Testimony 

Before the Committee on the Budget, 

House of Representatives 

United States Government Accountability Office

GAO 

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Thursday, September 20, 2007 21ST CENTURY 

CHALLENGES 

How Performance 

Budgeting Can Help 

Statement of David M. Walker, Comptroller General 

of the United States 

GAO-07-1194T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

To view the full product, including the scope 

and methodology, click on GAO-07-1194T. 

For more information, contact Susan J. Irving 

at (202) 512-9142 or irvings@gao.gov. 

Highlights of GAO-07-1194T, a testimony 

to Committee on the Budget, House of 

Representatives 

September 20, 2007

21ST CENTURY CHALLENGES 

How Performance Budgeting Can Help 

Reexamining the base of all major existing federal spending and tax programs, 

policies, and activities by reviewing their results and testing their continued 

relevance and relative priority for our changing society is an important step in 

the process of assuring fiscal responsibility and facilitating national renewal. 

Reexamination can arm decision makers with better information on both 

individual program results and entire portfolios of programs and tools—

encompassing a wide range of discretionary, entitlement, tax, and regulatory 

approaches—addressing common goals. 

GPRA provided a foundation for strengthening government performance and 

accountability. The President’s Management Agenda and the Program 

Assessment Rating Tool (PART)—OMB’s framework for assessing federal 

program performance—continue to build on GPRA’s foundation. Properly 

done, these and future efforts—along with a set of Key National Indicators 

(KNI)—could provide a strong basis to support the needed review, 

reassessment, and reprioritization process. 

Moving forward, for performance budgeting and program reviews to hold 

appeal beyond the executive branch and actually have an impact on 

legislation, congressional buy-in on what to measure and how to present this 

information is critical. In addition, tax expenditures result in forgone revenue 

that in some years has approximated the size of total discretionary spending. 

Yet relatively little is known about the effectiveness of these provisions, which 

are often aimed at policy goals similar to those of federal spending programs. 

To date, PART has generally not been applied to tax expenditures. GAO 

continues to urge as a next step a more comprehensive and consistent 

approach to evaluating all programs relevant to common goals. This would 

require assessing the performance of all programs related to a particular 

goal—including tax expenditures—using a common framework. 

Figure 1: Federal Income Tax Expenditures Reported by Treasury Doubled from 1974 to 2006 

Source: GAO analysis of Office of Management and Budget (OMB) budget reports on tax expenditures, fiscal years 1976-2008

160

180

140

120

100

80

60

40

20

0

Fiscal year

Number

160

180

140

120

100

80

60

40

20

0

1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Note: The number of tax expenditures reflects all provisions reported by Treasury, including those 

enacted but effective for future fiscal years. Fluctuations in the trend lines from year to year may 

reflect changes in Treasury’s methodology. 

As part of its work to improve the 

management and performance of 

the federal government, GAO 

monitors progress and continuing 

challenges in using performance 

information to inform budgetary 

choices (performance budgeting). 

In light of the nation’s long-term 

fiscal imbalance and other 21st

century challenges, we have 

reported that the Government 

Performance and Results Act of 

1993 (GPRA) and performance 

budgeting can support needed 

reexamination of what the federal 

government does, how it does it, 

and who does it. GAO remains 

committed to working with 

Congress and the Administration to 

help address these important and 

complex issues. 

What GAO Recommends

GAO is not making new 

recommendations. We have 

previously reported that 

reexamination requires a 

comprehensive perspective that 

crosses agencies, includes all major 

tools of government, and considers 

both spending programs and tax 

provisions. How different programs 

or policies in the same area support 

each other or work at cross 

purposes is important. 

Government-wide strategic and 

performance plans—especially if 

created in consultation with 

Congress and supported by KNIs—

could provide a framework for 

reexamination. GAO has also 

suggested that Congress consider 

the need to develop vehicles and 

structures for such review and for 

communicating its top 

performance concerns. 
Page 1 GAO-07-1194T 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss performance budgeting as a way 

to help government meet the pressing challenges of the 21st Century by 

prompting review of federal activities and programs. The federal 

government is in a period of profound transition and faces an array of 

challenges and opportunities to enhance performance, ensure 

accountability, and better position the nation for the future. A number of 

overarching trends—including the nation’s long-term fiscal imbalance—

drive the need to reexamine what the federal government does, how it 

does it, and who does it. The term “performance budgeting” encompasses 

a range of approaches, activities, and processes but they all have in 

common the idea of more explicitly linking resources to results. As such it 

holds promise as a means for facilitating a reexamination effort. 

Reexamination can enhance the government’s capacity to assess 

competing claims for federal dollars by arming decision makers with 

better information both on the results of individual programs as well as on 

entire portfolios of programs and tools—encompassing a wide range of 

discretionary, entitlement, tax, and regulatory approaches—addressing 

common goals. 

Through the President’s Management Agenda (PMA) and its related 

initiatives, including the Office of Management and Budget’s (OMB) 

Program Assessment Rating Tool1

 (PART), the Administration has taken 

steps in the right direction by calling attention to successes and needed 

improvements in federal management and performance. As we have 

previously reported,2

 PART itself has certain weaknesses we believe 

should be addressed and several strengths on which future efforts should 

 1

 OMB describes PART as a diagnostic tool meant to provide a consistent approach to 

assessing federal programs as part of the executive budget formulation process. It applies 

25 questions to all “programs” under four broad topics: (1) program purpose and design, (2) 

strategic planning, (3) program management, and (4) program results (i.e., whether a 

program is meeting its long-term and annual goals) as well as additional questions that are 

specific to one of seven mechanisms or approaches used to deliver the program. There is 

no standard definition for the term “program.” OMB defined the unit of analysis (program) 

as (1) an activity or set of activities clearly recognized as a program by the public, OMB, 

and/or Congress; (2) having a discrete level of funding clearly associated with it; and (3) 

corresponding to the level at which budget decisions are made. 

2

 GAO, Performance Budgeting: Observations on the Use of OMB’s Program Assessment 

Rating Tool for the Fiscal Year 2004 Budget, GAO-04-174 (Washington, D.C.: Jan. 30, 2004) 

and Performance Budgeting: PART Focuses Attention on Program Performance, but More 

Can Be Done to Engage Congress, GAO-06-28 (Washington, D.C.: Oct. 28, 2005). 
Page 2 GAO-07-1194T 

build. Whatever approach is taken in the future, however, it will be 

important to include not only those programs and activities run through 

the spending side of the budget but also those run through the tax side. 

Any reexamination or performance budgeting effort that fails to include 

tax expenditures in the review of federal activities and whether they are 

achieving their intended policy goals will fall short of its potential. 

In my testimony today I will focus on three main points: 

• The extent of our long-term fiscal and governance challenges necessitates 

a thorough reexamination of government programs and spending; 

• Performance budgeting can help accomplish the goal of reexamination; 

and 

• Congressional support and comprehensive crosscutting program 

assessments are critical to reexamination. 

In addition, I offer some ideas for moving forward. 

This testimony draws upon our wide-ranging work on the use of 

performance information in government—including the Government 

Performance and Results Act of 19933

 (GPRA), PART, agency coordination 

and collaboration, tax expenditures, and key national indicator (KNI) 

systems. We conducted our work for this statement during August and 

September 2007 in accordance with generally accepted government 

auditing standards. 

As I have previously testified before this committee,4

 known demographic 

trends and rising health care costs are major drivers of the nation’s large 

and growing structural deficits. The nation cannot ignore this fiscal 

pressure: it is not a matter of whether the nation deals with the fiscal gap, 

but how and when. Although it is the “big three”—Medicare and Medicaid 

and to a lesser extent, Social Security—that drive this phenomenon on the 

spending side, other federal spending cannot be ignored. Difficult as it may 

seem to deal with these long-term challenges, policymakers must not only 

address these entitlement programs but also reexamine other budgetary 

priorities in light of the changing needs of this nation in the 21st century. It 

 3

 Pub. L. No. 103-62 (1993). 

4

 GAO, Long-Term Budget Outlook: Deficits Matter—Saving Our Future Requires Tough 

Choices Today, GAO-07-389T (Washington, D.C.: Jan. 23, 2007). 

Long-Term Fiscal 

Challenge Provides 

Context and Impetus 

for Reexamining 

Federal Programs 
Page 3 GAO-07-1194T 

will be necessary to work on several fronts at once. In fact, our history 

suggests that all major spending and revenue programs and policies need 

to be subject to periodic reviews and that exempting major areas can 

undermine the credibility and support for the entire process.5

These challenges would be difficult enough if all we had to do is figure out 

how to fund existing commitments. But as the nation continues to change 

in fundamental ways, a wide range of emerging needs and demands—for 

example, evolving defense and homeland security policies, increasing 

global interdependence, and advances in science and technology—can be 

expected to compete for a share of the budget. Whether national security, 

transportation, education, or public health, a growing population will 

generate new claims for federal actions on both the spending and tax sides 

of the budget. Many of our programs were designed decades ago to 

address earlier challenges. Outmoded commitments and operations 

constitute an encumbrance on the future that can erode the capacity of the 

nation to better align its government with the needs and demands of a 

changing world and society. 

Accordingly, reexamining the base of all major existing federal spending 

and tax programs, policies, and activities by reviewing their results and 

testing their continued relevance and relative priority for our changing 

society is an important step in the process of assuring fiscal responsibility 

and facilitating national renewal. A periodic reexamination offers the 

prospect of addressing emerging needs by weeding out programs and 

policies that are redundant, outdated, or ineffective. Those programs and 

policies that remain relevant often could be updated and modernized by 

improving their targeting and efficiency through such actions as 

redesigning allocation and cost-sharing provisions, consolidating facilities 

and programs, and streamlining and reengineering operations and 

processes. 

We recognize that taking a hard look at existing programs and carefully 

reconsidering their goals and financing are challenging tasks, as making 

decisions about reforming programs and activities creates winners and 

losers. Furthermore, given the wide range of programs and issues covered, 

the process of rethinking government programs and activities may take a 

 5

 For more information on reexamination of federal programs, see GAO, 21st Century 

Challenges: Reexamining the Base of the Federal Government, GAO-05-352T (Washington, 

D.C.: February 2005) and Suggested Areas for Oversight for the 110th Congress, 

GAO-07-235R (Washington, D.C.: Nov. 17, 2006). 
Page 4 GAO-07-1194T 

generation to unfold. We are convinced, however, that reexamining the 

base offers compelling opportunities to both redress our current and 

projected fiscal imbalance while better positioning government to meet 

the new challenges and opportunities of this new century. 

Performance budgeting can help enhance the government’s capacity to 

assess competing claims in the budget by arming budgetary decision 

makers with better information on the results of both individual programs 

as well as entire portfolios of policies, tools, and programs designed to 

address common outcomes. It is useful to start with a review of the 

current landscape. The management and performance reforms enacted by 

Congress in the past 15 years have provided some new ways to gain insight 

into the financial, program, and management performance of federal 

agencies and activities. With GPRA as its centerpiece, the statutory and 

management framework laid out in the 1990s provided a foundation for 

strengthening government performance and accountability. As our work 

as shown,6

 GPRA has succeeded in expanding the supply of performance 

information and promoting institutionalization of a culture of performance 

as well as providing a solid foundation for more recent budget and 

performance initiatives. 

As I have previously said,7

 PMA and its related initiatives, including PART, 

demonstrate the Administration’s commitment to improving federal 

management and performance. Properly done, performance assessment 

and performance budgeting information produced by GPRA and PART 

could provide a strong basis to support the needed review, reassessment, 

and reprioritization process. By calling attention to successes and needed 

improvements, the focus that these initiatives bring is certainly a step in 

the right direction toward providing the kind of information needed for 

effective reexamination, and our work shows that progress has been made 

in several important areas over the past several years. For example, we 

have reported that the PART process continues to aid OMB’s oversight of 

agencies and encourage improvements in executive budget formulation 

and agency program management. The PART has helped to structure and 

discipline OMB’s use of performance information for internal program 

 6

 GAO, Results-Oriented Government: GPRA Has Established a Solid Foundation for 

Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004). 

7

 GAO, 21st Century Challenges: Performance Budgeting Could Help Promote Necessary 

Reexamination, GAO-05-709T (Washington, D.C.: June 2005). 

Performance 

Budgeting Can Help 

Facilitate 

Reexamination 
Page 5 GAO-07-1194T 

analysis and budget review, and made its use of this information more 

transparent. Many agency officials told us that the PART helped to create 

or strengthen an evaluation culture within agencies by providing external 

motivation for program review and focused attention on performance 

measurement and its importance in daily program management. Some 

officials said that the PART and the PMA helped them move away from 

“analysis by anecdote” and refocused their attention on the impact their 

programs have, instead of largely on output measures. Others echoed a 

similar sentiment—one indicated that the PART scores helped to create “a 

new sense of urgency” about performance measures and completing the 

changes to performance systems that were already under way. 

Even the best performance data are insufficient to achieve real 

improvements in management and program results unless they are used by 

decision makers and managers alike to inform policy and management 

decisions. Key stakeholder outreach and involvement in developing 

performance information is critical to encouraging the use of such 

information in both performance budgeting and reexamination efforts. 

Moreover, little is known about the performance of tax expenditures, 

which are often aimed at policy goals similar to those of federal spending 

programs, such as those intended to encourage economic development in 

disadvantaged areas, finance postsecondary education, and stimulate 

research and development. Yet tax expenditures and their relative 

contributions toward achieving federal missions and goals are often less 

visible than spending programs, which are subject to more systematic 

review. 

In order for performance budgeting and program reviews to hold appeal 

beyond the executive branch, and to actually have an impact on 

legislation, garnering congressional buy-in on what to measure and how to 

present this information is critical. Without congressional involvement and 

buy-in, these efforts are unlikely to play a major role in the authorization, 

appropriations, and oversight processes. Although congressional support 

is critical to sustain any major management initiative, Congress’s 

constitutional role in setting national priorities and allocating the 

resources to achieve those priorities makes it especially important for 

performance budgeting and reexamination efforts. Lack of consensus by a 

community of interested parties on goals and measures and the way that 

they are presented can detract from the credibility of performance 

information and, subsequently, its use. Fifty years of past executive branch 

efforts to link resources with results have shown that any successful effort 

Congressional 

Support and 

Comprehensive, 

Crosscutting Program 

Assessments Are 

Critical to 

Reexamination 

Lack of Congressional 

“Buy-in” and Participation 

Limits the Potential of 

Performance Budgeting 

Efforts 
Page 6 GAO-07-1194T 

must involve Congress as a full partner. We have previously reported that 

past performance budgeting initiatives faltered in large part because they 

intentionally attempted to develop performance plans and measures in 

isolation from the congressional authorization, appropriations, and 

oversight processes.8

Some tension about the amount of stakeholder involvement in the internal 

deliberations surrounding the development of measures used in budget 

formulation and the broader consultations more common to the GPRA 

strategic planning process is inevitable. Compared to the relatively openended GPRA process, any budget formulation process is likely to seem 

closed. However, if performance information—and budget 

recommendations based on such information—is to hold appeal beyond 

the executive branch, congressional understanding and acceptance will be 

critical. Moreover, any performance budgeting effort that does not involve 

Congress will be limited in its ability to function as a tool to 

comprehensively reexamine the entire scope of federal spending, as a 

major player will be left out of the effort. 

Existing performance budgeting initiatives provide a foundation for a 

baseline review of federal policies, programs, functions, and activities. 

Building on this foundation, several changes are in order to support the 

type of reexamination needed. For example, PART focuses on individual 

programs, but key outcome-oriented performance goals—ranging from 

low-income housing to food safety to counterterrorism—are addressed by 

a wide range of discretionary, entitlement, tax, and regulatory approaches 

that cut across a number of agencies, levels of government, and sectors. 

PART’s program-by-program approach fits with OMB’s agency-by-agency 

budget reviews, but it is not well-suited to addressing crosscutting issues 

or to looking at broad program areas in which several programs or 

program types address a common goal. The evaluation of programs in 

isolation may be revealing, but a broader perspective is necessary for an 

effective overall reexamination effort. It is often critical to understand 

how each program fits with a broader portfolio of programs, tools, and 

strategies to accomplish federal missions and goals. 

 8

 GAO, Performance Budgeting: Past Initiatives Offer Insights for GPRA 

Implementation, GAO/AIMD-97-46 (Washington, D.C.: Mar. 27, 1997). 

Performance Budgeting 

and Reexamination 

Require a Crosscutting 

Perspective 
Page 7 GAO-07-1194T 

Such an analysis is necessary to capture whether and how a program 

complements and supports other related programs, policies, and tools, or 

whether it actually works at cross-purposes to such other initiatives. OMB 

has reported on a few crosscutting assessments9

 in recent budget requests. 

We would urge as a next step a more comprehensive and consistent 

approach to evaluating all programs relevant to common goals. Such an 

approach would require assessing the performance of all programs related 

to a particular goal—including tax expenditures and regulatory 

programs—using a common framework. 

Our federal tax system includes hundreds of billions of dollars of forgone 

revenue annually. In some years, total tax expenditures have 

approximated the size of total discretionary spending. Yet relatively little 

is known about the effectiveness of tax incentives in achieving the 

objectives intended by Congress.10 PART, OMB’s current framework for 

assessing the performance of federal programs, has generally not been 

applied to tax expenditures. 

Tax preferences—which are legally known as tax expenditures—result in 

forgone revenue for the federal government due to preferential provisions 

in the tax code, such as exemptions and exclusions from taxation, 

deductions, credits, deferral of tax liability, and preferential tax rates. 

Excluding tax expenditures from program reviews is especially 

problematic because tax expenditures represent such a substantial 

investment in such a wide range of policy goals. Whether gauged in 

absolute numbers, by revenues forgone, or in comparison to federal 

spending, tax expenditures have been substantial over the last three 

 9

 In addition, OMB recently announced two new PMA initiatives aimed at improving the 

performance of federal credit programs and health information quality and transparency 

across the major relevant federal agencies. 

10 For more information on tax expenditures, see GAO, Government Performance and 

Accountability: Tax Expenditures Represent a Substantial Federal Commitment and 

Need to Be Reexamined, GAO-05-690 (Washington, D.C.: Sept. 23, 2005). 

Tax Expenditures Have 

Doubled in Number and 

Represent a Substantial 

Federal Commitment 
Page 8 GAO-07-1194T 

decades.11 Between fiscal years 1974 and 2006, tax expenditures doubled in 

number from 67 to 161, as shown in figure 1. While some were dropped 

over the period, considerably more were added. 

Figure 1: Federal Income Tax Expenditures Reported by Treasury Doubled from 1974 to 2006 

Note: The number of tax expenditures reflects all provisions reported by Treasury, including those 

enacted but effective for future fiscal years. Fluctuations in the trend lines from year to year may 

reflect changes in Treasury’s methodology. 

 11 Summing the individual tax preference estimates is useful for gauging the general 

magnitude of the federal revenue involved, but it does not take into account possible 

interactions between individual provisions. Despite the limitations in summing separate 

revenue loss estimates, these are the best available data to measure the value of tax 

expenditures and make comparisons to other spending programs. Summing the estimates 

provides perspective on the use of tax expenditures as a policy tool and represents a useful 

gauge of the general magnitude of government subsidies carried out through the tax code. 

The estimates also can be used to compare tax expenditures to federal spending overall 

and by budget function. Other researchers also have summed tax expenditure estimates to 

help gain perspective on the use of this policy tool and examine trends in the aggregate 

growth of tax expenditure estimates over time. 

Fiscal year

Number Number

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2006

0

20

40

60

80

100

120

140

160

180

0

20

40

60

80

100

120

140

160

180

Source: GAO analysis of Office of Management and Budget (OMB) budget reports on tax 

expenditures, fiscal years 1976-2008.

2003

2004
Page 9 GAO-07-1194T 

Tax expenditures span almost all federal mission areas, but their relative 

size differs across budget functions. As figure 2 shows, the sum of revenue 

loss estimates was greater than federal spending in these budget functions: 

energy, commerce and housing credit, and general government. For 

example, the $42.4 billion in outlays for the Department of Housing and 

Urban Development in fiscal year 2006 are far surpassed by the estimated 

revenue losses of $68.3 billion from the mortgage interest deduction (the 

second largest tax expenditure for that year). Moreover, as figure 3 

indicates, revenue losses due to tax expenditures exceeded discretionary 

spending for half of the last decade. 
Page 10 GAO-07-1194T 

Figure 2: Tax Preference Revenue Loss Sums Compared with Federal Outlays by 

Budget Function, Fiscal Year 2006 

0 50 100 150 200 250 300 350 400 450 500

Budget function

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal year 2006.

522

3

23

30

10

24

33

334

3 70

3

55

97

119

253

123

352

26

549

4

70

66

18

1

227

141

6

1

26

7

1

2

550

Federal outlays in 2006

Revenue loss in 2006

National defense

Dollars in billions

Energy

Agriculture 

Health 

Transportation 

Income security 

Social security 

Veterans benefits

and services

General government 

International affairs

General science, space

and technology

Natural resources

and environment 

Education, training, 

employment, and 

social services

Community and 

regional development 

Commerce and 

housing credit

Net interest
Page 11 GAO-07-1194T 

Figure 3: Federal Tax Expenditures Exceeded Discretionary Spending for Half of the Last Decade 

Note: Summing tax expenditure estimates does not take into account interactions between individual 

provisions. Outlays associated with refundable tax credits are included in mandatory spending. 

Much of the revenue loss due to individual income tax expenditures is 

attributable to a small number of large tax expenditures. The six tax 

expenditures shown in figure 4—each with an annual revenue loss 

estimated at $40 billion or more—accounted for about 44 percent of the 

sum of revenue losses for all tax expenditures for fiscal year 2006. 

Dollars in billions (in 2006 dollars)

Fiscal year

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal years 1976–2008.

0

200

400

600

800

1,000

1,200

1,400

1,600

0

200

400

600

800

1,000

1,200

1,400

1,600

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Discretionary spending

Sum of tax expenditure revenue loss estimates

Mandatory spending excluding net interest
Page 12 GAO-07-1194T 

Figure 4: Revenue Loss Estimates for the Largest Tax Expenditures Reported for 

Fiscal Year 2006 

a

The value of employer-provided health insurance is excluded from Medicare and Social Security 

payroll taxes. Some researchers have estimated that payroll tax revenue losses amounted to more 

than half of the income tax revenue losses in 2004, and we use this estimate for 2006. The research 

we are aware of dealt only with health care, therefore the 50 percent figure may not apply to other 

items that are excluded from otherwise applicable income and payroll taxes. 

Tax expenditure estimates reflect federal income tax revenue forgone and 

do not account for provisions that exclude certain earnings from payroll 

taxes. As a result, this understates the total revenue forgone by the federal 

government for some of the largest tax exclusions. If payroll tax revenue 

losses were 50 percent of the $125 billion in income tax revenue loss 

estimated by the Department of the Treasury, the combined revenue loss 

0

50

100

150

200 187.5

125.0

62.5a

68.3

49.0a 48.6 43.1 40.8a

Approximate payroll tax revenue losses

Treasury estimated income tax revenue losses

Revenue loss estimates (dollars in billions)

Net exclusion 

of pension 

contributions

and earnings:

defined benefit 

plans

Capital gains

(except 

agriculture,

timber, iron 

ore,

and coal)

Deductibility 

of

nonbusiness

state and 

local taxes

other than

on owneroccupied

homes

Net 

exclusion of

pension

contributions

and 

earnings:

401(k) plans

Deductibility 

of mortgage 

interest

on owneroccupied

homes

Exclusion of 

employer 

contributions

for medical 

insurance 

premiums and

medical care

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2008.
Page 13 GAO-07-1194T 

associated with the exclusion of employer contributions for health 

insurance premiums would be $187.5 billion in 2006.12

So far, OMB has used PART to review tax expenditures in only a few 

cases, such as the Earned Income Tax Credit (EITC) compliance initiative, 

the New Markets Tax Credit, and the Health Care Tax administration. 

Generally, these reviews assessed how well Treasury and IRS administer 

the tax expenditures rather than the efficacy of the tax expenditures 

themselves. Since tax expenditures represent a significant investment of 

resources and in some program areas tax expenditures may be the main 

tool used to deliver services, this is a significant gap. For example, in the 

fiscal year 2006 budget request, OMB reported on a crosscutting PART 

assessment for Community and Economic Development (CED) programs. 

The CED crosscut examined the performance of 18 of the 35 federal 

community and economic development programs that were identified by 

OMB and that account for the majority of the $16.2 billion OMB estimates 

is spent annually in this area. Although OMB identified three tax 

expenditures in the CED portfolio, it did not assess all of them with the 

PART instrument even though Treasury’s estimate of their combined 

“cost” was nearly $1.4 billion, or about 57 percent of Treasury’s revenue 

loss estimates for community development. 

Periodic review and reexamination of programs—including tax 

expenditures—is important to identify and mitigate against mission 

fragmentation, overlap, and conflict, as well as service gaps. In the same 

way that federal spending programs can work at cross purposes, tax 

expenditures meant to address certain policy challenges may exacerbate 

other key private sector and public policy challenges. For example, the 

income tax exclusion of employer-paid health insurance premiums 

reduces the after-tax cost of insurance for the beneficiary. However, the 

exclusion offers no benefit to workers whose employers do not offer 

health benefits or who purchase their own insurance. Further, this tax 

benefit also leads people to obtain more comprehensive coverage than 

they would otherwise and could increase the demand for health care to 

 12 Some researchers have estimated that payroll tax revenue losses amount to more than 

half of the income tax revenue losses. See John Sheils and Randall Haught, “The Cost of 

Tax-Exempt Health Benefits in 2004,” Health Affairs (Feb. 25, 2004); and Leonard E. 

Burman and Jonathan Gruber, “Tax Credits for Health Insurance,” Tax Policy Center 

Discussion Paper No. 19 (Washington, D.C.: The Tax Policy Center, June 2005). This work 

dealt only with health care. Payroll tax revenue losses for certain other tax expenditures, 

such as pensions, could differ. 

Tax Expenditures Receive 

Little Scrutiny 
Page 14 GAO-07-1194T 

the extent that it shields those insured from the full costs of health care, 

complicating efforts to moderate health care spending. The exclusion also 

tends to favor higher-income workers more likely to have employersponsored coverage. Another example is higher education: students 

seeking federal grants and loans are penalized for having saved funds to 

pay for their education although the Internal Revenue Code encourages 

saving by exempting individuals from federal income taxation on interest 

income used to pay for postsecondary education. 

If well designed and effectively implemented, tax expenditures can be an 

effective tool and appropriate to further some federal goals and objectives. 

Moreover, sometimes it may be cheaper and simpler to subsidize through 

the tax code than by setting up a separate program using a different tool. 

For example, the incremental administrative and compliance costs to 

deliver the tax credit for child and dependent care expenses may be 

relatively low compared to the costs of setting up a separate system for 

processing child care applications and sending vouchers to those eligible. 

However, tax expenditures may not always be efficient, effective, or 

equitable; consequently, information on these attributes can help 

policymakers make more informed decisions about resource allocation 

and the most effective or least costly methods to deliver federal support. 

Regular review could also provide needed scrutiny of certain expenditures 

that have few controls. With some exceptions, tax expenditures generally 

are not subject to reauthorization and therefore lack the opportunity for 

regular review. Moreover, many tax expenditures—like mandatory 

spending programs—are governed by eligibility rules and benefit formulas, 

meaning funds are spent as required to provide benefits to those who are 

eligible and wish to participate. Thus, because they are not as visible in the 

budget as discretionary spending programs, tax expenditures run the risk 

of simply being a form of “back-door spending” embedded in the tax code 

and are effectively “fully funded” before any discretionary spending is 

considered. 
Page 15 GAO-07-1194T 

The federal government is in a period of profound transition and faces an 

array of challenges and opportunities to enhance performance, ensure 

accountability, and better position the nation for the future. In our 

February 2005 report on 21st century challenges,13 we outlined a number of 

approaches that could facilitate a reexamination effort. Agencies and OMB 

will need to continue to focus on ensuring that the growing supply of 

performance information is credible, useful, reliable, and used both in dayto-day program management and in formulating budget requests that focus 

on outcomes that can be achieved with resources requested. Further, the 

executive branch can help promote demand for and acceptance of 

performance information by developing goals and measures relevant to 

the large and diverse community of stakeholders in the federal budget and 

planning processes and presenting this information in a way that is 

tailored to the needs of congressional stakeholders. Engaging Congress 

early in the process may help target reviews with an eye toward those 

areas most likely to be on the agenda of Congress, thereby better ensuring 

the use of performance assessments in resource allocation processes 

throughout government. Lastly, taking a comprehensive and crosscutting 

approach to program assessment by more strategically selecting programs 

and policy areas for review—regardless of the agency in which programs 

are housed, and inclusive of all tools (e.g., grant, credit, regulatory 

programs, and especially tax expenditures) that bring resources to bear on 

a particular program or policy area—will provide robust, rich information 

about the performance of all tools aimed at federal and national 

challenges. Moving forward will require actions by both the executive 

branch and the Congress. Let me elaborate. 

Although recent OMB efforts to assess programs in a crosscutting fashion 

represent progress, to provide the kind of information that can be of 

assistance in reexamining the base of government, we encourage a more 

extensive and consistent approach to evaluating all programs relevant to 

common goals. We recommended in 1994 and again in 2005 that OMB 

design and implement a structure for conducting reviews of tax 

expenditures’ performance. Our recommendation is consistent with 

language in the Senate Committee on Government Affairs’ Report on 

GPRA, which specified that the Director of OMB was to establish an 

appropriate framework for periodic analyses of the effects of tax 

expenditures in achieving performance goals. To significantly increase the 

 13 GAO-05-325SP. 

Future Performance 

Budgeting Efforts 

Must Continue to 

Build on Lessons 

Learned in Order to 

Facilitate Effective 

Reexamination 

Executive Branch Actions 
Page 16 GAO-07-1194T 

oversight and analysis of tax expenditures, the committee report also 

called for a schedule for periodic tax expenditure evaluations. 

Although incorporating tax expenditures into crosscutting reviews 

presents significant analytical challenges, we do not believe such 

challenges are insurmountable. Moreover, assessing the performance of 

tax expenditures is critically important given that many function as 

entitlement programs—although perhaps with even less transparency—

and do not compete overtly in the annual budget process. Presenting tax 

expenditures alongside outlays is a first step in providing the public and 

policymakers with a more useful and accurate picture of the extent of 

federal support and activities. In fact, in the tax expenditure chapter in 

Analytical Perspectives, OMB has in the past included a section outlining 

possible performance measures developed by Treasury, which could be 

used to present information about the performance of tax expenditures. 

Although this overview was initially introduced in the 1997 budget and 

expanded in the 1999 budget, no performance information is actually 

displayed. OMB states that the measure examples provided are 

“illustrative” in nature, acknowledges that the performance measure 

discussion “although broad, is nonetheless incomplete,” and notes that 

many tax expenditures are not explicitly cited. 

One of the key impediments to moving forward in conducting reviews of 

tax expenditures’ performance is the continuing lack of clarity about the 

roles of OMB, Treasury, IRS, and departments or agencies with 

responsibility for related spending programs. Designing a structure and 

approach for including tax expenditures in performance reviews will be 

challenging, but it is important. Ideally, reviews would look at federal 

involvement in a given policy area across related agencies and tools, 

which means a decision would have to be made as to which tax 

expenditures and which spending programs are relevant. The review 

would need to involve the departments or agencies with related spending 

programs, Treasury, and OMB. It might make sense for OMB and Treasury 

to conduct some case studies of the proposed review structure to identify 

(1) successful methods agencies devise for reviewing tax expenditures’ 

performance, (2) how best to report the results of these reviews, and 

(3) how to ensure that adequate resources are available for such reviews. 

This type of effort can both strengthen the budget process itself and 

provide a valuable tool to facilitate a fundamental reexamination of the 

base of government. 

Reexamination is not a one-time activity. It must be a continuing process 

and we should expect even the initial round to take several years. The 
Page 17 GAO-07-1194T 

process could be helped by the governmentwide performance plan 

required by GPRA, as well as a governmentwide strategic plan and a set of 

KNIs. GPRA requires the President to include in his annual budget 

submission a federal government performance plan. Congress intended 

that this plan provide a “single cohesive picture of the annual performance 

goals for the fiscal year.” The governmentwide performance plan could 

help Congress and the executive branch address critical federal 

performance and management issues, including redundancy and other 

inefficiencies in how we do business. It could also provide a framework 

for any restructuring efforts. Unfortunately, this provision has not been 

fully implemented. Instead, OMB has used the President’s budget to 

present high-level information about agencies and certain program 

performance issues. The agency-by-agency focus of the budget does not 

provide the integrated perspective of government performance envisioned 

by GPRA. 

In addition, we have previously said that a governmentwide strategic plan 

could provide a framework to identify long-term goals and strategies to 

address issues that cut across federal agencies.14 Such a plan for the 

federal government, supported by key national outcome-based indicators 

and a fully developed governmentwide performance plan to assess the 

government’s performance, position, and progress, could be a valuable 

tool for governmentwide reexamination of existing programs, as well as 

proposals for new programs. Developing a strategic plan can help clarify 

priorities and unify stakeholders in the pursuit of shared goals and is 

therefore an important first step in articulating the role, goals, and 

objectives of the federal government. A governmentwide strategic plan can 

potentially provide a cohesive perspective on the long-term goals of the 

federal government and provide a much needed basis for fully integrating, 

rather than merely coordinating, a wide array of federal activities. The 

development of a set of KNIs could both be used as a basis to inform the 

development of governmentwide strategic and annual performance plans 

as well as link to and provide supporting information for outcome-oriented 

goals and objectives in agency-level strategic and annual performance 

plans. Successful strategic planning requires the involvement of key 

stakeholders and thus could serve as a mechanism for building consensus. 

Further, it could provide a vehicle for the President to articulate long-term 

goals and a road map for achieving them. In addition, a strategic plan can 

 14 GAO-04-38. 
Page 18 GAO-07-1194T 

provide a more comprehensive framework for considering organizational 

changes and making resource decisions. 

Fully implemented, governmentwide strategic and performance plans—if 

developed in consultation with Congress—could also provide a framework 

for congressional authorization, appropriation, and oversight processes. 

Congress of course has a number of regular opportunities to provide its 

perspective on specific performance issues and performance goals. When 

you create a new spending program or tax provision, you have the 

opportunity to say what you expect that program or incentive to achieve—

and to direct that performance be tracked. I believe Congress should be 

clear about what performance information it wants and should expect that 

information to be provided. For discretionary spending programs, the 

annual appropriations process provides an opportunity to ask about the 

performance of an individual program and/or a group of programs within 

the same agency or within the jurisdiction of the appropriations 

subcommittee. When Congress considers the reauthorization of a program, 

it should have information on that program’s performance—and on how 

that performance compares with other tools addressing the same or 

similar objectives. Reauthorization can—and should—be informed by 

performance information and evaluations. 

Discretionary spending programs may be looked at in the annual 

appropriations process or when they are up for reauthorization. Although 

some entitlement programs require reauthorization and so offer up 

opportunities for evaluation and reexamination, others do not. With few 

exceptions, programs run through the tax code—tax expenditures—

generally are not subject to reauthorization; as a result no review or 

evaluation of their effectiveness is triggered. For many mandatory 

spending programs and tax expenditures, congressionally initiated 

oversight may be the vehicle for evaluation. I would suggest that Congress 

specify the kind of performance information it would like for these 

programs and use that in crosscutting reviews. 

The institutional challenge before you is to find a way to broaden your 

assessment beyond individual programs or agencies or even committee 

jurisdiction. It is not uncommon for multiple tools or programs—

administered through more than one agency—to address a similar goal or 

national priority. Although this may make sense, it also complicates the 

task of evaluation, oversight, and reexamination. 

Congressional Actions 
Page 19 GAO-07-1194T 

We have previously suggested that Congress consider the need to develop 

a more systematic vehicle for communicating its top performance 

concerns and priorities; develop a more structured oversight agenda to 

prompt a more coordinated congressional perspective on crosscutting 

performance issues; and use this agenda to inform its authorization, 

appropriations, and oversight processes. Just as the executive branch 

needs a vehicle to coordinate and address programs and challenges that 

span multiple departments and agencies, Congress might need to develop 

structures and processes that better afford a coordinated approach to 

overseeing agencies and tools where jurisdiction crosses congressional 

committees. 

In the past we have also suggested that one possible approach could 

involve developing a congressional performance resolution identifying the 

key oversight and performance goals that Congress wishes to set for its 

own committees and for the government as a whole. Such a resolution 

could be developed by modifying the current Congressional Budget 

Resolution, which is already organized by budget function. I note that this 

year your Committee took the first step by including in this year’s Budget 

Resolution a directive that Committee “Views and Estimates” reports 

include recommendations for improved governmental performance based 

on “committee performance reviews of programs within their jurisdiction.” 

I hope this Committee remains interested and continues to urge and 

support the other Committees in this effort. 

You may also wish to consider what kind of structures will facilitate crosscutting reviews. If a performance resolution or some other mechanism 

specifies areas for reexamination in any given year, what structure will 

enable you to look across agencies and at both programs run through the 

spending side of the budget and those run through the tax side? 

Challenging as this task may be, I believe it is critical to the successful 

assertion of Congress’ role in setting the goals and objectives to be 

achieved with the programs it establishes and the resources it provides. 

Much is at stake in the development of a collaborative performance 

budgeting and reexamination process. This is an opportune time for the 

executive branch and Congress to consider and discuss how agencies and 

committees can best take advantage of and leverage the new information 

and perspectives coming from the reform agenda under way in the 

executive branch. Through PMA and its related initiatives, including 

PART, the Administration has taken important steps in the right direction 

by calling attention to successes and needed improvements in federal 

Concluding 

Observations 
Page 20 GAO-07-1194T 

management and performance. Some program improvements can come 

solely through executive branch action, but for any performance 

budgeting or reexamination effort to meet its full potential the 

assessments it generates must also be meaningful to and used by Congress 

and other stakeholders. I cannot stress this point enough—to make a 

difference, performance information must be useful and used. Hence I 

believe it is important for Congress to develop structures and processes 

that are flexible, adaptable, and inclusive of various perspectives to 

conduct successful performance reviews on those issues that cross 

jurisdictional boundaries. GAO stands ready to assist Congress in 

addressing the much needed baseline review of existing federal programs, 

policies, functions, and activities. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 

to answer any questions you or the other Members of the committee may 

have at this time. 

For future information on this testimony, please contact Michael Brostek, 

at (202) 512-9110 or brostekm@gao.gov or Susan J. Irving at (202) 512-9142 

or irvings@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this 

testimony. Individuals making key contributions to this testimony were 

Jacqueline M. Nowicki, Assistant Director; Elizabeth Curda; Edward 

Nannenhorn; Amy Rosewarne; and MaryLynn Sergent. 

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