FEDERAL FINANCIAL

SUPPORT OF BUSINESS

JULY 1995

The Congress of the United States

Congressional Budget Office
NOTES

Unless otherwise indicated, all years referred to in this study are fiscal years.

Numbers in the text and tables may not add to totals because of rounding.
T

Preface

he federal government supports private business activities through a variety of

direct spending programs, credit subsidies, and tax incentives. The ongoing debate

about the appropriate federal role in supporting business is hampered by the lack

of data and analysis of current federal policies. A previous Congressional Budget Office

(CBO) study in this area, Federal Support of U.S. Business, is now more than 10 years old

and has been rendered obsolete by major legislation and the passage of time. At the request of the former Chairman of the Senate Committee on the Budget, Chairman Sasser,

CBO has updated that earlier report. In keeping with CBO's mandate to provide nonpartisan analysis, this study makes no recommendations.

Philip Webre of CBO's Natural Resources and Commerce Division wrote the report

under the supervision of Jan Paul Acton and Elliot Schwartz. The Natural and Physical

Resources Cost Estimating Unit and the Tax Analysis Division made substantial contributions in both estimates and content. The author also appreciates the comments of George

Eads, Robert Hartman, Rosemary Marcuss, William Randolph, Pearl Richardson, Frank

Sammartino, and Aaron Zeisler.

Sherry Snyder edited the manuscript, and Christian Spoor provided editorial assistance. Donna Wood, Marlies Dunson, and William Boswell typed the many drafts.

Kathryn Quattrone prepared the study for publication.

June E. O'Neill

Director

July 1995

Contents

SUMMARY ix

ONE INTRODUCTION 1

Determining What Constitutes Business Support 1

Business Support Versus $Corporate Welfare# 3

TWO ISSUES IN DEFINING AND MEASURING

FEDERAL SUPPORT OF BUSINESS 7

Spending Programs 7

Credit Programs 9

Tax Expenditures 10

Federal Activities That Are Not Counted

as Business Support 12

THREE FEDERAL ACTIVITIES THAT SUPPORT

BUSINESS 17

Tax Expenditures 17

Spending Programs 22

Credit Programs 26

FOUR DISTRIBUTION OF FEDERAL SUPPORT

AMONG BUSINESS SECTORS 29

Support Targeted Toward a Specific

Business Sector 29

Tax Expenditures That Benefit More

Than One Sector 36

Targeted Support in Its Industrial Context 38

Effects of Tax Support on Investment

by Businesses 40

Technology Programs 41
vi FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

APPENDIXES

A Estimated Tax Expenditures That

Support Business 45

B Estimated Program Outlays That

Support Business 49

C Estimated Credit Activity and Outlays

That Support Business 53
CONTENTS vii

TABLES

S-1. Selected Federal Tax Expenditures That Support

Business, 1995 x

S-2. Federal Expenditures and Credit Activity That

Support Business, 1995 xi

1. Federal Expenditures and Credit Activity That

Support Business, 1995-1999 18

2. Selected Federal Tax Expenditures That Support

Business, 1995-1999 19

3. Selected Federal Spending Programs That Support

Business, 1984 and 1995 22

4. Selected Federal Credit Programs That Support

Business, 1984 and 1995 27

5. Targeted Federal Support for Agriculture 30

6. Targeted Federal Support for Manufacturing 31

7. Targeted Federal Support for Mining 32

8. Targeted Federal Support for Utilities and

Sanitary Services 33

9. Targeted Federal Support for Transportation 34

10. Targeted Federal Support for Finance, Insurance,

and Real Estate 35

11. Illustrative Allocation of Multisector Tax

Expenditures by Sector 37

12. Federal Business Support in an Industrial Context 39

13. Marginal Effective Corporate Tax Rates

by Type of Asset 40

14. Marginal Effective Corporate Tax Rates

by Sector 41

15. Federal Outlays for Technology Commercialization

Programs in 1995 by Budget Function 41
viii FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

A-1. Estimated Tax Expenditures by Budget Function 46

B-1. Estimated Outlays for Spending Programs by

Budget Function 50

C-1. Estimated Obligations, Commitments, and Outlays

for Credit Programs by Budget Function 54
T

Summary

he federal government extends financial support to business as part of its efforts to promote private enterprise. That support takes

three main forms: spending programs, credit programs, and favorable tax treatment. The most visible

form of support consists of spending programs related to business interests, such as the programs of

the Agricultural Research Service. Through credit

programs, federal agencies such as the Export-Import

Bank provide loans and loan guarantees to individual

businesses. The largest category of support comes

through special provisions of the tax code designed

to encourage commercial activity--so-called tax expenditures. The favorable treatment of corporate research and development is one example. 

The Congressional Budget Office (CBO) estimates that spending programs to promote commerce

and business will cost $27.9 billion in 1995 and that

credit programs will cost $2.2 billion. The provision

of the tax code that yields the largest amount of direct support for business--depreciation of capital assets in excess of the alternative depreciation system--

is estimated to cost $32.2 billion in lost revenue.

Federal activities that support business distribute

their aid unevenly among business sectors, both in

absolute terms and relative to the size of the sector.

The agricultural sector receives by far the most support in dollar terms--$14.7 billion including outlays

from both spending and credit programs. It also receives the most support relative to its size; through

credit and spending programs, the agricultural sector

receives a level of support equal to 11 percent of its

contribution to gross domestic product (GDP). The

utilities sector is second, receiving federal support

equal to 2 percent of its contribution to GDP. All

other sectors receive amounts less than 0.6 percent.

What Constitutes Business

Support?

Federal agencies provide business support through

many activities. The list of activities CBO compiled

for this study includes only those with a central goal

of promoting commerce and industry.

CBO assumes nothing about the value, effectiveness, or success of any programs or provisions on

this list. Many of them are cost-effective and contribute to a public goal, which is their intended purpose. Others may be less effective and may, through

poor design or control, transfer more resources than

are justified. Furthermore, CBO does not assume

that the businesses that receive federal financial support are necessarily the ultimate beneficiaries. For

example, federal payments to air carriers for flying

into airports of underserved communities can benefit

both the community and the air carrier.

This tally of federal activities that support business cannot be compared with analyses of $corporate

welfare.# The largest difference between CBO's

study and those studies is the purpose of drawing up

the list. Other analysts attempt to create a tally of

corporate welfare--programs that they claim transfer

money from the federal government to businesses but

accomplish no other public purpose--in order to reduce such spending. CBO's tally has no such purpose. CBO set out to determine how much the federal government is spending on business support, not

whether the government should be spending funds on

business support or how such spending should be

reduced.
x FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Tax Expenditures

The federal government dispenses the bulk of its support for business through special provisions of the tax

code. The largest--accelerated depreciation of capital

Summary Table 1.

Selected Federal Tax Expenditures That Support

Business, 1995 (In billions of dollars)

Tax Provision 1995

Depreciation of Capital Assets 

in Excess of Alternative 

Depreciation System 32.2

Reduced Rates on First $10 Million 

of Corporate Taxable Income 3.9

Tax Credit for Corporations with 

Income from U.S. Possessions 

(Section 936 income) 3.7

Exception to the Source Rule for

the Sale of Inventory Property 3.5

Tax Credit for Low-Income Housing 2.2

Special Treatment of Life 

Insurance Companies’ Reserves 2.1

Expensing of Research and 

Development Costs 2.0

Deduction of Unpaid Property Loss 

Reserves for Property and Casualty 

Insurance Companies 1.6

Expensing of up to $17,500 of 

Depreciable Business Property 1.5

Exclusion of Income of Foreign 

Sales Corporations 1.4

SOURCE: Congressional Budget Office based on Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the

Committee on Ways and Means and the Committee

on Finance (November 9, 1994).

assets--provides incentives to increase investment.

Because of interactions between different provisions

of the tax code, the level of federal support does not

equal the arithmetic sum of revenue losses from individual tax provisions. Consequently, this report does

not provide a total. Nonetheless, the arithmetic sum

of the business-oriented tax preferences is twice the

size of the business-oriented spending and credit programs put together. Although that sum is not a measure of revenue losses, it suggests the magnitude of

the support delivered through the tax system.

The federal government supports business with

more than 60 tax preferences. Fourteen individual

provisions each cost the Treasury $1 billion or more

in lost revenue annually (the largest are shown in

Summary Table 1). The estimates of revenue losses

are not necessarily equal to the amount of funds that

would be gained by eliminating any of the tax provisions.

Spending Programs

Spending programs are the second largest channel of

federal support. They will provide an estimated

$27.9 billion in 1995, with five program areas accounting for two-thirds of that total (see Summary

Table 2).

o The Commodity Credit Corporation accounts for

an estimated $7.9 billion through its programs of

price supports for agricultural commodities and

other programs for stabilizing farm income.

o The National Institutes of Health's applied and

clinical research in health-related fields totals

$3.7 billion.

o The Department of Energy's research and development into new energy technologies, such as

solar and nuclear energy, adds $3.4 billion to this

inventory of federal support.

o Farm-related soil conservation efforts through

the Conservation Reserve Program cost $1.9 billion.
SUMMARY xi

o Development of technology with possible civilian applications at the Department of Defense

consumes $1.8 billion.

Credit Programs

CBO estimates that credit programs to promote business and commerce will cost the government $2.2

billion in 1995 (see Summary Table 2). That figure

represents both the costs of administering loans and

loan guarantees and the outlays for subsidizing low

interest rates and defaults. Loans and loan guaranSummary Table 2.

Federal Expenditures and Credit Activity That

Support Business, 1995 (In billions of dollars)

1995

Program Outlays

Spending Programs

Commodity Credit Corporation 7.9

Applied Biomedical Research at

the National Institutes of Health 3.7

Technology Development at

the Department of Energy 3.4

Conservation Reserve Program 1.9

Dual-Use Technology at the

Department of Defense 1.8

Other 9.2

Total 27.9

Credit Programs (Subsidy and 

administrative costs) 2.2 a

Credit Activitya

Direct Loan Obligations 7.3

Loan Guarantee Commitments 33.2

SOURCE: Congressional Budget Office. 

a. The Export-Import Bank, the Small Business Administration,

the Commodity Credit Corporation, and the Agricultural Credit

Insurance Fund account for most of the credit activity and outlays.

tees for business support in 1995 will total an estimated $7.3 billion and $33.2 billion, respectively.

The largest credit programs, measured by their subsidy and administrative costs, are those of the

Export-Import Bank, the Small Business Administration, the Commodity Credit Corporation, and the Agricultural Credit Insurance Fund; they account for

over 80 percent of the cost of all business-oriented

credit programs.

Programs and Tax Provisions

Excluded from the Study

This inventory includes only federal activities with a

stated goal of promoting commerce and business.

Thus, it excludes programs that may significantly

affect different sectors of the economy but that the

Congress undertakes for purposes other than promoting business. The programs and efforts that CBO did

not include in its tally fall into several categories:

o Macroeconomic policy,

o Benefits to individuals,

o Federal procurement and sales,

o Nonindustrial research and development, and

o Social and physical infrastructure.

The costs of the excluded programs are much

greater than those included, which account for 2 percent of federal outlays. Programs to benefit individuals that have significant effects on the medical economy, for example, include Medicare ($178 billion in

1995 outlays) and Medicaid ($89 billion in 1995 outlays). Estimates of the Department of Defense's procurement, which clearly encourages the aerospace

and other industries, total $55 billion in 1995. Similarly, in the research area, the inventory includes less

than $2 billion of the estimated $35 billion the Department of Defense will spend on research, because

that research is primarily intended to develop new

weapon systems.
xii FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Many of the tax expenditures that CBO excludes

also have substantial effects on businesses, often

much larger than the effects of the tax preferences

included here. The most notable of those expenditures is the deductibility of interest payments on

home mortgages, which stimulates the demand for

housing and which the Joint Committee on Taxation

estimates will cost the Treasury $54 billion in 1995.

The study also excludes employer contributions for

medical insurance premiums and medical care even

though such payments increase the demand for medical insurance and medical care and will reduce tax

revenues by an estimated $46 billion in 1995. In this

analysis, CBO does not include the tax expenditures

resulting from the preferential treatment accorded to

long-term capital gains, since that treatment lowers

the cost of capital throughout the economy and does

not apply uniquely to gains from investments in business.
F

Chapter One

Introduction

ederal activities to aid business represent both

a claim on federal budgetary resources and, in

the case of several industrial sectors, a sizable

share of their contribution to the economy. This

study details those programs and places their support

in its industrial and budgetary context.

Although they are presented here as business

support programs, these programs were not conceived as parts of a coherent whole. Rather, they

result from separate initiatives taken at different

times to support a variety of legislative objectives.

Some are designed to aid specific sectors of the economy such as agriculture, some to aid smaller firms,

and others to reward specific commercial activities

such as research and development or investment. 

Although the Congress and the Administration

have never considered these programs together, treating them as a group devoted to a specific purpose--

promoting commerce and industry--provides a useful

perspective. In that sense, this study is similar to

analyses of federal spending on research and development that treat federal programs housed in different agencies and different budget functions as a single group.1

This analysis updates a Congressional Budget

Office (CBO) study, Federal Support of U.S. Business, that appeared in January 1984. That study has

been rendered obsolete both by major legislation,

including tax and credit reform and reform of the

budget process, and by the passage of time. Though

no longer current, the earlier study can serve as a

benchmark for assessing how policies and priorities

have changed.

Determining What Constitutes

Business Support

The analysis of federal support for business depends

largely on the quality of the criteria for including and

excluding programs. Every government spending

program or tax expenditure increases the demand for

the output of some individual business, but including

the entire federal budget in the category of business

support would not provide meaningful information.

To determine what the federal government is doing

to promote commerce and industry in a deliberate

way, an analysis should include only programs whose

central goal is to promote business.

Although many Congressional actions promote

industry and commerce, CBO has included in this

catalog only those that assist business financially.

That criterion eliminates programs that have only

collateral, and possibly unintended, consequences for

business. Nevertheless, deciding whether a program

or a provision of the tax code was intended to promote business and industry remains difficult and subject to reasoned disagreement.

The difference between inclusion and exclusion,

however, is largely a matter of convention rather than

1. The Analytical Perspectives volume of the Budget of the United

States Government has several such analyses that cut across the

federal budget according to different analytic criteria.
2 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

economic logic. No federal program has a single

purpose; rather, most serve multiple goals, and many

programs that were excluded have consequences that

are similar to those of programs that were included.

CBO decided that to be included, programs would

have to meet a test of reasonableness--that is, in

CBO's judgment, most policy analysts would agree

that the primary purpose of the program or tax provision was to promote commerce and industry. (Such

definitional issues are not unique to this study but

often arise when analysts try to divide the federal

budget according to some analytic, rather than legal

or institutional, criterion.)

Any attempt to define where business support

ends and support of some other legislative goal begins raises questions about methods and assumptions.

This study does not claim to resolve those issues definitively; CBO has made judgments in categorizing

programs, and other analysts might disagree with

those decisions. Consequently, this analysis should

be thought of as illustrating general trends and policies rather than as defining the role, or even the absolute amount, of federal aid to business in the economy. The remainder of this chapter and the next

chapter explain both the general rules CBO used to

decide which programs would be included and the

definitional and measurement issues involved.

How the Federal Government 

Promotes Business

Federal efforts to promote commerce and industry

fall into three general categories.

o Infrastructure support. The federal government

provides or defines the physical and social infrastructure as well as the institutional $rules of the

game,# such as patent laws and regulation of

markets and contracts, all of which are needed if

businesses are to thrive.

o Indirect financial support. The economy, but not

the federal government, bears the cost of aiding a

business or industry, as in the case of protective

tariffs or quotas.

o Federal financial support. The federal assistance

has a direct effect on the federal budget, as in the

case of direct subsidies, credit programs, or tax

expenditures. 

This analysis is solely concerned with the last

type of assistance--direct financial support. It defines

such support as that for which the federal government receives no equivalent direct benefit in return.

Rather, the aid is designed to affect prices and costs

in the private sector so as to encourage some activities in preference to others.

This study generally defines businesses as commercial operations of corporations, partnerships, and

individuals in any industry. For example, individuals

own some of the farms benefiting from agricultural

support and corporations own others. If an individual

is engaged in a business activity, then for purposes of

this study, programs and provisions to support him or

her in that endeavor are classified as business support. That definition also includes the commercial

operations of nonprofit corporations.

The definition excludes the noncommercial actions of corporations, partnerships, and individuals--

for example, tax preferences related to corporate contributions to charity. The commercial actions of individuals and economic organizations are difficult to

disentangle from other aspects of their lives. These

distinctions, however, have been made elsewhere.

For example, tax law does not typically refer to all

investments, such as education or preventive health

care, as business investments. Similarly, not all actions that individuals take to improve their welfare

should be referred to as commercial activities.

Mechanisms for Providing Federal 

Financial Support

The federal government uses three types of programs

to provide direct financial support. 

o Spending programs include research and development programs that support industry goals,

direct subsidies, provision of information for a

special purpose, and insurance programs.
CHAPTER ONE INTRODUCTION 3

o Credit programs include loans and loan guarantees.

o Tax expenditures--special tax concessions designed to encourage a particular activity--include

credits against current taxes as well as the deferral or exclusion of or deductions from income on

which taxes would have been levied.

Perspectives from Which to View 

Business Support

Business support can be viewed from the perspective

of both the federal budget and the business sector that

receives it. Although presenting both perspectives in

this study inevitably results in some duplication, it

affords the opportunity to highlight different aspects

of the same set of programs.

Business Support Versus

$Corporate Welfare#

Some policymakers have recently suggested that society reexamine government programs that provide

$corporate welfare#--that is, programs that they claim

transfer money from the federal government to businesses but accomplish no other public purpose.2

CBO’s list of federal programs that support business

cannot be compared with such analyses. The largest

difference between CBO's study and studies of corporate welfare is the purpose of drawing up the list.

The latter studies attempt to create a tally of corporate welfare in order to reduce that type of spending.

CBO instead sets out to determine how much the federal government is spending on business support; it

did not try to determine whether the government

should be spending funds on business support or how

to reduce such spending.

CBO has not analyzed or made assumptions

about the value, effectiveness, or efficiency of any

program. This study can best be described as a catalog of federal payments to corporations and individuals for engaging in specified commercial activities.

Unlike most studies of corporate welfare, it is not a

deficit reduction $hit list.# It draws no conclusions

as to the social value of such payments, nor does it

systematically discuss their success in fostering the

desired activities. This study is, however, a starting

place that identifies some of the programs that policymakers and analysts may want to examine further.

Moreover, CBO does not assume that the businesses receiving federal financial support are necessarily the ultimate beneficiaries. If federal research

and development (R&D) at the National Institutes of

Health helps to create new technologies--for example, new drugs--that enhance the lives of U.S. taxpayers, how are analysts to allocate the benefits of that

program between drug companies and consumers?

Similarly, federal payments to air carriers for flying

into airports of underserved communities benefit

both the community and the air carrier.

Although CBO’s study of federal support for

business has a different perspective and motivation

than studies of corporate welfare, a large degree of

overlap is inevitable. This section compares several

such studies, including those by Stephen Moore and

Dean Stansel of the Cato Institute, Robert J. Shapiro

of the Progressive Policy Institute, and Scott A.

Hodge of the Heritage Foundation.3

Each of the tallies varies substantially from the

others in what it includes and, consequently, in the

total amount of funding it reports for such programs.

Each study also has a different methodology: the one

by Moore and Stansel includes all the funding in a

2. In November, Secretary of Labor Robert Reich raised the issue in a program; the others (Shapiro and Hodge) include

speech before the Democratic Policy Council. See Kirk Victor,

$Takin' on the Bacon,# National Journal (May 6, 1995). Since

then, a variety of organizations, speaking from a variety of political

viewpoints, have taken up the call. They include the Cato Institute,

the Progressive Policy Institute, and the Heritage Foundation. For

a useful compendium of programs, see also Edward Knight and

Vivian Catherine Jones, Federal Programs That Could Financially

Benefit Business Enterprises, CRS Report 95-535E (Congressional

Research Service, April 18, 1995). 

3. Stephen Moore and Dean Stansel, Ending Corporate Welfare As

We Know It (Washington, D.C.: Cato Institute, May 12, 1995);

Robert J. Shapiro, Cut-and-Invest: A Budget Strategy for the New

Economy (Washington, D.C.: Progressive Policy Institute, March

1995); Scott A. Hodge, ed., $Rolling Back Government: A Budget

Plan to Rebuild America# (unpublished draft, Heritage Foundation,

Washington, D.C., no date).
4 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

only the savings that would arise from specified cuts.

Consequently, the numbers are not comparable.

Moore and Stansel recommend cutting programs that

they claim total $87 billion in 1995. Shapiro recommends reductions in spending programs that he estimates will total $114 billion over five years and tax

proposals that will generate a similar amount of additional revenue. Hodge's proposals for reducing federal business programs total $11 billion in 1996, out

of a total savings in all areas of the budget of $67

billion. (His proposed budget would start in 1996.)

Generally, CBO's tally is the most conservative,

mainly because it includes only programs with a

stated business focus whereas the other studies include programs that may help business but have no

such stated focus. All four tallies include largely the

same set of programs in the areas of agriculture, energy, and technology. Indeed, most of the spending

programs in CBO's tally are in those three areas.

Infrastructure accounts for the biggest quantitative difference in spending programs between CBO's

analysis and the others. Those analyses include federal spending devoted to providing infrastructure and

the $rules of the game# discussed earlier. Agencies

mentioned by one or more of those analysts include

the Army Corps of Engineers, the Federal Aviation

Administration, the Coast Guard, the National

Weather Service, and the Federal Transit Administration. In general, the analysts argue that the fees those

agencies charge are not sufficient to cover their costs

and that the agencies therefore provide support for

business.

Although CBO agrees that those activities promote business, the issue is whether each infrastructure program as a whole supports business in preference to its other users. As will be discussed in Chapter 2, CBO excluded most spending on infrastructure

from its tally because infrastructure benefits not only

business but also everyone in society. Consequently,

separating the business function from other functions

of that spending is difficult. Rather than separate out

the business portion of such spending, which would

be a largely subjective process, CBO chose to exclude it, thus providing a tally that more consistently

includes only business support. 

Differences with Moore and Stansel

Unlike CBO, Moore and Stansel focused their analysis on spending programs, including only one tax expenditure in their tally--the tax provisions related to

alcohol fuels. They also included many programs

that CBO has classified as other than business support. For example, their tally included $9.5 billion of

weapons development and procurement by the Department of Defense (DoD). As will be discussed in

Chapter 2, CBO excluded federal procurement from

its tally.

Moore and Stansel included the Department of

Labor's training and employment services. Although

such programs benefit business, they also benefit the

entire economy generally and the recipients of the

training in particular. CBO therefore classified those

programs as benefits to the workers involved, not as

business support.

Moore and Stansel included all basic R&D performed by university researchers and in fields such as

high-energy physics, whose connections to business

are tenuous. CBO included only technology-oriented

R&D. Moore and Stansel also included funding for

the cleanup of Department of Energy (DOE) facilities, but CBO did not.

Last, Moore and Stansel double-counted (and in

some cases triple-counted) some federal technology

programs. For example, the High Performance Computing and Communications program was counted

once as itself; its components were counted again as

part of the Civilian Technology Investment program,

DoD’s dual-use technology initiatives, or DOE's

R&D activities. CBO counted the major components

of this program individually within their respective

agency.

Differences with Shapiro

Shapiro includes several programs and provisions

that CBO does not. He includes the space station,

which is primarily not business support; mass transit

subsidies, even though the government runs most

mass transit in the United States; and several propos-
CHAPTER ONE INTRODUCTION 5

als for changing the federal payments to universities,

which also have no relationship to business. 

With regard to tax expenditures, Shapiro's and

CBO's tallies of business support are quite similar,

although CBO is more conservative. Shapiro includes a proposal to end the deduction of business

entertainment as a business subsidy. Since spending

by businesses to entertain clients is not conventionally considered a tax expenditure, CBO has not included it in its tally.

Differences with Hodge

Hodge does not limit his study to support of business

but discusses many areas of the budget. Therefore,

his study may be best compared with CBO's Reducing the Deficit: Spending and Revenue Options rather

than with this volume.

Hodge does not simply tally programs but proposes changing many of them in specified ways over

a specified number of years. His estimates therefore

count potential savings and so are not comparable

with CBO's estimates, which count current levels of

outlays adjusted for inflation.

Shapiro's and Hodge's lists of programs that support business overlap with CBO's. Their lists are narrower in that they include only programs they wish to

end; the lists are broader in that they include programs that CBO classified as part of infrastructure or,

like the mass transit subsidies, that do not provide aid

to business.

T

Chapter Two

Issues in Defining and

Measuring Federal Support of Business

his study starts with the entire federal budget

and narrows it down to an analytically manageable set of programs to determine the support the federal government provides to business.

The methodological challenge is to decide which programs have as a central goal the support of commercial activity and which programs affect business incidentally.

Any analysis of federal financial efforts to promote commerce and industry must make distinctions

that are somewhat arbitrary. This chapter discusses

those distinctions, addresses analytic issues pertaining to measuring federal support, and points out the

federal programs and activities that have been excluded.

Federal financial support can take three budgetary forms: 

o Funds spent directly for selected assistance,

o Provision of credit or guarantees for private

loans, and 

o Selective tax reduction. 

This study’s estimates of that support assume that

1995 programs continue unchanged in inflationadjusted terms over the 1996-1999 period. The estimates of expenditures from spending and credit programs are those of the Congressional Budget Office’s

Budget Analysis Division, and estimates of revenue

losses from tax expenditures come from the Joint

Committee on Taxation. Neither set of estimates

reflects actions taken in 1995.

Spending Programs

The most straightforward way to support a business

or industry is to award money directly or spend it

directly on an industry’s behalf. (Individual spending programs and their budgetary effects are discussed more fully in Chapter 3.)

Types of Direct Spending Programs

Spending programs generally fall into one of three

categories: direct payments, statistical and other

basic technical information, and the commercialization of technology. Most of the problems of measurement and definition are encountered in the last

category.

Direct Payments. Federal agencies provide direct

support to businesses through cash payments. That

method is especially prominent in agriculture: farms

can receive money for a variety of crops or agricultural practices, such as withholding certain lands

from cultivation. Such direct payments are unrelated

to procurement and are rare in other program areas.

Technical Information. Federal agencies provide

market information to businesses and their clients in

the hope of promoting commerce. By increasing the
8 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

amount of information in the marketplace, federal

agencies make transactions easier and reduce uncertainty to sellers and buyers alike. Subjects on which

information is disseminated include developments in

foreign markets, surveys of natural resources in the

United States leading to commercial exploitation,

and publication of commercial standards through the

Cooperative Extension Service or the National Institute of Standards and Technology.

The list does not include Bureau of the Census

and other information programs that have applications beyond business activities. For example, the

current tally excludes the Geological Survey, which

was in the 1984 tally, because much of its funding is

spent on monitoring water quality. Outlays for the

Geological Survey are projected to total only $611

million in 1995, so excluding them should not alter

the study’s conclusions.

Technology Commercialization. Supporting the

development of new commercial technologies is a

service that the government can perform for business.

This study includes research and development programs whose goal is not knowledge per se but rather

the production of technology that will be incorporated in commercial products. Thus, the Congressional Budget Office has included some agencies’

R&D budgets in their entirety because the overall

purpose of the R&D is to support business. For example, the National Institute of Standards and Technology devotes its entire R&D budget to producing

standards of measurement for business and industry.

In other instances, however, only a portion of an

agency’s R&D budget has been included because a

clearly identifiable portion was for noncommercial

purposes. For example, the tally includes roughly a

dozen programs of the National Aeronautics and

Space Administration (NASA) and a handful of initiatives by the National Science Foundation (NSF).

Although other NASA and NSF programs may ultimately have commercial benefits, CBO judged those

programs as not specifically intended to aid business.

The R&D programs included in the study target

their money in various ways. Some programs spend

funds on business’s behalf, such as those that pay

university or government scientists to develop a new

technology that industry may eventually exploit.

Other programs may pay a company to develop a

technology that the federal agency providing the

funds will then use in its own products. For example,

some of the defense R&D programs pay firms to develop products that they can sell both to the Department of Defense and to civilian consumers.

Issues of Definition and Measurement

Two agencies with large R&D budgets--the Department of Defense and the National Institutes of

Health--were almost completely excluded from

CBO’s 1984 study. Their inclusion this time raises

issues of both definition and measurement.

Issues of Definition. The defense programs included

in the tally are mainly those that promote technologies that have both commercial and defense applications--the so-called dual-use programs. The Technology Reinvestment Project, which helps defense contractors to develop commercial versions of their military technology, typifies the explicit commercial focus of many of DoD’s technology development programs in the post-Cold War period. 

That broader inclusion of military programs is a

substantial change from CBO’s 1984 study. Even

though the commercial effects of military technology

programs were well understood in 1984, they were

not targeted so explicitly toward the commercial

market. Rather, most observers justified and viewed

the programs on the basis of their contribution to

DoD’s military mission. Recent policy changes have

altered the justification of those programs, prompting

their inclusion in this volume.

Issues of Measurement. The R&D programs of the

National Institutes of Health (NIH) presented problems of classification and measurement. Many organizations involved in medicine are not businesses but

rather nonprofit or governmental organizations.

However, not-for-profit corporations have economic

interests that may cause them to behave in a manner

similar to for-profit entities. With the understanding

that it is the activity more than the organizational

form that is being promoted, CBO included in its

tally the portion of NIH’s budget devoted to applied

research.
CHAPTER TWO ISSUES IN DEFINING AND MEASURING FEDERAL SUPPORT OF BUSINESS 9

One reason that this classification matters is that

the NIH budget is so large, with more than $11 billion in outlays projected for 1995. Consequently,

simply including or excluding the whole amount

seems analytically sterile, especially given NIH’s

role in developing health care technology and the

U.S. health care industry. According to NIH, over

the past 10 years, 57 percent of its research spending

has been for basic research. Assuming that another 1

10 percent was for administrative and other costs,

roughly 33 percent of the budget was for applied research and development that might directly benefit

health care providers. 

Nontheless, ample room exists for disagreeing

with both CBO’s decision to include NIH and the

method CBO used to determine what percentage of

the R&D budget should be counted as business support. In 1984, for example, CBO excluded NIH from

its tally, concluding that its budget was primarily for

health spending, not business support. Other researchers with access to the same publicly available

budget documents may wish to draw their own lines

of demarcation between the NIH programs that directly support business and those that do not.

Credit Programs

Federal agencies provide credit in two primary ways:

loans and loan guarantees. They can make loans directly to borrowers, who are obligated by contract to

repay their loans, or they can issue guarantees that

obligate the government to repay a private lender all

or part of a loan if the borrower defaults. 

Loan programs help industries in a variety of

ways. In some instances, such as the loans the Farmers Home Administration provides for farm operations and ownership, the federal government provides

credit to businesses that might not be able to obtain it

elsewhere. Other credit programs provide interest

rate subsidies that reduce the borrowing rate below

the prevailing market rate and sometimes below the

federal government’s cost of borrowing. For example, the Rural Electrification and Telephone Loans

program provides loans to rural electric cooperatives

and telephone companies at interest rates as low as

5 percent.

Many federal agencies also provide more generous terms than would private creditors. The ExportImport Bank, for example, permits much longer periods for repayment than would commercial banks for

similar loans. Federal agencies often exercise greater

forbearance in foreclosing businesses that are in arrears, and they may carry loans beyond the point of

clear default.

Similarly, federal loan guarantees provide private

businesses with several benefits. The guarantees permit lenders to reduce the risk premiums on their loan

rates. In some cases, the guarantees provide businesses with access to credit that they might not otherwise have.

Loans are more expensive to the government initially, whereas loan guarantees allow the government

to leverage its funds for greater effect. Conceptually,

however, both loans and guarantees can be reduced

to a common factor--their subsidy value expressed in

terms of the discounted present value of the funds

committed.2

Federal loan programs have three elements for

budgetary purposes:

o The financial subsidy, which is the portion of the

cash disbursement that the government does not

expect to recover through repayment;

o The unsubsidized portion, which is the present

value of the expected stream of repayments; and

o Administrative costs.3

1. National Institutes of Health, NIH Data Book, 1993 (Bethesda,

Md.: NIH, 1993), pp. 7 and 12.

2. For a more complete discussion of the budgetary treatment of credit

programs, see Congressional Budget Office, Budgeting for Administrative Costs Under Credit Reform (January 1992).

3. Although some federal loan programs do not have a budgetary

subsidy--that is, no difference exists between the federal cost of

borrowing and the expected repayments by the borrowers--they

may have an economic subsidy. The federal government can borrow at lower rates than most beneficiaries of federal loan programs.

Federal programs that allow those beneficiaries to borrow at rates

lower than they could have on the open market are, in effect, providing an economic subsidy.
10 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

The Federal Credit Reform Act of 1990 mandates

that the discounted present value of the expected future costs of interest subsidies and loan defaults associated with federal credit programs be charged when

credit is extended rather than when costs are incurred. CBO uses that value as the annual cost of 4

credit subsidies, an approach that has one drawback:

whereas the cost of interest rate subsidies and defaults is measured in present-value terms, the rest of

the budget is measured on a cash flow basis. Nevertheless, the present value captures more accurately

the real value of the economic resources that the federal government commits.

The subsidy value does not currently include administrative costs for purposes of budgeting. Those

costs are simply accounted for in the year they are

incurred, the same as other administrative costs of

federal agencies. No way of accounting for administrative costs is without problems. One can argue that

many of those costs constitute part of the subsidy and

should be included in the initial calculation of the

subsidy. The administrative costs associated with

spending programs, however, are appropriated annually even when the program may take several years to

spend out. This study follows the annual appropriation cycle and counts such costs in the year incurred.

Despite the shortcomings of the current method

of accounting for the costs of credit programs, it allows much better comparison with spending programs--the main purpose of credit reform--and gives

policymakers a clearer sense of the resources they are

allocating with those programs. It does so by providing more accurate and timely measures of the longterm costs of credit programs in the budget.

Tax Expenditures

The term $tax expenditures# refers to revenue losses

that arise from provisions of the tax code extending

selective or special tax relief to particular taxpayers.

To be classified as a tax expenditure that supports

business, a provision must fulfill two criteria: it must

be a special exemption from a general tax rule, and it

must provide a subsidy. As with spending and credit

programs, those special tax provisions are intentionally designed to influence taxpayers’ decisions--that

is, to alter the allocation of resources in the economy

from that which would have otherwise prevailed.5

Tax expenditures are entitlements in that any person or firm that meets the requirements of the tax

code is eligible for the special treatment. The revenue losses from a provision in any year will depend

on the number of eligible taxpayers and their tax liabilities. The revenue loss can vary widely from one

year to another even if provisions of law governing

tax preferences remain unchanged. That is because

tax expenditures are sensitive to both economic activity and general tax rates.

This study includes in its tally those tax expenditures granted to taxpayers who engage in commercial

or business-related activities. The taxpayers may be

corporations or individuals. As noted in Chapter 1,

the determining factor for inclusion in this list is the

purpose of the provision of the tax code, not who the

beneficiaries are. Thus, a tax provision that is intended to encourage some business activity would be

included even if corporations were not eligible. 

Although this study includes corporate tax expenditures as providing support to business, some

analysts might raise objections to doing so. Because

dividends are often taxed twice--once as part of corporate net income and again as part of individual income when they are actually paid out--the corporate

income tax as a whole might be thought of as $negative# business support. According to that argument,

tax expenditures do not provide positive support but

instead compensate for the double taxation of corporate profits.

But not all corporate equity is subject to double

taxation. For example, dividends on stock paid to

4. Present value is the value now of future income or future costs.

The present value of money in the future is calculated by discounting it at a rate of interest equivalent to the rate at which it could be

invested.

5. For recent discussions of the theoretical and measurement issues

regarding tax expenditures, see Senate Committee on the Budget,

Tax Expenditures: Compendium of Background Material on Individual Provisions, S. Prt. 103-101, prepared by the Congressional

Research Service (December 1994); and General Accounting Office, Tax Policy: Tax Expenditures Deserve More Scrutiny, GAO/

GGD/AIMD-94-122 (June 1994).
CHAPTER TWO ISSUES IN DEFINING AND MEASURING FEDERAL SUPPORT OF BUSINESS 11

charitable, educational, and other nonprofit institutions are not subject to income tax. Those income

flows are difficult to disentangle, but this study follows convention and counts corporate tax expenditures as support in their own right.

Types of Tax Expenditures

The Congressional Budget Impoundment and Control

Act of 1974 defines tax expenditures as revenue

losses that arise from:

o Exclusions, exemptions, or deductions that reduce taxable income. For example, the interest

earned on many industrial development bonds

issued by state and local governments is excluded from the taxable income of the bond’s

purchasers. 

o Preferential rates applied to a portion of income--

most notably, the reduced rates on the first $10

million of corporate taxable income. 

o Credits, which are subtracted directly from tax

liabilities as ordinarily computed. The credit for

increasing spending on research and experimentation is one example. 

o Deferral of taxes either by delaying recognition

of income or by accelerating the use of future

years’ deductions, as with accelerated depreciation of buildings and equipment. Tax deferral

provides the equivalent of an interest-free loan

from the government to the taxpayer. 

The relative value of each type of tax expenditure

will vary with the taxpayer, his or her marginal rate,

and other deductions for which he or she is eligible.

This study divides tax expenditures into two categories: those that are targeted toward a specific sector and those that affect multiple sectors. Some tax

expenditures directly benefit businesses in only one

industry or sector. For example, special treatment of

the depletion of oil and gas fields initially benefits

only firms and individuals engaged in that activity.

(How those initial recipients then spread the benefits

throughout the economy is beyond the scope of this

study.) Other provisions provide tax relief to people

and corporations in more than one sector. For example, rapid depreciation of capital assets benefits investment, albeit unevenly, in many sectors.

Issues of Definition

The definition of tax expenditures in current law is

based on the distinction between the basic structural

features of an income tax and the provisions that are

exceptions to them. The basic features are generally 6

referred to as the normal tax rules. Those rules,

which define the income that is to be taxed, include

the general rate schedules and exemption levels, the

general rules defining who is subject to tax and what

accounting period should be used, and all deductions

for the costs of earning income. Since the normal

rules are an integral part of the income tax, they are

not considered to be tax expenditures; rather, they

form the standard against which tax expenditures are

selected and measured. A separate corporate income

tax is considered part of the normal structure.

Tax analysts generally agree on which provisions

constitute tax expenditures, with few exceptions.

This analysis uses previous classifications from CBO

and the Joint Committee on Taxation.

Issues of Measurement

Following the definition of tax expenditures in the

Congressional Budget Act of 1974, this study uses

revenue losses as the basis for measuring them. The

Joint Committee on Taxation estimates the revenue

loss from each tax expenditure by comparing the revenue raised under current law with the revenue that

would be raised if the specified provision did not exist, assuming that taxpayers’ behavior and all other

tax provisions remained the same.

Three issues are of particular concern in evaluating tax expenditures that support business. First, any

6. For a more detailed discussion of the definition and measurement

issues related to tax expenditures, see Congressional Budget Office,

The Effects of Tax Reform on Tax Expenditures (March 1988), pp.

1-9.
12 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

totals derived by adding together the estimated revenue losses associated with individual provisions are

of questionable value. Most analysts maintain that

adding up the effects of individual provisions is not

useful for policy purposes because of interactions

among the provisions: repealing one tax provision

may change the revenue loss attributable to another.7

That problem is not unique to tax expenditures; similar interactions typically exist in related entitlement

programs. Nevertheless, given the level of uncer- 8

tainty surrounding the estimates of the revenue loss

associated with individual provisions and the potential for interactions, this analysis follows current

practice by not adding up revenue losses.

Second, the estimates of revenue losses are not

necessarily equivalent to the amount of funds that

would be gained by repealing the tax preferences.

Repeal is not likely to be retroactive, and the federal

government would still bear revenue losses from actions taken before repeal. For example, tax-exempt

bonds continue to provide tax-free income even

though the Congress limited the power of the states

to issue them in 1986. Furthermore repealing a tax

expenditure could change the tax status of the firms

and individuals who use it. Those changes in status

could, in turn, alter their tax liabilities. In addition,

current tax law permits taxpayers to carry forward

unused deductions and credits for up to 15 years.

Finally, changes in tax law could affect taxpayers’

behavior, which would in turn affect revenue.

The third measurement issue concerns the effects

of inflation on the provisions for depreciating assets.

By eroding the true value of the original costs, inflation distorts the historical cost-accounting system on

which depreciation provisions are based. Deductions

for depreciation are thus understated. Some analysts

argue that since the Congress intended the depreciation provisions to compensate for the effect of inflation, those provisions should not be considered tax

expenditures. CBO decided, however, to include depreciation. The current corporate tax system is not,

on the whole, indexed for inflation; consequently, the

normal tax rules might well be biased against investment in an inflationary period. In that case, helping

businesses deal with inflation to encourage investment would be a form of business support. Further

evidence for this position comes from the fact that

most of the relatively few indexing provisions in the

tax code are for individuals, not corporations.

Given those difficulties in measuring tax expenditures, this analysis should be viewed as illustrating

the central features of federal policy rather than as

defining or measuring exactly the impacts of all

business-related tax expenditures.

Federal Activities That Are

Not Counted as Business 

Support

The Congressional Budget Office’s decision to include only programs and provisions whose primary

intent is to help business and industry means that the

study excludes whole categories of federal actions

that can have profound effects on specific industries

and enterprises. This section examines some of the

implications of that decision. The major categories

of federal activities that CBO excluded are:

o Macroeconomic policy,

o Benefits to individuals,

o Nonindustrial research and development,

o Federal procurement and sales, and

o Infrastructure and social capital.

7. For example, eliminating one exclusion might force many taxpayers into a higher marginal tax bracket, thus raising the value of their

remaining exclusions and deductions. Eliminating itemized deductions could lead taxpayers to forgo itemizing, thus eliminating the

value of the remaining deductions.

8. Consider, for example, how changes in unemployment insurance

outlays affect Social Security outlays. If unemployment benefits

fall, retirement will become relatively more attractive for some

individuals, and Social Security benefits may rise. Conversely, if

unemployment benefits rise, many of the same individuals will opt

for unemployment rather than retirement, and so Social Security

outlays may fall.
CHAPTER TWO ISSUES IN DEFINING AND MEASURING FEDERAL SUPPORT OF BUSINESS 13

Macroeconomic Policy

Macroeconomic policy instruments, such as general

tax cuts or increases in the money supply, are not

directed specifically at business or industry but at the

economy as a whole and are therefore excluded. This

analysis also excludes the different impacts of monetary or fiscal policy on various industries. For example, specific sectors of the economy may be affected

differently by changes in interest rates resulting from

policy actions. Although the question of how such

policies affect specific sectors may be important to

economic decisionmakers, those policies do not support individual industries.

The very structure of the tax system and therefore changes in tax rates have profound implications

for both the amount of commerce and the relative

sizes of industries. The effect of the tax structure is

an important topic but is beyond the limits of this

exercise because the primary purpose of the tax system is to raise funds to pay for governmental services, not promote one or another activity.

Benefits to Individuals

The federal government provides benefits, such as

food stamps or Medicare, to individuals and classes

of individuals who are deemed eligible for such

goods or services. Most federal benefits to individuals fall into certain areas of stated public interest,

such as health care, housing, and retirement. Medical

services include Medicare ($178 billion in 1995),

Medicaid ($89 billion), and the exclusion of employer contributions to health insurance from taxable

income ($46 billion). Housing benefits with the largest budgetary impact include the deductibility of interest on homes ($54 billion in 1995), housing assistance ($24 billion), and the deductibility of property

tax on owner-occupied homes ($14 billion). Retirement benefits include retirement-related tax provisions that have direct effects on business.

Although the federal benefits that individuals

receive may stimulate the demand for the good or

service provided (for example, Medicare increases

the amount of medical services used each year), the

primary intent of the policy is focused on the recipients. The beneficial effects on industry, though often

welcome and highly touted, are not the primary concern, however, and so benefits to individuals are not

counted as providing business support.

This study also excludes the federal payments for

resolving failed savings and loan institutions. The

individual depositors, not the owners of the closed

thrifts, were the primary beneficiaries of those federal efforts.9

Nonindustrial Research and 

Development

Nonindustrial R&D, whether performed in federal

laboratories or through contracts and grants, may

have collateral effects on business, but unless such

research has clear industrial goals, CBO has not included it. Most of the Department of Defense’s

R&D programs, for example, are related to producing

better weapon systems; only DoD’s dual-use and

other commercially oriented R&D has been included,

as discussed above. Defense R&D is estimated to

total $35 billion in 1995, of which CBO included

only $1.8 billion. Most of NASA’s R&D was excluded for similar reasons.

In the past few years, the federal government has

entered into an increasing number of cooperative research and development agreements (CRADAs) with

private companies in areas of common interest. Because the federal agencies involved receive some direct benefit in return, CBO has excluded CRADAs

for purposes of this tally.

CBO has also excluded very basic research on

the grounds that although some of it may eventually

bear commercial fruit, the links are very indirect and

difficult to untangle. Potential commercial benefits

are only one of the reasons the federal government

supports basic science. Consequently, the analysis

excludes most outlays of the National Science Foundation and all of the Department of Energy’s outlays

for general science. (NIH’s research and develop9. This treatment is consistent with other CBO analyses with regard to

failed financial institutions. For more discussion, see Congressional Budget Office, Reforming Federal Deposit Insurance (September 1990).
14 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

ment efforts were discussed earlier in this chapter.)

Furthermore, the most common direct outcome of

basic research is the education of graduate students

and advanced undergraduates; that too has been excluded. 

Federal Procurement and Sales

Federal expenditures for goods and services that the

government uses may have significant effects on the

level of output and profits in certain industries.

Those purchases, however, are made for reasons

other than to stimulate business. For example, military contracts benefit industries such as aerospace,

but their primary purpose is national security. CBO

estimates that federal outlays for defense procurement in 1995 will be $55 billion, including purchases

of weapons and other goods and services.

Federal procurement is often restricted to domestic suppliers, through the Buy American Act and

other, similar legislation. Such restrictions stimulate

the demand for U.S. goods and services and thus support business. However, CBO has excluded the subsidy value of that restricted procurement from this

tally. Only part of the cost of the goods bought under

the Buy American Act and similar provisions represents the cost of that law. The rest, and presumably

the bulk, of the costs of such purchases represent

payment for the goods or services in question.

Though possibly large in total, the costs of directed

procurement provisions are diffused throughout the

budget with every procurement item. Calculating the

sum would therefore be difficult, if not impossible,

and so has largely been excluded.

Systematically selling federal assets and resources, especially water and land resources, at

below-market prices is also a form of business support. Like Buy American purchases, however, the

budgetary costs of systematic undercharging are scattered throughout the budget, vary by asset or resource

sale, and have therefore not been included.

Infrastructure and Social Capital

The benefits of spending on physical infrastructure

(for example, roads and bridges) and on social capital

(for example, education and public health and safety)

are impossible to assign broadly to business and industry. Sewers and water lines, for instance, benefit

the entire community, although occasionally such

investments can help a real estate developer. Similarly, an educated workforce is an asset to business

and industry, but the primary beneficiary is the recipient of the education. Only in the case of the Bureau

of Reclamation, an agency that was established to

deliver water for agriculture, has CBO included

spending on infrastructure.

In addition, a great deal of infrastructure is paid

for by user fees, such as those collected in the Highway Trust Fund. Although cross-subsidies may be

created if some users do not pay their fair share, the

issue is not whether federal support exists but

whether prices charge users fairly. 

If user fees are not sufficient to cover the federal

government’s costs for an activity, the pricing (or

sometimes mispricing) of the activity can create the

impression of business support, even though such

support may not at all characterize the goal of the

activity or program. Determining whether such 10

cases are the result of a conscious decision to support

a commercial activity or whether there is some alternative economic explanation is difficult without a

detailed examination, which is beyond the scope of

this study.

10. In situations in which the fixed investment is large and the cost to

serve one additional user is small, as is often the case with public

infrastructure, charging the user the full cost might result in uneconomic use of the facility. For a more complete discussion of cost

recovery under economies of scale, see Congressional Budget Office, Paying for Highways, Airways, and Waterways: How Can

Users Be Charged? (May 1992), pp. 5-8.
CHAPTER TWO ISSUES IN DEFINING AND MEASURING FEDERAL SUPPORT OF BUSINESS 15

Cross-subsidies further complicate the distinction

between spending on infrastructure that supports

business and spending that does not. Cross-subsidies

occur when one category of users pays more than its

share so that other categories of users pay less. If

business users of infrastructure are charged less than

other users, that helps business users; however, it

does not mean that the entire infrastructure project or

program supports business. CBO chose to exclude

such cross-subsidies because of the difficulties in

disentangling the flows of subsidies. CBO’s tally

may therefore understate the true extent to which

spending on infrastructure supports business.

Other Excluded Categories

The 1984 study included the preferential tax treatment of capital gains not related to housing, but this

study does not. Since 1984, various laws have

changed the treatment of net long-term capital gains

relative to that accorded ordinary income. That benefit now accrues only to individuals, not to corporations, and consists of a maximum statutory tax rate of

28 percent on income from realized capital gains

rather than a possible maximum income tax rate of

up to 39.6 percent (the rate depends on one’s total

income). The Joint Committee on Taxation estimates

that the tax expenditure from a lower top tax rate will

be $9.1 billion in 1995. 

The current treatment of capital gains may offset

several distortions within the tax system, including

the double taxation of an individual’s savings, the tax

bias in favor of corporate debt, the taxation of gains

resulting from inflation, and the deferral of the tax on

the capital gains from an asset until it is sold (the socalled lock-in effect). In the last instance, without

some special treatment of capital gains, individuals

would hold assets longer to avoid the one-time tax

than would be economically optimal. CBO does not

suggest that the tax system perfectly balances all

those distortions, but the current treatment of capital

gains balances some adverse treatment of business

and so should not be viewed as a separate element of

business support.

Some analysts believe that the special treatment

of capital gains indeed supports business. They point

to the rationale that is commonly offered during debates on capital gains that such different treatment

encourages private investment in entrepreneurial

businesses by lowering the cost of venture capital.

CBO believes, however, that the current treatment of

capital gains lowers the cost of capital throughout the

economy relative to nonpreferential treatment and

does not apply uniquely to gains from investment in

business. Therefore, its effect is similar to that of

macroeconomic policy, which CBO has also excluded from its tally.

The National Railroad Passenger Corporation

(Amtrak) has the authority to become truly private

but has not done so. If it should ever become financially sound, Amtrak would undoubtedly use that

power and become a transportation company. Since

it has not done so, Amtrak is considered a government entity rather than a business. Consequently, 11

CBO does not count funds appropriated to it as business support. Payments to Amtrak are projected to

amount to $550 million in 1995, with another $390

million allocated to ancillary efforts such as the

Northeast Corridor Improvement Program.

11. In Lebron v. National Railroad Passenger Corp., the Supreme

Court ruled that Amtrak was a government entity.

T

Chapter Three

Federal Activities That

Support Business

he government supports business through

spending programs, credit activity, and tax

preferences. Of the three types of support,

tax expenditures represent the government's largest

financial effort. The arithmetic sum of the businessoriented tax preferences is more than twice the size

of the business-oriented spending and credit programs combined. That sum does not represent total

revenue losses because it does not take into account

the interactions among individual provisions. It does,

however, suggest the extent of the government’s use

of the tax system in promoting business.

The Joint Committee on Taxation (JCT), which

prepared all the estimates of tax expenditures, estimates that the largest tax preference--accelerated depreciation of capital assets--will cost the government

about $32 billion in 1995. That amount is larger than

the value of all the business-oriented spending programs combined. The Congressional Budget Office

estimates that federal spending programs will provide

about $27.9 billion in business support in 1995.

Credit programs are estimated to account for $2.2

billion in subsidies and administrative costs for $7.3

billion in new loans and $33.2 billion in loan guarantees (see Table 1). Spending and credit programs

together account for 2 percent of federal outlays.

The overall pattern of using the tax system as the

primary vehicle for tax support is similar to what

CBO found in 1984. Because of the dominance of

tax expenditures, most federal efforts to promote

business are entitlements, as they were in 1984. With

entitlements, the Congress sets general eligibility

requirements, and then all who qualify may receive

the benefit or tax preference. Thus, most businessoriented federal support is not subject to the annual

appropriation cycle. That means the Congress does

not explicitly consider annually most funds spent for

business support against alternative uses of the funds.

(Some agriculture spending programs that support

business are also entitlements and are not appropriated by the Congress.)

Tax Expenditures

Tax expenditures account for the bulk of federal efforts to promote business. A small number of provi- 1

sions of the tax code account for a large share of the

revenue loss (see Table 2). The amount of support

provided by those preferences and by more than 50

other, smaller ones is detailed in Appendix A. The

Joint Committee on Taxation estimates that 15 of

those preferences will each result in revenue losses

that exceed $1 billion in 1995.

Although the federal government’s use of the tax

system as the main vehicle for supporting business

has remained constant since 1984, the details of such

1. For a more detailed description of the provisions of the tax system

discussed in this study, see Senate Committee on the Budget, Tax

Expenditures: Compendium of Background Material on Individual

Provisions, S. Prt. 103-101, prepared by the Congressional Research Service (December 1994). Estimates of tax expenditures are

based on Joint Committee on Taxation, Estimates of Federal Tax

Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways and Means and the Committee on Finance (November 9, 1995).
18 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table 1.

Federal Expenditures and Credit Activity 

That Support Business, 1995-1999 

(In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 27.9 29.7 30.1 30.2 30.3

Credit Programs 2.2 2.1 2.3 2.3 2.5

Credit Activity

Direct Loan 

Obligations 7.3 6.9 a a a

Loan Guarantee 

Commitments 33.2 33.5 a a a

SOURCE: Congressional Budget Office.

a. The Congressional Budget Office prepares estimates of most

credit activity only for the current and the next fiscal year.

support have changed substantially. Most important,

the Tax Reform Act of 1986 eliminated the investment tax credit, which was one of the largest business preferences. In addition, the treatment of asset

depreciation has changed so as to eliminate the previously notable difference in the treatment of different

categories of assets, rendering the tax system much

more neutral. Those changes are discussed at length

in the next chapter. Finally, many of the smaller

preferences have been modified or limited, either by

tax reform or budgetary pressures.2

Depreciation of Capital Assets 

in Excess of the Alternative 

Depreciation System

The subsidy provided by the regular system of accounting for asset depreciation is, in essence, an

interest-free loan to businesses. The cost of an asset

designed to produce income over several years would

normally be deducted over the useful life of the asset;

each year’s deduction would represent the decline in

the asset’s value. The regular system, however, accelerates those deductions in two ways: by allowing

firms to deduct more of the asset’s cost in the early

years, and by depreciating the asset over a period that

is shorter than the useful life of most such assets. By

taking the deduction up front, firms show lower taxable income in the near term but higher taxable income in later years, when the cost of the asset has

been largely or completely written off. Thus, a firm

will be able to defer the payment of taxes; that deferral is equivalent to an interest-free loan.

The revenue loss from accelerated depreciation is

estimated to be $32.2 billion in 1995. CBO derived

that estimate by adding together three tax expenditures that the Joint Committee on Taxation reports

separately: the depreciation of equipment ($25.6 billion), the depreciation of buildings other than rental

housing ($4.9 billion), and the depreciation of rental

housing ($1.7 billion). Combining those tax expenditures simplifies exposition but does not raise the

problems of interaction to the same degree as adding

all tax expenditures.

For equipment, the estimate of the tax expenditure reflects both the shortened asset lives and the

accelerated depreciation under the regular system

relative to the longer asset lives and nonaccelerated

(straight-line) depreciation under the alternative system (the Asset Depreciation Range System). For 3

structures, the revenue loss reflects only the shorter

asset life allowed by the regular system. Given that

assets lose more of their value in the early years,

nonaccelerated depreciation overstates a firm’s economic income and hence its tax liabilities.

Reduced Rates on the First $10 Million

of Corporate Taxable Income

The U.S. tax code provides a graduated tax rate structure for corporations with less than $10 million in

taxable income. Some provision of lower marginal

rates on the lowest corporate income brackets has

2. For a detailed discussion of the changes stemming from tax reform,

see Congressional Budget Office, The Effects of Tax Reform on Tax

Expenditures (March 1988).

3. With straight-line depreciation, the asset value is divided by the

number of years over which it is to be depreciated. That amount is

the annual depreciation of the asset.
CHAPTER THREE FEDERAL ACTIVITIES THAT SUPPORT BUSINESS 19

been in the tax code since 1936. The lower rates are

generally justified as a way of promoting small businesses, which some analysts believe create more jobs

for the economy. This tax preference is often compared with the graduated income tax on individuals,

but the two situations are not comparable. The lower

rate on corporate income cannot be justified on ability to pay, because the owner of a small corporation

may be very well off. Furthermore, corporations

with a large sales volume may have a low level of

taxable income.

Although the graduation of rates started out quite

simply, the Congress and the Internal Revenue Service have introduced complications in the rules governing those provisions in an effort to limit the ability

of larger corporations to fragment their operations

and thereby take advantage of this provision. Those

Table 2.

Selected Federal Tax Expenditures That Support Business, 1995-1999 

(In billions of current dollars)

1995 1996 1997 1998 1999

Depreciation of Capital Assets in Excess 

of Alternative Depreciation System 32.2 31.7 30.8 28.0 28.0

Reduced Rates on the First $10 Million 

of Corporate Taxable Income 3.9 4.1 4.3 4.5 4.7

Tax Credit for Corporations with Income from 

U.S. Possessions (Section 936 income) 3.7 3.8 4.0 4.1 4.2

Exception to the Source Rule for the

Sale of Inventory Property 3.5 3.6 3.7 3.7 3.8

Tax Credit for Low-Income Housing 2.2 2.6 2.9 3.4 3.7

Special Treatment of Life Insurance 

Companies’ Reserves 2.1 2.3 2.5 2.7 2.9

Expensing of Research and Development Costs 2.0 2.1 2.1 2.2 2.3

Deduction of Unpaid Property Loss Reserves for 

Property and Casualty Insurance Companies 1.6 1.8 1.9 2.1 2.3

Expensing of up to $17,500 of Depreciable 

Business Property 1.5 1.1 0.8 0.4 0.1

Exclusion of Income of Foreign Sales 

Corporations 1.4 1.5 1.5 1.5 1.6

SOURCE: Congressional Budget Office based on Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-

1999, prepared for the Committee on Ways and Means and the Committee on Finance (November 9, 1994).

NOTE: See Appendix A for a complete list of tax expenditures that support business.
20 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

complications result in higher marginal rates for

firms as they shift into higher income categories.

Tax Credit for Corporations with 

Income from U.S. Possessions

U.S. tax law gives U.S. corporations a credit to offset

some of their U.S. tax liability on income from business operations and certain financial investments in

U.S. possessions, such as Puerto Rico and the Virgin

Islands. This credit has long been part of U.S. policy. JCT estimates that it will cost $3.7 billion in

1995.

In its early years, the credit had the general effect

of exempting qualifying corporate income generated

in Puerto Rico and the Virgin Islands and other U.S.

possessions from federal taxes. The Omnibus Budget Reconciliation Act of 1993 scaled back the credit

effective January 1994. U.S. corporations may now

choose between limits based on a percentage of the

credit that would have been allowed before the act

and limits based on economic activity in the possession. Under the first alternative, the allowable credit

gradually declines from 60 percent of the prior-law

credit in 1994 to 40 percent in 1998 and thereafter.

Under the second alternative, the credit is limited to

the sum of 60 percent of wages and fringe benefits

paid in the possession and a specified percentage of

deductions for depreciation.

To qualify, a corporation has to be actively in the

business for which it receives a credit. It also has to

have a U.S. charter and obtain roughly 80 percent of

its income from activities in those U.S. possessions.

Pharmaceutical companies claim half the credits.

Exception to the Source Rule for 

the Sale of Inventory Property

The tax code’s rules regarding the source of inventory sales interact with the foreign tax credits in such

a way as to exempt from U.S. taxation a portion of a

firm’s export income. U.S. tax law limits the portion

of foreign taxes that firms can claim as a credit

against their U.S. tax liabilities; foreign taxes above

the limit cannot be credited and thus become excess

credits. If firms with excess credits shift income

from their U.S. operations to foreign operations,

however, they can then use the excess credits. JCT

estimates that the revenue loss from this tax expenditure will be $3.5 billion in 1995.

The tax code’s treatment of inventory sales facilitates this shift in income from domestic to foreign

operations. In most cases, sales are credited to the

seller’s country of residence. Under that general

rule, exports from the United States count as U.S.

income. However, sales of inventory property are

treated differently. Income from inventory sales is

viewed as coming from the country where the sale

occurs. Income generated by the sale of inventory

that is manufactured in the United States and sold

abroad by a taxpaying company is treated as having a

divided source, half U.S. and half foreign. The foreign component of that income may be used against

the excess credits.

Tax Credit for Low-Income Housing

The tax credit for low-income housing encourages

individuals and corporations to invest in low-income

housing. Taxpayers can receive a credit for new construction and for rehabilitating older buildings. The

law requires that the tax credit be paid annually over

10 years. The present value of that stream of credits

can equal up to 70 percent of the depreciable costs

incurred in new construction of low-income housing

units that does not receive other federal subsidies.

Rehabilitated units and subsidized units receive credits with a present value of up to 30 percent of the depreciable basis of the units. To qualify for the credit,

the housing units in question must meet requirements

concerning tenants’ income. If the units are sold or

change in purpose within a specified period, the owners have to repay a portion of the credit. JCT estimates that in 1995 the low-income housing credit

will cost $2.2 billion.

Special Treatment of Life Insurance

Companies’ Reserves

Normally, businesses deduct expenses from their income when the business becomes liable for paying
CHAPTER THREE FEDERAL ACTIVITIES THAT SUPPORT BUSINESS 21

them. The tax code, however, allows life insurance

companies to deduct additions to their reserves for

future liabilities originating from life insurance policies. Thus, they can offset current income with future liabilities. JCT estimates that this tax expenditure will cost $2.1 billion in 1995.

Reserve accounting, which forms the basis of this

tax expenditure, is the standard method of accounting

for regulatory purposes when dealing with insurance

companies. The primary goal is to ensure that an

insurance company will have sufficient reserves to

meet its commitments. The understatement of current income that results when future liabilities are

used to offset current income is regarded as merely

prudent.

When the income tax system is added into the

equation, however, understating current income produces a tax advantage. The combination of the tax

benefits and some tax advantages that accrue to individuals makes life insurance a more attractive investment than it would be without the tax system.

Expensing of Research and 

Development Costs

Firms are allowed to deduct the entire cost of certain

research activities--mainly labor and materials--in the

year they are undertaken, even though the activities

are designed to produce income over a number of

years. As with excess depreciation of physical assets, this early deduction of costs represents the

equivalent of an interest-free loan to the taxpayer.

The provision was first included in the Internal Revenue Code of 1954 to encourage and clarify the tax

treatment of research and development expenditures.

JCT estimates that the provision will cost $2 billion

in 1995.

Deduction of Unpaid Property Loss 

Reserves for Property and Casualty 

Insurance Companies

The tax code allows property and casualty insurance

companies to deduct the discounted value of the estimated losses they will be required to pay in the future

under insurance policies now in force, including

claims in dispute. This provision of the law permits

them to deduct future expenses from current income

and thereby defer tax liability. By contrast, most

businesses calculate taxable income by deducting

expenses as they become due. As with excess depreciation, this early deduction of costs represents the

equivalent of an interest-free loan to the taxpayer.

JCT estimates that this provision will cost the Treasury $1.6 billion in 1995.

Although CBO follows convention and includes

this deduction as a tax expenditure, sound arguments

can be made opposing such inclusion. Because the

insurance industry is based on its ability to estimate

future payments on current policies, deducting those

payments, properly measured and discounted, from

current income seems appropriate. Indeed, federal

budgeting practice for credit programs scores the expected present value of a contingent liability, such as

a loan guarantee, when it is incurred, not when it is

paid. From that viewpoint, only the deduction of

payments on contested claims is a tax expenditure.

In contrast, federal noncredit programs, such as some

insurance programs, operate on a cash basis.

Expensing of up to $17,500 of 

Depreciable Business Property

All businesses can deduct as an expense up to

$17,500 of the cost of a capital asset in the year it is

put into place. Normally, businesses would take the

entire cost of a capital asset and depreciate it over

several years. Because the favorable treatment begins to phase out when the total amount of capital

assets put in service exceeds $200,000 in any year,

this provision is intended to reduce the tax burden on

small businesses. JCT estimates that this provision

will cost $1.5 billion in 1995.

Exclusion of Income of Foreign 

Sales Corporations

Provisions in the U.S. tax code permit U.S. firms to

exempt from U.S. taxes part of the income they derive from exports. One way a U.S. firm can take ad-
22 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

vantage of those provisions is to form a subsidiary

foreign sales corporation (FSC) in a qualifying country or possession and meet certain requirements that

ensure a minimal presence in a foreign location. The

tax code exempts a portion of the FSC’s own export

income from taxes, and the FSC can pass the tax savings back to its parent corporation. JCT estimates

that the preference for FSCs will cost $1.4 billion in

1995.

Spending Programs 

All federal spending programs that support business

will cost an estimated $27.9 billion in 1995, with 10

programs accounting for almost three-quarters of that

amount (see Table 3). Such spending has increased

by two-thirds in nominal terms since 1984 but has

grown by only one-ninth if inflation is taken into acTable 3.

Selected Federal Spending Programs That Support Business, 1984 and 1995 

(Outlays in billions of 1995 dollars)

1984 1995

(Actual) (Estimated) a

Commodity Credit Corporation 10.6 7.9 b

National Institutes of Health--Applied Biomedical Research 2.0 3.7 c

Department of Energy--Technology Development for New Energy Sources 4.0 3.4 d

Conservation Reserve Program e 1.9

Cooperative State Research, Education, and Extension Service 0.8 0.9 f

Bureau of Reclamation 1.2 0.8 g

Agricultural Research Service 0.7 0.8

Federal Crop Insurance Corporation 0.7 0.6h

Community Development Block Grants 0.6 0.5

Technology Reinvestment Project i 0.5

Other 4.5 7.0

Total 25.0 27.9

SOURCE: Congressional Budget Office.

NOTE: See Appendix B for a complete list of spending programs that support business.

a. Adjusted for inflation using the fixed-weighted price index. 

b. Spending for 1984 includes outlays for the export credit program; spending for both 1984 and 1995 excludes salaries and expenses.

c. The National Institutes of Health was not included in the 1984 tally but is presented here for comparability.

d. Excludes cleanup of Department of Energy facilities and energy conservation grants.

e. The Conservation Reserve Program was set up in 1985.

f. In 1984, the Extension Service and the Cooperative State Research Service were separate entities.

g. The Bureau of Reclamation was not included in the 1984 tally but is presented here for comparability.

h. Excludes $68 million in salaries and expenses, which are in the consolidated Farm Service Agency.

i. The Technology Reinvestment Project was set up in 1992 and 1993.
CHAPTER THREE FEDERAL ACTIVITIES THAT SUPPORT BUSINESS 23

count; in 1984, the programs listed in this category

cost $25 billion in 1995 dollars. The National Insti- 4

tutes of Health and the Conservation Reserve Program are the largest contributors to this growth. Several of the largest programs included in 1984 have

decreased substantially.

Commodity Credit Corporation

The programs of the Commodity Credit Corporation

(CCC) are designed to enhance farm income and support prices and to stabilize the market for agricultural

products. Agricultural commodity price supports and

related programs account for most of the CCC’s outlays. The CCC provides support through loans, purchases, and other means. Price supports are mandatory for wheat and feed grains, cotton, milk, sugar,

and a variety of other agricultural products.

Nonrecourse loans are an important instrument in

the CCC program. Any farmer who participates in an

annual price support program is eligible to receive a

loan equal to the value of that year’s crop; the value

is set at a federally determined support price. At the

end of the loan period, which is typically nine

months, the farmer must either pay back the loan plus

interest or--with no penalty, or recourse--deliver the

crop to the CCC.

Commodity loans thus act as price guarantees to

the farmer. In essence, the federal government pays

for the crop but gives the farmer the option of selling

it privately at a higher price within nine months and

returning the cash the government originally paid,

plus interest. As long as the market price is above

the support price, the farmer will probably sell the

crop in the open market and repay the loan.

In the earlier years of the program, the support

prices were set high enough that many farmers delivered their crops to the CCC. In recent years, however, the support prices have been set low enough in

relation to the market price that very few farmers

have done so, particularly those who grow cotton and

rice. If the world price of those two crops falls below

the U.S. price, the farmers are allowed to pay back

the loan at the world price, further discouraging them

from ceding their crop to the government.

CBO included the CCC commodity loans and

their associated costs with spending programs rather

than with credit programs because the Federal Credit

Reform Act of 1990 exempted them from the budgeting conventions used for other credit programs. Consequently, CBO makes no present-value calculations

of the subsidy value implicit in the loan. Indeed, because the interest rate is above the federal borrowing

rate, there might be no legal subsidy to assign to the

program, even though that rate is probably well below the farmers’ borrowing rate. Thus, the basis for

calculating the federal costs associated with nonrecourse loans is very different from that of other credit

programs. The CCC’s export guarantees, however,

are not exempt from credit reform and are discussed

below in the credit section.

In 1995, CCC programs are estimated to cost

$7.9 billion, down from $10.6 billion in 1984 adjusted for inflation. In addition to the $7.9 billion, 5

the CCC incurs other costs. The salaries and expenses of the federal employees administering the

CCC programs, for example, are paid by the Farm

Service Agency. In 1995, those administrative costs

will total an estimated $725 million. For future

years, those costs will be combined with the salary

costs of the Federal Crop Insurance Corporation in

the Farm Service Agency, and consequently they are

not estimated here separately; however, they are included in the totals and in Appendix B.

4. To make 1984 spending comparable with 1995 spending, CBO

converted 1984 funds to 1995 dollars using the fixed-weighted

price index. That conversion provides a better measure of the allocation of resources and changes in policy.

The programs included in the 1984 and 1995 tallies overlap but are

not identical for reasons discussed in Chapter 2. The National Institutes of Health and the Bureau of Reclamation were not included

in the 1984 tally but are included here for comparability.

5. The 1984 figure includes $3.1 billion in nonrecourse and other

loans and loan guarantees. As an entitlement, the CCC’s spending

levels fluctuate with the economy, and not all changes in spending

reflect changes in policy.
24 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Applied Biomedical Research at 

the National Institutes of Health

The National Institutes of Health funds and conducts

much of the biomedical research in the United States.

NIH has almost two dozen components and institutes

that concentrate in different areas of research. In addition to funding biomedical research at hospitals and

universities, NIH also funds research on its campus

outside Washington, D.C. Seven-eighths of its funding, however, supports extramural research. 6

Most of the research funded by NIH involves

basic and academic research, but a substantial portion

supports applied biomedical research and clinical

development, which are of near-term use to firms and

doctors in health and related lines of business. Based

on previous patterns of research funding, CBO assumes that $3.7 billion of the $11 billion NIH is estimated to spend this year will fall into that category.

NIH uses almost a quarter of the applied research

funds, or about $1 billion, for the preclinical and

clinical development of specific pharmaceuticals. If

the same patterns had held in 1984, CBO estimates

that NIH would have spent $2 billion on applied research (in 1995 dollars).

Energy Technology R&D Activities

The Department of Energy has three major R&D programs devoted to developing new sources of energy.

Those programs will cost an estimated $3.4 billion in

1995 compared with $4 billion in 1984 (in 1995 dollars). That tally excludes the costs of cleaning up the

department’s facilities and of energy conservation

grants. (The Clean Coal Technology Program--$300

million in 1995--is included elsewhere in this tally.)

Energy supply R&D is the largest of these programs and includes R&D into nuclear energy, solar

and renewable energy sources, fusion, and some aspects of energy safety. It will cost an estimated $2.5

billion in 1995. The other two major energy R&D

programs are in fossil fuels, such as coal and oil, and

energy conservation. Each accounts for an estimated

$430 million in 1995 outlays.

Conservation Reserve Program

The Congress set up the Conservation Reserve Program (CRP) under the Food Security Act of 1985.

The CRP is intended to address erosion and environmental concerns, curb the production of surplus agricultural commodities, and support farmers’ income.

It is a successor to earlier programs, such as the soil

bank, that encouraged farmers to idle land. The CRP

will cost an estimated $1.9 billion in 1995, primarily

in rental payments for idled land.

Farmers’ participation in the CRP is voluntary.

The Department of Agriculture solicits proposals

from farmers to enter a portion of their eligible land

in the program. Land that is accepted for enrollment

is generally put under a 10-year contract that requires

farmers to remove the land from production and establish a protective cover crop. The farmers also take

a proportionate reduction in payments to which they

are entitled under the agricultural income support

programs, such as those of the CCC. The CRP pays

rent on the land and covers a portion of the costs of

the cover crop. Through 1994, approximately 36

million acres were enrolled in the CRP.

Cooperative State Research, 

Education, and Extension Service

This agency participates in a nationwide system of

research and education planning and coordination

between the Department of Agriculture and state institutions. It provides grants to land grant colleges

for their agricultural experiment stations and to scientists for research related to agriculture, plants, animals, and food. In 1995, the Department of Agriculture will spend about $930 million on the Cooperative State Research, Education, and Extension Service. In 1984, when the Cooperative State Research

Service and the Extension Service were separate entities, their combined spending totaled $830 million (in

1995 dollars). 6. National Institutes of Health, NIH Extramural Trends: Fiscal Years

1984-1993 (Bethesda, Md.: NIH, October 1994), p. 2.
CHAPTER THREE FEDERAL ACTIVITIES THAT SUPPORT BUSINESS 25

Bureau of Reclamation

Since its founding in 1902, the primary purpose of

the Bureau of Reclamation has been to provide water

for agriculture in the western United States. Although its focus has broadened to include electricity,

agricultural water remains its primary mission. To

accomplish that mission, the bureau builds and maintains hydroelectric dams, reservoirs, canals, pipelines, pumping stations, and other irrigation infrastructure. The largest project under construction is

the Central Arizona Project, which will use water

from the Colorado River to irrigate fields in Central

Arizona and provide municipal supplies to Phoenix

and Tucson. CBO estimates that construction of new

facilities and operations and maintenance will cost

the bureau $780 million in 1995.

Although most infrastructure is excluded from

this tally of business support, the Bureau of Reclamation’s projects are dedicated primarily to providing a crucial input (water) into a type of business (agriculture). Other agencies may have some infrastructure projects that help business, but they typically do

so incidentally or as a small percentage of their overall budget. By contrast, the bulk of the bureau’s projects are designed to provide water for agriculture. In

1990 and 1991--the last year for which data are available--85 percent of the water the bureau delivered

went to agricultural irrigation. Furthermore, even 7

though the bureau sells electrical power, it does so

after subtracting the cost of the electricity needed to

pump the water. Given this pattern of investment

and output, CBO included the bureau in its tally of

business support.

Some analysts may disagree with CBO’s classifying the Bureau of Reclamation as business support,

because in recent years the bureau has broadened its

mission to include other goals, including environmental and wildlife management and recreation.8

Lacking specific data on how those newer goals have

affected budget outlays, CBO has chosen to continue

to count the bureau’s spending as business support.

To the extent that the newer missions drive the budget, this tally will overstate that support.

Agricultural Research Service

The Agricultural Research Service (ARS) funds research in areas of interest to agricultural producers,

including soil and water conservation; plant science

and productivity; animal science; food safety, processing, and delivery; and human nutrition. The aim

of such research is to provide the country with a safer

and more economical food supply and to provide

producers with technologies to supply food products

on a competitive basis. The ARS will spend an estimated $760 million on such research in 1995, up

from an inflation-adjusted $720 million in 1984.

(The Federal Crop Insurance Reform and Department

of Agriculture Reorganization Act of 1994 made the

National Agricultural Library part of the ARS, and

CBO has adjusted the 1984 expenditures to reflect

that change.)

Federal Crop Insurance Corporation

The Federal Crop Insurance Corporation (FCIC) is a

wholly owned government corporation that insures

crop producers against unavoidable losses or uncontrollable events. Farmers can claim losses caused by

natural hazards such as weather, floods, and pests but

not those resulting from bad or negligent farming

practices. The premiums farmers pay are subsidized

and cover all types of agricultural commodities from

almonds to wheat. In 1995, the FCIC will spend an

estimated $640 million on insurance, which is similar

to its spending in 1984 ($650 million in 1995 dollars). (The 1995 estimate does not include roughly

$68 million in salaries and expenses that are included

in the consolidated Farm Service Agency. The Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 made the FCIC

8

7. Department of the Interior, Bureau of Reclamation, Water, Land,

and Related Data: 1991 Summary Statistics (Denver, Colo.: Bureau

of Reclamation, no date), p. 1.

8. Department of the Interior, Bureau of Reclamation, Reclamation’s

Strategic Plan: A Long-Term Framework of Water Resources Management, Development, and Protection (June 1992).
26 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

part of the consolidated Farm Service Agency, but

the FCIC retains its status as a wholly owned government corporation.)

In late 1994, the FCIC was modified to provide a

base level of catastrophic coverage to farmers. That

coverage is completely subsidized except for a small

handling fee, and additional subsidized coverage is

also available. CBO estimates that those changes

will increase the subsidy level of the insurance from

$235 million in 1994 to $690 million in 1995. The

insured value of crops is expected to rise from $12.6

billion in crop year 1994 to $21 billion in crop year

1995. 9

Community Development Block Grants

The federal government uses Community Development Block Grants (CDBGs) to stimulate economic

development. First authorized under the Housing

and Community Development Act of 1974, the grants

provide flexible community development support to

units of local government. Activities related to housing rehabilitation and public works receive the largest share of grants. A smaller portion of CDBG

funds supports businesses. CBO estimates that the

CDBG program will spend $510 million on support

for local business development in 1995, down marginally from $580 million in 1984 (in 1995 dollars).

Technology Reinvestment Project

The Technology Reinvestment Project (TRP) is designed to integrate the military and commercial sectors of the economy. It consists of eight statutory 10

programs that fund awards competitively to organizations that develop dual-use technologies, deploy existing technologies and transfer effective business

practices to firms, or build and promote college and

university curricula in manufacturing education. All

eight programs require award recipients to share

costs. The TRP will cost an estimated $500 million

in 1995. (This estimate does not reflect the $300

million rescission that was passed after the estimate

was made.) The project did not exist in 1984.

The end of the Cold War has reduced the need

for a defense industrial base of the size that existed

during the previous four decades. Given the new,

smaller size of the defense industrial base, many analysts feel that it will no longer be able to keep U.S.

weapon systems at the forefront of technology. In

addition, civilian technology in some cases is clearly

superior to military technology. Consequently, the

TRP was established to encourage defense firms to

use commonly available technology for weapon systems and to use civilian markets to maintain their

technological capabilities.

Credit Programs

A small number of programs dominate federal credit

activity in support of business. Those programs include the Export-Import Bank, the Small Business

Administration, the Commodity Credit Corporation,

and the Rural Utilities Service. Since 1990, credit

reform has covered all of those programs, with one

exception: the CCC’s commodity loans are essentially an entitlement, are therefore not subject to

credit reform, and are treated in this study as a spending program rather than as credit activity.

A combination of budgetary pressures and credit

reform has served to reduce loans, which are more

expensive, while allowing guarantees, which are usually less expensive initially, to grow. The volume of

federal loans to business has fallen since 1984, from

$11.6 billion (in 1995 dollars) to $7.3 billion in 1995.

New loan guarantee commitments, by contrast, have

risen from $22 billion in 1984 to $33.2 billion in

1995 (see Table 4 for some of the largest credit programs). Federal credit programs that may have been

substantial in 1984 but that no longer contribute

much to the budget deficit are listed in Appendix C.

As noted in Chapter 2, measuring the cost of

credit programs in 1984 is problematic. CBO used

9. A crop year signifies the year in which a crop is brought to market

and does not necessarily correspond to fiscal or calendar years. It

also varies by crop.

10. For a detailed description of the TRP, see Congressional Budget

Office, The Technology Reinvestment Project: Integrating Military

and Civilian Industries, CBO Paper (July 1993).
CHAPTER THREE FEDERAL ACTIVITIES THAT SUPPORT BUSINESS 27

net program outlays for the 1984 figures and administrative and subsidy costs for the 1995 figures. For

that reason, historical comparisons of program costs

for individual programs will not be made. Loan and

guarantee levels illustrate the general trend sufficiently.

Export-Import Bank

Among the most expensive credit programs for the

federal government to run are those of the ExportImport Bank. Eximbank promotes U.S. exports by

providing loans and loan guarantees to foreign purchasers of U.S. goods. The annual volume of Eximbank’s loans has more than doubled since 1984, from

$2.1 billion (in 1995 dollars) to $4.6 billion in 1995.

Loan guarantee commitments have also risen, from

$10.4 billion to about $14.3 billion. Eximbank’s subsidy and administrative outlays for 1995 are estimated to total $545 million.

The direct loan program provides loans at belowmarket interest rates to finance foreign purchases of

U.S. goods. The loan guarantees encourage commercial banks to extend credit to buyers by reducing the

risk inherent in financing exports. The charges on

the guarantees do not fully compensate the federal

government for its contingent liability.

Table 4.

Selected Federal Credit Programs That Support Business, 1984 and 1995 (In billions of 1995 dollars)

Loan Subsidy and

Direct Loan Guarantee Administrative

Obligations Commitments Outlays

1984 1995 1984 1995 1984 1995 a a

Export-Import Bank 2.1 4.6 10.4 14.3 b 0.5

Commodity Credit Corporation 0.2 0 6.1 3.8 b 0.4 c

Agricultural Credit Insurance Fund 5.8 0.6 0.6 1.4 b 0.4

Small Business Administration 0.7 0.7 4.4 9.7 b 0.6

Rural Utilities Service 2.5 1.1 0 0 b 0.1 d

Other 0.1 0.3 0.6 4.1 b 0.2

Total 11.6 7.3 22.0 33.2 b 2.2

SOURCE: Congressional Budget Office.

NOTE: See Appendix C for a complete list of credit programs that support business.

a. Adjusted for inflation using the fixed-weighted price index.

b. CBO did not calculate subsidies for 1984.

c. Includes only the CCC's export credit program, not its commodity loans.

d. The Congress merged the Rural Electrification Administration and some of the Department of Agriculture's rural development grants into the

Rural Utilities Service in 1994.
28 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

CCC Export Loans Program

The Commodity Credit Corporation promotes the

export of agricultural commodities through a variety

of means. The export credit program of the CCC is

subject to the Federal Credit Reform Act’s rules on

budgeting and so is included here. In 1995, this program will provide an estimated $3.8 billion in new

loan guarantee commitments at a cost of $370 million to the taxpayer in subsidy and administrative

costs. In 1984, it had $200 million in new direct loan

obligations and $6.1 billion in new loan guarantee

commitments (in 1995 dollars).

Agricultural Credit Insurance Fund

The Agricultural Credit Insurance Fund (ACIF) provides loans and loan guarantees for farm ownership

and operating expenses, soil and water conservation

and development, irrigation, drainage projects, and

other agricultural endeavors. CBO estimates that

outlays for subsidies and administrative costs will be

$390 million in 1995. The volume of new direct

loans has dropped substantially, from $5.8 billion in

1984 (in 1995 dollars) to roughly $600 million in

1995. New loan guarantee commitments have risen,

however, from $640 million in 1984 to $1.4 billion in

1995. (The Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994

moved ACIF into the newly organized Farm Service

Agency. Because ACIF accounts are still separate,

however, the 1984 spending is generally comparable.)

Small Business Administration

The Small Business Administration (SBA) provides

both direct loans and loan guarantees to qualified

small businesses. Its lending objectives are to promote small businesses generally, aid economically

disadvantaged groups, and help small businesses and

households recover from natural disasters. All of its

credit programs offer terms that are more generous

than would typically be available to small businesses.

For example, the SBA extends credit for up to 25

years. Similarly, the loan guarantee program offers

interest rates that are only 2.5 percent above the

prime rate. The SBA also lends directly to businesses located in high-unemployment or low-income

areas and to businesses owned by designated groups.

CBO’s estimates assume that roughly one-third of the

outlays associated with the disaster loan programs

are for businesses because businesses account for

one-third of all disaster loans. (Those estimates do

not include the SBA’s noncredit programs, estimated

at $300 million in 1995.)

The 1995 outlays for the subsidy and administrative costs associated with the SBA’s credit programs

total $640 million, which includes $75 million appropriated as contingency emergency funds. CBO estimates that the SBA will provide almost $700 million

in new loan obligations and $9.7 billion in new loan

guarantee commitments in 1995. In 1984, the Small

Business Administration provided $700 million in

loan obligations and $4.4 billion in loan guarantee

commitments (in 1995 dollars).

Rural Utilities Service

In 1994, the Congress merged the Rural Electrification Administration (REA) and some of the Department of Agriculture’s rural development grant programs into the Rural Utilities Service. Since the

1930s, the REA has provided credit to rural cooperatives for rural electrification and telephone service.

The REA has experienced the most precipitous decline among credit programs, although the loan levels

had begun to decline well before credit reform. The

REA’s loans in 1984 totaled $2.5 billion (in 1995

dollars), compared with only $1.1 billion for the

Rural Utilities Service in 1995. Subsidy and administrative costs for 1995 are estimated to total $110

million.
F

Chapter Four

Distribution of Federal Support

Among Business Sectors

ederal support of business is distributed very

unevenly among industrial sectors and varies

in its importance to each sector. Chapter 3

viewed business support from the perspective of the

budget; this chapter views it from the perspective of

the receiving sector or industry. This analysis divides the federal activities that support business according to the sectors they target, discusses each sector's major source of federal assistance, and describes

that aid in relation to the sector's size.

In absolute terms, the agricultural sector receives

the largest amount of both spending and credit support. Half of the business-oriented spending goes to

the agricultural sector, most of it through the Commodity Credit Corporation. On the tax side, the manufacturing sector receives the largest amount of support because of its sizable investment in depreciable

assets. In credit support, it is second only to agriculture.

Relative to the size of the sector, agriculture is

also the largest recipient of business support. Federal

support for agriculture equals roughly 11 percent of

the sector's contribution to gross domestic product.

Support Targeted Toward a

Specific Business Sector

The allocation of support by sectors is extremely

rough, and details of this allocation are sensitive to

the assumptions delineated below. The allocation of

federal support among sectors, especially the allocation of tax expenditures, is therefore an illustration of

the order of magnitude of such benefits, not a definitive accounting. Nevertheless, the major aspects of

the allocations and the conclusions drawn from them

would remain roughly the same, even with changes

in many assumptions.

Major Assumptions

The Congressional Budget Office used the criteria of

the Bureau of Economic Analysis (BEA) to define

the industrial sectors. Each sector comprises many

industries, which do not share federal assistance

evenly. Thus, statements about a sector do not necessarily apply to every industry or firm within it.

Furthermore, the ultimate beneficiary of the federal program need not be in the same sector that initially receives the benefit. As a result of the competitive pressures in one sector or industry, firms in that

industry may, through price reductions, pass on all

the federal benefits to businesses in other sectors or

even to final consumers. As noted in Chapter 2, this

study analyzes the costs of providing support to business, not the organizations or people who ultimately

benefit.

In analyzing federal support for business, CBO

did not try to systematically break down spending or

credit programs that may benefit more than one sector. Rather, the study allocates support fully to the
30 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

sector or industry that receives the bulk of that support. Similarly, if the various components of a program help different sectors, CBO allocates funds to

the dominant use. In some cases, CBO could not allocate federal support because the data necessary to

do so were difficult or impossible to obtain. For instance, many of the firms aided by community development programs are in construction, trades and services, or finance, insurance, and real estate, but data

do not exist to tell precisely which industries dominate. Overall, though, finer allocation of those programs would not change the study's major analytic

conclusions.

Agriculture, Forestry, and Fisheries

Farm income maintenance programs, specifically

those of the Commodity Credit Corporation, dominate federal support for agriculture. Of the $14.7

billion the agricultural sector is estimated to receive

through spending and credit programs in 1995, the

CCC accounts for $7.9 billion. Two major credit

programs support agriculture--the Agricultural Credit

Insurance Fund and the export credits of the CCC.

Those programs account for roughly $800 million in

1995 in subsidies and administrative costs on $600

million in new loans and $5.1 billion in loan guarantees (see Table 5).

Table 5.

Targeted Federal Support for Agriculture (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 13.9 15.4 15.6 15.1 14.8

Credit Programs 0.8 0.8 0.8 0.8 0.8

Credit Activity

Direct Loan Obligations 0.6 0.6aaa

Loan Guarantee Commitments 5.1 5.6aaa

Sector-Specific Tax Expenditures

Expensing of Multiperiod Costs of Growing Timber 0.4 0.4 0.5 0.6 0.6

Cash Accounting for Agriculture 0.3 0.3 0.3 0.3 0.3

Exclusion of Cancellation of Farmers’ Indebtedness Income 0.1 0.1 0.1 0.1 0.1

Expensing of Costs of Raising Dairy and Breeding Cattle 0.1 0.1 0.1 0.1 0.1

Investment Credit and Seven-Year Amortization for Costs

of Reforestation b b b b b

Exclusion of Certain Cost-Sharing Payments b b b b b

Expensing of Costs of Soil and Water Conservation bbbbb

Expensing of Costs of Fertilizing and Soil Conditioning bbbbb

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.

b. Less than $50 million.
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 31

Manufacturing

In absolute terms, the manufacturing sector is second

only to agriculture in the level of support it receives

from spending and credit programs combined--$8.2

billion in 1995 (see Table 6). The bulk of that support is for developing and commercializing technology. The largest collections of programs are those of

the Department of Defense and the National Institutes of Health, which provide $1.8 billion and $3.7

billion, respectively. If those programs also benefit

other industrial sectors, however, assigning all of that

support to the manufacturing sector may overstate

the support that sector receives. 

The manufacturing sector receives substantial

support through credit programs, largely export credits. Credit programs are estimated to cost $0.6 billion on $4.7 billion in loans and $16.2 billion in loan

guarantees in 1995. Although export credits are primarily for manufactured goods, some credits also go

to large construction, communications, and other

business services.

On the tax side, the manufacturing sector benefits

primarily from the large, multisector tax expenditures, but it also has some targeted tax expenditures.

CBO allocated to the manufacturing sector the credit

for income from U.S. possessions because that sector

accounts for over 95 percent of business activity in

foreign countries and in U.S. possessions.

Mining

The mining sector receives very little support from

spending or credit programs, although it benefits

from some sector-specific tax provisions. The spending programs, principally those of the Bureau of

Mines, cost the federal government $200 million per

year (see Table 7). That accounting understates,

however, the extent of federal support: the Department of Energy's fossil energy research and development program, which includes R&D into better oil

recovery and other topics of interest to oil well companies, is included in the total for utilities but obviously contributes to both sectors.

Table 6.

Targeted Federal Support for Manufacturing (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 7.6 8.0 8.1 8.6 9.0

Credit Programs 0.6 0.7 0.8 0.9 0.9

Credit Activity

Direct Loan Obligations 4.7 4.5 a a a

Loan Guarantee Commitments 16.2 16.6 a a a

Sector-Specific Tax Expenditures

Tax Credit for Corporations with Income 

from U.S. Possessions (Section 936 income) 3.7 3.8 4.0 4.1 4.2

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.
32 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

The sector-specific tax expenditures are primarily for oil and gas mining--namely, deductions for the

depletion of oil and gas wells ($600 million) and for

exploration and drilling costs ($500 million). The

tax code permits firms to deduct the costs of drilling

and developing oil and gas wells in the year incurred

rather than spread them out over the life of the well.

That special treatment reduces the firms’ tax rates,

and investments in oil and gas mining are therefore

tax-preferred.

Utilities and Sanitary Services

The utilities sector is estimated to receive $3.9 billion

in support from spending and credit programs (see

Table 8). That support comes largely from the development of new energy technologies at the Department of Energy. As noted above, some of that

spending--for instance, part of fossil energy R&D--

more properly belongs in the mining sector. Other

small parts of the department’s R&D programs may

Table 7.

Targeted Federal Support for Mining (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 0.2 0.2 0.2 0.2 0.2

Credit Programs a a a a a

Credit Activity

Direct Loan Obligations aabbb

Loan Guarantee Commitments aabbb

Sector-Specific Tax Expenditures

Credit for Producing Nonconventional Fuels 1.1 1.2 1.2 1.2 1.2

Excess of Percentage over Cost Depletion

Oil and gas 0.6 0.6 0.6 0.6 0.6

Other fuels 0.2 0.2 0.3 0.3 0.3

Nonfuel minerals 0.2 0.2 0.3 0.3 0.3

Expensing of Exploration and Development Costs

Oil and gas 0.5 0.5 0.5 0.5 0.5

Other fuels a a a a a

Nonfuel minerals a a a a a

Credit for Investments in Solar and Geothermal Energy Facilities a 0.1 0.1 0.1 0.1

Credit for Costs of Enhanced Oil Recovery aaaaa

Expensing of Tertiary Injectants aaaaa

Special Rules for Mining Reclamation Reserves a a a a a

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. Less than $50 million.

b. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 33

belong elsewhere as well. The utilities sector also

receives support through credit programs--$110 million of subsidies on $1.1 billion in loans projected for

1995. On the tax side, the largest expenditure is for

the tax preference given to industrial revenue bonds

for sewage, water, and hazardous waste facilities,

estimated to cost $700 million in 1995.

Transportation

Credit and spending programs account for an estimated $680 million in federal support for the transportation sector in 1995 (see Table 9). The two main

sources of support are maritime operating differentials and aeronautical R&D conducted by the National Aeronautics and Space Administration. CBO

included all of NASA's aeronautical R&D in the

1984 study but only the portions most closely related

to commercial technology in this study.

The largest source of support from tax expenditures is the industrial revenue bonds used to build

private airports and other transportation facilities.

One could argue for excluding this tax expenditure

because it helps build infrastructure. Tax law, however, treats those bonds as private-activity bonds because a substantial portion of the benefits accrue to

private parties rather than to the public, as do highways generally. Nevertheless, although this distinction is in the tax code, excluding this tax expenditure

would not substantially alter the study's conclusions.

Table 8.

Targeted Federal Support for Utilities and Sanitary Services (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 3.8 3.9 4.0 4.0 4.2

Credit Programs 0.1 0.1 0.1 0.2 0.1

Credit Activity

Direct Loan Obligations 1.1 1.4aaa

Loan Guarantee Commitments bbaaa

Sector-Specific Tax Expenditures

Exclusion of Interest on State and Local Government Bonds

for Sewage, Water, and Hazardous Waste Facilities 0.7 0.7 0.7 0.7 0.7

Exclusion of Interest on State and Local Government Bonds 

for Energy Production Facilities 0.1 0.1 0.1 0.1 0.1

Exclusion of Energy Conservation Subsidies Provided 

by Public Utilities b 0.1 0.2 0.3 0.3

Credits for Electricity Production from Wind and Biomass b b b 0.1 0.1

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.

b. Less than $50 million.
34 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Finance, Insurance, and Real Estate

The financial sector receives most of its federal support through tax benefits. The special allowances for

life insurance companies’ reserves, for example, will

cost the federal government an estimated $2.1 billion

in 1995 (see Table 10). The financial sector also accounts for a large share of the multisector tax expenditures, such as the accelerated depreciation allowances. Although the financial sector benefits from

the commerce and community development activities

of the Community Development Block Grant program, the Small Business Administration, and the

Economic Development Administration, which are

discussed below, CBO did not allocate those benefits

to it.

Trades and Services

The federal government provides little spending or

credit support for the trades and services sector.

Multisector tax benefits and community development

programs account for most of its assistance. 

Communications

Most federal costs on behalf of the communications

sector are incurred in the form of tax expenditures,

all of which are multisector. Most of the spending

programs that support communications are multisector R&D and technology development programs,

which CBO has allocated to the manufacturing secTable 9.

Targeted Federal Support for Transportation (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs 0.6 0.6 0.6 0.5 0.5

Credit Programs 0.1 a a a a

Credit Activity

Direct Loan Obligations aabbb

Loan Guarantee Commitments aabbb

Sector-Specific Tax Expenditures

Exclusion of Interest on State and Local Government Bonds for

Private Airports, Docks, and Mass-Commuting Facilities 0.8 0.9 0.9 1.1 1.1

Deferral of Tax on Capital Construction Funds 

of Shipping Companies 0.1 0.1 0.1 0.1 0.1

Exclusion of Interest on State and Local Government Bonds 

for High-Speed Rail aaaaa

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. Less than $50 million.

b. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 35

tor. Programs of the National Institute of Standards

and Technology and the High Performance Computing and Communications program, for example, also

benefit communications services.

The only credit program designed to benefit the

communications sector is the Rural Telephone Bank.

In 1995, the bank will provide an estimated $175

million in loans. (The Rural Utilities Service also

provides credit for telephone systems.) In addition, a

large share of the Export-Import Bank's credits support the export of communications equipment and

systems.

Table 10.

Targeted Federal Support for Finance, Insurance, and Real Estate (In billions of current dollars)

1995 1996 1997 1998 1999

Program Outlays

Spending Programs aaaaa

Credit Programs a a a a a

Credit Activity

Direct Loan Obligations aabbb

Loan Guarantee Commitments aabbb

Sector-Specific Tax Expenditures

Tax Credit for Low-Income Housing 2.2 2.6 2.9 3.4 3.7

Special Treatment of Life Insurance Companies’ Reserves 2.1 2.3 2.5 2.7 2.9

Depreciation of Rental Housing in Excess of Alternative

Depreciation System 1.7 1.6 1.5 1.3 1.2

Deduction of Unpaid Property Loss Reserves for Property 

and Casualty Insurance Companies 1.6 1.8 1.9 2.1 2.3

Exclusion of Interest on State and Local Government Bonds 

for Rental Housing 0.9 0.9 0.9 0.8 0.8

Exemption of Income of Credit Unions 0.7 0.7 0.7 0.8 0.8

Special Deduction for Blue Cross and Blue Shield Companies 0.3 0.3 0.1 0.1 0.1

Bad-Debt Reserves of Financial Institutions 0.1 0.1 0.1 0.1 0.1

Adjustment of Taxable Income of Small Life 

Insurance Companies 0.1 0.1 0.1 0.1 0.1

Exclusion of Investment Income from Structured 

Settlement Amounts aaaaa

Special Alternative Tax on Small Property and Casualty 

Insurance Companies aaaaa

Tax Exemption for Certain Insurance Companies aaaaa

SOURCE: Data on spending and credit programs are from the Congressional Budget Office. Data on tax expenditures are from Joint

Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-1999, prepared for the Committee on Ways

and Means and the Committee on Finance (November 9, 1994).

a. Less than $50 million.

b. The Congressional Budget Office estimates credit activity only for the current and the next fiscal year.
36 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Construction and Other

The construction sector undoubtedly benefits from

the economic development programs described in the

next section. It also benefits from the efforts of

Eximbank, which guarantees certain construction

projects abroad. Investment credits for rehabilitating

historic and other structures also encourage construction activities.

Unallocated Spending Programs

One category of programs has not been attributed to

any specific sector: commerce and community development programs. The Small Business Administration, the Economic Development Administration,

and the Community Development Block Grant program all assist local economic development. Because those programs help firms in all sectors, allocating them to any one sector would be extremely

arbitrary. In addition, the economic development

portion of those programs is often so small and the

data on which to allocate programs so weak that dividing the programs among sectors based on historical patterns would be spuriously accurate. Furthermore, unlike tax expenditures, those programs are not

entitlements with straightforward qualification rules

that permit some allocation according to published

data. Total outlays for the three programs are estimated to be $1.8 billion in 1995. 

Tax Expenditures That 

Benefit More Than One Sector

As noted in Chapter 3, much of the federal support

flows through tax expenditures that go to more than

one sector. The largest of those expenditures is the

accelerated depreciation allowance on buildings and

equipment (the allowance on rental housing is assumed to promote the real estate sector). CBO has

allocated those multisector tax expenditures among

the major industrial sectors. The caveats presented in

the discussion of targeted support are even more relevant to the allocation of multisector tax expenditures.

Major Assumptions

One problem with using the Bureau of Economic

Analysis’s data for tax analysis is that its classification is performed on a firm, rather than an establishment, basis. A firm is a single legal entity that may

have more than one place of business (or establishment). In a classification based on a firm, the firm's

major activity defines its class even though it may

operate establishments in a variety of unrelated activities; in a classification based on an establishment,

each of the firm's separate operating units is classified according to its specific activity. Thus, the BEA

data classify integrated oil firms as manufacturing

firms because refining is classified as a manufacturing activity. Their exploration and production of oil

and gas, though more properly classified as mining

activities, are attributed to manufacturing.

Although some of the spending programs benefit

only one industry, there is often no clear record of

which firms, industries, or sectors take advantage of

which provisions of the tax law. To allocate aggregate tax expenditures among industrial sectors, analysts must make assumptions about the types of firms

that are likely to take advantage of a given provision

and in what amount. The largest of the multisector

tax expenditures are the provisions permitting the

accelerated depreciation of assets. Many of the

smaller tax expenditures also benefit more than one

sector, but allocating them all would not serve any

clear purpose.

o Asset depreciation. CBO made the simplifying

assumption that the preferences for asset depreciation would flow to sectors in proportion to their

capital stocks and used the BEA series on fixed

reproducible tangible wealth. Both the estimates

of tax expenditures and the BEA series separate

assets into equipment and structures. Revenue

losses attributed to this aspect of the tax code

arise because of the differences in tax liabilities

under conventional tax depreciation and the Asset Depreciation Range System. CBO's assumptions about the allocation of tax expenditures implies that the difference is the same for all assets.

If that implication is not true, the assumption

may introduce biases. The estimates of asset depreciation used 1993 as the base year.
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 37

Table 11.

Illustrative Allocation of Multisector Tax Expenditures by Sector (In billions of dollars)

Depreciation

of Buildings Reduced Exception

and Equipment Rates on First to Source

in Excess of $10 Million Rule for Expensing of Credit for

Alternative of Corporate the Sale of Research and Increasing

Depreciation Taxable Inventory Development Research

Sector System Income Property Costs Activities a

Manufacturing 7.8 0.3 2.8 1.5 0.8

Trades and Services 7.5 2.2 0.2 0.3 0.3

Finance, Insurance, and Real Estate 6.2 0.5 0.3 * *

Utilities and Sanitary Services 3.0 b b b b

Communications 2.0 b b 0.1 b

Transportation 1.7 0.1 b * *

Agriculture, Forestry, and Fisheries 1.1 0.1 b * *

Mining 0.7 b 0.1 * *

Construction and Other 0.4 0.5 b * *

Total 30.5 3.9 3.5 2.0 1.1

SOURCE: Congressional Budget Office.

NOTE: * = not available.

a. Depreciation of rental housing was allocated separately to the finance, insurance, and real estate sector (see Table 10).

b. Less than $50 million.

o Other assumptions. Using data from the Internal

Revenue Service, CBO allocated the loss attributable to the reduced rates on the first $10 million of corporate taxable income by assuming

that each sector's share was proportional to its

share of profitable companies in the economy.1

The IRS also publishes data on the possessions

tax credits claimed by profitable firms. Tax expenditures related to foreign sales were allocated

on the basis of the foreign tax credits claimed by

the profitable firms in a sector. CBO used the

National Science Foundation's data on industrial

R&D to allocate R&D-related tax expenditures

among sectors.2

Several sectors receive many more benefits from

multisector tax expenditures than from either targeted

tax expenditures or spending and credit programs

(see Table 11). As one would expect from the assumption, capital-intensive sectors such as manufacturing, utilities, and communications receive a disproportionate share of the accelerated depreciation

allowances.

1. Data are from Internal Revenue Service, Statistics of Income--

1991: Corporation Income Tax Returns (1994). 

2. National Science Foundation, Research and Development in Industry (1991).
38 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Manufacturing

The manufacturing sector receives a great deal more

support from multisector tax expenditures than from

other sources. CBO estimates that manufacturing

will receive $7.8 billion in accelerated depreciation

allowances alone in 1995, counting depreciation of

both buildings and equipment. By comparison, the

sum of all its spending and credit outlays is $8.2 billion. The manufacturing sector also receives most of

the support provided by other multisector tax expenditures: manufacturing firms perform roughly threequarters of the R&D conducted by private industry.

Only in the case of the reduced rates on the first $10

million of corporate taxable income is the manufacturing sector’s share small, representing just 8 percent of the profitable firms in the United States.

Trades and Services

Because this sector comprises so many firms and accounts for such a large fraction of total investment, it

receives a large share of the accelerated depreciation

benefits--$7.5 billion in 1995. This sector also is

projected to receive much of the benefit from the reduced rates on the first $10 million of corporate taxable income ($2.2 billion).

Finance, Insurance, and Real Estate

The high level of investment in this sector ensures

that it receives a substantial portion of the accelerated

depreciation allowances--$6.2 billion in 1995. Although it benefits disproportionately from depreciation allowances associated with structures--as would

be expected from the real estate sector--generally it

also does well with targeted tax support.3

Mining

The mining sector receives only a small fraction of

the accelerated depreciation allowance. The assumptions outlined above, however, do not necessarily

reflect the actual situation. As noted previously,

much of the investment in the oil and gas industry is

done through integrated oil companies, which are

classified as manufacturing firms, not as mining

companies.

Targeted Support in Its 

Industrial Context

Simply providing dollar figures for the federal support industries receive is of limited value unless one

examines the industrial context in which that support

takes place. To make the aggregate numbers more

meaningful, they must be compared with some measure of the size of the sector. This study uses federal

outlays (for spending and credit programs) or revenue losses (for tax preferences) relative to each sector's contribution to gross domestic product (GDP),

or the sector's gross product. That comparison normalizes the estimates for each sector; it does not imply that federal support causes the output in the sector.

A sector's gross product attempts to measure the

economic activity originating in a sector or industry.4

It equals the sector’s output, minus purchased inputs

and declines in inventory or work in progress. When

added together, the gross product of all sectors, including government, equals gross domestic product.

CBO used projections of nominal gross domestic

product in January 1995 to make those measurements, then calculated each sector's share of GDP

using its average share since 1990 as a weight. Although future shares may differ, such shifts are usually slow and gradual.

Comparing these estimates illustrates the level of

support going to each sector; it is not an attempt to

judge the relative impact of federal aid on the condi3. The assumptions used to allocate the tax benefits associated with

depreciation of buildings other than rental housing overstate the

benefits going to the real estate sector and understate those going to

other sectors. Apartments are included in the net assets of the real

estate sector, but the depreciation benefits accruing to investment

in apartments are broken out separately. Thus, in some sense the

assumptions permit the double-counting of apartments for the real

estate sector. However, since the tax expenditures are not added

together, that need not affect the study's major conclusions. 4. See Robert Yuskavage, "Gross Domestic Product by Industry,

1991-1992," Survey of Current Business (October 1994), p. 31.
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 39

tions of supply and demand in any industry. The relative impact is difficult to determine and is certainly

not equal to the total level contained in this study.

Furthermore, the mechanism for allocating the federal assistance among sectors is too crude to justify

any detailed policy judgments.

These estimates consequently do not imply that

reducing federal support would decrease output in the

sector by any given amount. The federal government

may play a large role in a given industry, but the industry would be dependent on this support only if no

other actor was willing to provide the same financial

capital as the federal government. Such an analysis

for each industry would carry this study farther than

its limited mission allows: it would be the first step

in determining whether the federal aid in a given instance is appropriate. If the federal government is

merely preempting private actors, then the aid may

not be important to the industry.

Outlays from Spending and 

Credit Programs

Some industrial sectors clearly receive more support

than others relative to their size (see Table 12). The

agricultural sector receives support from spending

and credit programs equal to almost 11 percent of its

gross product, compared with less than 1 percent for

the communications sector. Agriculture receives five

times as much as the next largest sector--utilities and

sanitary services--relative to its contribution to the

economy. Federal support for the utilities and sanitary services sector equals 1.9 percent of its gross

product. Although the manufacturing sector ranks

second only to agriculture in the absolute level of

support it receives, that support equals only 0.6 percent of its gross product.

Multisector Tax Expenditures

As noted above, the arithmetic sum of tax expenditures is not meaningful because their interactions are

too complex. Consequently, this section cannot mirror the analysis of the spending and credit programs.

However, the largest single tax expenditure--the accelerated depreciation of capital assets--can be

viewed relative to each sector's contribution to gross

domestic product.

Although accelerated depreciation benefits are

larger in the aggregate than the support from spending programs, they are so spread around the economy

that no single sector receives more than a small fraction of the total. By contrast with the spending and

credit support for agriculture, which equaled almost

11 percent of the gross product in that sector, the

benefits from accelerated asset depreciation are no

more than 1.5 percent of the gross product of any

sector and in most cases are less than 1 percent (see

Table 12). The primary beneficiaries are the utilities

Table 12.

Federal Business Support in an Industrial 

Context (As a percentage of each sector’s

share of gross domestic product in 1995)

Tax

Outlays Expenditures

from from

Spending Accelerated

and Credit Depreciation

Sector Programs of Assetsa

Agriculture, Forestry, 

and Fisheries 10.8 0.8

Utilities and Sanitary 

Services 1.9 1.5

Manufacturing 0.6 0.6

Transportation 0.3 0.8

Mining 0.2 0.7

Communications b 1.1

Finance, Insurance, 

and Real Estate b 0.5

Trades and Services b 0.3

Construction and Other b 0.1

SOURCE: Congressional Budget Office.

a. Includes buildings and equipment only; depreciation of rental

housing was allocated separately to the finance, insurance,

and real estate sector (see Table 10).

b. Less than 0.05 percent.
40 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

and communications sectors, which receive support

equal to 1.5 percent and 1.1 percent of their gross

product, respectively. Both sectors are capital-intensive, relatively small, and dominated by large firms.

Effects of Tax Support on 

Investment by Businesses

The tax system affects businesses in two ways. First,

it favors individual proprietorships and other enterprises organized so as to qualify for treatment under

the tax laws for individuals. (A discussion of the difference in the tax treatment of individuals and corporations, however, is beyond the bounds of this study.)

Second, the tax system treats some investments more

favorably than it treats others. Industries that invest

more heavily in the favored assets receive more support from the tax system than industries that invest in

assets that are not favored.5

One way of analyzing the effect of the tax expenditures on the recipient sectors is to observe the sectors' tax rates and see how they vary among sectors

and over time. This approach differs from that of the

previous section in several ways. The effective rate

looks at industrial support from the recipient’s point

of view, not the budget’s: it tells what something is

worth to the recipient, not what it costs the government.

Economists use effective tax rates to measure

how the tax system treats investments in different

assets. The effective tax rate measures the difference

between the before-tax and after-tax rates of return

on an investment in an asset. That measure shows

the system of incentives that the tax system is providing to investors. Everything else being equal, investments will flow disproportionately toward industries

with lower effective tax rates.

In the Tax Reform Act of 1986, the Congress and

the Administration made major changes in tax policy,

including changes in effective tax rates. The central

thrust of that law was to lower the nominal tax rates

on both individuals and corporations and to eliminate

or reduce many tax preferences. The reduction in tax

preferences increased the income base to be taxed,

which allowed nominal rates to be reduced while still

raising the same level of revenue.

Before 1986, the difference in the tax treatment

between categories of assets bought by corporations

was substantial, which in turn caused wide variations

in the tax treatment of corporations in different sectors. However, the tax treatment of broad categories

of corporate assets has evened out substantially since

then (see Table 13). Thus, tax reform, measured in

these broad categories of assets, decreased the average marginal tax rate from 37 percent to 33 percent

and treated most assets equally. It also narrowed the

spread of the marginal tax rates among sectors (see

Table 14).

The mining sector--most notably oil and gas

mining--was favored by the tax system before reform, and oil and gas mining remain by far the most

Table 13.

Marginal Effective Corporate Tax Rates

by Type of Asset (In percent)

Before After

Type of Asset Tax Reform Tax Reforma

Structures 54 41

Inventories 46 34

Equipment 43 30

Apartments 34 32

Land 8 30

SOURCE: Congressional Budget Office using data from Jane

Gravelle, The Economic Effects of Taxing Capital Income (Cambridge: MIT Press, 1994), Table 3.1, p.

54.

a. Calculations do not reflect the increase in the maximum corporate tax rate in 1993 from 34 percent to 35 percent.

5. The discussion in this section is largely derived from Jane Gravelle,

The Economic Effects of Taxing Capital Income (Cambridge: MIT

Press, 1994). 
CHAPTER FOUR DISTRIBUTION OF FEDERAL SUPPORT AMONG BUSINESS SECTORS 41

favored industries. By contrast, manufacturing is

still subject to unfavorable tax treatment, although

tax reform has brought it much closer to the treatment other sectors receive.

Table 14.

Marginal Effective Corporate Tax Rates

by Sector (In percent)

Before After

Sector Tax Reform Tax Reforma

Agriculture, Forestry, 

and Fisheries 52 44

Manufacturing 49 46

Trades and Services 48 46 b

Finance, Insurance, 

and Real Estate 47 40 c

Construction 38 44

Utilities and Sanitary 

Services 37 40 d

Mining 34 34 e

Transportation 34 41

SOURCE: Congressional Budget Office using data from Jane

Gravelle, The Economic Effects of Taxing Capital Income (Cambridge: MIT Press, 1994), Table 3.3 and

Table B.6.

NOTE: Calculations reflect the effects of both corporate and individual income taxes on corporate investment.

a. Calculations do not reflect the increase in the maximum corporate tax rate in 1993 from 34 percent to 35 percent.

b. The average of trades and services weighted by the capital

stock in each subsector; calculated using data from Gravelle,

Table B.6.

c. Includes rental housing only. CBO assumes that Gravelle includes finance and insurance companies in the trades and

services sector.

d. Gravelle does not give a separate rate for the communications

sector. Most analyses include communications with the utilities and sanitary services sector.

e. The average of oil and gas mining and all other mining

weighted by the capital stock in each subsector; calculated

using data from Gravelle, Table B.6.

Technology Programs

During the 1990s, federal participation in the commercialization of new technologies has been the focus of much debate. According to CBO's tally, federal agencies will spend more than $12 billion in

1995 on programs that purport to help the process of

commercializing technology.

Traditional federal missions--agriculture, energy,

and health-related R&D--account for almost threequarters of all such funding. The development of

energy technology and health-related R&D, at $3.7

billion each, are the largest areas (see Table 15). By

contrast, the development of dual-use technology by

the Department of Defense is estimated to receive

only $1.8 billion. (As stated in Chapter 2, many of

the dual-use technology programs are not new; only

the explicit recognition by policymakers of the potential effects on commercial technology is new.)

Table 15.

Federal Outlays for Technology 

Commercialization Programs in 1995 by 

Budget Function (In billions of current dollars)

Budget Function 1995

National Defense (050) 1.8

General Science, Space, 

and Technology (250) 1.1 a

Energy (270) 3.7

Agriculture (350) 1.3

Commerce and Housing Credit (370) 0.5

Health (550) 3.7

Total 12.0

SOURCE: Congressional Budget Office.

a. Includes transportation.

Appendixes

A

Appendix A

Estimated Tax Expenditures

That Support Business

tax expenditure is a loss of revenue arising

from a provision of the tax code that extends selective income tax relief to particular taxpayers--in this case, businesses. The Congressional Budget Office identified more than 60 tax expenditures that benefit businesses, whether organized

as corporations or individuals. Table A-1 lists them

by budget function.

The estimates of the tax expenditures were prepared by the Joint Committee on Taxation. JCT

made its estimates based on provisions in tax law

enacted through December 31, 1993. Since no major

changes in tax law affecting tax expenditures occurred during 1994, those estimates are still current.

The estimators do not include proposed extensions or

modifications of expiring provisions until they have

been enacted into law.
46 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table A-1.

Estimated Tax Expenditures by Budget Function (In billions of current dollars)

1995 1996 1997 1998 1999

International Affairs (150)

Exception to the Source Rule for the Sale of Inventory Property 3.5 3.6 3.7 3.7 3.8

Exclusion of Income of Foreign Sales Corporations 1.4 1.5 1.5 1.5 1.6

Deferral of Income of Controlled Foreign Corporations 1.1 1.1 1.1 1.2 1.2

Exception to Interest Allocation for Certain Nonfinancial Institutions 0.2 0.2 0.2 0.2 0.2

General Science, Space, and Technology (250)

Expensing of Research and Development Costs 2.0 2.1 2.1 2.2 2.3

Credit for Increasing Research Activities 1.1 0.7 0.3 0.1 0.1

Energy (270)

Credit for Producing Nonconventional Fuels 1.1 1.2 1.2 1.2 1.2

Excess of Percentage over Cost Depletion

Oil and gas 0.6 0.6 0.6 0.6 0.6

Other fuels 0.2 0.2 0.3 0.3 0.3

Expensing of Exploration and Development Costs

Oil and gas 0.5 0.5 0.5 0.5 0.5

Other fuels a a a a a

Exclusion of Interest on State and Local Government 

Bonds for Energy Production Facilities 0.1 0.1 0.1 0.1 0.1

Exclusion of Energy Conservation Subsidies Provided 

by Public Utilities a 0.1 0.2 0.3 0.3

Credit for Investments in Solar and Geothermal 

Energy Facilities a 0.1 0.1 0.1 0.1

Credits for Electricity Production from Wind and Biomass a a a 0.1 0.1

Credit for Costs of Enhanced Oil Recovery a a a aa

Credit for Alcohol Fuels a a a aa b

Expensing of Tertiary Injectants a a a aa

Deductions and Credits for Clean-Fuel Vehicles and 

Refueling Property a a a aa

Natural Resources and Environment (300)

Exclusion of Interest on State and Local Government Bonds for

Sewage, Water, and Hazardous Waste Facilities 0.7 0.7 0.7 0.7 0.7

Expensing of Multiperiod Costs of Growing Timber 0.4 0.4 0.5 0.6 0.6

Excess of Percentage over Cost Depletion for Nonfuel Minerals 0.2 0.2 0.3 0.3 0.3

Investment Tax Credit for Rehabilitation of Historic Structures 0.1 0.1 0.1 0.1 0.1

Investment Credit and Seven-Year Amortization for 

Costs of Reforestation a a a a a

Expensing of Costs of Exploring and Developing Nonfuel Minerals a a a aa

Special Rules for Mining Reclamation Reserves a a a a a

(Continued)
APPENDIX A ESTIMATED TAX EXPENDITURES THAT SUPPORT BUSINESS 47

Table A-1.

Continued

1995 1996 1997 1998 1999

Agriculture (350)

Cash Accounting for Agriculture 0.3 0.3 0.3 0.3 0.3

Exclusion of Cancellation of Farmers’ Indebtedness Income 0.1 0.1 0.1 0.1 0.1

Expensing of Costs of Raising Dairy and Breeding Cattle 0.1 0.1 0.1 0.1 0.1

Exclusion of Certain Cost-Sharing Payments a a a a a

Expensing of Costs of Soil and Water Conservation a a a aa

Expensing of Costs of Fertilizing and Soil Conditioning a a a aa

Commerce and Housing Credit (370)

Depreciation of Equipment in Excess of Alternative 

Depreciation System 25.6 25.6 25.2 24.5 24.7

Depreciation of Buildings Other Than Rental Housing in Excess

of Alternative Depreciation System 4.9 4.5 3.8 3.0 2.1

Reduced Rates on First $10 Million of Corporate Taxable Income 3.9 4.1 4.3 4.5 4.7

Tax Credit for Low-Income Housing 2.2 2.6 2.9 3.4 3.7

Special Treatment of Life Insurance Companies’ Reserves 2.1 2.3 2.5 2.7 2.9

Depreciation of Rental Housing in Excess of Alternative 

Depreciation System 1.7 1.6 1.5 1.3 1.2

Deduction of Unpaid Property Loss Reserves for Property 

and Casualty Insurance Companies 1.6 1.8 1.9 2.1 2.3

Expensing of up to $17,500 of Depreciable Business Property 1.5 1.1 0.8 0.4 0.1

Exclusion of Interest on State and Local Government Bonds 

for Rental Housing 0.9 0.9 0.9 0.8 0.8

Deferral of Gain on Nondealer Installment Sales 0.7 0.7 0.7 0.9 0.9

Exemption of Income of Credit Unions 0.7 0.7 0.7 0.8 0.8

Deferral of Gain on Like-Kind Exchanges 0.6 0.8 0.8 0.8 1.0

Exclusion of Interest on State and Local Government SmallIssue Industrial Development Bonds 0.5 0.4 0.4 0.4 0.3

Exception from Limitations on Net Operating Losses

for Corporations in Bankruptcy Proceedings 0.4 0.4 0.5 0.5 0.5

Special Deduction for Blue Cross and Blue Shield Companies 0.3 0.3 0.1 0.1 0.1

Amortization of Business Startup Costs 0.2 0.2 0.2 0.2 0.2

Completed Contract Rules 0.2 0.2 0.2 0.2 0.2

Permanent Exemption from Imputed Interest Rules 0.2 0.2 0.2 0.2 0.2

Adjustment of Taxable Income of Small Life Insurance Companies 0.1 0.1 0.1 0.1 0.1

Deferral of Gains from Sale of Broadcasting Facilities to

Minority-Owned Businesses 0.1 0.1 0.1 0.1 0.1

Bad-Debt Reserves of Financial Institutions 0.1 0.1 0.1 0.1 0.1

Cash Accounting, Other Than Agriculture a a a aa

Exclusion of Investment Income from Structured 

Settlement Amounts a a a aa

Expensing of Costs of Magazine Circulation a a a aa

Special Alternative Tax on Small Property and Casualty 

Insurance Companies a a a aa

(Continued)
48 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table A-1.

Continued

1995 1996 1997 1998 1999

Commerce and Housing Credit (370) (Continued)

Special Rules for Returns of Magazines, Paperback Books,

 and Records a a a aa

Tax Exemption for Certain Insurance Companies a a a aa

Transportation (400)

Deferral of Tax on Capital Construction Funds of Shipping 

Companies 0.1 0.1 0.1 0.1 0.1

Exclusion of Interest on State and Local Government Bonds 

for High-Speed Rail a a a aa

Community and Regional Development (450)

Exclusion of Interest on State and Local Government Bonds 

for Private Airports, Docks, and Mass-Commuting Facilities 0.8 0.9 0.9 1.1 1.1

Regional Economic Development Tax Incentives--

Empowerment Zones, Enterprise Communities, and

Incentives for Indian Investments 0.3 0.4 0.5 0.6 0.6

Investment Credit for Rehabilitation of Structures, Other 

Than Historic Structures a a a aa

Education, Training, Employment, and Social Services (500)

Special Tax Provisions for Employee Stock Ownership Plans 0.9 1.0 1.1 1.2 1.2

General Government (800)

Tax Credit for Corporations with Income from U.S.

Possessions (Section 936 income) 3.7 3.8 4.0 4.1 4.2

SOURCE: Congressional Budget Office based on Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1995-

1999, prepared for the Committee on Ways and Means and the Committee on Finance (November 9, 1994).

a. Less than $50 million.

b. In addition, the 5.4 cents per-gallon exemption from excise tax for alcohol fuels reduces excise tax receipts, net of the effect of income

taxes, by $0.6 billion in 1995 and $0.7 billion in 1996 through 1999.
T

Appendix B

Estimated Program Outlays

That Support Business

he federal government supports business

through a variety of spending programs that

either award money directly to a business or

industry or spend it on their behalf. Table B-1 lists

these programs by budget function.

The estimates of the costs of the spending programs were prepared by the Budget Analysis Division of the Congressional Budget Office. The estimates are from CBO’s March 1995 baseline and include inflation; they do not reflect legislation passed

in 1995. Most of the estimates are made at the budget account level. Estimates of program spending at

the subaccount level are consistent with the CBO

baseline for the account.
50 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table B-1.

Estimated Outlays for Spending Programs by Budget Function (In millions of current dollars)

Program 1995 1996 1997 1998 1999

National Defense (050)a

Technology Reinvestment Project 493 481 392 417 409

Manufacturing Technology 395 388 361 422 428

Computing Systems Technology 355 370 329 384 388

Materials and Electronics 268 235 208 265 289

Semiconductor Manufacturing 89 83 36 11 1

Defense Research Sciences 87 83 76 91 96

Other Dual-Use Initiatives 66 93 58 69 71

Advanced Simulation 45 18 9 7 2

General Science, Space, and Technology (250)

National Science Foundation 

High Performance Computing and Communications 261 268 276 284 292

Design, Manufacturing, and Industrial Innovation 66 67 69 71 73

Engineering Research Centers 51 52 53 55 56

National Aeronautics and Space Administration

Aeronautical Research and Development 341 352 364 376 388

Microgravity Sciences Research 130 134 138 143 148

Spacecraft and Remote Earth Application 124 128 132 137 141

High Performance Computing and Communications 75 78 80 82 85

Landsat 61 63 64 66 68

Technology Transfer 45 47 48 50 51

Centers for the Commercialization of Space 19 20 20 21 21

Space Processing 18 19 19 20 20

Energy (270)b

Energy Supply R&D 2,544 2,628 2,691 2,784 2,882

Fossil Energy R&D 432 446 460 477 493

Energy Conservation R&D 430 509 542 559 576

Clean Coal Technology 300 300 200 200 150

Uranium Supply and Enrichment Activities 102 86 67 69 72

Synthetic Fuels Corporation 41 35 20 0 0

Natural Resources and Environment (300)

Department of the Interior

Bureau of Reclamation

Construction 494 434 444 461 479

Operations and maintenance 284 293 304 315 327

Bureau of Mines 159 158 163 169 176

(Continued)
APPENDIX B ESTIMATED PROGRAM OUTLAYS THAT SUPPORT BUSINESS 51

Table B-1.

Continued

Program 1995 1996 1997 1998 1999

Natural Resources and Environment (300) (Continued)

Department of Agriculture

Conservation Reserve Program 1,858 1,848 1,922 1,575 1,367

Forest Service

Forest research 198 206 215 223 232

State and private forestry 173 181 188 195 202

Natural Resources Conservation Service--

Wetlands Reserve Program 47 88 183 116 86

Agriculture (350)c

Farm Service Agency

Commodity Credit Corporation 7,944 8,494 8,396 8,268 8,056

Salaries and expenses 934 813 846 880 915

Federal Crop Insurance Corporation 643 1,530 1,535 1,445 1,392

Cooperative State Research, Education, and Extension Service 929 956 976 1,011 1,047

Agricultural Research Service 758 777 805 838 880

Animal and Plant Health Inspection Service 443 460 478 496 517

Foreign Agricultural Service and General Sales Manager 109 112 115 119 124

Agricultural Marketing Service 50 47 49 51 53

Grain Inspection, Packers, and Stockyard Administration 23 24 25 26 27

Commerce and Housing Credit (370)

Department of Commerce

National Institute of Standards and Technology

Scientific and technical research and services

and construction of research facilities 277 327 345 356 370

Industrial technology services 180 324 476 550 569

International Trade Administration--

Operations and Administration 242 272 283 294 305

Minority Business Development Agency 42 44 46 48 50

Export Administration--Operations and Administration 38 39 44 45 47

United States Travel and Tourism Administration 17 17 18 18 19

Small Business Administration

Salaries and Expenses 308 264 274 284 295

Transportation (400)d

Maritime Administration

Operating-differential subsidies 211 167 128 46 11

Ocean freight differential 40 40 40 40 40

Office of the Secretary--Payments to Air Carriers 33 34 35 37 38

Federal Railroad Administration--Railroad 

Research and Development 25 25 24 24 24

(Continued)
52 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table B-1.

Continued

Program 1995 1996 1997 1998 1999

Community and Regional Development (450)

Department of Housing and Urban Development

Community Development Block Grants 510 562 587 608 629

Salaries and Expenses 28 38 35 36 38

Department of Commerce,

Economic Development Administration

Economic Development Assistance Programs 285 336 370 402 434

Salaries and Expenses 32 33 35 36 38

Department of Agriculture 

Rural Business and Cooperative Development Service--

Salaries and Expenses 14 15 16 16 17

Rural Business Enterprise Grants 32 45 48 50 52

Health (550)e

National Institutes of Health--

Applied Biomedical Research 3,680 3,788 3,948 4,095 4,239

SOURCE: Congressional Budget Office.

NOTE: R&D = research and development.

a. Department of Defense.

b. Department of Energy.

c. Department of Agriculture.

d. Department of Transportation.

e. Department of Health and Human Services.
F

Appendix C

Estimated Credit Activity and Outlays

That Support Business

ederal agencies provide credit to business either by making loans directly to borrowers or

by issuing guarantees that obligate the government to repay a private lender all or part of a loan

if the borrower defaults. The cost of the government's credit activity is measured by the outlays for

the subsidy and administrative costs of that activity.

Table C-1 lists these credit programs by budget function.

The estimates of the costs of the credit programs

were prepared by the Budget Analysis Division of the

Congressional Budget Office. The estimates are

from CBO’s March 1995 baseline and include inflation; they do not reflect legislation passed in 1995.
54 FEDERAL FINANCIAL SUPPORT OF BUSINESS July 1995

Table C-1.

Estimated Obligations, Commitments, and Outlays for Credit Programs by Budget Function

(In millions of current dollars)

Program 1995 1996 1997 1998 1999

National Defense (050)

Maritime Administration--Maritime (Title XI) Guaranteed Loans

Loan guarantee commitments 1,658 920 a a a

Administration and subsidy outlays 70 27 3 3 4

International Affairs (150)

Overseas Private Investment Corporation

Direct loan obligations 86 81 a a a

Loan guarantee commitments 1,899 1,794 a a a

Administration and subsidy outlays 42 75 99 110 114

Export-Import Bank

Direct loan obligations 4,567 4,380 a a a

Loan guarantee commitments 14,340 14,820 a a a

Administration and subsidy outlays 546 637 718 746 773

Energy (270)

Rural Utilities Service

Direct loan obligations 1,116 1,350 a a a

Administration and subsidy outlays 110 117 119 115 106

Agriculture (300)

Agricultural Credit Insurance Fund

Direct loan obligations 611 630 a a a

Loan guarantee commitments 1,354 1,399 a a a

Administration and subsidy outlays 393 407 423 438 456

(Continued)
APPENDIX C ESTIMATED CREDIT ACTIVITY AND OUTLAYS THAT SUPPORT BUSINESS 55

Table C-1.

Continued

Program 1995 1996 1997 1998 1999

Agriculture (300) (Continued)

Commodity Credit Corporation--Export Credit

Loan guarantee commitments 3,759 4,250 4,250 4,250 4,250

Administration and subsidy outlays 369 349 350 350 350

Commerce and Housing Credit (370)

Small Business Administration

Direct loan obligations 704 204 a a a

Loan guarantee commitments 9,679 9,496 a a a

Administration and subsidy outlays 614 467 480 497 515

Community and Regional Development (450)

Rural Telephone Bank

Direct loan obligations 175 175 a a a

Administration and subsidy outlays 11 10 11 11 11

USDA Rural Business and Cooperative Development Service--

Rural Business and Industry Loans Program

Loan guarantee commitments 505 800 a a a

Administration and subsidy outlays 17 18 20 21 22

USDA Rural Development Loan Fund

Direct loan obligations 85 90 a a a

Administration and subsidy outlays 22 34 40 47 48

SOURCE: Congressional Budget Office.

NOTE: USDA = U.S. Department of Agriculture.

a. The Congressional Budget Office prepares estimates of most credit activity only for the current and the next fiscal year.