

1,550

1,490

6,140

6,050

6,610

6,310

NOTE: Preliminary estimates, subject to change.

The Comprehensive Employment and Training Act (CETA) authorizes public service employment (PSE) in Titles II-D and VI: Title

II-D is intended to address structural employment problems; Title

VI, cyclical employment problems. Actually, however, the two programs operate quite similarly and, since 1978, both have been more

heavily targeted on disadvantaged groups. The continuing resolution for fiscal year 1981 provides funding for approximately

215,000 Title II-D jobs and 100,000 Title VI jobs. Compared with

actual fiscal year 1980 job levels, this represents an 8 percent

increase for Title II-D and a 46 percent decrease for Title VI.

Cutting the number of Title VI jobs funded by 15 percent a

month (starting in April 1981), and phasing the program out

entirely by the end of fiscal year 1982, would save about $150

million in fiscal year 1981 and $6.1 billion during the following

five years, compared with maintaining the program at the planned

1981 level. The net effect would be less, however, because

increases in other federal expenditures and decreases in revenues

could reduce overall federal savings to approximately $4.6 billion

over the next five years.

Proponents of reduced Title VI funding argue that the program

is not an effective countercyclical strategy and, in fact, may be

partially substituting for state and local expenditures. To make

Title VI more countercyclical—that is, more effectively serving

the recently unemployed—would require major legislative changes

and might worsen the problem of "fiscal substitution."

115
Others argue against decreased Title VI funding for two major

reasons* First, eliminating Title VI, unless fully offset by increased Title II-D appropriations, would decrease the number of

jobs targeted on the disadvantaged. Second, reducing PSE could

also increase the costs of other federal programs (including unemployment compensation, welfare, Medicaid, and food stamps) and decrease revenues from income and Social Security taxes. Under the

present PSE operations, these offsets in other federal spending and

revenues could reach 25 percent of the PSE job cost.

The differences shown between estimated savings from the CBO

baseline and from President Carter's fiscal year 1982 budget

recommendations arise from slightly different methods for projecting costs.

116
LIMITING OF ELIGIBILITY FOR TARGETED JOBS TAX CREDIT

Annual Revenue Effect Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Extension of

Current Law 345 345 350 355 355

Increase from Limiting

Eligibility 40 115 165 175 175 670

Increase under Carter

Budget N.A. N.A. N.A. N.A. N.A. N.A.

NOTE: Preliminary estimates, subject to change.

The Targeted Jobs Tax Credit (TJTC) program is designed to

help certain classes of unemployed workers find jobs by authorizing

tax credits of up to $3,000 in the first year and $1,500 in the

second year to employers who hire any member of seven targeted

groups, including cooperative education students between the ages

of 16 and 19. By the end of fiscal year 1980, 305,000 people had

been certified for TJTC participation, of whom 151,000 were cooperative education students.

Cooperative education programs arrange for high school and, in

some cases, postsecondary students to spend a part of the school

day working in local businesses, thus gaining employment experience. Many cooperative education programs are well established and

have little difficulty generating work placements for participating

students. Therefore, eliminating cooperative education students

from TJTC would focus the subsidy on people likely to experience

the greatest difficulty in finding employment.

On the other hand, employers who have received tax credits for

hiring cooperative education students may decide to hire members of

other targeted groups instead, thus eliminating any increased revenues from this provision. Also, the recent increase in minimum

wage rates may make cooperative education placements more difficult

to generate; some program coordinators feel that TJTC helps to

maintain the attractiveness of cooperative education programs.

President Carter's budget for fiscal year 1982 does not

recommend that the TJTC be extended when the current law expires on

October 1, 1981.

117

84-656 0-81- 9
LOWERING OF THE FEDERAL SHARE FOR STATE MEDICAID AND AFDC PROGRAMS

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

1,100

1,100

1,400

1,400

1,800

1,800

2,200

2,200

2,800

2,800

9,300

9,300

NOTE: Preliminary estimates, subject to change.

States can choose between two different formulas to determine

federal support for state Aid to Families with Dependent Children

(AFDC) programs: the regular AFDC formula, and the formula used to

determine federal support for state Medicaid programs. Under both

formulas, the federal share declines as state per capita income

increases. All but a few states have found the Medicaid formula

to be more generous than the regular AFDC formula. Under the

Medicaid formula the federal government pays between a statutory

minimum of 50 percent in states with the highest per capita incomes

and 77 percent of Medicaid and AFDC costs in the poorest states.

Federal outlays could be reduced if the current formulas for

calculating federal support for Medicaid and AFDC were modified or

if new formulas were adopted. One possible modification would be

to remove the statutory 50 percent minimum federal share from

Medicaid and AFDC. This would lower outlays by $700 million for

Medicaid and $400 million for AFDC in fiscal year 1982. Over the

1982-1986 period, Medicaid outlays would be reduced by $6.0 billion

and AFDC outlays by $3.3 billion. Under this option, the decline

in the federal share of state Medicaid and AFDC expenditures in the

13 affected states would range from about 2 percentage points to

about 33 percentage points. An alternative proposal, one that

would affect all states rather than just those with the highest per

capita incomes, would be to reduce the federal share under the

Medicaid formula by 3 percentage points. This would save roughly

the same total amount as removing the 50 percent federal minimum.

One argument in favor of removing the 50 percent minimum is

that it adds significantly to federal outlays and provides too

great an incentive for the higher-income states to expand Medicaid

and AFDC programs.

118
Opponents of this proposal would argue that the reduced level

of federal support for these programs would strain state budgets if

current services were maintained. In response, these jurisdictions

might restrict eligibility or reduce benefits in their Medicaid and

AFDC programs. Another possible argument against the option is

that per capita income is not a good measure of the relative

ability of states to pay the costs of welfare programs, and

therefore penalizing those states benefiting from the 50 percent

minimum federal share in the Medicaid formula would be unfair.

119
ADDED STATE FLEXIBILITY IN SETTING MEDICAID REIMBURSEMENT RATES

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA 250 280 320 350 390 1,590

Outlays 250 280 320 350 390 1,590

NOTE: Preliminary estimates, subject to change.

The federal government significantly limits the ability of

states to bargain with hospitals when establishing the level of

payment for Medicaid patients. Unless specific approval is obtained from the Department of Health and Human Services, each state

must reimburse hospitals for the average cost of treating Medicaid

patients. Since the federal government pays at least 50 percent of

state expenditures for medical care under Medicaid, the level of

hospital reimbursement in each state directly affects federal outlays .

If the states were permitted more flexibility, they might be

able to set hospital reimbursement rates at levels lower than

average costs but high enough to be acceptable to a sufficient

number of hospitals to serve the needs of Medicaid patients.

States could also more easily include Medicaid hospital

reimbursement in statewide hospital rate-setting programs.

Proponents of this option argue that it could induce hospitals to cut their costs in response to this market-like

constraint. They also argue that hospitals might prove willing to

accept Medicaid patients at less than average cost, so long as they

were reimbursed for the incremental cost of each Medicaid patient.

If the Medicaid program were withdrawn, hospitals would receive

little or no reimbursement for such patients.

Opponents of the proposal point out that, if hospitals received less than their average costs for Medicaid patients, they might

not cut costs but simply raise charges to other patients. Moreover, some hospitals could refuse to accept Medicaid patients, thus

120
reducing access to health care by the poor. (Others argue that

hospitals' abilities to take such actions are limited.)

The estimate given above is illustrative and assumes a 5 percent reduction in Medicaid hospital reimbursements. The suggested

savings of $1.6 billion in 1982-1986 are subject to considerable

uncertainty because the effectiveness of the proposal would depend

on the extent to which state Medicaid agencies reduced hospital

reimbursement rates.

121
INCENTIVES TO STATES FOR HOSPITAL COST CONTAINMENT

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

0

0

50

100

100

400

200

800

350

1,100

700

2,400

NOTE: Preliminary estimates, subject to change.

Hospital costs have been rising rapidly for some time, averaging 15 percent a year from 1968 to 1979. These increases have

contributed to the substantial growth in federal outlays for Medicare and Medicaid. The Carter Administration twice proposed to the

Congress federal limits on increases in hospital revenues per

admission, but neither proposal passed.

About eight states currently set maximum rates for hospital

charges. Although the programs differ substantially from state to

state, recent studies show that as a group they have been effective

at restraining increases in hospital costs. The federal government, through financial incentives, could encourage additional

states to adopt rate-setting programs. This could reduce not only

federal and state outlays, but payments by private purchasers of

hospital care.

One proposal would have the federal government share with the

states some of the savings to Medicare that are attributable to

state efforts in this area. Currently, states with effective ratesetting programs cut their outlays by only 11 cents (principally

the state share of Medicaid) for every dollar that Medicare and

Medicaid outlays are reduced. Allowing states to keep a higher

share of these savings might induce additional states to initiate

effective rate-setting efforts. Such incentives could be augmented

by automatically granting waivers for alternative Medicare and

Medicaid reimbursement policies to states participating in

the program.

The major argument in favor of encouraging state rate-setting

is that extensive third-party financing of hospital care (by

122
government agencies and private insurers) has eliminated the normal

market restraints on hospital spending, leaving regulation as the

only practical alternative. State-level limits on hospital revenues might be more effective than federal limits because of additional flexibility, the ability to tailor programs to local conditions, and opportunities for states to attempt a variety of

approaches and learn from each other's experiences. Indeed, the

House of Representatives, in amending the Carter Administration's

hospital cost containment proposal so as to remove federal revenue

limits, sought to encourage state-level programs (H.R. 2626, Hospital Cost Containment and Reporting Act of 1979).

The major argument against state rate-setting is that it is a

regulatory approach. Although it has been effective at cutting

costs thus far, there is no certainty that this success will continue or that it may not have been at the expense of quality of

care and efficiency.

Savings to the federal government under this proposal would

depend upon the number and size of states initiating rate-setting

programs, the effectiveness of the program, and the details of the

incentive formula. The estimate presented above, of $2.4 billion

in savings over five years, is based on assumptions that states

accounting for 25 percent of hospital expenditures would implement

programs in response to the proposal and that one-third of the

Medicare savings would be returned to the states. Savings could be

higher or lower, and could even be negative if few states initiated

programs and those states that currently have programs were rewarded for continuation of their past efforts as well as for increased

activity.

123
ELIMINATION OF MERCHANT SEAMEN HEALTH CARE ENTITLEMENT

Annual Savings

(millions of dollars)

Savings from

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1982

80

75

70

60

1983

130

130

N.A.

N.A.

1984

150

140

N.A.

N.A.

1985

160

155

N.A.

N.A.

1986

180

165

N.A.

N.A.

Cumulative

Five-Year

Savings

700

665

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

American merchant seamen have been entitled since 1798 to

free, all-inclusive health care from the federal government. That

care is now provided in 8 hospitals and 27 clinics operated by the

Public Health Service (PHS). If the entitlement were ended beginning fiscal year 1982 and the PHS facilities were disposed of, the

five-year savings would be about $665 million.

The argument for ending this entitlement is that it is no

longer necessary. It grew out of 18th-century circumstances, when

seamen had high rates of communicable diseases that posed a danger

to public health, and when health care facilities in ports were

primitive. Improved health, the declining size of the merchant

fleet, and the growth of collectively bargained health care plans

have led to low demands by seamen on the PHS system, some of which

needs extensive modernization.

Only one-third of PHS users are seamen, accounting for about

14,000 inpatient admissions and 600,000 outpatient visits in 1980.

The system has sought to avoid severe underutilization by providing

services, on a reimbursable basis from other government agencies,

to military personnel and their dependents and to the beneficiaries

of Community Health Services programs. Even so, PHS hospitals have

more excess capacity than is the norm in private hospitals.

The argument against ending the entitlement and closing the

PHS facilities is that many seamen would, at least in the short

run, have to find and pay for their own health insurance coverage. Also, the facilities are providing useful services to

124
military personnel and other persons. Many of the PHS facilities

are located in medically underserved neighborhoods, and their

closing could mean reduced access to care for some low-income

persons.

If the hospitals were closed without ending the entitlement,

the savings would be much lower than shown above. Keeping the

entitlement would require that federal health insurance benefits

be provided for all seamen, even those currently receiving medical

care outside the PHS system.

President Carter's budget recommendations for fiscal year 1982

do not contain sufficient detail for years after 1982 to calculate

the savings this proposal would achieve in those years, relative to

his budget.

125
TERMINATION OF SOME FEDERAL MEDICAID FUNDING

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

320

320

350

350

390

390

440

440

490

490

1,990

1,990

NOTE: Preliminary estimates, subject to change,

People eligible for Supplemental Security Income (SSI), a

federal income support program for the needy aged, blind, and

disabled, generally qualify automatically for Medicaid, the

federal-state health care program for the poor. Thirty-eight

states provide supplemental SSI benefits to some aged, blind, and

disabled persons whose income disqualifies them for federal SSI

payments. Thirty-four of these states have chosen to provide

Medicaid to recipients of such supplemental payments, and the

federal government pays a minimum of 50 percent of the Medicaid

expenditures that result from their participation.

If the federal government were to cease paying any part of the

Medicaid costs for recipients of these supplemental payments, the

five-year savings through fiscal year 1986 could be almost $2

billion.

This change would eliminate or reduce Medicaid benefits for

about 600,000 persons. Those 'living in states with coverage for

the medically needy could continue to receive some benefits,

however.

Supporters argue that those affected by the change are among

the least needy persons eligible for Medicaid. Further, such a

change would lead to more equal nationwide treatment by the federal government in its income support programs for the needy aged,

blind, and disabled.

On the other hand, most of the people disqualified under this

proposal have low incomes, even though not eligible for SSI.

Furthermore, federal policy in many welfare programs has been to

126
encourage states to extend eligibility beyond minimal levels. As

an incentive, the federal government has agreed to finance part of

the cost of including additional categories of persons or enriching

benefits in some income support programs. Interstate variations

result from this policy and, if accepted in programs such as Aid to

Families with Dependent Children (AFDC), should be acceptable in

Medicaid as well.

127
TIGHTENING OF THE MEDICAL EXPENSE DEDUCTION

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law

Increase from Eliminating Health Insurance Deduction

Increase from Raising

Floor for Deductible

Expenses to 10 Percent

of AGI

Increase under Carter

Budget

4.1 4.7 5.3 6.0 6.9

0.4 0.4 0.5 0.6 0.7

2.2 2.5 2.8 3.2 3.7

(no proposal)

2.6

14.3

NOTE: Preliminary estimates, subject to change.

The 35 percent of taxpayers who itemize may claim as

deductions up to $150 for health insurance premiums, plus all

out-of-pocket medical expenses that in total exceed 3 percent of

adjusted gross income (AGI).

The separate deduction for health insurance premiums was

adopted in 1965, in the belief that it would encourage the purchase of such insurance. There is no empirical evidence that it

has had such effects. But there is substantial evidence that the

financial assistance provided by this tax subsidy is not well targeted on those with the greatest need. The deduction is claimed by

less than 4 percent of all taxpayers with incomes under $10,000,

but by more than 50 percent of those with incomes over $100,000.

The deductibility of medical expenses above 3 percent of

adjusted gross income has been justified on the ground that it

assists people with extraordinary and involuntary expenses. But

some of those expenses are optional rather than involuntary. The

deduction has also been criticized for the characteristic it shares

with all deductions: it provides a larger, rather than a smaller,

subsidy rate the higher a person's income.

The basic argument for change in this instance is that, if the

income tax system is to be used to shift part of a person's health

128
care costs to the federal treasury, the relief ought to be confined

to taxpayers with genuine financial need. This is the same principle that governs Medicaid, the government's direct expenditure

health care program for the poor. By this standard, the separate

deduction for health insurance premiums would be repealed, and the

3 percent threshold for the medical expense deduction raised to a

level considerably higher than the average family health care cost

burden.

Repeal of the deduction for health insurance premiums would

increase federal revenues by about $2.6 billion over the 1982-1986

period. If the threshold for the medical expense deduction was

raised to 10 percent effective January 1, 1981, revenues for the

five-year period would increase by about another $14.3 billion.

129
TAXATION OF SOME EMPLOYER-PAID HEALTH INSURANCE

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

Loss under Current Law

Increase from Limiting the Exclusion

Increase under Carter

Budget

21.4 25.3 29.8 35.1 41.4

1.9 2.5 3.3 4.4 5.9

(no proposal)

17.9

NOTE: Preliminary estimates, subject to change,

Employees do not pay taxes on income received in the form of

employer-paid health care coverage. This exclusion will reduce

income tax revenues by about $21 billion in fiscal year 1982, somewhat more than total federal spending on Medicaid, the major program financing health care services for the poor. This form of

income also escapes payroll taxation, reducing Social Security

trust fund revenues by about $7 billion in 1982.

One proposal for limiting the present exclusion would restrict

tax-free employer contributions to $120 a month for family coverage in 1981, with the amount to be adjusted to inflation in the

future. This is similar to the approach already adopted by the

Congress in connection with employer-provided group life insurance. The proposal would raise income tax revenues by $1.9 billion

and payroll tax revenues by $0.7 billion in fiscal year 1982. Over

five years, the revenue increases would amount to $17.9 billion and

$7.0 billion, respectively. In 1982, such a limitation would

affect about 23 million employed persons—roughly one-third of

those who participate in employer-sponsored health insurance

plans. Similar proposals were introduced in the 96th Congress but

did not come to a vote.

Both health policy and tax policy arguments have been made

for limiting this exclusion. The exclusion leads to what many

consider to be overly extensive health insurance coverage, which

has expanded use of health care services and, consequently, driven

up their prices. The provision disproportionately benefits persons

with higher incomes, because they tend to have larger employer-paid

130
health insurance premiums that are excluded from taxation and

because they are in higher marginal tax brackets•

Opponents of such a measure argue that present health insurance coverage is not excessive and that reductions in insurance

coverage might cause some people to forgo important medical care.

Also, they argue that a $120 per month ceiling would have uneven

effects, for that amount purchases differing levels of coverage

depending on several factors, such as geographic location and the

composition of the work force.

131
LIMITING OF HOSPITAL BOND TAX EXEMPTION

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law 0.7 0.8 0.9 1.0 1.2

Increase from Repeal

of Tax Exemption on

New Bonds 0.1 0.2 0.3 0.5 0.6 1.8

Increase under

Carter Budget 0.1 0.2 0.4 0.5 0.7 1.9

NOTE: Preliminary estimates, subject to change,

About half the funding for capital projects at hospitals comes

from tax-exempt bonds. Over $3.4 billion of these bonds were

issued in 1979 alone. More than 75 percent were used to finance

private nonprofit hospital projects, with the rest supporting

public government-owned hospitals. The federal revenue loss in

fiscal year 1982 from all outstanding private hospital bonds will

be about $700 million.

The lower borrowing costs from tax-exempt bond financing provide savings to the hospital, which they may pass on in the form of

lower charges to patients, to insurers, and to the federal government though Medicare and Medicaid. These potential cost savings

are outweighed, however, by the revenue losses from the bonds. As

with all tax-exempt bond subsidies, about a quarter of the subsidy

goes to outsiders including bondholders, underwriters, and bond

counsel. Every $1 saved by the borrowing hospitals thus costs

$1.33 in lost federal revenue.

The effectiveness of the subsidy can also be questioned

because it allocates resources on the basis of a hospital1s financial standing, rather than on the need for such facilities in a

particular area. At present, the United States does not have a

general shortage of hospital beds, and thus the Congress has

sharply reduced direct expenditure subsidies for hospital

facilities.

132
Eliminating the tax exemption for private hospital bonds

issued after July 1, 1981, would increase fiscal year 1982 revenues

by about $100 million, and the amount would grow significantly in

later years, reaching about $600 million by fiscal year 1986. The

Carter budget contains a similar ban on further tax-exempt bond

financing by private hospitals, effective January 1, 1981, but

extends it to all tax-exempt private institutions, including

colleges and universities. Both of these options would preserve

tax-exempt financing for public hospitals.

133
TERMINATION OF CERTAIN SOCIAL SECURITY BENEFITS

Phasing Out Postsecondary Student Benefits. Both the Ford and

the Carter Administrations recommended phasing out Social Security

postsecondary student benefits, which are paid to unmarried fulltime students between 18 and 22 who are dependents of retired,

deceased, or disabled workers. Child dependent benefits otherwise

stop at age 18.

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline and

Carter Budget

BA

Outlays

-24

650

-96

1,235

-216

1,820

-391

2,480

-612

2,710

-1,339

8,895

NOTE: Preliminary estimates, subject to change,

This entitlement was added to the Social Security system in

1965. Since that time, the Congress has greatly expanded other

forms of student assistance. Thus, it can be argued that phasing

out these Social Security student benefits would eliminate some

duplicative payments; other federal student aid programs would

ensure that those in need would not be denied access to higher

education for financial reasons.

The argument against this reduction in Social Security benefits is that: the vast majority of full-time students are still

financially dependent upon their families. Therefore, the dependency notion behind the Social Security system's benefits would

suggest that continued payments are warranted.

If no new student beneficiaries were added after July 1981,

and if those already receiving benefits were phased out over the

next three years, federal savings would amount to nearly $8.9 billion in the 1982-1986 period. These savings would be partially

offset by increases in the costs of other federal student assistance programs.

134
The increase in budget authority shown above and in the following tables represents additional interest that accrues to the

trust funds because their balances are higher on account of the

reduced outlays for benefits.

Phasing Out the Parent's Survivor Benefit. Survivor benefits

are paid to the parent (typically, the mother) of children until

they reach age 18. If the parent's benefit (but not the children's) was stopped when the youngest dependent turned 16, annual

savings would be about $500 million. If the benefit were phased

out over three years, the savings in the 1982-1986 period would be

nearly $1.7 billion.

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-1

25

-5

90

-27

500

-67

525

-112

535

-212

1,675

NOTE: Preliminary estimates, subject to change.

The case for this change rests on the belief that a single

parent whose youngest child is age 16 or 17 is not homebound and

can join the work force; in fact, about half of such parents are in

the work force. An argument against making this change is that

many parents, typically the mothers, have little recent job experience, face problems finding a job in times of high unemployment,

and are likely to receive relatively low earnings compared with the

family income before the death or disability of the covered spouse.

President Carter proposed phasing out this benefit in his 1980

budget, but the Congress did not act on the proposal.

Phasing Out the Minimum Benefit. The minimum Social Security

benefit for new beneficiaries was frozen at $122 per month in

1979. Thus, as earnings rise over time, the minimum benefit will

cease to be a factor boosting recipients' benefits over the levels

that would result from the application of the regular benefit calculations based solely on past contributions. Eliminating the

135
minimum benefit immediately would save $65 million in the first

year and $790 million over the 1982-1986 period.

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-2

65

-10

135

-22

160

-44

205

-56

225

-134

790

NOTE: Preliminary estimates, subject to change.

The argument for eliminating the minimum benefit is that a

significant number of those receiving it are retirees who spent

most of their working careers in noncovered employment, typically

in government. In fact, about one-fifth of these recipients of the

minimum benefit have earned pensions under other programs. The

argument against eliminating this benefit immediately is that

many of those helped by it are persons who had low earnings, not

former government employees receiving a windfall. Elimination of

the minimum benefit would increase the demands on the Supplemental

Security Income (SSI), food stamps, and other welfare programs,

thereby offsetting some of the savings to the Social Security

system.

President Carter also proposed phasing out the minimum benefit

in his 1980 budget, but the proposal was not enacted.

Phasing Out the Death Benefit. A lump sum death benefit of

$255 is paid to surviving families of fully insured workers. Since

families do not receive a regular Social Security benefit for a

deceased family member for the month in which the death occurred,

the lump sum death benefit is the last benefit received for that

person. The amount paid is meant to cover part of burial costs,

but it normally covers only a small part of them. If the benefit

was eliminated and the survivors experienced financial hardship,

the SSI or other needs-based assistance programs could be used to

provide assistance. Elimination of the death benefit could save

over $2 billion in the 1982-1986 period.

136
Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-15

400

-46

410

-80

420

-118

435

-159

450

-418

2,115

NOTE: Preliminary estimates, subject to change,

Aside from the financial hardship that could result,

elimination of the death benefit could pose certain administrative

difficulties for the Social Security system. The request for the

death benefit constitutes one method by which the system learns

that a recipient has died, and that regular benefits should be

stopped.

Again, in his 1980 budget, President Carter proposed phasing

out the lump sum death benefit, but the Congress did riot act on the

proposal.

137
REPEAL OF EXTRA PERSONAL EXEMPTION FOR THE ELDERLY

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

Loss under Current Law

Increase from Repeal of

Extra $1,000 Exemption

for the Elderly

Increase under Carter

Budget

2.5 2.8 3.1 3.4 3.8

2.5 2.8 3.1 3.4 3.8

(no proposal)

15.6

NOTE: Preliminary estimates, subject to change.

Under current income tax law, taxpayers 65 or older are

allowed an extra $1,000 personal exemption. The extra exemption

for the elderly dates back to the Revenue Act of 1948, and was

added to take into account the reduction in income usually experienced by those over 65. But the subsidy is paid irrespective of

financial need; and, as with all exemptions and exclusions from

income, it is worth more in tax savings to those with higher

incomes. More than 50 percent of all persons over 65 do not

benefit at all from this provision, since their income is so low

they would pay no taxes anyway. Of those that do benefit, the 7.4

percent of elderly taxpayers with incomes over $50,000 receive more

than 17 percent o* the tax relief the extra exemption provides.

Repeal of this extra exemption effective January 1, 1981,

would increase federal revenues by $2.5 billion in 1982 and $15.6

billion over the 1982-1986 period. Only about 15 percent of the

elderly with incomes below $7,000 would be affected; their average

increase in liability would be about $150 in 1982. The average for

all those affected would be about $300.

If the Congress wanted to continue providing some tax relief

for the elderly, but at a lower cost and in a form more equal for

those at different income levels, the present exemption could be

converted to a credit. With credits, taxpayers subtract an amount

directly from their final tax bill, rather than reducing the amount

of income on which the tax is calculated. A credit of $200, for

example, would allow all those over 65 to reduce their taxes by

138
$200. Relative to current law, elderly taxpayers with top marginal

tax brackets below 20 percent would gain with such a credit, while

those above the 20 percent bracket would lose. Thus, most of the

elderly with incomes below about $13,000 would pay less in taxes,

while most with incomes above that level would pay more. A $200

credit would raise about $500 million in additional revenue in

fiscal year 1982.

139
DELAY IN SOCIAL SECURITY COST-OF-LIVING ADJUSTMENT

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985

Cumulative

Five-Year

1986 Savings

CBO Baseline and

Carter Budget

BA -100 -361

Outlays 3,608 4,277

-690 -1,062 -1,510 -3,723

4,735 5,261 5,701 23,582

NOTE: Preliminary estimates, subject to change.

Each July, benefits for the Social Security, Railroad Retirement, Supplemental Security Income (SSI), and veterans1 pensions

programs are automatically adjusted to reflect increases in the

cost of living (COLA). The adjustments are based on the increase

in the Consumer Price Index (CPI) from the first calendar quarter

of the previous year to the first quarter of the current year.

These automatic increases began in 1975, when the federal government's fiscal year started on July 1; now it starts on October 1.

This option would change the date on which the COLA is made

from July 1 to October 1, thus shifting the indexation of these

benefits to the start of the fiscal year. The computation period

for the amount of the COLA would remain as it is in current law.

Enactment of this option would result in large and continuing

savings, $4.1 billion in 1981 and nearly $24 billion for the 1982-

1986 period if the change was made effective in 1981. The savings

in later years would occur because the change would increase the

lag after which beneficiaries are compensated for inflation from 15

months to 18 months. This, of course, means that real benefit

levels would be reduced for one quarter each year. If the lag

were kept as it is now by changing the base period to the second

calendar quarter of each year, the fiscal year 1981 savings would

still be $ 4.1 billion but the effects in later years are too small

to be subject to precise calculation.

The increase in budget authority shown in the table represents

the net effect of added interest earned on the higher Social Security and Railroad Retirement trust funds balances and the lower

budget authority needed to support benefits in the veterans1

pensions and SSI appropriations.

140
ELIMINATION OF EARNINGS TEST AND TAXATION OF BENEFITS FOR SOME

SOCIAL SECURITY RECIPIENTS

Annual Revenue Effect

(billions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

Loss under Current Law

Higher Outlays from

Liberalization of

Earnings Test

Increase from Partial

Taxation of Benefits

Net Revenue Increase

Increase under Carter

Budget

13.7 16.4 19.5 23.1 27.3

0.0

0.0

0.0

1.8 2.1

2.2 2.8

2.2

3.6

0.4 0.7 1.4

(no proposal)

2.2

4.6

2.4

8.3

13.2

4.9

NOTE: Preliminary estimates, subject to change.

Under current law, Social Security recipients below age 72

and their dependents who continue working are penalized for earning more than $5,500 a year by having their monthly cash benefit

reduced one dollar for every two dollars earned over the threshold.

The earnings test, as this provision is called, has been a

continuing source of controversy since Social Security was enacted

in the 1930s. The Social Security Administration has repeatedly

resisted attempts to have the test eliminated, arguing that those

who remain in the work force have not experienced the income loss

that retirement benefits are intended to cushion. But this argument has lost much of its force since the removal of the earnings

test for those past 72, and the main objection now is based on the

annual cost of about $2 billion that removing the earnings test for

recipients above 65 would entail.

The test imposes what amounts to a 50 percent marginal tax on

the earnings of Social Security recipients, on top of the 6.65 percent payroll tax and the income tax they must pay on those same

earnings. Eliminating this 50 percent tax for those 65 and over

would provide such older workers with greater incentives to remain

in the labor force, thus increasing payroll tax receipts of the

cash-short Old Age and Survivors Insurance (OASI) trust fund, with

141
a side advantage of reducing the need to provide Supplementary

Security Income benefits for some low-income beneficiaries.

The trust fund outlay costs of eliminating the earnings test

could be more than offset by taxing half of Social Security benefits, with the tax applying only to those with incomes in excess of

$20-25,000, much as unemployment compensation is now taxed. If

such a proposal was enacted effective January 1, 1982, it would

result in $13.2 billion in additional revenues in the 1982-1986

period. The increase in income tax revenues could be dedicated to

the OASI trust fund. The effect would be to replace a 50 percent

tax on the earnings of 65- to 72-year-old workers with a lower

marginal tax on higher-income Social Security beneficiaries. More

recipients would experience an income tax increase than would

realize a gain from higher benefits, however. A significant benefit increase for those over 65 would thus be financed with a tax on

those beneficiaries who have the greatest ability to pay.

The cash position of the OASI trust fund could be even further

strengthened if half of benefits were taxed for all recipients, and

the resulting revenues dedicated to the trust fund. Taxing benefits in this way was recommended by the most recent Social Security

Advisory Council. Another option would be to tax not half, but

all, Social Security income, after the employee's own contributions

have been paid back in retirement benefits. Social Security would

then be taxed in exactly the same way as private pension payments.

142
CHANGES IN SOCIAL SECURITY INDEXING

Since 1975, Social Security benefit payments have been

adjusted automatically, or indexed, to reflect increases in the

cost of living. In recent years, the specific index used to

calculate this cost-of-living adjustment, as well as the automatic

nature of the adjustment itself, have come under increasing

scrutiny. The specific index used is the revised Consumer Price

Index (CPI) for urban earners and clerical workers. The CPI

has been thought to overstate the actual rise in the cost of living

over the past few yars because it reflects an outdated consumption

pattern (1972-1973) and because of the manner in which it treats

homeownership costs. The first defect causes an upward bias in

the index because it does not recognize that consumers adjust their

purchases when prices are rising—buying less of goods whose prices

have risen most rapidly, and more of substitutes with more slowly

rising prices. For example, despite the reduced level of energy

consumption brought on by price increases, the CPI still reflects

oil consumption levels antedating the OPEC embargo of 1973-1974.

In addition, the CPI treatment of homeownership costs exaggerates

actual shelter costs because it uses housing purchase prices that

reflect not only the cost of shelter but also the investment value

of housing. In addition, mortgage interest rates are given inordinant significance in the CPI, a fact that makes the index rather

volatile.

The use of automatic indexing has come into question because

of the large costs it entails for the federal budget during inflationary periods, and because of the question of fairness that

arises when retired workers are given more protection against

inflation than those still in the work force. The 14.3 percent

cost-of-living adjustment paid in July 1980 will add nearly $17

billion to Social Security outlays in fiscal year 1981 alone. This

will be compounded in future years as successive cost-of-living

adjustments are calculated on benefit levels that have been

increased by previous adjustments.

Using Lower of Wage or Price Index. Several proposals have

been advanced for dealing with these problems. One option would be

to limit the annual cost-of-living increase to the lower of the

rise in the CPI or of a wage index. Wages ordinarily rise faster

than prices because of productivity increases. During the 1970s,

however, there were two periods (1974-1975 and 1980) when large oil

price shocks combined with recessions to make prices rise faster

than wages. During these two periods, when the purchasing power of

workers declined, Social Security benefits were fully protected

through automatic indexing.

143
Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA -211 -529 -916 -1,350 -1,925 -4,931

Outlays 3,815 4,355 5,053 5,643 6,325 25,191

NOTE: Preliminary estimates, subject to change.

If benefit increases were limited to the lower of the rise

in wages or of the CPI starting with the adjustment scheduled for

July 1981, the estimated savings would total about $26 billion

through 1986. Choosing the lower of a wage or a price index would

prevent the benefits of retirees from rising faster than the

incomes of workers in times of falling real wages. This option,

however, would result in lower real benefits for Social Security

recipients than under current law. The National Commission on

Social Security, which has endorsed this option in its preliminary

report, has also proposed that beneficiaries ultimately be compensated for such losses by allowing Social Security benefits to

rise by more than the increase in prices when wages are rising

faster than prices. Such a catch-up provision would reduce the

savings estimated in the table.

The increased budget authority shown above and in the following tables represents additional interest that accrues to the

trust funds because their balances are higher on account of the

reduced outlays for benefits.

Limiting Increase to 85 Percent of CPI. A second option would

be to increase the government's discretion with respect to the

automatic cost-of-living increases. One way of doing this would be

to follow the procedure now used to adjust white-collar federal pay

scales. Each year, after reviewing the nation's budgetary and

economic health, the President could propose to the Congress a

cost-of-living increase for Social Security not to exceed the rise

in the CPI. The recommendation would take effect unless the

Congress acted to alter it. If the President and the Congress held

the increases in benefits to 85 percent of the expected rise in the

CPI starting in July 1981, savings in Social Security outlays over

the 1982-1986 period would total about $43 billion. These savings,

of course, would represent a substantial erosion of real benefit

144
levels—amounting to an 8.2 percent reduction from what the level

would be under the current system by 1986.

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-105

2,848

-410

5,178

-934

8,158

1,739

11,745

2,893

15,959

-6,081

43,888

NOTE: Preliminary estimates, subject to change.

Shifting to the PCE. A third option, one that would respond

to the criticisms of the dated nature of the CPI's consumption

pattern and its treatment of shelter costs, would be to base

the cost-of-living adjustments for Social Security on rises in the

Personal Consumption Expenditures (PCE) chain index of the National

Income and Product Accounts. The PCE measures housing by using a

rental equivalency concept and continually changes the market

basket of goods and services that are priced to reflect changing

consumption patterns. Such a shift, if implemented before the July

1981 adjustment, would save an estimated $11 through 1986.

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-73

1,863

-187

1,185

-314

1,953

-503

2,442

-733

2,791

-1,810

10,234

NOTE: Preliminary estimates, subject to change.

The savings estimates presented for all three options refer

only to Social Security. Several other federal retirement and

disability programs are also indexed to the CPI, including Railroad

Retirement, Supplemental Security Income, veterans' pensions,

Military Retirement, and Civil Service Retirement. If the same

method of adjustment were applied to those programs, additional

savings would result.

145
CHANGES IN CIVIL SERVICE AND MILITARY RETIREMENT BENEFITS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Annual adjustments with

Social

Security base 1,696

Wage increase

limitation 315

Total 2,011

Carter Budget

BA 46

Outlays 900

1,221 1,401 1,385 1,423 1,474

2,026 2,087 2,198 2,222

344 369 395 422

2,370 2,456 2,593 2,644

416 399 385 429

1,412 1,468 1,546 1,587

6,904

10,229

1,845

12,074

1,675

6,913

NOTE: Preliminary estimates, subject to change.

Federal civilian and military retirement annuities are currently adjusted twice a year to reflect changes in the Consumer

Price Index (CPI). These adjustments are more frequent than the

once-a-year increases provided Social Security beneficiaries,

and in recent years have exceeded the pay adjustments provided

active employees. From October 1978 through October 1980, cumulative adjustments for federal retirees totaled 33 percent while

the comparable pay adjustments for federal white-collar employees

totaled 23 percent.

The Seriate in 1980 approved a proposal that would have limited

the frequency of federal postretirement adjustments to once a

year, but the item was dropped in conference. In reconsidering

this measure, the Congress could also change the base period and

index used to calculate such adjustments. If the postretirement

increases were limited to one annual increase occurring in October,

146
and the method used to make the adjustments was the same as for

Social Security, the federal government would save $10.2 billion in

outlays through fiscal year 1986. This estimate assumes that the

annual adjustments would, beginning with October 1982, reflect the

calendar-year increase in the CPI from first quarter to first

quarter. The October 1981 increase, a transition adjustment, would

reflect the CPI change between December 1980 and the first quarter

of 1981.

Further savings could be achieved if the size of future

increases was limited to the lesser of changes in prices or wages

as measured by the CPI and the average wage index (discussed in

the item on Changes in Social Security Indexing). If this action

was taken in conjunction with switching to annual adjustments,

cumulative five-year savings would rise by $1.8 billion.

The argument for having an annual rather than a twice-a-year

adjustment is that federal retirees should not receive greater

protection against inflation than Social Security retirees. But

the protection would not be identical unless the adjustment

date was also the same. This proposal assumes that the Social

Security adjustment would also occur in October, rather than in

July as the law now provides. If the uniform date was July 1

rather than October 1, the savings would be less than stated

above.

Opponents of annual indexing argue that twice-a-year indexation for federal employees is a recompense for pay limitations

imposed on federal employees and for the taxation of their retirement benefits. Federal pay is sometimes held below private-sector

rates, mainly for budgetary reasons, and federal pensions are

subject to income tax but Social Security benefits are not.

President Carter's budget recommendations for fiscal year

1982 incorporate savings from a change to once-a-year indexation

for federal retirees. The Carter budget, however, uses a different

date and base period from those in the proposal presented here, and

it does not assume a switch to using the lower of price or wage

increases. This, together with different economic assumptions,

accounts for the additional savings from the Carter budget that

would occur from the proposal presented here.

147
TAXATION OF ALL UNEMPLOYMENT BENEFITS

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law 4.5 3.9 4.2 4.6 5.1

Increase from Taxation

of All Unemployment

Benefits

Increase from Carter

Budget

0.0 3.9 4.2 4.6 5.1

(no proposal)

17.8

NOTE: Preliminary estimates, subject to change.

In principle, there is no reason to exempt unemployment

compensation from income taxation. The payments are in fact income

to the recipient, and ability to pay rather than the source of

income should determine income tax liability. The lowered ability

of a jobless person to pay taxes is already taken into account for

income tax purposes through exemptions, deductions, the "zero

bracket amount," and graduated tax rates.

The Congress partially acknowledged these points in 1978, when

it changed the law to make a portion of unemployment benefits paid

under government programs taxable for individuals with incomes over

$20,000 and for married couples with incomes above $25,000. If all

government-sponsored benefits of this kind were taxed effective

January 1, 1982, the estimated revenue gain would be $3.9 billion

in fiscal year 1983, and $17.8 billion over the 1983-1986 period.

There would also be some lessening of the work disincentives associated with such benefits, including those in the rapidly growing

Trade Adjustment Assistance program.

Opponents of such a change argue that unemployment benefits

for the most part replace only a portion of lost wages, and that

to tax such already inadequate payments runs counter to the basic

income-support purpose of unemployment insurance programs. They

also point out that existing benefit levels were set on the assumption that benefits would not be taxed; if they were now to be

taxed, some rise in benefit levels would likely be necessary,

thereby reducing the potential budgetary savings.

148
ELIMINATION OF NATIONAL TRIGGER FOR UNEMPLOYMENT INSURANCE EXTENDED

BENEFITS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

400

700

0

0

100

0

0

0

100

0

0

0

100

0

0

0

0

0

0

0

700

700

0

0

NOTE: Preliminary estimates, subject to change.

Under current law, the federal government and the state

governments each pay half of the cost of 13 weeks of additional

unemployment insurance benefits for those who have exhausted the

regular benefits provided under state law. The federal share is

financed through the federal unemployment tax, a payroll tax of 0.7

percent on wages up to $6,000. The state portion is financed by

state unemployment taxes. Since the state unemployment insurance

accounts are included in the unified federal budget, both federal

and state extended benefit payments are included in the unified

federal budget.

Extended benefits are payable only when the state's insured

unemployment rate (IUR) exceeds a prescribed level, or when the

national IUR exceeds 4.5 percent. When the national trigger is

reached, extended benefits are payable in every state, including

those with low unemployment rates. If the national trigger was

eliminated, the savings would reach $700 million during the next

five years, given current CBO economic assumptions. Half of these

savings, $350 million, would accrue to those states with low

unemployment, but the unified federal budget would reflect the

entire $700 million reduction. If unemployment rates over the next

five years should be higher than projected, the savings could be

much larger than those shown here.

The immediate losers from this option would be unemployed persons in states with low unemployment rates. The argument in favor

149
of the proposal is that providing extended benefits to those persons acts as a disincentive to seeking work despite the comparatively better job opportunities in their areas. The argument

against this proposal is that pockets of high unemployment often

exist within states with low overall unemployment rates, and that

the extended benefit program has provided a way to alleviate part

of the problem.

This option was included in the Senate-passed 1980 reconciliation bill, but was not agreed to in the reconciliation conference.

This option is not included in President Carter's budget

recommendation for fiscal year 1982; however, an option to change

the definition of the insured unemployment rate (IUR) is included.

If the IUR was changed as proposed in the Carter budget, the

extended benefit program would not trigger on under current CBO

economic assumptions. For this reason, no savings are shown

relative to the Carter budget.

150
CHANGE IN COMPUTING INSURED UNEMPLOYMENT RATES

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

850

1,370

0

0

455

500

0

0

620

470

0

0

775

590

0

0

515

590

0

0

3,215

3,520

0

0

NOTE: Preliminary estimates, subject to change

The preceding item describes the unemployment insurance

extended benefits program. Those benefits are triggered on or off

within a state, or nationally, when the insured unemployment rate

(IUR) reaches a particular figure. The IUR is now defined as the

ratio of the number of persons currently claiming regular or

extended benefits (EB) to the number of persons in covered employment in a base period (the first four of the six preceding quarters) .

The inclusion of EB claimants in calculating the IUR has the

effect of keeping a state trigger on longer after the economy has

started to improve than would otherwise be the case. Their inclusion also keeps the national trigger on longer and invokes it

sooner as well.

In February 1980, the Carter Administration issued a regulation that would have excluded EB claimants in calculating IUR. Its

implementation was blocked by a court ruling that such a change

requires legislation. If the Congress enacts the change in time to

apply to fiscal year 1982, the five-year savings would be about

$3.5 billion.

Under current economic projections, the present: IUR definition will trigger nationwide extended benefits in 1981 and 1982,

but not during the following four years. If the definition is

changed as proposed, not only will the national trigger not be

reached in 1982, but several state triggers that would otherwise be

reached during the five-year period will not be reached.

151
The argument for the proposal is that extended benefits may

act as a work disincentive, and that counting EB claimants in

calculating the IUR artificially prolongs the period in which such

disincentives may have effects. The argument against the proposal

is that a person is no less unemployed while receiving extended

benefits, and that not to count such people is to understate the

true impact of a recession.

President Carter's budget recommendations for fiscal year 1982

already capture the savings attributable to changing the definition

of the IUR.

152
MODIFICATION IN TRADE ADJUSTMENT ASSISTANCE

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

1,275

1,275

500

500

450

450

450

450

450

450

3,125

3,125

NOTE: Preliminary estimates, subject to change.

Workers who lose their jobs because of foreign competition

qualify for Trade Adjustment Assistance (TAA) payments. TAA benefits currently are set at 70 percent of a worker's former average

gross weekly wage, not to exceed the current average weekly manufacturing wage. These benefits, which can continue for up to 52

weeks, are considerably more generous than regular unemployment

compensation. Any regular unemployment compensation the individual

receives, however, reduces his TAA payment dollar for dollar.

Because of the recent recession and the concomitant problems

facing the automobile industry, TAA outlays grew from about $270

million in fiscal year 1979 to $1.7 billion in fiscal year 1980.

The General Accounting Office has suggested that TAA payments be

limited to those who have exhausted their unemployment insurance

benefits, be payable at the same level as the unemployment benefits, and be payable for up to 52 weeks following exhaustion of the

unemployment benefits. If this approach was adopted before October

1, 1981, it could save almost $1.3 billion, or nearly 90 percent of

the program's anticipated costs in fiscal year 1982. The savings

would decrease after fiscal year 1982, because total program outlays are expected to drop.

In the near term, those most likely to be affected by the

change would be workers in durable goods manufacturing industries

(notably automobiles), and, to a lesser extent, steel and rubber.

In the longer run, workers in the electronics, leather, textile,

and apparel manufacturing industries would also be affected

significantly.

153
The argument for the change is that TAA recipients should not

receive more generous payments than those provided by regular

unemployment compensation simply because they happen to be

unemployed for a specialized reason. The counterargument is that

higher tariffs could prevent this type of unemployment, but would

be costly to consumers generally. Special TAA benefits are,

therefore, justified as compensation for those who must pay the

price of the government's policy of lowering trade barriers.

Aside from budgetary savings, the proposed changes could well

improve the functioning of labor markets. TAA, like other

unemployment-based assistance programs, creates a disincentive for

seeking work, an effect probably magnified in TAA's case by the

greater relative size of the payments. This disincentive may

result in deterring workers from seeking jobs in other industries,

thus bolstering their attachment to a vulnerable industry and

vitiating the adjustment goals the program is intended to attain.

154
CHARGING OF INTEREST ON LOANS TO STATES FOR UNEMPLOYMENT

COMPENSATION

Annual Added Revenues Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

CBO Baseline and

Carter Budget 245 655 875 995 1,075 3,845

NOTE: Preliminary estimates, subject to change.

The federal government makes interest-free loans to states

that, because of high unemployment, have overdrawn their Unemployment Trust Fund accounts. At the same time, the federal government

pays interest on state balances in trust fund accounts. State

borrowing to cover fund deficits from 1982 to 1986 is expected to

total $10 billion. If the states paid interest equal to federal

borrowing costs, receipts would total almost $4 billion through

1986.

The argument for such a change is that the present arrangement

disguises what are in fact federal grants to bolster state systems

that were intended by law to be self-financing. The states decide

the level and duration of unemployment insurance benefits to be

paid, and they set the state payroll tax rates to finance the benefits selected. While it is appropriate for the federal government

to cover overdrawn state accounts, it is not appropriate, according

to this argument, to do so interest-free, because that effectively

shifts part of the cost from the taxpayers in a particular state to

federal taxpayers.

On the other hand, charging interest on state debts might

well lead to higher payroll taxes in states already experiencing

high unemployment, thus worsening the business climate, employment

levels, and inflation. According to this view, there is a national

interest in mitigating the unemployment compensation burden in particularly hard-hit states, and the interest-free advances to those

states are a recognition of that national interest.

155
REDUCED FUNDING FOR LOWER-INCOME RENTAL ASSISTANCE

Each year, the federal government makes 15- to 40-year commitments under the Section 8 and public housing programs to subsidize the rents of some lower-income households in addition to those

already receiving aid. The amount of additional assistance and the

mix among programs is set annually by the Congress.

By the end of fiscal year 1981, approximately 3.3 million

subsidy commitments will be outstanding and up to 2.6 million

households will actually be receiving aid. Outlays for all

assisted housing programs will total about $6.6 billion in 1981.

Because of the many outstanding assistance commitments that have

not yet resulted in occupied units, expenditures would rise to more

than $11 billion by 1986, even if no additional subsidy commitments

were made after 1981. If 255,000 new commitments were made in

1982—the estimated 1981 level—and if that annual assistance

increment was maintained through 1986, outlays in that fiscal year

would exceed $15 billion.

Making Fewer Commitments. Future outlays for lower-income

housing assistance could be cut back in a number of ways. If the

fiscal year 1982 assistance increment was fixed at 150,000 and

sustained at: that rate through 1986 rather than kept at the 1981

level of 255,000, savings would total about $2.4 billion over the

five-year period, as shown in the table below. Still greater

savings could be realized by rescinding authority to enter into

commitments in 1981.

Savings from

Annual Savings

(millions of dollars)

1982 1983 1984 1985

Cumulative

Five-Year

1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

11,249

5

9,986

5

12,470

132

11,070

117

13,717

308

12,177

274

14,996

708

13,311

628

16,341

1,270

14,505

1,128

68,773

2,423

61,049

2,152

NOTE: Preliminary estimates, subject to change.

Raising Tenant Rents. Increasing the maximum proportion of

income that new tenants are required to pay for rent from the

current 25 percent ceiling to 30 percent could reduce outlays

156
through 1986 by $2.8 billion, as shown in the table below. Such a

change would raise the typical family's monthly rent by about $30,

but assisted households would still pay appreciably less than the

nearly 40 percent of income now devoted to housing costs by the

average unassisted lower-income renter.

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

38

68

123

279

212

534

316

803

419

1,146

1,108

2,830

BA

Outlays

38

69

123

277

212

530

315

795

418

1,132

1,106

2,803

NOTE: Preliminary estimates, subject to change.

Increasing Use of Existing Housing. A third option relates to

the housing mix. The Congress specified a funding mix for 1981

that was expected to result in about one-half the subsidy

commitments going to persons living in newly built or substantially

rehabilitated units, and the other half aiding persons living in

existing dwellings. This action has reversed the recent trend

toward a greater emphasis on new construction. Increasing the

reliance on existing-housing assistance to 60 percent of the

additional households assisted in 1982 and thereafter would

increase outlays somewhat during the next few years (because of the

shorter lead time to lease existing units) but would begin to

result in savings by 1986, as shown below. Shifting the program

Annual Savings

(millions of dollars)

Savings from

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1982

2,758

-3

2,651

-2

1983

3,152

-63

3,028

-60

1984

3,544

-116

3,404

-110

1985

3,930

-77

3,773

-72

1986

4,348

26

4,174

28

Cumulative

Five-Year

Savings

17,732

-233

17,030

-216

NOTE: Preliminary estimates, subject to change.

157

84-656 0-81-1 1
mix in this manner would reduce long-term obligations—and, therefore, eventually outlays—by more than $17 billion even if the

number of new commitments was not reduced.

The savings estimates from the three options given above are

not additive. Adoption of all three or any two would have

different consequences from merely summing the parts.

158
REPEAL OF THE CASUALTY LOSS DEDUCTION

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law 0.9 1.0 1.1 1.3 1.4

Increase from Repeal

of Deduction 0.4 1.0 1.1 1.3 1.4 5.2

Increase under Carter

Budget (no proposal)

NOTE: Preliminary estimates, subject to change.

Under current law, taxpayers who itemize their deductions may

deduct losses caused by fire, storm, shipwreck or other casualty,

or theft, to the extent that the taxpayer is not reimbursed for the

loss through insurance, disaster assistance, or other compensation. In 1964, the Congress limited the deduction to the amount of

each loss in excess of $100.

If the deduction was repealed effective July 1, 1981, revenues

would increase by about $400 million in fiscal year 1982 and by

about $5.2 billion over the 1982-1986 period.

The main argument for allowing the deduction is that taxpayers who suffer large, unpredictable, and unavoidable losses have

a diminished ability to pay their federal income taxes and should

thus be granted some financial assistance.

The present system, however, has three drawbacks: it is difficult to administer, it provides an uneven kind of disaster assistance, and it creates perverse incentives. The deduction is difficult to administer because defining a casualty loss is inherently

difficult and valuing the loss is even more difficult. The definition, for instance, includes the loss of nonessential luxury items

such as jewelry, furs, and ornamental shrubs, whose loss probably

does not diminish an individual1s ability to pay tax. A deduction

is allowed only for sudden and unexpected losses. A deduction is

allowed, for instance, for ornamental shrubs struck by lightning

but not for the same shrubs lost gradually to winterkill.

159
The deduction provides uneven disaster assistance because the

assistance is granted only to those who itemize their deductions,

and the amount of the assistance for a given loss increases with

the taxpayer's marginal tax rate. Only about 3 percent of all taxpayers claim the deduction, but it is skewed toward those with the

highest incomes: the top 5 percent will receive about 40 percent of

the financial assistance provided in 1981.

Finally, the current system discourages some taxpayers from

taking precautions of their own against disaster—encouraging them

to buy less insurance than they otherwise might.

An alternative to outright repeal would be to establish a

higher floor for the deduction. Raising it from $100 to $250

would simply be an adjustment for the inflation that has occurred

since 1964, and would cut the projected revenue loss by about $150

million a year. In 1978, President Carter recommended that the

floor be made dependent on income, and that the personal casualty

and theft loss deduction be combined with the medical expense

deduction, but the Congress took no action on that recommendation.

160
LIMITATION ON FEDERAL DISABILITY BENEFITS

Annual Savings

(millions of dollars)

Savings from

CBO Baseline and

Carter Budget

All awards

BA

Outlays

New awards

BA

Outlays

1982

190

365

12

25

1983

170

375

30

65

1984

150

380

45

100

1985

140

382

55

130

1986

120

386

60

160

Cumulative

Five-Year

Savings

770

1,888

202

480

NOTE: Preliminary estimates, subject to change«

Under current law, disabled workers can collect Social Security disability payments while they are also receiving benefits—

without reduction—under one or more of the following programs:

veterans1 service-connected compensation, military disability

retirement benefits, civil service disability retirement benefits,

and black lung (Part B) benefits. Recent Social Security Administration data show that approximately 6 to 11 percent of Social

Security disability beneficiaries received nonintegrated payments

in 1978 from other federal disability programs. It is probable

that a significant portion of them received federal payments greater than their pre-disability, pre-tax Social Security earnings.

Federal savings could be realized by limiting the total of

benefits received from federal disability programs. Estimated savings for this example are based on a cap equal to the larger of

disability benefits from a single program or 80 percent of combined

federal disability benefits. In this case, savings would be about

$365 million in fiscal year 1982. Cumulative five-year savings of

about $1.9 billion could be realized by 1986. Capping only the

benefits of new disability awards would result in smaller savings—around $25 million in fiscal year 1982 and $480 million

through 1986.

Proponents of limiting the total amount of federal disability

benefits argue that it could improve work incentives among disabil161
ity beneficiaries and promote equity in family benefit levels,

which vary widely among beneficiaries of different programs. Since

the combined benefits from Social Security disability insurance and

state workmen's compensation are now limited, proponents feel that

total federal program benefits should be treated in a similar way.

Opponents of the proposal argue that beneficiaries are entitled to their total compensation because of past services, large

medical expenses, or personal losses resulting from impairment.

This argument applies primarily to recipients of veterans1 service-connected compensation—the largest group affected by the

proposal.

162
FUNDING FOR AFDC AND MEDICAID WITH A BLOCK GRANT

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

550

550

600

600

670

670

740

740

800

800

3,360

3,360

NOTE: Preliminary estimates, subject to change.

Aid to Families with Dependent Children (AFDC) and Medicaid

are entitlement programs, in which federal and state expenditures

depend upon the number of applicants meeting the eligibility standards and on the level of benefit allowed per recipient. States

administer both programs in accordance with broad federal requirements that allow considerable state discretion with respect to

eligibility and benefit levels. The federal government pays a

proportion of each state's program costs, varying according to the

state's per capita income.

One method of reducing federal outlays would be to terminate

the entitlement aspect of these two programs and instead provide

each state with a welfare block grant designed to meet the subsistence and health care needs of its low-income population. The

Congress could explicitly establish a lower level of funding for

such a block grant program and at the same time relax federal

eligibility and benefit requirements. Block grant welfare proposals were introduced in the 96th Congress for AFDC, but Medicaid

could be added because, for many persons, Medicaid eligibility

depends upon meeting AFDC eligibility criteria.

The size of each state's block grant would be determined by a

formula chosen by the Congress. Proposed formulas have included

many factors, such as allowances for past state welfare expenditures, fiscal capacity, population changes, unemployment rates,

inflation, and the size of a state's low-income population.

Proponents argue that block grant funding for welfare would

allow each state to design a welfare program that would best serve

163
the needs of its poor within the limits of its budget. This flexibility would encourage innovation. For example, states could rely

more heavily upon family income in determining eligibility and less

upon whether a person is aged, disabled, or a member of an AFDC

family.

Opponents argue that the federal government would have difficulty both in controlling the use of block grants and in monitoring

compliance with any federal requirements accompanying them. State

cutbacks in eligibility and benefits would likely occur because the

cost of continuing to provide current services would probably

eventually exceed the funds provided in a state's block grant.

Since the additional cost of current services would be borne fully

by the state, reductions in services would likely occur.

If the welfare block grants were funded at a level 2 percent

below currently projected levels of spending for categorical purposes, the federal savings would amount to over $3 billion through

1986. Several of the welfare block grant proposals introduced in

the 96th Congress would have increased outlays initially, but led

to savings after several years.

164
REDUCED FUNDING FOR CHILD NUTRITION PROGRAMS

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

410

410

0

0

450

450

0

0

485

485

0

0

510

510

0

0

575

575

0

0

2,430

2,430

0

0

NOTE: Preliminary estimates, subject to change.

About 27 million children participate in federally supported

school lunch, school breakfast, child care, and summer food programs. Fiscal year 1981 outlays will be about $3.5 billion, a 2

percent increase from 1980, but $400 million lower than projected

because of various cost savings enacted as part of the Omnibus

Reconciliation Act of 1980.

Some of the changes, such as making once-a-year instead of

twice-a-year inflation adjustments for all feeding programs, will

apply in fiscal year 1981 but not in the future. If the Congress

now extended these changes to 1982 and succeeding fiscal years, the

estimated five-year savings would be about $2.4 billion. Additional savings could be achieved if the Congress limited the school

lunch cash and commodity subsidies for children from families with

incomes over $15,500. Those subsidies, which are about $1.80 per

week per child, will cost approximately $800 million in 1982.

The argument for such proposals is that they result in better

targeting of federal subsidies on needy children. The argument

for subsidizing nonpoor children is that their participation in the

school meal programs helps hold down the per meal preparation and

service costs for needy children. If school districts cannot operate feeding programs without larger local subsidies, some may opt

out of providing this service, thus denying reduced-price or free

meals to low-income children.

President Carter's 1982 budget already captures the savings

from applying the 1981 changes to 1982 and succeeding years.

165
FUNDING OF CHILD NUTRITION PROGRAMS WITH A BLOCK GRANT

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline and

Carter Budget

BA

Outlays

0

0

1,600

1,600

1,770

1,770

1,950

1,950

2,125

2,125

7,445

7,445

NOTE: Preliminary estimates, subject to change,

The federal child nutrition programs, which will cost about

$4.5 billion in fiscal year 1981, have been characterized as fragmented, overlapping, and administratively complex. At least 37

different federal reimbursement schemes are used for the 10 major

programs.

Both Presidents Nixon and Ford recommended financing the

separate programs with a single block grant. Had their proposals

been accepted by the Congress, federal spending on child nutrition

in fiscal year 1980 would have been about $1.3 billion less than it

actually was•

If a block grant funded at $3.5 billion and adjusted for

inflation was adopted in 1981, federal child nutrition expenditures

over the 1982-1986 period would be about $7.4 billion less than

would be spent under a continuation of the present system.

The argument for the proposal is that it would simplify administration and enhance flexibility at the state and local level, and

would permit federal budgetary savings without reducing nutrition

assistance for needy children. At present, about 15 million nonpoor children (from families with incomes over $15,500) receive

about $800 million annually in federal subsidies from child nutrition programs. Block grant proposals for child nutrition programs

usually do not include such children in calculating the states'

block grants.

Opponents of such a change argue that the states might

continue to assist nonpoor children, and that the block grants

166
would lead either to a cutback in assistance to poor children or

force an increase in the federal appropriation. They also contend

that some states may lack experience in planning and executing

programs to meet the nutritional needs of children.

President Carter's budget recommendations for fiscal year 1982

do not include a proposal to fund child nutrition programs with a

block grant. The Carter budget does, however, assume some reduction in child nutrition programs, as shown in the preceding

example.

167
CHANGES IN FOOD STAMP PROGRAM

The Food Stamp Program subsidizes the purchase of food

by low-income households. In fiscal year 1982, the program is

expected to cost $12.4 billion and provide assistance to nearly

22.7 million persons monthly. The program has been subject to

extensive public criticism and has undergone major legislative

changes in 1977, 1979, and 1980. Authorization for the program

will expire at the end of fiscal year 1981. Many changes could be

made that would reduce future program costs; three examples are

given here.

Shifting Base Period. Food stamp allotments during calendar

year 1981 will be based on September 1980 food prices. If the

expiring authorization were merely extended, the 1982 allotments

would be based on projected December 1981 food prices. Retaining

the previous September as the base period would reduce projected

fiscal year 1982 outlays by about $470 million as shown in the

table below. President Carter's budget recommendations for fiscal

year 1982 already incorporate this proposal.

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

470

470

0

0

500

500

0

0

530

530

0

0

570

570

0

0

630

630

0

0

2,700

2,700

0

0

NOTE: Preliminary estimates, subject to change.

Proponents argue that this proposal would avoid the uncertainty involved in projecting food prices and that the increased

time lag would not be unusually long in comparison to those

employed in other indexed programs serving low-income persons.

Opponents argue that the 1980 legislation switching foods stamps

from twice-a-year to once-a-year indexing has already meant a

decline in benefit levels, and that the further decline attributable to using a September base would be inappropriate in the face

of rapid food price inflation.

168
Increasing Marginal Reduction Rate* Before 1977, food stamp

benefits were reduced by 30 cents for each one dollar in earned or

unearned income of recipients above a prescribed amount. In 1977,

the effective reduction rate was changed to 24 cents for each additional dollar of earned income. If that rate was raised to 26

cents, the fiscal year 1982 savings would be about $675 million as

shown in the following table.

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA 675 725 760 830 900 3,890

Outlays 675 725 760 830 900 3,890

NOTE: Preliminary estimates, subject to change.

Proponents argue that, since poverty households spend on average about 30 percent of their incomes for food, the reduction rate

could properly be even higher than 26 percent. Opponents counter

that the higher reduction rate, in conjunction with earnings-related reductions in other assistance programs, could result in high

cumulative reduction rates that would create work disincentives.

Reducing Gross Income Limit. A final example of a possible

change would be to reduce the maximum qualifying income for food

stamp households. The expected maximum in fiscal year 1982 for a

household of four (not including anyone past 59) will be $13,600.

Such a family would be eligible for nearly $262 in annual benefits. If the maximum was cut back to the poverty line, the gross

income ceiling for the four-person household would become $8,448.

Participation would decline by 23 percent (5.3 million people).

Outlays in 1982 would go down $1.3 billion, as shown in the following table.

Merely reducing the maximum qualifying income would, however,

lead to a severe notch problem. A family with an income of $8,448

would qualify for about $1,070 in food stamp benefits, but if its

income were one dollar higher, the family would receive nothing.

To avoid this problem, changes would have to be made in other basic

aspects of the program, such as the guarantee levels, the benefit

reduction rate, or the various allowable income deductions.

169
Annual Savings

(millions of dollars)

Savings from 1982 1983 1984 1985 1986

CBO Baseline and

Carter Budget

BA 1,285 1,380 1,450 1,580 1,725

Outlays 1,285 1,380 1,450 1,580 1,725

Cumulative

Five-Year

Savings

7,420

7,420

NOTE: Preliminary estimates, subject to change.

The savings estimates for the three examples given above are

not cumulative. Adoption of all three or any two would have

different consequences from merely summing the parts.

170
RECOUPMENT OF FOOD STAMP BENEFITS

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

-10

-10

-10

-10

120

120

130

130

140

140

370

370

NOTE: Preliminary estimates, subject to changeThe Congress has recently debated several proposals that would

recoup benefits from part-year participants in the food stamp program. One such proposal, adopted by the House in 1980 but later

dropped in conference, would have recouped half of all food stamp

benefits from participants whose annual income exceeded 175 percent

of their poverty threshold income. This would have been accomplished through the tax system. Under such a proposal, beginning

with the return due on April 15, 1983, recipients would be required

to report their annual food stamp benefits on their federal income

tax forms and repay the government any liability incurred as a result of these benefits at the time they pay their taxes. For most

of those affected by this proposal, recoupment would mean a smaller

income tax refund rather than an out-of-pocket expense on April

15. Reduced federal benefit costs would be partially offset by

increased federal, state, and local administrative costs. Some of

the federal saving would be returned to the states by reducing

their required matching of federal funds for program administration.

During the first two fiscal years of such a program, start-up

and administrative costs would be higher than the increase in

federal revenues. Over the 1982-1986 period, net savings would

amount to $370 million. These savings would be significantly

reduced if other changes directed at recipients with relatively

high annual incomes, such as retrospective accounting, were also

implemented. Recoupment would affect about 7 percent of the households that participate in the food stamp program, primarily those

that receive food stamps for relatively short periods. These

171
households would have to repay about 1.5 percent of the food stamp

benefits paid to all recipients during the year.

Proponents argue that recoupment would make the program more

equitable. Households with sporadic periods of low income that

qualify them for food stamp benefits despite relatively high annual

incomes would be treated similarly to households with steady

monthly and equivalent annual incomes. In addition, the proposal

could give states incentives to improve management by computerizing

the record keeping of all public assistance programs, not just food

stamps. Because the Internal Revenue Service would collect the

recoupment, the system would require only slightly more administrative staff. Most households required to return food stamp benefits

would do so through reduced income tax refunds.

Opponents argue that a long lead time would be required to

implement the proposal fully, and that start-up costs could reach

$10 million a year. Although only 7 percent of recipients would be

subject to recoupment, food stamp offices would have to maintain a

cumulative record of benefits actually received together with

addresses of all former recipients in order to send them "W-2 food

stamp forms/' The federal income tax return would have additional

lines for all filers, not just food stamp recipients. The proposal

could work to discourage participation for households with uncertain knowledge of their future incomes. Finally, some opponents

argue that it is unfair to single out the food stamp program for

this proposal. Other programs with high turnover rates and short

accounting periods, such as the unemployed fathers program of Aid

to Families with Dependent Children (AFDC) and unemployment

insurance, could also be considered for recoupment.

172
CHANGE IN THE LOW INCOME ENERGY ASSISTANCE PROGRAM

Annual Savings

(millions of dollars)

Savings from

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

1982

574

574

463

463

1983

659

659

463

463

1984

762

762

463

463

1985

880

880

463

463

1986

1,024

1,024

463

463

Cumulative

Five-Year

Savings

3,899

3,899

2,315

2,315

NOTE: Preliminary estimates, subject to change.

In recent years, the Congress has appropriated funds for a

special program that helps low-income households meet rising home

heating or cooling costs. For fiscal year 1981, $1.85 billion was

appropriated—95 percent of which will be distributed by formula to

the states as a block grant. The remaining 5 percent will be

allocated to the crisis assistance program of the Community Services Administration.

If instead of the current program the states were offered

matching grants, with the federal matching rate set at 75 percent,

federal savings would approach $3.9 billion over the next five

years. This estimate assumes that all states would meet the

matching requirement; if some did not, the federal savings would be

larger but there would be a reduction in benefits to some households.

Proponents of such a proposal argue that providing assistance

to the low-income population is a state, as well as a federal,

responsibility. Furthermore, if states in which increased energy

costs do not severely burden the low-income population chose not to

participate in a matching grant program, funds could be reallocated

to those states experiencing greater need.

Opponents of the proposal argue that high energy prices are

comparable to a highly regressive tax, and that one of the purposes of the Windfall Profits Tax was to generate federal revenues

that could be redistributed to low-income households burdened by

173
the extraordinary rise in energy costs. Consequently, since the

states do not share in revenues from the Windfall Profits Tax, they

should not be asked to share the cost of the low-income energy

assistance program.

President Carter's budget recommendations for fiscal year 1982

propose to hold the funding level for this program constant at

$1.85 billion. This accounts for the lower savings compared with

those from the CBO baseline.

174
ADMINISTRATIVE IMPROVEMENTS IN AFDC

Savings from

Annual Savings Cumulative

(millions of dollars) Five-Year

1982 1983 1984 1985 1986 Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

N.A.

N.A.

N.A.

N.A.

187

187

N.A.

N.A.

195

195

N.A.

N.A.

201

201

N.A.

N.A.

207

207

N.A.

N.A.

790

790

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

Savings may be possible in the Aid to Families with Dependent

Children (AFDC) program from the establishment of a mandatory

nationwide monthly income reporting system and a one-month retrospective accounting system.

Currently, most AFDC programs base initial eligibility and

benefit levels on estimates of the income the applicant: expects to

receive in the following month. Benefits then continue until the

recipient reports a change in income, or until a change is determined in the course of casework.

This proposal would require the determination of each month's

benefits on the basis of the previous month's income. The recipient would be required to mail a monthly income status form to the

public assistance office before benefits were calculated and a

check mailed. Information from a 1976-1977 pilot program suggested

that such changes could result not only in budgetary savings, but

also in simplified eligibility determinations, more rapid processing of initial applications, and increased responsiveness to changing needs of recipients.

The major savings would be generated through the monthly

reporting requirement, which would reveal changes in income not

reported or detected under the current system. Such a system would

improve the efficiency of program operation through more accurate

calculations of benefits for those with fluctuating incomes and by

more rapid elimination of those cases that become ineligible.

175
Because of offsetting start-up costs, it is not known whether there

would be a net savings or cost in the first year.

Arguments against monthly reporting and retrospective accounting are twofold: First, the procedure would require increased processing of records and thus would generate additional administrative costs. Second, part of the savings would be related to the

failure of the system to make legitimate payments, rather than to

the elimination of overpayments or ineligibles. This system failure would occur when AFDC recipients failed to send in their

monthly income reports or reported their income incorrectly. Lack

of education, an inability to deal with administrative forms, or an

English-language deficiency could cause such failure rather than

factors more in the recipient's control.

Because AFDC recipients are automatically eligible for Medicaid, a reduction in the number of AFDC recipients caused by this

proposal would also result in fewer Medicaid cases and, thereby,

would generate about $85 million in savings in Medicaid over the

1982-1986 period.

Monthly reporting and retrospective accounting were mandated

in II.R. 4904, the Social Welfare Amendments of 1979. The House of

Representatives passed this bill, but the Senate did not act on it.

President Carter's budget recommendations for fiscal year 1982

contain a similar proposal, but insufficient details are available

to permit calculating a comparison with the savings against the CBO

baseline.

176
STANDARDIZING OF THE AFDC WORK EXPENSE DISREGARD

Savings from 1982

Annual Savings

(millions of dollars)

1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline

BA

Outlays

Carter Budget

BA

Outlays

178

178

N.A.

N.A.

184

184

N.A.

N.A.

191

191

N.A.

N.A.

198

198

N.A.

N.A.

206

206

N.A.

N.A.

957

957

N.A.

N.A.

NOTE: Preliminary estimates, subject to change.

Monthly benefits under the Aid to Families with Dependent

Children program (AFDC) are reduced by two dollars for every three

dollars a recipient earns above the monthly earnings disregard of

$30. An amount equal to all child-care and work expenses is also

disregarded. Proposals have been made to change the work-expense

disregard to a flat amount, a percentage of earnings, or some

combination of both,and to allow the deduction of only a fraction

of child-care expenses.

One such proposal (the Senate Finance Committee's version of

H.R. 3434) was passed by the Senate in 1980. It would have eliminated itemized work expenses from the calculation and replaced them

with a standardized deduction equal to a fixed percentage of earnings. In addition it would have raised the initial earnings disregard from $30 to $70 a month and allowed only a fraction of childcare expenses to be deductible. Under this proposal, the recipient

would have been able to keep earnings equal to the $70 disregard

plus child-care expenses plus 40 percent of earnings in excess of

$70 plus child-care expenses.

If this revised formula were enacted, federal AFDC expenditures would decrease by about $178 million in fiscal year 1982. In

addition, because AFDC recipients are automatically eligible for

Medicaid, the reduction in the number of AFDC cases caused by this

provision would also result in fewer Medicaid cases, resulting in

Medicaid savings of about $19 million in 1982 and $106 million over

177
the five-year period. States would also experience savings under

this proposal.

The arguments in favor of standardizing the various disregards

are that it would save money, simplify the program's administration, and curtail the practice of claiming inappropriate work

expenses. The argument against making such a change is that standardized methods for taking into account highly variable expenses,

such as work- and child-related expenses, are likely to provide

some AFDC recipients with windfalls and impose hardships on

others. For the latter, this might prove to be a powerful disincentive to seek or expand employment.

President Carter's budget recommendations for fiscal year 1982

contain a similar proposal, but insufficient details are available

to permit calculating a comparison with savings against the CBO

baseline.

178
CHANGES IN VA PENSION BENEFITS FOR SURVIVING SPOUSES

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

11

10

7

7

124

114

128

127

159

156

429

414

NOTE: Preliminary estimates, subject to change,

Under the Veterans' and Survivors1 Pension Improvement Act of

1978 (P.L. 95-588), a veteran without a service-connected disability can qualify for a pension only if his income is below a prescribed standard and he is over age 64 or totally and permanently

disabled. On his death, his widow qualifies for a pension equal to

two-thirds the amount payable to a veteran with similar income, if

she meets the income test. She does not have to meet the age or

disability test.

This option would require a surviving widow to meet the same

age or disability test that a veteran must meet, except that having

a dependent child under age 6 would also qualify her for benefits.

Under this proposal, the widow's pension would be equal to, rather

than two-thirds of, a veteran's pension. If such changes were

phased in over the three years beginning October 1, 1981, savings

would amount to over $400 million during the 1982-1986 period.

This proposal would ultimately disentitle about half the estimated

200,000 widows who would otherwise be receiving pensions in fiscal

year 1982. When the transition was complete, those remaining on

the roll would have had their benefits increased by 50 percent.

The equalization of eligibility requirements and benefits was

included in several early versions of the 1978 legislation but was

dropped because the veterans' service organizations strongly opposed it. Their representatives argued that, because many of the

widows under age 65 had probably never held jobs, they should not

be expected to find employment after the deaths of their veteran

husbands. This position, however, is not consistent with other

federal income security programs.

179
LIMITATION OF VA BURIAL BENEFITS

Annual Savings Cumulative

(millions of dollars) Five-Year

Savings from 1982 1983 1984 1985 1986 Savings

CBO Baseline and

Carter Budget

BA

Outlays

160

147

169

168

178

177

188

187

205

204

900

883

NOTE: Preliminary estimates, subject to change,

All veterans of wartime service are eligible for an allowance

of $300 to help defray the expenses of their funerals and burial,

plus an allowance of $150 to be applied to the cost of a burial

plot. The vast majority of such veterans are also eligible for a

$255 death benefit from Social Security. In addition, all veterans

are eligible for burial in national cemeteries free of charge. In

such cases, however, the Veterans Administration (VA) plot allowance is not paid.

This proposal would discontinue the payment of VA burial and

plot allowances for veterans dying after September 30, 1981.

Burial allowances of up to $1,100 for veterans dying as a result of

service-connected disabilities would not be affected. Veterans

dying of causes unrelated to military service could still be buried

in national cemeteries and would retain eligibility for Social

Security death benefits. Under this proposal, close to $1 billion

could be saved over the next five fiscal years.

Proponents of such a change argue that the federal government

should not be expected to contribute toward the burial expenses of

a veteran solely because of that status and without regard to the

financial circumstances of the veteran's survivors. For surviving

families with limited incomes, the option of burial in a national

cemetery would still be available. Although this proposal would

undoubtedly increase the number of applications for burial in

national cemeteries, the operation of the entire system of 108

national cemeteries is expected to cost less than $35 million in

fiscal year 1981. The savings that would be realized from the

elimination of non-service-connected burial benefits should be

180
considerably greater than the cost of expanding the national

cemetery system to accommodate the likely increase in applications.

On the other hand, burial in a national cemetery would not be

an acceptable alternative for the surviving families of many

veterans whose homes are hundreds of miles from the nearest

cemetary site, and who would also have to absorb the loss of the

$300 in funeral expenses currently covered by the VA allowance.

181
ELIMINATION OF DUAL LIVING EXPENSES PAID BY UNEMPLOYMENT INSURANCE

AND GI BILL BENEFITS

Savings from

Annual Savings

(millions of dollars)

1982 1983 1984 1985 1986

Cumulative

Five-Year

Savings

CBO Baseline and

Carter Budget

BA

Outlays

39

39

35

35

33

33

30

30

26

26

163

163

NOTE: Preliminary estimates, subject to change.

In most states, GI Bill participants who are also unemployed

workers can collect living expenses from two federal . sources,

subject to varying restrictions of state unemployment compensation

laws. During fiscal year 1982, an estimated 33,000 persons will

qualify for and receive both unemployment insurance and GI Bill

benefits concurrently. If these benefits were limited to either

the total GI Bill monthly stipend or the unemployment benefit plus

the GI Bill allowance for tuition and fees, the savings would be

about $39 million in fiscal year 1982.

Since most eligible persons would be better off choosing to

take unemployment benefits plus GI Bill reimbursement for tuition

and fees, rather than the full GI Bill benefits, the savings would

appear in the GI Bill budget account.

While enactment of this proposal would reduce the income of

approximately 33,000 unemployed veterans, the reduction would only

apply to individuals who are receiving two federal benefits

designed to meet the same need.

182
INCREASE IN IRS RESOURCES

Annual Effect

(billions of

1982

Revenue Increase

Increased Outlays for IRS

Net

Increase

Budget

Revenue Increase

under Carter

0

0

0

.4

.1

.3

1983

0.4

0.1

0.3

(no

1984

0.4

0.1

0.3

dollars)

1985

0

0

0

.4

.1

.3

1986

0

0

0

.4

.1

.3

Cumulative

Five-Year

Effect

2

0

1

.0

.5

.5

proposal)

NOTE: Preliminary estimates, subject to change.

The Treasury Department has estimated that as much as $20

billion a year in interest and dividend income is not reported by

taxpayers, resulting in a revenue loss of $2 billion to $3 billion

a year* In 1980, President Carter proposed that taxes be withheld

on interest and dividend income to deal with this problem, but the

proposal met with overwhelming oppostion in the Congress.

A major argument against the President's proposal was that a

significant share of this revenue could be collected if the Internal Revenue Service (IRS) increased its efforts to match information returns from dividend and interest payors with individual tax

returns. Approximately 80 percent are normally involved, little

effort is made to follow up on discrepancies. Simply sending out

more follow-up letters could significantly increase collections.

CBO estimates that each one dollar spent on this type of minimal

follow-up could produce as much as four dollars in additional

revenues.

An increase of $100 million a year in IRS resources for document matching and follow-up of income and dividend reports could

thus generate added revenues of $400 million a year, or a net

revenue increase of $1.5 billion over the 1982-1986 period.

183
STRENGTHENING OF AGENCY DEBT COLLECTION ACTIVITIES

1982

Annual Revenue Effect

(millions of dollars)

1983 1984 1985

Cumulative

Five-Year

1986 Effect

CBO Baseline

Increased

Revenue 1,700

Additional

expenditures -100

2,400 1,900 1,600 1,300 8,900

-100 -100 -100 -100 -500

Net Increase 1,600 2,300 1,800 1,500 1,200 8,400

Carter Budget

Increased

Revenue 115

Additional

expenditures -15

Net Increase 100

115 115 115 115 575

-15 -15 -15 -15 -75

100 100 100 100 500

NOTE: Preliminary estimates, subject to change.

Back taxes owed to the federal government, and other debts

past due by more than 90 days, amounted to about $20 billion at the

end of fiscal year 1979. Such delinquencies represent about 40

percent of current federal accounts receivable. The many federal

agencies responsible for collecting these debts follow inconsistent

practices in reporting delinquencies to commercial credit bureaus,

imposing interest or penalties on overdue accounts, establishing

adequate reporting and debt management systems, and allocating

resources to debt collection activities. Significant budgetary

savings could be achieved by strengthening agency collection

activities.

The General Accounting Office supports legislation to clarify

federal agency debt collection powers and remedies, including:

disclosure of delinquencies to commercial credit bureaus, a direct

role for agencies in debt litigation, more adequate interest

rates on overdue accounts, application of Internal Revenue Service

(IRS) refunds against nontax debts owed the government, and garnishment of federal salaries.

184
Those who oppose more vigorous debt collection activity

by the government have expressed concern over the invasion of

privacy, doubts about the practicality of collecting debts from

low-income persons, and fear of the potential abuse of centralized

financial records. Also, such an effort would require either

increasing appropriations to the various agencies or reducing

resources allocated to other public purposes.

Any estimate of the increases in federal receipts that might

result from better management of federal debt collection activity

is subject to considerable uncertainty. The collection estimates

provided in the table assume savings from accelerated collection of

outstanding debt, reduced debt write-offs, and some avoidance of

future debt. The cumulative savings estimate of $8.4 billion

may be conservative, and could perhaps be achieved by increasing

resources and improving agency collection procedures, without

relying on IRS offsets or the garnishment of federal salaries.

President Carter's budget recommendations for fiscal year

1982 include a similar proposal, but at a much lower level of

effort than that assumed in the CBO baseline. This accounts for

the differences in the projected debt collections.

185
REPEAL OF TAX CREDIT FOR "POSSESSIONS CORPORATIONS"

Annual Revenue Effect Cumulative

(billions of dollars) Five-Year

1982 1983 1984 1985 1986 Increase

Loss under Current Law 1.1 1.1 1.3 1.5 1.7

Increase from Repeal

of Tax Credit 0.4 1.1 1.3 1.5 1.7 6.0

Increase under Carter

Budget (no proposal)

NOTE: Preliminary estimates, subject to change.

"Possessions corporations" are companies incorporated in the

United States that are exempt from U.S. income tax on their operations in Puerto Rico, American Samoa, and Guam. Ninety-nine percent of the revenue loss is attributable to Puerto Rico.

If the possessions corporation exemption was repealed effective January 1, 1982, the revenue increase would be about $400

million in 1982 and $6 billion over the 1982-1986 period.

The exemption was originally enacted in 1921, mainly to provide U.S. firms doing business in the Phillippines, then a U.S.

possession, with the same favorable tax treatment enjoyed by their

British competitors. In 1975, the House Ways and Means Committee

considered repeal of the exemption on the grounds that its original

purpose was no longer being served, since the Phillippines ceased

being a U.S. possession in 1946. Proponents of the exemption

argued, however, that it had become crucial to the economic development of another U.S. possession, Puerto Rico. A large number of

U.S. firms had established plants in Puerto Rico after Puerto Rico

enacted special tax exemption provisions of its own in 1948, and it

was argued that these firms were a primary source of jobs in Puerto

Rico. It was also argued that the loss of revenue from the provision was quite modest—about $200-300 million a year—and that

this was a small price to pay for the benefits achieved. The Tax

Reform Act of 1976 narrowed the possessions corporation exemption

somewhat, and required that the Treasury Department report annually

on the "operation and effect" of the exemption.

186
The third of these annual reports, released in June 1980,

shows that the revenue loss from the possessions corporation exemption is much larger than originally estimated. A loss of $1.1

billion is expected in fiscal year 1982, increasing to $1.5 billion

by fiscal year 1985. Almost 50 percent of the revenue loss in 1978

was attributable to 55 pharmaceutical companies, according to the

Treasury report. Relative to their profits, these companies employ

few people; the annual revenue loss per pharmaceutical company

employee in 1978 was an estimated $43,261, while average compensation in Puerto Rico per pharmaceutical company employee was estimated at $13,618. For all 374 manufacturing companies benefiting

from the possessions corporations exemption, the federal revenue

loss per employee in 1978 was estimated to be $12,667, compared to

average employee compensation of $10,697. The Treasury reports

suggest that a major effect of the exemption in the 1970s has been

to induce U.S. firms to shift high-profit, low-labor activities to

Puerto Rico, with relatively few benefits to the Puerto Rican

economy. Defenders of the exemption argue that it is crucial to

long-term Puerto Rican economic growth, that the job loss and

economic dislocation that would result from repeal would impose

additional costs on the U.S. and Puerto Rican governments, and that

the exemption is an important underpinning of the U.S.-Puerto Rican

political relationship.

If, as the Treasury reports indicate, the possessions corporation exemption is not an efficient job-creating mechanism, it

could be either phased out or replaced by some less costly form of

assistance. Revenue-sharing funds could be extended to Puerto

Rico, for example, to be used for whatever job-creating purposes

the Puerto Rican government saw fit, or eligibility for the

existing targeted jobs tax credit could be broadened to include

more Puerto Rican workers. The cost of any alternative form of

assistance would, of course, reduce the budgetary savings from

repeal of the exemption.

187

APPENDIX. SUMMARY TABLES OF ILLUSTRATIVE EXAMPLES

CATEGORIZED BY BUDGET FUNCTION

34-656 0-81-1 3

TABLE A-l. ILLUSTRATIVE SAVINGS IN BUDGET AUTHORITY FROM CBO BASELINE PROJECTIONS, BY BUDGET FUNCTION,

FISCAL YEARS 1982-1986 (In millions of dollars)

Budget Function

i

050 National Defense

Continued Restructuring of Military Bases

Increase in Joint Service Advertizing

Streamlining of Military Recruiting

Support Operation

Ending of Certain Social Security Credits

for Military Personnel

Continued Restructuring of Active-Duty

Military Retirement

Restructuring of Reserve Retirement Pay

Increase in the States ' Share of Army

National Guard Costs

Substitution of KC-10 Procurement for

KC-135 Reengining

Termination of E-4B Aircraft Procurement

Accelerated Buyout of Aircraft

Limiting of Defense Investment Increases

to 3 Percent Real Growth

Increased Efficiency in Defense Procurement

Reform of Federal Wage-Setting Provisions

Elimination of Dual Pay for Reservists Who

Are Federal Employees

Sale of Surplus Silver

1982

0

18

66

0

0

0

210

-353

0

-790

3,100

N.A.

370

53

229

1983

38

21

73

0

0

0

230

507

0

502

6,600

N.A.

890

58

229

1984

135

24

80

0

0

0

250

701

388

540

9,000

N.A.

1,090

63

229

1985

150

26

88

0

0

0

270

764

320

0

6,500

N.A.

1,200

69

229

1986

166

29

96

0

0

0

300

1,715

0

0

-7,600

N.A.

1,310

75

229

Cumulative

Five-Year

Savings

489

118

403

0

0

0

1,260

3,334

708

252

17,600

N.A.

4,860

318

1,145

(Continued)
TABLE A-l. (Continued)

Budget Function

150 International Affairs

Reduction of P.L. 480 Title I Sales

Increased Interest Charges on Development Loans

1982

100

8

1983

214

24

1984

347

41

1985

499

59

1986

673

75

Cumulative

Five-Year

Savings

1,833

207

250 General Science, Space and Technology

Elimination of One Space Shuttle Orbiter

270 Energy

Elimination of DOE Funding for Synthetic

Fuel Development

Termination of the Clinch River Breeder

Reactor Project

Private Financing of the Strategic Petroleum

Reserve

Reduced Funding for the Economic Regulatory

Administration

300 Natural Resources and Environment

Elimination of the States' Share of Land

and Water Conservation Fund

Elimination of Urban Park Grants

Reduced Funding for EPA Construction Grants

350 Agriculture

Elimination of Farm Deficiency Payments

Reduction in Dairy Price Support Levels

199

545

300

3,450

62

290

70

1,260

0

0

262

690

350

4,600

69

315

80

1,390

0

0

122

600

350

3,815

77

345

85

1,530

90

400

0

710

300

3,740

84

370

90

1,670

131

700

0

700

200

2,820

93

400

100

1,820

187

900

583

3,245

1,500

18,425

325

1,720

425

7,670

408

2,000

(Continued)
TABLE A-l. (Continued)

Budget Function

370 Commerce and Housing Credit

Increased Interest Rate on Rural Housing

Loans

Discontinuance of Postal Service Subsidies

Change in Timing of Payments to the Postal

Service

400 Transportation

Reduced Funding for Amtrak

Phasing Out of Conrail Funding

Reduction in New Subway Commitments

Reduced Spending on Highways

Repeal of Davis-Bacon Requirements

Shifting Certain Airways Costs

Ending Grants-in-Aid

Elimination of Maritime Industry Subsidies

450 Community and Regional Development

Reduced Funding for Urban Development Action

Grants

Elimination of Energy Impact Assistance

Increased Interest Rates on Disaster Loans

1982

30

1,756

64

200

0

290

1,200

130

260

168

135

46

75

1983

85

1,727

62

340

250

910

1,300

155

300

206

135

51

225

1984

145

1,761

65

400

300

1,120

1,500

172

330

245

150

56

375

1985

215

1,746

57

425

300

1,230

1,600

199

360

292

165

61

500

1986

290

1,760

58

550

300

1,310

1,800

215

390

339

180

67

625

Cumulative

Five-Year

Savings

765

8,750

306

1,915

1,150

4,860

7,400

870

1,640

1,250

765

281

1,800

(Continued)
TABLE A-l. (Continued)

Budget Function 1982 1983 1984 1985 1986

Cumulative

Five-Year

Savings

500 Education, Training, Employment,

and Social Services

Reduced Funding for Vocational Education

Reduced Funding for Impact Aid

Reduced Funding for Emergency School Aid

Reduced Student Loan Subsidies

Reduction in Dairy Price Support Levels

Elimination of Two Youth Employment

and Conservation Programs

Phasing Out of CETA Title VI

550 Health

Lowering of the Federal Share for

State Medicaid and AFDC Progams

Added State Flexibility in Setting Medicaid

Reimbursement Rates

Incentives to States for Hospital

Cost Containment

Elimination of Merchant Seaman Health Care

Entitlement

Termination of Some Federal Medicaid Funding

343 379 421 466 516

451 498 553 613 678

52 58 64 71 78

124 539 1,070 1,772 2,057

277 295 318 342 366

1,030 1,180 1,250 1,320 1,360

1,100 1,400 1,800 2,200 2,800

250 280 320 350 390

0 50 100 200 350

80

320

130

350

150

390

160

440

180

490

2,125

2,793

323

5,562

1,598

6,140

9,300

1,590

750

700

1,990

600 Income Security

Termination

Phasing

Phasing

Phasing

of Certain Social Security Benefits

Out

Out

Out

Postsecondary Student Benefits

the Minimum Benefit

the Death Benefit

-24

-1

-2

-96

-5

-10

-216

-27

-22

-391

-67

-44

-612

-112

-56

-1,339

-212

-134

(Continued)
TABLE A-l. (Continued)

Budget Function

600 (Continued)

Delay in Social Security

Cos t-of -Living Adjustment

Elimination of Earnings Test and Taxation of Benefits for Some Social Security Recipients

Changes in Social Security Indexing

Using Lower of Wage or Price Index

Limiting Increase to 85 Percent of CPI

Shifting to the PCE

Changes in Civil Service and Military Retirement

Benefits

Elimination of National Trigger for Unemployment

Insurance Extended Benefits

Change in Computing Insured Unemployment Rates

Modification in Trade Adjustment Assistance

Reduced Funding for Lower-Income

Rental Assistance

Making Few Commitments

Raising Tenant Rents

Increasing Use of Existing Housing

Limitation on Federal Disability BenefitsAll Awards

New Awards

Funding for AFDC and Medicaid with a Block Grant

Reduced Funding for Child Nutrition Programs

Funding of Child Nutrition Programs with a Block

Grant

1982

-100

-211

-105

-73

400

850

1,275

11,249

38

2,758

190

12

550

410

0

1983

-361

-529

-410

-187

100

455

500

12,470

123

3,152

170

30

600

450

1,600

1984

-690

-916

-934

-314

100

620

450

13,717

212

3,544

150

45

670

485

1,770

1985

-1,062

-1,350

-1,739

-503

100

775

450

14,996

316

3,930

140

55

740

510

1,950

1986

-1,510

-1,925

-2,893

-733

0

515

450

16,341

419

4,348

120

60

800

575

2,125

Cumulative

Five-Year

Savings

-3,723

-4,931

-6,081

-1,810

700

3,215

3,125

68,773

1,108

17,732

770

202

3,360

2,430

7,445

(Continued)
TABLE A-l. (Continued)

Budget Function

600 (Continued)

Changes in Food Stamp Program

Shifting Base Period

Increasing Marginal Reduction Rate

Reducing Gross Income Limit

Recoupment of Food Stamp Benefits

Change in the Low-Income Energy Assistance

Program

Administrative Improvements in AFDC

Standardizing of the AFDC Work Expense

Disregard

700 Veterans Benefits

Changes in VA Pension Benefits for Surviving

Spouses

Limitation of VA Burial Benefits

Elimination of Dual Living Expenses Paid by Unemployment Insurance and GI Bill Benefits

800 General Government

Strengthening Agency Debt Collection

Activities

1982

470

675

1,285

-10

574

N.A.

178

11

160

39

1,600

1983

500

725

1,380

-10

659

187

184

7

169

35

2,300

1984

530

760

1,450

120

762

195

191

124

178

33

1,800

1985

575

830

1,580

130

880

201

198

128

188

30

1,500

1986

630

900

1,724

140

1,024

207

206

159

205

26

1,200

Cumulative

Five-Year

Savings

2,700

3,890

7,420

370

3,899

790

957

429

900

163

8,400

NOTE: Preliminary estimates, subject to change,
TABLE A-2. ILLUSTRATIVE SAVINGS IN OUTLAYS FROM CBO BASELINE PROJECTIONS, BY BUDGET FUNCTION, FISCAL

YEARS 1982-1986 (In millions of dollars)

Budget Function/ Savings Example

050 National Defense

Continued Restructuring of Military Bases

Increase in Joint Service Advertising

Streamlining of Military Recruiting

Support Operations

Ending of Certain Social Security Credits

for Military Personnel

Continued Restructuring of Active-Duty

Military Retirement

Restructuring of Reserve Retirement Pay

Increase in the States

 f Share of Army

National Guard Costs

Substitution of KC-10 Procurement for

KC-135 Re-engining

Termination of E-4B Aircraft Procurement

Accelerated Buyout of Aircraft

Limiting of Defense Investment Increases

to 3 Percent Real Growth

Increased Efficiency in Defense Procurement

Reform of Federal Wage-Setting Provisions

Elimination of Dual Pay for Reservists Who

Are Federal Employees

Sale of Surplus Silver

1982

0

15

59

0

0

0

210

-36

0

-126

400

N.A.

370

52

229

1983

32

20

71

0

0

0

230

-105

0

-374

1,700

N.A.

890

58

229

1984

118

23

79

0

0

0

250

169

39

-7

3,100

N.A.

1,090

63

229

1985

144

26

87

0

0

0

270

536

204

408

4,200

N.A.

1,200

69

229

1986

161

29

95

0

0

0

300

813

281

264

2,500

N.A.

1,310

76

229

Cumulative

Five-Year

Savings

455

113

391

0

0

0

1,260

1,377

524

165

11,900

N.A.

4,860

318

1,145

(Continued)
TABLE A-2. (Continued)

Budget Function/ Savings Example

150 International Affairs

Reduction of P.L. 480 Title I Sales

Increased Interest Charges on Development Loans

250 General Science, Space and Technology

Elimination of One Space Shuttle Orbiter

270 Energy

Elimination of DOE Funding for Synthetic

Fuel Development

Termination of the Clinch River Breeder

Reactor Project

Private Financing of the Strategic Petroleum

Reserve

Reduced Funding for the Economic Regulatory

Administration

300 Natural Resources and Environment

Elimination of the States1 Share of Land

and Water Conservation Fund

Elimination of Urban Park Grants

Reduced Funding for EPA Construction Grants

350 Agriculture

Elimination of Farm Deficiency Payments

Reduction in Dairy Price Support Levels

1982

100

8

147

250

175

4,100

60

135

5

70

90

400

1983

214

24

240

465

275

4,850

67

185

30

260

131

700

1984

347

41

157

605

325

4,395

74

255

50

600

187

900

1985

499

59

36

710

330

4,030

82

315

70

1,030

117

1,200

1986

673

75

3

725

275

3,020

90

345

70

1,360

122

1,400

Cumulative

Five-Year

Savings

1,833

207

583

2,755

1,380

20,395

373

1,235

225

3,320

647

4,600

(Continued)
TABLE A-2. (Continued)

Budget Function/ Savings Example

370 Commerce and Housing Credit

Increased Interest Rate on Rural Housing

Loans

Discontinuance of Postal Service Subsidies

Change in Timing of Payments to the Postal

Service

400 Transportation

Reduced Funding for Amtrak

Phasing Out of Conrail Funding

Reduction in New Subway Commitments

Reduced Spending on Highways

Repeal of Davis-Bacon Requirements

Shifting Certain Airways Costs

Ending Grants-in-Aid

Elimination of Maritime Industry Subsidies

450 Community and Regional Development

Reduced Funding for Urban Development Action

Grants

Elimination of Energy Impact Assistance

Increased Interest Rates on Disaster Loans

1982

30

1,756

64

200

0

20

95

124

50

33

15

3

75

1983

85

1,727

62

340

250

120

475

140

180

83

50

25

225

1984

150

1,761

65

400

300

300

885

149

250

154

120

38

375

1985

220

1,746

57

425

300

560

1,145

170

300

241

140

50

500

1986

295

1,760

58

550

300

800

1,340

193

350

300

155

58

625

Cumulative

Five-Year

Savings

780

8,750

306

1,915

1,150

1,800

3,940

776

1,130

811

480

174

1,800

(Continued)
TABLE A-2. (Continued)

Budget Function/ Savings Example 1982 1983

500 Education, Training, Employment,

Reduced Funding for Vocational Education

Reduced Funding for Impact Aid

Reduced Funding for Emergency School Aid

Reduced Student Loan Subsidies

Elimination of Two Youth Employment and Conservation

Programs

Phasing Out of CETA Title VI

550 Health

Lowering of the Federal Share for State Medicaid and

AFDC Progams 1

Added State Flexibility in Setting Medicaid

Reimbursement Rates

Incentives to States for Hospital Cost Containment

Elimination of Merchant Seaman Health Care

Entitlement

Termination of Some Federal Medicaid Funding

600 Income Security

Termination of Certain Social Security Benefits

Phasing Out Postsecondary Student Benefits

Phasing Out the Parent's Survivor Benefit

Phasing Out the Minimum Benefit

Phasing Out the Death Benefit

34

361

5

96

223

980

,100

250

0

75

320

650

25

65

400

347

488

53

429

291

1,170

1,400

280

100

130

350

1,235

90

135

410

1984

and

383

542

59

945

314

1,240

1,800

320

400

140

390

1,820

500

160

420

1985 1986

Social

426

601

65

1,602

338

1,310

2,200

350

800

155

440

2,480

525

205

435

471

665

72

1,993

362

1,350

2,800

390

1,100

165

490

2,710

535

225

450

Cumulative

Five-Year

Savings

Services

1,661

2,657

254

5,065

1,528

6,050

9,300

1,590

2,400

665

1,990

8,895

1,675

790

2,115

(Continued)
TABLE A-2. (Continued)

Budget Function/ Savings Example

600 (Continued)

Delay in Social Security Co st-of -Living Adjustment

Changes in Social Security Indexing

Using Lower of Wage or Price Index

Limiting Increase to 85 Percent of CPI

Shifting to the PCE

Changes in Civil Service and Military Retirement

Benefits

Elimination of National Trigger for Unemployment

Insurance Extended Benefits

Change in Computing Insured Unemployment Rates

Modification in Trade Adjustment Assistance

Reduced Funding for Lower-Income Rental Assistance

Making Fewer Commitments

Raising Tenant Rents

Increasing Use of Existing Housing

Limitation on Federal Disability Benefits

All Awards

New Awards

Funding for AFDC and Medicaid with a Block Grant

Reduced Funding for Child Nutrition Programs

Funding of Child Nutrition Programs with a Block

Grant

1982

3,608

3,815

2,848

1,863

2,011

700

1,370

1,275

5

68

-3

365

25

550

410

0

1983

4,277

4,355

5,178

1,185

2,370

0

500

500

132

279

-63

375

65

600

450

1,600

1984

4,735

5,053

8,158

1,953

2,456

0

470

450

308

534

-116

380

100

670

485

1,770

1985

5,261

5,643

11,745

2,442

2,593

0

590

450

708

803

-77

382

130

740

510

1,950

1986

5,701

6,325

15,959

2,791

2,644

0

590

450

1,270

1,146

26

386

160

800

575

2,125

Cumulative

Five-Year

Savings

23,582

25,191

43,888

10,234

12,074

700

3,520

3,125

2,423

2,830

-233

1,888

480

3,360

2,430

7,445

(Continued)
TABLE A-2. (Continued)

Budget Function/ Savings Example

600 (Continued)

Changes in Food Stamp Program

Shifting Base Period

Increasing Marginal Reduction Rate

Reducing Gross Income Limit

Recoupment of Food Stamp Benefits

Change in the Low-Income Energy Assistance Program

Administrative Improvements in AFDC

Standardizing of the AFDC Work Expense Disregard

700 Veterans Benefits

Changes in VA Pension Benefits for Surviving Spouses

Limitation of VA Burial Benefits

Elimination of Dual Living Expenses Paid by Unemployment Insurance and GI Bill Benefits

1982

470

675

1,285

-10

574

N.A.

178

10

147

39

1983

500

725

1,380

-10

659

187

184

7

168

35

1984

530

760

1,450

120

762

195

191

114

111

33

1985

570

830

1,580

130

880

201

198

127

187

30

1986

630

900

1,725

140

1,024

207

206

156

204

26

Cumulative

Five-Year

Savings

2,700

3,890

7,420

370

3,899

790

957

414

883

163

NOTE: Preliminary estimates, subject to change.
TABLE A-3. ILLUSTRATIVE SAVINGS IN BUDGET AUTHORITY FROM CARTER BUDGET PROJECTIONS, BY BUDGET FUNCTION,

FISCAL YEARS 1982-1986 (In millions of dollars)

Budget Function/ Savings Example

050 National Defense

Continued Restructuring of Military Bases

Increase in Joint Service Advertising

Streamlining of Military Recruiting

Support Operations

Ending of Certain Social Security Credits

for Military Personnel

Continued Restructuring of Active-Duty

Military Retirement

Restructuring of Reserve Retirement Pay

Increase in the States ' Share of Army

National Guard Costs

Substitution of KC-10 Procurement for

KC-135 Re-engining

Termination of E-4B Aircraft Procurement

Accelerated Buyout of Aircraft

Limiting of Defense Investment Increases

to 3 Percent Real Growth

Increased Efficiency in Defense Procurement

Reform of Federal Wage-Setting Provisions

Elimination of Dual Pay for Reservists Who

Are Federal Employees

Sale of Surplus Silver

1982

0

18

66

0

0

0

210

0

N.A.

N.A.

1,600

N.A.

0

23

0

1983

38

21

73

0

0

0

230

N.A.

N.A.

N.A.

N.A.

N.A.

0

28

0

1984

135

24

80

0

0

0

250

N.A.

N.A.

N.A.

N.A.

N.A.

0

33

0

1985

150

26

88

0

0

0

270

N.A.

N.A.

N.A.

N.A.

N.A.

0

39

0

1986

166

29

96

0

0

0

300

N.A.

N.A.

N.A.

N.A.

N.A.

0

45

0

Cumulative

Five-Year

Savings

489

118

403

0

0

0

1,260

N.A.

N.A.

N.A.

N.A.

N.A.

0

168

0

(Continued)
nABLE A-3. (Continued)

Budget Function/Savings Example

Cumulative

Five-Year

1982 1983 1984 1985 1986 Savings

150 International Affairs

Reduction of P.L. 480 Title I Sales

Increased Interest Charges on Development Loans

53

N.A.

102

N.A.

260

N.A.

373

N.A.

433

N.A.

1,221

N.A.

250 General Science, Space and Technology

Elimination of One Space Shuttle Orbiter

270 Energy

Elimination of DOE Funding for Synthetic

Fuel Development

Termination of the Clinch River Breeder

Reactor Project

Private Financing of the Strategic Petroleum

Reserve

Reduced Funding for the Economic Regulatory

Administration

300 Natural Resources and Environment

Elimination of the States1 Share of Land

and Water Conservation Fund

Elimination of Urban Park Grants

Reduced Funding for EPA Construction Grants

350 Agriculture

Elimination of Farm Deficiency Payments

Reduction in Dairy Price Support Levels

199

802

0

3,898

51

185

75

1,240

0

0

262

1,285

0

3,645

27

220

75

1,330

0

0

122

838

0

2,517

18

240

75

1,470

90

0

0

352

0

2,948

12

255

75

1,570

131

0

0

425

0

7,127

12

270

75

1,670

187

0

583

3,702

0

20,135

120

1,170

375

7,280

408

0

(Continued)
TABLE A-3. (Continued)

Budget Function/ Savings Example

370 Commerce and Housing Credit

Increased Interest Rate on Rural Housing

Loans

Discontinuance of Postal Service Subsidies

Change in Timing of Payments to the Postal

Service

400 Transportation

Reduced Funding for Amtrak

Phasing Out of Conrail Funding

Reduction in New Subway Commitments

Reduced Spending on Highways

Repeal of Davis-Bacon Requirements

Shifting Certain Airways Costs

Ending Grants-in-Aid

Elimination of Maritime Industry Subsidies

450 Community and Regional Development

Reduced Funding for Urban Development Action

Grants

Elimination of Energy Impact Assistance

Increased Interest Rates on Disaster Loans

1982

25

1,050

50

120

N.A.

400

1,240

160

250

128

135

50

25

1983

80

800

40

270

N.A.

970

1,290

179

260

176

135

50

75

1984

140

738

38

335

N.A.

1,140

1,330

194

280

232

135

50

150

1985

205

726

32

370

N.A.

1,210

1,360

210

300

295

135

50

200

1986

280

758

35

480

N.A.

1,230

1,390

228

320

369

135

50

250

Cumulative

Five-Year

Savings

730

4,072

195

1,575

N.A.

4,950

6,610

971

1,410

1,200

675

250

700

(Continued)
TABLE A-3. (Continued)

Budget Function/ Savings Example

500 Education, Training, Employment, and Social Servic

Reduced Funding for Vocational Education

Reduced Funding for Impact Aid

Reduced Funding for Emergency School Aid

Reduced Student Loan Subsidies

Elimination of Two Youth Employment and Conservation

Programs

Phasing Out of CETA Title VI

550 Health

Lowering of the Federal Share for State Medicaid and

AFDC Progams

Added State Flexibility in Setting Medicaid

Reimbursement Rates

Incentives to States for Hospital Cost Containment

Elimination of Merchant Seaman Health Care

Entitlement

Termination of Some Federal Medicaid Funding

600 Income Security

Termination of Certain Social Security Benefits

Phasing Out Postsecondary Student Benefits

Phasing Out the Parent's Survivor Benefit

Phasing Out the Minimum Benefit

Phasing Out the Death Benefit

1982

es

257

-26

41

-735

118

1,060

1,100

250

0

70

320

-24

-1

-2

-15

1983

266

-37

40

N.A.

60

1,230

1,400

280

50

N.A.

350

-96

-5

-10

-46

1984

265

-53

34

N.A.

60

1,330

1,800

320

100

N.A.

390

-216

-27

-22

-80

1985

272

-76

25

N.A.

60

1,440

2,200

350

200

N.A.

440

-391

-67

-44

-118

1986

261

-106

14

N.A.

60

1,550

2,800

390

350

N.A.

490

-612

-112

-56

-159

Cumulative

Five-Year

Savings

1,321

-298

154

N.A.

358

6,610

9,300

1,590

700

N.A.

1,990

-1,339

-212

-134

-418

(Continued)
TABLE A-3. (Continued)

Budget Function/Savings Example 1982 1983 1984 1985 1986

Cumulative

Five-Year

Savings

600 (Continued)

Delay in Social Security Cost-of-Living Adjustment

Changes in Social Security Indexing

Using Lower of Wage or Price Index

Limiting Increase to 85 Percent of CPI

Shifting to the PCE

Changes in Civil Service and Military Retirement

Benefits

Elimination of National Trigger for Unemployment

Insurance Extended Benefits

Change in Computing Insured Unemployment Rates

Modification in Trade Adjustment Assistance

Reduced Funding for Lower-Income Rental Assistance

Making Fewer Commitments

Raising Tenant Rents

Increasing Use of Existing Housing

Limitation on Federal Disability Benefits

All Awards

New Awards

Funding for AFDC and Medicaid with a Block Grant

Reduced Funding for Child Nutrition Programs

Funding of Child Nutrition Programs with a Block

Grant

-100

-211

-105

-73

46

0

0

1,275

9,986

38

2,651

190

12

550

0

-361 -690 -1,062 -1,510

-529

-410

-187

416

0

0

500

11,070

123

3,028

170

30

600

0

-916

-934

-314

399

0

0

450

12,177

212

3,404

150

45

670

0

-1,350

-1,739

-503

385

0

0

450

13,311

315

3,773

140

55

740

0

-1,925

-2,893

-733

429

0

0

450

14,505

418

4,174

120

60

800

0

0 1,600 1,770 1,950 2,125

-3,723

-4,931

-6,081

-1,810

1,675

0

0

3,125

61,049

1,106

17,030

770

202

3,360

0

7,445

(Continued)
TABLE A-3. (Continued)

Budget Function/ Savings Example

600 (Continued)

Changes in Food Stamp Program

Shifting Base Period

Increasing Marginal Reduction Rate

Reducing Gross Income Limit

Recoupment of Food Stamp Benefits

Change in the Low-Income Energy Assistance Program

Administrative Improvements in AFDC

Standardizing of the AFDC Work Expense Disregard

700 Veterans Benefits

Changes in VA Pension Benefits for Surviving Spouses

Limitation of VA Burial Benefits

Elimination of Dual Living Expenses Paid by Unemployment Insurance and GI Bill Benefits

1982

0

675

1,285

-10

463

N.A.

N.A.

11

160

39

1983

0

725

1,380

-10

463

N.A.

N.A.

7

169

35

1984

0

760

1,450

120

463

N.A.

N.A.

124

178

33

1985

0

830

1,580

130

463

N.A.

N.A.

128

188

30

1986

0

900

1,725

140

463

N.A.

N.A.

159

205

26

Cumulative

Five-Year

Savings

0

3,890

7,420

370

2,315

N.A.

N.A.

429

900

163

NOTE: Preliminary estimates, subject to change.
TABLE A-4. ILLUSTRATIVE SAVINGS IN OUTLAYS FROM CARTER BUDGET PROJECTIONS, BY BUDGET FUNCTION, FISCAL

YEARS 1982-1986 (In millions of dollars)

Budget Function/ Savings Example

050 National Defense

Continued Restructuring of Military Bases

Increase in Joint Service Advertising

Streamlining of Military Recruiting

Support Operations

Ending of Certain Social Security Credits

for Military Personnel

Continued Restructuring of Active-Duty

Military Retirement

Restructuring of Reserve Retirement Pay

Increase in the States

 f Share of Army

National Guard Costs

Substitution of KC-10 Procurement for

KG- 135 Re-engining

Termination of E-4B Aircraft Procurement

Accelerated Buyout of Aircraft

Limiting of Defense Investment Increases

to 3 Percent Real Growth

Increased Efficiency in Defense Procurement

Reform of Federal Wage-Setting Provisions

Elimination of Dual Pay for Reservists Who

Are Federal Employees

Sale of Surplus Silver

1982

0

15

59

0

0

0

210

0

N.A.

N.A.

900

N.A.

0

22

0

1983

32

20

71

0

0

0

230

N.A.

N.A.

N.A.

N.A.

N.A.

0

28

0

1984

118

23

79

0

0

0

250

N.A.

N.A.

N.A.

N.A.

N.A.

0

33

0

1985

144

26

87

0

0

0

270

N.A.

N.A.

N.A.

N.A.

N.A.

0

39

0

1986

161

29

95

0

0

0

300

N.A.

N.A.

N.A.

N.A.

N.A.

0

46

0

Cumulative

Five-Year

Savings

455

113

391

0

0

0

1,260

N.A.

N.A.

N.A.

N.A.

N.A.

0

168

0

(Continued)
TABLE A-4. (Continued)

Budget Function/ Savings Example

150 International Affairs

Reduction of P.L. 480 Title I Sales

Increased Interest Charges on Development Loans

250 General Science, Space and Technology

Elimination of One Space Shuttle Orbiter

270 Energy

Elimination of DOE Funding for Synthetic

Fuel Development

Termination of the Clinch River Breeder

Reactor Project

Private Financing of the Strategic Petroleum

Reserve

Reduced Funding for the Economic Regulatory

Administration

300 Natural Resources and Environment

Elimination of the States1 Share of Land

and Water Conservation Fund

Elimination of Urban Park Grants

Reduced Funding for EPA Construction Grants

350 Agriculture

Elimination of Farm Deficiency Payments

Reduction in Dairy Price Support Levels

1982

53

N.A.

147

697

0

3,660

53

85

5

70

90

0

1983

102

N.A.

240

1,085

0

4,050

27

125

25

250

131

0

1984

260

N.A.

157

1,074

0

2,703

18

170

45

590

187

0

1985

373

N.A.

36

546

0

2,425

12

220

60

1,010

117

0

1986

433

N.A.

3

371

0

4,491

12

240

65

1,320

122

0

Cumulative

Five -Year

Savings

1,221

N.A.

583

3,773

0

17,329

122

840

200

3,240

647

0

(Continued)
TABLE A-4. (Continued)

Budget Function/ Savings Example

370 Commerce and Housing Credit

Increased interest Rate on Rural Housing

Loans

Discontinuance of Postal Service Subsidies

Change in Timing of Payments to the Postal

Service

400 Transportation

Reduced Funding for Amtrak

Phasing Out of Conrail Funding

Reduction in New Subway Commitments

Reduced Spending on Highways

Repeal of Davis-Bacon Requirements

Shifting Certain Airways Costs

Ending Grants-in-Aid

Elimination of Maritime Industry Subsidies

450 Community and Regional Development

Reduced Funding for Urban Development Action

Grants

Elimination of Energy Impact Assistance

Increased Interest Rates on Disaster Loans

1982

30

1,050

50

120

N.A.

20

90

125

50

29

15

31

25

1983

85

800

40

270

N.A.

130

490

147

170

77

50

50

75

1984

145

738

38

335

N.A.

340

900

168

230

143

115

50

150

1985

210

726

32

370

N.A.

580

1,090

180

260

223

135

50

200

1986

285

758

35

480

N.A.

880

1,220

199

290

292

135

50

250

Cumulative

Five-Year

Savings

755

4,072

195

1,575

N.A.

1,950

3,790

819

1,000

764

450

231

700

(Continued)
TABLE A-4. (Continued)

Budget Function/ Savings Example

500 Education, Training, Employment , and Social Service

Reduced Funding for Vocational Education

Reduced Funding for Impact Aid

Reduced Funding for Emergency School Aid

Reduced Student Loan Subsidies

Elimination of Two Youth Employment and Conservation

Programs

Phasing Out of CETA Title VI

550 Health

Lowering of the Federal Share for State Medicaid and

AFDC Progams 1

Added State Flexibility in Setting Medicaid

Reimbursement Rates

Incentives to States for Hospital Cost Containment

Elimination of Merchant Seaman Health Care

Entitlement

Termination of Some Federal Medicaid Funding

600 Income Security

Termination of Certain Social Security Benefits

Phasing Out Postsecondary Student Benefits

Phasing Out the Parent's Survivor Benefit

Phasing Out the Minimum Benefit

Phasing Out the Death Benefit

1982

s

180

-44

5

-66

79

980

,100

250

0

60

320

650

25

65

400

1983

334

-39

36

N.A.

60

1,180

1,400

280

100

N.A.

350

1,235

90

135

410

1984

290

-57

34

N.A.

60

1,280

1,800

320

400

N.A.

390

1,820

500

160

420

1985

303

-80

26

N.A.

60

1,380

2,200

350

800

N.A.

440

2,480

525

205

435

1986

294

-108

20

N.A.

60

1,490

2,800

390

1,100

N.A.

490

2,710

535

225

450

Cumulative

Five -Year

Savings

1,401

-328

121

N.A.

319

6,310

9,300

1,590

2,400

N.A.

1,990

8,895

1,675

790

2,115

(Continued)
TABLE A-4. (Continued)

Budget Function/ Savings Example

600 (Continued)

Delay in Social Security Cost -of -Living Adjustment

Changes in Social Security Indexing

Using Lower of Wage or Price Index

Limiting Increase to 85 Percent of CPI

Shifting to the PCE

Changes in Civil Service and Military Retirement

Benefits

Elimination of National Trigger for Unemployment

Insurance Extended Benefits

Change in Computing Insured Unemployment Rates

Modification in Trade Adjustment Assistance

Reduced Funding for Lower-Income Rental Assistance

Making Fewer Commitments

Raising Tenant Rents

Increasing Use of Existing Housing

Limitation on Federal Disability Benefits

All Awards

New Awards

Funding for AFDC and Medicaid with a Block Grant

Reduced Funding for Child Nutrition Programs

Funding of Child Nutrition Programs with a Block

Grant

1982

3,608

3,815

2,848

1,863

900

0

0

1,275

5

69

-2

365

25

550

0

0

1983

4,277

4,355

5,178

1,185

1,412

0

0

500

117

277

-60

375

65

600

0

1,600

1984

4,735

5,053

8,158

1,953

1,468

0

0

450

274

530

-110

380

100

670

0

1,770

1985

5,261

5,643

11,745

2,442

1,546

0

0

450

628

795

-72

382

130

740

0

1,950

1986

5,701

6,325

15,959

2,791

1,587

0

0

450

1,128

1,132

28

386

160

800

0

2,125

Cumulative

Five-Year

Savings

23,582

25,191

43,888

10,234

6,913

0

0

3,125

2,152

2,803

-216

1,888

480

3,360

0

7,445

(Continued)
TABLE A-4. (Continued)

Budget Function/ Savings Example

600 (Continued)

Changes in Food Stamp Program

Shifting Base Period

Increasing Marginal Reduction Rate

Reducing Gross Income Limit

Recoupment of Food Stamp Benefits

Change in the Low-Income Energy Assistance Program

Administrative Improvements in AFDC

Standardizing of the AFDC Work Expense Disregard

700 Veterans Benefits

Changes in VA Pension Benefits for Surviving Spouses

Limitation of VA Burial Benefits

Elimination of Dual Living Expenses Paid by Unemployment Insurance and GI Bill Benefits

1982

0

675

1,285

-10

463

N.A.

N.A.

10

147

39

1983

0

725

1,380

-10

463

N.A.

N.A.

7

168

35

1984

0

760

1,450

120

463

N.A.

N.A.

114

177

33

1985

0

830

1,580

130

463

N.A.

N.A.

127

187

30

1986

0

900

1,725

140

463

N.A.

N.A.

156

204

26

Cumulative

Five-Year

Savings

0

3,890

7,420

370

2,315

N.A.

N.A.

414

883

163

NOTE: Preliminary estimates, subject to change.
TABLE A-5. ILLUSTRATIVE REVENUE INCREASES FROM CBO BASELINE PROJECTIONS, BY BUDGET FUNCTION, FISCAL

YEARS 1982-1986 (In billions of dollars)

Budget Function/ Re venue Increase Example

150 International Affairs

Phasing Out of DISCs

300 Natural Resources and Environment

Increased Waterway User Charges

No subsidy

50 percent subsidy

Increased Charges for Outdoor Recreation and

Topographic Maps

Recreation fees

Map charges

Elimination of Tax Exemption for Pollution

Control Bonds

370 Commerce and Housing Credit

Elimination of Tax Exemption on Small-Issue IDBs

Limiting of Home Mortgage Interest Deduction

Increase from $5,000 cap

Increase from $10,000 cap

Reduction of Capital Gains Exclusion on Home Sales

Repeal of Consumer Interest Deduction

400 Transportation

Shifting Certain Airways Costs

Increasing User Fees

User Charges for Certain Coast Guard Activities

User Charges for Deep-Draft Navigation

1982

0.2

1.2

0.6

a

a

0.1

0.3

4.3

0.8

a

6.0

0.8

0.7

0.5

1983

0.8

1.3

0.6

0.1

a

0.2

0.6

5.4

1.0

0.1

6.8

0.9

0.7

0.6

1984

1.7

1.4

0.7

0.1

a

0.3

1.0

6.8

1.2

0.2

7.8

1.0

0.8

0.7

1985

2.4

1.5

0.7

0.1

a

0.4

1.5

8.5

1.6

0.2

8.9

1.1

0.8

0.7

1986

3.0

1.7

0.8

0.1

a

0.5

2.0

10.6

1.9

0.2

10.1

1.2

0.9

0.8

Cumulative

Five-Year

Increase

8.1

7.0

3.3

0.3

0.1

1.5

5.4

35.6

6.5

0.7

39.6

5.0

3.9

3.3

(Continued)
TABLE A-5. (Continued)

Budget Function/Revenue Increase Example 1982 1983 1984 1985 1986

Cumulative

Five-Year

Increase

500 Education, Training, Employment, and Social

Services

Limit on Parental Personal Exemption for Students

Limiting of Eligibility for Targeted Jobs Tax

Credit

550 Health

1.1

Tightening of the Medical Expense Deduction

Increase from eliminating health insurance

deduction

Increase from raising floor for deductible

0.4

1.1

0.1

0.4

1.1

0.2

0.5

1.1.

0.2

0.6

1.1

0.2

0.7

5.5

0.7

2.6

expenses to 10 percent of AGI

Taxation of Some Employer-Paid Health Insurance

Limiting of Hospital Bond Tax Exemption

600 Income Security

Repeal of Extra Personal Exemption for the Elderly

Elimination of Earnings Test and Taxation of

Benefits for Some Social Security Recipients

Taxation of All Unemployment Benefits

Charging of Interest on Loans to States for

Unemployment Compensation

Repeal of the Casualty Loss Deduction

2.2

1.9

0.1

2.5

0

0

0.2

0.4

2.5

2.5

0.2

2.8

0.4

3.9

0.7

1.0

2.8

3.3

0.3

3.1

0.7

4.2

0.9

1.1

3.2

4.4

0.5

3.4

1.4

4.6

1.0

1.3

3.7

5.9

0.6

3.8

2.4

5.1

1.1

1.4

14.3

17.9

1.8

15.6

4.9

17.8

3.8

5.2

(Continued)
TABLE A-5. (Continued)

Budget Function/Revenue Increase Example 1982

800 General Government

Increase in IRS Resources 0.3

Strengthening of Agency

850 General Purpose Fiscal

Repeal of Tax Credit for

Debt Collection Activities 1.6

Assistance

"Possessions Corporations" 0.4

1983 1984 1985 1986

0.3 0.3 0.3 0.3

2.3 1.8 1.5 1.2

1.1 1.3 1.5 1.7

Cumulative

Five-Year

Increase

1.5

8.4

6.0

NOTES: Preliminary estimates, subject to change. Details may not add to totals because of rounding,

a. Less than $50 million.

o