1

BACKGROUND

PAPER Reducing the Federal Budget:

Strategies and Examples

February 1980

Congress of the United States

Congressional Budget Office
REDUCING THE FEDERAL BUDGET:

STRATEGIES AND EXAMPLES

The Congress of the United States

Congressional Budget Office

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

Washington, D.C. 20402

CONGRESSIONAL BUDGET OFFICE Alice M. RIvlIn

U.S. CONGRESS Director

WASHINGTON, D.C. 20515

ERRATA SHEET

REDUCING THE FEDERAL BUDGET

STRATEGIES AND EXAMPLES

Page 24, eighth line of first paragraph should read: "savings of

roughly $94 million in 1981 and $696 million over the

next five years."

Page 25, fourth line of second paragraph shoud read: "according to

CBO projections, in 1981 the CPI will increase at a slower

rate than the modified CPI."

Page 35, first line of second paragraph should read: "The Lump sum

death benefit (2,55)"

Page 90, last line of third paragraph should read: "the U.S. domestic market."

Page 92, first line of first paragraph should read: "When Social

Security benefits were first paid in the 1930s,"

PREFACE

This paper was written in response to a request by Robert N.

Giaimo, Chairman of the House Budget Committee, and seven other

Members of the Committee—Barber B. Conable, Richard A. Gephardt,

Norman Y. Minetta, Leon E. Panetta, Ralph S. Regula, Paul Simon,

and Timothy E. Wirth—for a report on the possible strategies that

could lead to a reduction in the size of the federal budget.

The report was prepared by all divisions of the Congressional

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

Faherty and Francis S. Pierce edited the manuscript and coordinated its preparation for publication. The various drafts were

typed by Norma A. Leake, Linda B. Brockman, Janet L. Fain, Shirley

Hornbuckle, Marsha L. Mottesheard, and Kathleen M. Quinn.

In keeping with CBOfs mandate to provide objective analysis,

the report contains no recommendations.

Alice M. Rivlin

Director

February 1980

iii
Congress of tlje Uniteb States

House of 3Xepre*entattoe*

, 39.C. 20515

December 20, 1979

Dr. Alice Rivlin

Director

Congressional Budget Office

Washington, D.C.

Dear Dr. Rivlin:

In a few months we will have to make difficult and complicated

decisions on the Federal budget for fiscal 1981. Faced by a

worsening economy, upward pressures on spending, strong support

for tax cuts, and major resistance to any cutbacks in programs

from affected groups, we have the duty to forge jointly a

responsible budget resolution.

As part of this effort we believe significant reductions will

have to be made in a number of Federal programs. Rather than

courting irresponsible, last minute budget cut amendments which

have not been carefully analyzed, we would prefer to prepare

systematically for these questions, taking advantage of the

best resources we have available.

We request that CBO undertake a report on the possible

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

Federal budget. This report should include among other things

an examination of programs and program areas which may have

outlived their usefulness, may be beneficial but are incorrectly

targetted. or may fund functions more appropriately handled by

other levels of government or the private sector.

CBO's analysis should include an estimate of the magnitude

of the budget saving not only in FY 1981, but in future

years, that would result from the action and the persons who

would be adversely affected by such a budget cutback.

As you are aware, effective budget strategy must take a

multiyear perspective. Therefore, we would like CBO's

study not to be confined to steps that are feasible only in

fiscal year 1981 but to look at the budget reduction issue
Dr. Alice Rivlin

December 20, 1979

Page Two

in a five year perspective.

To be of most use, we would like to have this report as

early as we can next year, before the new budget cycle

gets too far along.

Thank you for your assistance,

Sincerely vours,

Barbar B. Conable

Paul Simon Richard A. Gephardt

CONTENTS

Page

PREFACE iii

LETTER OF REQUEST iv

SUMMARY xv

CHAPTER I. INTRODUCTION 1

Recent Growth in Federal Spending 1

The Sources of Growth in

Federal Spending 4

Considerations for Cutting Back 7

CHAPTER II. STRATEGIES AND EXAMPLES 9

An Explanation of the Illustrative

Examples 10

Basis for the Savings Estimates 10

Strategy I: Management Efficiencies 11

Administrative Improvements in Public

Assistance Programs 11

Change in Trigger for Unemployment Insurance for Extended

Benefits 12

Reform of the Wage Board Pay System 13

Elimination of World War II

Destroyers 14

Elimination of Certain GI Bill

Benefits 15

Restructuring of Military Retirement

Pay 16

Change in Enlisted/Officer Ratio

in the Armed Forces 18

Elimination of Dual Pay for Reservists

Who Are Federal Employees 19

vii
CONTENTS (Continued)

Closing of the Clinch River

Breeder Reactor Program . 20

Modifications in Federal

Compensation Practices 21

Elimination of Farm

Deficiency Payments 23

Reduction of Soil and Water

Conservation Program 24

Modification of Indexation of

Federal Programs 25

Strategy II: Better Targeting 26

Modifications in Trade

Adjustment Assistance 26

Modifications in Child

Nutrition Programs . 27

Reduction of Funding for Youth

Employment Programs 29

Restructuring of College Student

Loan Programs 31

Retargeting of Basic Educational

Opportunity Grants 33

Termination of Certain Social

Security Benefits 34

Reduction of Funding for EPA

Construction Grants 36

Reduction of Funding for Impact Aid 37

Elimination of Farm Disaster

Payments 38

Strategy III: Shifting Responsibility

to State and Local Governments 39

Limiting of Federal Highway Aid 39

Elimination of the State Share of the

Land and Water Conservation Fund 41

Elimination of Urban Park

Grant Program 42

Termination of the Legal

Services Corporation 43

Reduction of Funding for

Criminal Justice Assistance 44

viii
CONTENTS (Continued)

Page

Reduction of Funding for Urban

Development Action Grants 45

Reduction in the General

Revenue Sharing Program 46

Increase of Statesf Share in

Cost of Army National Guard 47

Phasing Out of Funding

for Vocational Education 48

Reduction in Commitments for

Subway Construction 49

Strategy IV: Shifting Responsibility

to the Private Sector 50

User Charges for Coast Guard

Activities 50

Increased User Charges for Army

Corps of Engineers Waterway

Projects 51

Increased User Charges for

Airports and Airways 52

Reduced Spending for Large Airports 53

Elimination of Solar Demonstration

and Application Projects 54

Elimination of Subsidies to the

U.S. Postal Service 55

Establishment of Fees to Cover

Costs of Food Product Inspections 57

Reimbursement of Veterans

Administration by ThirdParty Insurers 58

Elimination of Operating and

Construction Subsidies for

the Maritime Industry 59

Strategy V: Revising Judgment as to

What Can Be Afforded 60

Adjustment of Social Security Costof-Living Increases: 85 Percent

of CPI Instead of 100 Percent 60

Once-a-Year Cost-of-Living

Adjustments for Federal Retirees 62

Capping of Pay Raises for Federal

White-Collar Employees 63

ix
CONTENTS (Continued)

Reduction of Funding for Community

Development Block Grant Program 64

Reduction of Support for Health

Professions Programs 65

Reduction of Funding for CETA Public

Service Employment, Title VI 66

Reduction of Funding for LowerIncome Housing Assistance Programs .... 67

Relaxation of Davis-Bacon Wage

Requirements 68

Reduction of Spending by the

Small Business Administration 69

Imposition of Fees for Outpatient

Visits at Military Hospitals 70

Reduction in Procurement of

Aegis Cruisers 71

Elimination of Procurement of

the KC-10 Tanker 72

Termination of MX Missile Program

and Expansion of Sea-Based

Deterrent 73

Elimination of the Military

Assistance Program 74

Hospital Cost Containment 75

CHAPTER III. SAVINGS ON THE REVENUE SIDE: REDUCTIONS

IN TAX EXPENDITURES AND TIGHTER EXFORCEMENT OF EXISTING LAW 77

Reduction in Tax Expenditures 78

Termination of Tax-Exempt Bond

Subsidies for Mixed Public/

Private Activities 78

Industrial Development Bonds 78

Pollution Control Bonds 80

Single-Family Housing Bonds 81

Private Hospital Bonds 82

Student Loan Bonds 83

Limiting the Exclusion from Tax of

Employer-Paid Health Insurance 84

x
CONTENTS (Continued)

Page

Reduction of Medical Expense

Deduction 85

Repeal of Percentage Depletion

Allowance for Oil and Gas 87

Repeal of Expensing of Oil and

Gas Intangible Drilling Costs 88

Repeal of Home Insulation Tax Credit .... 89

Repeal of Domestic International

Sales Corporation Provisions 90

Taxation of a Portion of Social

Security Benefits 92

Taxation of All Unemployment

Insurance Benefits 94

Increase in Tax Rates on First

$100,000 of Corporate Income 95

Limiting of Home Mortgage Interest

Deductions 97

Reduction of $100,000 Capital

Gains Exclusion on Homes Sales

by Persons Aged 55 or Over 99

Additional Withholding and Better

Enforcement 100

Institution of Withholding on

Interest and Dividend Income 100

Institution of Withholding on

Independent Contractors 101

Increase in IRS Audit and Collection

Resources 102

APPENDIX. SUMMARY TABLES OF ILLUSTRATIVE EXAMPLES

CATEGORIZED BY BUDGET FUNCTION 103

xi

TABLES

Page

TABLE S-l. ILLUSTRATIVE SAVINGS FROM CBO BASELINE

PROJECTION, BY REDUCTION STRATEGY,

FISCAL YEARS 1981-1985 xvii

TABLE S-2. ILLUSTRATIVE REVENUE INCREASES, FISCAL

YEARS 1981-1985 xxi

TABLE 1. FEDERAL ACTIVITY AS A PERCENT OF GNP,

1955-1979 3

TABLE 2. CBO BASELINE OUTLAY PROJECTIONS, FISCAL

YEARS 1980-1985 3

TABLE 3. INCOME TAX INCREASES RESULTING FROM THE

TAXATION OF HALF OF OASDI BENEFITS, BY

INCOME CLASS 93

APPENDIX TABLES

TABLE A-l. ILLUSTRATIVE SAVINGS FROM CBO BASELINE

PROJECTIONS, BY BUDGET FUNCTION, FISCAL

YEARS 1981-1985 105

TABLE A-2. ILLUSTRATIVE REVENUE INCREASES, BY

BUDGET FUNCTION, FISCAL YEARS 1981-1985 108

FIGURES

FIGURE 1. FEDERAL SPENDING INCREASES, 1966-1980 2

FIGURE 2. PERCENTAGE CHANGES IN FEDERAL OUTLAYS,

FISCAL YEARS 1970-1980 6

xiii

SUMMARY

The size of the federal government, measured by spending,

has grown from less than 18 percent of Gross National Product (GNP)

in the late 1950s to about 22 percent in recent years. Most of the

growth can be accounted for by the adoption or enlargement of

federal programs that entail benefits to individuals (for example,

Medicare), and by the rising amounts of federal aid to state and

local governments for a wide variety of public purposes.

If the Congress were to adopt no new programs, but simply

continue current programs and policies, federal spending would

probably continue to rise in real terms during the next five years,

although not as fast as GNP. The main reason for the growth is

that the number of people receiving Social Security and other

federal retirement benefits will increase. Another reason is the

probable real growth in defense spending (the projections in this

report assume funding of the real growth in the January 1979

Administration Five-Year Defense Program as modified by Congressional action on the 1980 budget).

The growth of federal spending over the years, and the

prospect that it will continue, have led to proposals for Constitutional or other restraints on Congressional appropriations.

But while unease exists over the total amount of federal spending,

there is consistent public support for the parts that make up

the total. If the total is not to grow, something must be done

about the parts.

Proposals for reducing federal spending can be grouped under

five major strategies or rationales:

o Management Efficiencies—ending duplication, ferreting

out fraud and abuse, improving program administration, and

the like.

o Better Targeting—aiming benefit payments and subsidies

at the most needy, while reducing or eliminating awards

to others.

o Shifting Responsibility to State and Local Governments—

transferring federal activities that arguably could be

performed as well or better at lower levels of government.

xv
o Shifting Responsibility to the Private Sector—reducing

or ending some of the federal subsidies that over the

years have been extended to private firms and individuals.

o Revising Judgments as to What Can Be Afforded—reversing

past policy decisions because they have proved to be

too costly in the light of changing priorities.

A long list of examples of spending reduction proposals could

be drawn up for each of the five strategies. The Congressional

Budget Office (CBO) has analyzed 56 such proposals. They are

listed by strategy, together with their estimated 1981-1985

effects on outlays, in Summary Table 1. The estimated savings

are not totaled because some of the items are alternatives to

others, and because possible ripple effects in still other programs

preclude a precise estimate of aggregate net savings.

Some federal spending takes place on the tax side of the

budget, in the form of "tax expenditures," which are special

provisions in the tax code to encourage certain kinds of activity

or to aid certain kinds of taxpayers. Because reducing tax expenditures has the same effect on the federal deficit (or surplus)

as reducing spending, CBO has analyzed 16 examples of possible

tax expenditure reductions. There are also 3 examples of revenue

gains possible through additional withholding of taxes and improved

enforcement by the Internal Revenue Service. These examples are

listed, with their revenue effects, in Summary Table 2. The tax

changes are not totaled for the same reasons applicable to the

spending reduction items.

The inclusion of an item in this study, or its omission

from it, does not imply a recommendation by the Congressional

Budget Office. The CBO does not advocate any particular size for

the budget, nor does it endorse any particular level of funding

for specific federal programs. The items discussed are simply

illustrative examples.

xvi
SUMMARY TABLE 1. ILLUSTRATIVE SAVINGS FROM CBO BASELINE PROJECTION, BY

REDUCTION STRATEGY, FISCAL YEARS 1981-1985: IN MILLIONS

OF DOLLARS

I. Management Efficiencies

Administrative Improvements

in Public Assistance Programs

Change in Trigger for Unemployment Insurance Extended

Benefits

Reform of the Wage Board Pay

System

Elimination of World War II

Destroyers

Elimination of Certain GI

Bill Benefits

Restructuring of Military

Retirement Pay

Change in Enlisted/Officer

Ratio in the Armed Forces

Elimination of Dual Pay for

Reservists Who are Federal

Employees

Closing of the Clinch River

Breeder Reactor Program

Modifications in Federal

Compensation Practices

Elimination of Farm Deficiency Payments

Reduction of Soil and Water

Conservation Program

Modification of Indexation

of Federal Programs

II. Better Targeting

Modifications in Trade

Adjustment Assistance

Modifications in Child

Nutrition Programs

School Lunches

Food Stamps

Reduction of Funding for

Youth Employment Programs

Restructuring of College

Student Loan Programs

1981

325

1,000

260

129

70

-100

16

35

220

49

0

94

3,500

150

300

1,180

547

400

1982

350

1,000

610

27

60

-90

35

39

430

148

914

128

3,500

200

325

1,312

774

800

1983

375

0

780

20

50

-60

57

42

560

263

1,049

147

5,700

250

355

1,400

842

1,100

1984

400

o~

870

31

40

-20

83

46

160

394

353

158

7,600

250

390

1,460

908

1,300

1985

440

0

950

35

30

20

110

50

80

539

111

169

9,700

250

430

1,530

983

1,200

Cumulative

Five-Year

Savings

1,890

2,000

3,470

242

250

-250

301

212

1,450

1,393

2,427

696

30,000

1,100

1,800

6,880

4,054

4,800

xvii

57-988 0-80- 2
SUMMARY TABLE 1. (Continued)

Retargeting of Basic Educa- tional Opportunity Grants

Termination of Certain Social

Security Benefits

Reduction of Funding for EPA

Construction Grants

Reduction of Funding for

Impact Aid

Elimination of Farm Disaster

Payments

III. Shifting Responsibility to

State and Local Governments

Limiting of Federal Highway

Aid

Elimination of the State Share

of the Land and Water

Conservation Fund

Elimination of Urban Park

Grant Program

Termination of the Legal

Services Corporation

Reduction of Funding for

Criminal Justice Assistance

Reduction of Funding for Urban

Development Action Grants

Reduction in the General

Revenue Sharing Program

Eliminate States

Limit Local Units

Increase of States' Share

in Cost of Army National

Guard

Phasing Out of Funding for

Vocational Education

Reduction in Commitments

for Subway Construction

IV. Shifting Responsibility to

the Private Sector

User Charges for Coast Guard

Activities

Increase User Charges for Army

Corps of Engineers Waterway

Projects

1981

100

455

0

250

0

200

147

9

250

74

7

2,440

240

190

20

10

600

980

1982

400

1,215

420

325

0

900

196

58

341

320

37

2,660

260

210

213

230

650

1,010

1983

400

2,280

732

350

560

1,600

259

111

369

488

85

2,900

290

230

457

420

700

1,070

1984

300

2,880

973

400

560

2,000

282

153

399

560

153

3,150

310

250

708

525

760

1,120

1985

300

3,150

1,030

450

560

2,100

313

166

432

606

231

3,420

340

275

966

645

820

1,200

Cumulative

Five-Year

Savings

1,500

9,980

3,155

1,775

1,680

6,800

1,197

497

1,791

2,048

513

14,570

1,440

1,155

2,363

1,830

3,530

5,380

xviii
SUMMARY TABLE 1. (Continued)

Cumulative

Five-Year

1981 1982 1983 1984 1985 Savings

Increased User Charges for

Airports and Airways

Reduced Spending for Large

Airports

Elimination of Solar Demonstration and Application

Projects

Elimination of Subsidies to

the U.S. Postal Service

Establishment of Fees to

Cover Costs of Food

Product Inspections

Reimbursement of Veterans

Administration by ThirdParty Insurers

Elimination of Operating and

Construction Subsidies

for the Maritime Industry

V. Revising Judgment as to

What Can Be Afforded

Adjustment of Social Security

Cost-of-Living Increases:

85 Percent of CPI Instead

of 100 Percent

Once-a-Year Cost-of-Living

Adjustments for Federal

Retirees

Capping of Pay Raises for Federal White-Collar Employees

Reduction of Funding for

Community Development

Grant Program

Reduction of Support for

Health Professions Program

Reduction of Funding for CETA

Public Service Employment,

Title VI

Reduction of Funding for LowerIncome Housing Assistance

Programs

Relaxation of Davis-Bacon

Wage Requirements

Reduction of Spending by the

Small Business Administration

910

100

85

1,614

310

200

130

2,700

803

950

25

50

523

100

134

50

980

200

141

1,756

320

250

160

4,800

1,044

760

140

250

572

100

144

125

1,060

300

206

1,726

331

280

189

7,600

1,086

710

290

350

630

200

153

160

1,120

400

227

1,761

343

330

221

10,600

1,141

630

420

450

689

500

160

195

1,200

500

250

1,746

356

380

254

13,900

1,212

380

530

500

758

900

168

230

5,270

1,500

909

8,603

1,660

1,440

954

39,600

5,286

3,430

1,405

1,600

3,172

1,800

759

760

xix
SUMMARY TABLE 1. (Continued)

Cumulative

Five-Year

1981 1982 1983 1984 1985 Savings

Imposition of Fees for Outpatient

Visits at Military Hospitals 76 76 76 77 77 382

Reduction in Procurement of

Aegis Cruisers 25 155 356 651 877 2,064

Elimination of Procurement of

the KC-10 Tanker 14 147 245 145 72 623

Termination of MX Missile

Program and Expansion of

Sea-Based Deterrent 873 1,507 1,574 2,035 3,905 9,894

Elimination of the Military

Assistance Programs 0 110 120 130 150 510

Hospital Cost Containment 370 1,400 3,000 5,000 7,200 16,970

xx
SUMMARY TABLE 2. ILLUSTRATIVE REVENUE INCREASES, FISCAL YEARS 1981-1985: IN

BILLIONS OF DOLLARS

Reduction in Tax Expenditures

Termination of Tax-Exempt Bond

Subsidies

Industrial development bonds

Pollution control bonds

Single-family housing bonds

Private hospital bonds

Student loan bonds

Limiting the Exclusion from Tax of

Employer-Paid Health Insurance

Reduction of Medical Expense

Deduction

Repeal of Percentage Depletion

Allowance for Oil and Gas

Repeal of Expensing of Oil and

Gas Intangible Drilling Costs

Repeal of Home Insulation Tax

Credit

Repeal of Domestic International

Sales Corporation Provisions

Taxation of a Portion of Social

Security Benefits

Taxation of All Unemployment

Insurance Benefits

Increase in Tax Rates on First

$100,000 of Corporate Income

Limiting of Home Mortgage

Interest Deductions

Reduction of $100,000 Capital

Gains Exclusion on Homes Sales

by Persons Aged 55 or Over

Additional Withholding and Better

Enforcement

Institution of Withholding on

Interest and Dividend Income

Institution of Withholding on

Independent Contractors

Increase in IRS Audit and

Collection Resources*3

1981

0.1

0.1

0.6

0.1

0.1

2.0

1.2

1.8

2.6

0.4

0.2

5.0

3.1

2.5

0.8

0.5

6.5

0.6

0.2

1982

0.3

0.1

2.1

0.1

0.1

1.7

1.3

2.1

2.7

0.4

0.6

6.0

2.9

2.8

0.9

0.5

3.3

0.6

0.7

1983

0.5

0.2

4.8

0.2

0.1

1.4

1.4

2.2

3.1

0.4

1.2

7.1

2.5

3.1

1.0

0.6

3.7

0.7

1.1

1984

0.8

0.2

8.4

0.2

0.2

1.1

1.6

2.2

3.5

0.5

1.7

8.3

2.1

3.4

1.1

0.6

4.2

0.9

1.5

Cumulative

Five-Year

Revenue

1985 Increase a/

1.1

0.3

12.0

0.3

0.2

1.0

1.7

2.5

4.0

0.5

2.0

9.6

1.8

3.7

1.3

0.7

4.6

1.1

1.9

2.8

0.9

27.9

0.9

0.7

7.2

7.3

10.8

15.9

2.2

5.6

36.0

12.4

15.5

5.1

2.8

22.3

3.9

5.3

SOURCE: Joint Committee on Taxation (JCT) staff, Department of Treasury, and

Congressional Budget Office. Many of the estimates are preliminary and

subject to change.

aj Details may not add to totals because of rounding. b/ Net increase after subtracting increased outlays for IRS budget.

CHAPTER I. INTRODUCTION

In recent years, federal spending has grown substantially—in

nominal terms, in real terms (after adjusting for inflation), and

relative to the size of the economy. The prospect that these

trends will continue has generated numerous proposals to limit the

federal budget through constitutional amendments, legislation,

modification of the Congressional Budget Act of 1974, and cuts in

existing federal programs.

This paper describes five general strategies for reducing

federal spending along with illustrative examples of each strategy.

Because nearly $200 billion a year in federal activity takes the

form not of outlays but of "tax expenditures"—that is, specially

reduced, cancelled, or deferred taxes intended to assist people in

specified circumstances or to induce taxpayers to change their

behavior—the paper also provides examples of reduced tax expenditures. As background to these strategies and examples, the

remainder of this chapter briefly describes the recent growth in

federal spending, the sources of this growth, and some considerations for cutting back federal spending.

RECENT GROWTH IN FEDERAL SPENDING

Over the last 15 years, federal spending has increased at

an average rate of 11 percent a year (see Figure 1). When the

effects of inflation are eliminated, the real year-to-year increase

in federal spending has averaged 3.6 percent. Relative to the size

of the economy—as measured by the Gross National Product (GNP)—

federal spending has also risen. Whereas federal unified budget

outlays amounted to just under 18 percent of GNP in the late 1950s,

during the last half of the 1970s they constituted 22 percent of

GNP (see Table 1). Federal receipts have also grown substantially

during the last two decades. They have not, however, grown as

rapidly as spending, and consequently the gap between the amounts

collected and spent by the federal government has been increasing.
Figure 1.

Federal Spending Increases, 1966-1980

(Annual Percentage Changes)

Perec

25

20

15

10

5

n

jnt urvyi-i-rii 10

>>!;!;!

x.;.>

1

—

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Fiscal Years

Percent

15r

1972 DOLLARS

10

-5

-10

i\\\i

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Fiscal Years
TABLE 1. FEDERAL ACTIVITY AS A PERCENT OF GNP, 1955-1979: FIVEYEAR AVERAGES, UNIFIED BUDGET

Receipts Spending

1955-1959

1960-1964

1965-1969

1970-1974

1975-1979

17.2

18.4

18.9

19.2

19.4

17.9

19.1

19.8

20.4

22.0

If current policies were to continue unchanged, and no new

programs were adopted, federal spending would nevertheless go

on growing in nominal and in real terms during the next five years

(see Table 2). This growth would be relatively modest, however,

and not as fast as the projected growth in the economy. As a

result, spending as a percent of GNP would decline substantially

from the peacetime peak of 22.6 percent reached in fiscal year

1976.

TABLE 2. CBO BASELINE OUTLAY PROJECTIONS, FISCAL YEARS 1980-1985:

IN BILLIONS OF DOLLARS

Outlays 1980 1981 1982 1983 1984 1985

In Nominal Dollars 560 619 687 750 812 883

In Constant 1972 Dollars 285 287 292 294 294 296

As Percent of GNP 22.3 22.3 22.1 21.4 20.6 20.1

SOURCE: Congressional Budget Office, Five-Year Budget Projections; Fiscal Years 1981-1985 (February 1980). Baseline

projections assume a continuation of federal programs

already legislated, but no new spending programs.
THE SOURCES OF GROWTH IN FEDERAL SPENDING

The growth in federal spending from year to year comes

from four basic sources:

o Increases in program participation caused by demographic

and economic changes;

o Adjustments made in response to inflation to maintain

program benefits and services in real terms;

o Momentum of prior program and contract commitments;

o Initiation of new programs and activities without elimination of older programs.

Under current law, the federal government is obligated to

provide benefits to all eligible persons under such entitlement

programs as Social Security, food stamps, military and civilian

retirement, and Medicare. The numbers of eligible persons, and

hence program costs, are governed by demographic and economic

factors. For example, the increase in the size of the aged

population has meant, and will continue to mean, that the numbers

of persons receiving Social Security benefits will increase. Not

only do the newcomers to eligibility each year outnumber those

who leave the roster because of death, but their entitlements are

significantly higher because their past wages, upon which Social

Security benefits are based, were higher. These two factors

alone—increasing numbers of recipients and higher compensation

histories—increased Social Security spending about $4.5 billion

between fiscal years 1979 and 1980.

During the past decade, policies have been adopted to protect

the benefits of many federal programs from being eroded by inflation. Under current law, most federal entitlement programs—

including Social Security, food stamps, federal military and

civilian retirement, Supplemental Security Income, child nutrition,

and veterans1 pensions—have their benefits explicitly adjusted for

increases in the cost of living either once or twice a year.

Spending for Medicaid, Medicare, Aid to Families with Dependent

Children, and a number of other programs is indirectly, but nevertheless automatically, adjusted for increases in inflation. Such

automatic inflation-related adjustments caused federal spending to

rise by about $14 billion between fiscal years 1979 and 1980.
Spending increases also result from the momentum of previous

program and contract commitments. In defense, program decisions are made to procure new weapons systems in one year, but

actual spending for those systems may not occur for several

years, after an extensive research and development period has

elapsed. In housing, the federal government enters into commitments to subsidize low-income housing for as long as 30 years.

The first spending for this housing may not occur until several

years after the original commitment is made because of the delays

in building the new units. About $14 billion in the growth of

federal spending between fiscal years 1979 and 1980 was caused

by the momentum of spending decisions taken in previous budget

years.

New programs represent a fourth source of increased spending. New programs have been passed in virtually every area of

federal activity. Some of the major programs that have come into

existence since the early 1960s include Medicaid, Medicare, food

stamps, General Revenue Sharing, Community Development Block

Grants, section eight housing, the Comprehensive Employment and

Training Act (CETA), Basic Educational Opportunity Grants, the

Law Enforcement Assistance Administration, Urban Development

Action grants, urban mass transit grants, agricultural deficiency

payments, and the strategic petroleum reserve.

The four sources of growth have generated very different

increases in spending in terms of the various budget functions.

During the past decade, spending for energy has increased by over

500 percent, while outlays for agriculture have grown by less than

50 percent (see Figure 2).

In conclusion, the growth and shape of the current federal

budget is largely the consequence of decisions, not of the current

Congress, but of past Congresses. The forces at work to influence

those earlier decisions (and to discourage their reversal) were

mainly three: the changing age composition of the U.S. population

since the middle of this century, about which the Congress could

do nothing; the pressures on the Congress over the same period

to adopt or enlarge the federal role in caring for the old, the

sick, the hungry, the poor, and the jobless; and the persistent

claims from states and local governments for federal help in

meeting the cost of highways, parks, sewage treatment facilities,

and innumerable other state and local activities.
Figure 2.

Percentage Changes in Federal Outlays, Fiscal Years 1970-1980

Percent

"1560"

FXI

Functions to the left of the dark bar

have a lower share of GNP in 1980

than in 1970. Those to the right of

the bar have a higher share.

Percent Change in GNP

1970-1980
CONSIDERATIONS FOR CUTTING BACK

Any attempt to reduce the growth of federal spending will

require long-term planning and budgeting and careful examination

of the candidates for reduction.

Planning Ahead. Under present legislative budgeting procedures, the Congress makes a preliminary determination in May for

the fiscal year starting October 1, then adopts a final budget

resolution just before that year begins. By then it is too late,

as a practical matter, to make any signficant change in the budget;

its size has been dictated by the state of the economy and legislation previously enacted. If the Congress is to make major

changes in the allocation of federal resources or in the extent of

federal responsibilities, it must plan them several years in

advance.

The possibility of achieving a reduced level of federal

activity would be enhanced if proposed changes were phased in

gradually rather than implemented abruptly. The lives of most

Americans are shaped by an assumption of stability in the programs and commitments of their government. When change is in

order, so is an allowance of a reasonable time to adjust to the

new arrangements. Morever, a powerful force working against any

reduction in the size of tti^federal government is the momentum

of the status quo. Every federal program is of benefit to someone

and in consequence has a vocal constituency. Proponents of change

must meet charges of heartlessness, indifference to the nation's

security, misunderstanding of the facts, and lack of principle.

Attempts to reduce federal spending should take a long-run

view for another reason. Oftentimes the savings from a legislative reduction are quite modest at the outset, becoming significant only after five years or more. Indeed, sometimes long-run

savings can be gained only by spending more in the short run.

In addition, attention should be paid to the legislative

cycle. The Congressional authorizing committees cannot and do

not deal with every subject every year. Reduction proposals

should be timed to come before the Congress when the program in

question is due for review, or when it has not been reviewed in

recent years.

Reviewing All Programs. The federal budget cannot be held

down or cut back by appealing to some simple mathematical formula.
Whatever device was used to fix an upper limit to federal spending—for example, no more than 20 percent of last year's GNP, or

year-to-year growth limited to no more than half the inflation

rate—the resulting restraints would still have to be distributed

one way or another across the range of federal activities. It

seems quite unlikely that any sizable part of the budget could be

reduced by an across-the-board cut. Furthermore, cuts cannot be

applied to interest on the national debt—or to any outstanding

contractual obligation of the federal government.

Some cuts cannot be made without reducing related government

activities; others involve possibly self-defeating actions; still

others pose particularly difficult choices. To take several

examples, 9 percent of the government's full-time permanent employees—172,000 people—are responsible for providing patient care

in the Veterans Administration (VA) hospital system; almost 90,000

are in the Customs Service and the Internal Revenue Service; and

nearly 3 percent—56,000 people—are in the Federal Aviation

Agency, most of them watching radar screens in air traffic control

centers. Unless VA patient loads were reduced—which would mean

restricting eligibility for such care—it would be a difficult

matter to defend lower staffing in the VA hospital system. Similarly, it is to be doubted that the Congress would want to vote for

less efficient collection of the taxes it has enacted, or to invite

greater risks for air travelers. Exceptions of this kind are

certain to overwhelm any standard reduction formula. Difficult

value judgments and explicit political choices will be an unavoidable part of any concerted budget reduction effort.
CHAPTER II. STRATEGIES AND EXAMPLES

Specific proposals for cutting federal spending tend to

fall into several major strategies or rationales. Five strategies are identified here:

o Management Efficiencies. Savings could be made through

consolidating programs, ending duplication, ferreting

out fraud and abuse, and improving program administration.

o Better Targeting. Outlays could be reduced by targeting benefit payments and subsidies on those persons

and jurisdictions that need them most, and by reducing

or eliminating awards to others.

o Shifting Responsibility to State and Local Governments.

Some of the activities of the federal government arguably

could be better performed, or properly should be performed, at the state or even the local level, where there

can be more responsiveness to particular situations and a

more direct accounting to the electorate, and where there

may also be more ability to foot the bill.

o Shifting Responsibilities to the Private Sector.

Over the years, the federal government has increasingly

subsidized activities in the private sector. Now may

be an appropriate time to consider transferring the

costs of such subsidies back to private firms and

individuals.

o Revising Judgments as to What Can Be Afforded. Every

year the Congress rejects worthwhile new claims on

federal resources on the general ground that the government cannot afford to do everything asked of it. But

the Congress does not systematically go back and review

programs already on the books to see if there are some

that should be cut back on the grounds that they can no

longer be afforded.

This chapter contains brief descriptions of 56 possible

actions that could lead to reduced federal spending, listed by
groups in the order of the strategies described above. Many of

those potential cuts could fit into more than one strategy. In

the appendix, these same examples of possible cuts are categorized by budget function.

AN EXPLANATION OF THE ILLUSTRATIVE EXAMPLES

The collection of potential cuts in this chapter is by no

means exhaustive; many others could be added. Still others have

been omitted because, while they could achieve savings, no single

legislative action would bring them about—for example, military

base closures, which the Department of Defense asserts would lead

to eventual annual savings of over $400 million.

Each of the examples used to illustrate the five reduction

strategies would violate the status quo. There are arguments

both for and against enacting each of them. CBO offers the

illustrations, not as recommendations, but only as examples of

the kinds of issues the Congress will confront in the course of

any concerted effort to reduce the size of the federal sector.

BASIS FOR THE SAVINGS ESTIMATES

The savings estimates contained in this chapter are derived

from CBO's five-year budget projections for fiscal years 1981-1985,

except where a different source is specifically stated. !_/ These

five-year projections are not a forecast of what will happen.

Rather, they are intended to answer the question: What might the

federal budget look like in each of the next five years if the

policies embodied in the budget actions taken by the Congress

through 1979 are continued unchanged—save for adjustments for

inflation and for the growth in entitlement programs?

Obviously, the outlay pattern projected by CBO for any particular program is subject to errors in the economic assumptions

used and in the estimating methodology. Savings from that projected pattern are subject to similar considerations. Time has not

permitted detailed analysis of the possible secondary or ricochet

effects that a cut in one federal program might have on other

federal programs.

I/ Congressional Budget Office, Five-Year Budget Projections;

Fiscal Years 1981-1985 (February 1980).

10
STRATEGY I: MANAGEMENT EFFICIENCIES

Administrative Improvements in Public Assistance Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

325 350 375 400 440 1,890

One possible means of reducing the cost of public assistance

programs would be to establish a nationwide monthly income reporting system, along with a one-month retrospective accounting

system. In the current system, the various programs use several

different accounting periods. The Supplemental Security Income

(SSI) program calculates benefits on the basis of income expected

over the coming quarter (quarterly prospective), the Aid to

Families with Dependent Children (AFDC) program has no specific

rules but is usually monthly prospective, and the food stamp

program is monthly prospective. Reporting changes in income

status is usually a responsibility of the recipient between

periods of recertification.

This proposal would determine each month's benefits on the

basis of the previous month's income. The recipient would be

required to mail a monthly income status form to the public

assistance office before benefits were calculated and a check

mailed. A 1976-1977 pilot program suggests that such changes

could result not only in budgetary savings but also in simplified

eligibility determination, more rapid processing of initial

applications, and increased responsiveness to changing needs

of recipients.

The major savings would be generated through the monthly

reporting requirement, which would reveal changes in income not

reported or detected under the current discretionary system.

Such a system would improve the efficiency of program operation

through more accurate calculations of benefits for those with

fluctuating incomes and by more rapid elimination of those who

have become ineligible.

11

57-988 0-80- 3
Change in Trigger For Unemployment Insurance Extended Benefits

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

1,000 1,000 00 0 2,000

Under current law, the federal government pays half the cost

of 13 weeks of additional unemployment insurance benefits for

those who have exhausted the regular benefits provided by state

law. The extended benefits are payable only when a state's insured

unemployment rate exceeds a prescribed formula level, or when the

national insured unemployment rate exceeds 4.5 percent. When the

national trigger is reached, extended benefits are payable in every

state, including those with low unemployment rates. If the national trigger were eliminated, the savings would reach $2 billion

during the next five years, given current CBO economic assumptions,

or about a 2 percent reduction in estimated total unemployment

insurance outlays during the period.

The immediate losers would be unemployed persons in states

with low unemployment rates. The argument in favor of the proposal

is that providing extended benefits to those persons acts as a

disincentive to seeking work despite the comparatively better

opportunities in their areas. The argument against the proposal is

that unemployment is individual; the fact that most of one's

neighbors are employed is of no help to one who has exhausted the

regular benefits without: being able to find employment. According

to this view, the disincentive effects should be dealt with by

administrative controls rather than by cutting off benefits entirely.

12
Reform of the Wage Board Pay System

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

260 610 780 870 950 3,470

The hourly rates of federal wage board (blue-collar) workers

are adjusted annually in an attempt to maintain comparability

with wage rates paid by the private sector in the same locality.

Under certain provisions of current laws and regulations, however, the 400,000 federal wage board workers may receive about 8

percent more than their private-sector counterparts in similar

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

limits on federal pay raises have reduced such differences over

private-sector rates, but the laws and regulations remain.

The Administration has repeatedly recommended changes in the

wage board system in order to eliminate the 8 percent differential. If the changes are enacted, the five-year outlay savings

through 1985 could approach $3.5 billion. This estimate of

savings assumes, however, that federal wage board workers would

be granted a catch-up raise in fiscal year 1981 to make up for

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

would be imposed over the next five years. If a catch-up raise

is not permitted in fiscal year 1981 and limits on pay raises

continue, then the 8 percent differential would be eliminated.

In those circumstances, wage board reform would result in a pay

system that corresponds more closely to private-sector practices,

but would not result in outlay savings.

Proponents of the proposed changes argue that the present

system is overgenerous to wage board workers and unfair to federal

taxpayers. Unions and others opposing the changes assert that

there is wide variation in private-sector practices, and that some

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

reforms are selective, dealing only with those aspects of the

wage-setting mechanism favorable to employees, while continuing

those aspects of the system tending to depress federal wage rates.

13
Elimination of World War II Destroyers

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

129 27 20 31 35 242

The Navy has proposed to retire 12 destroyers built more

than a third of a century ago. This year, however, the Congress

directed that the 12 destroyers be retained in the fleet for

use by the Navy Reserve. If they were phased out in 1981, the

five-year savings through 1985 could be about $242 million.

While the old destroyers could be used for reserve training

purposes, it is unlikely that they could play any future combat

role. Thus, the reservists trained on them would, in any event,

have to be assigned to other vessels with systems very different

from those on which they had been trained.

14
Elimination of Certain GI Bill Benefits

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

70 60 50 40 30 250

Under the GI Bill, veterans are eligible for correspondence

and flight training to assist them in readjusting to civilian life.

The effectiveness of this training in the readjustment process,

however, has been repeatedly questioned. Under current law, all

eligibility for the use of Readjustment Benefits will expire at the

end of 1989. If the correspondence and flight training benefits

were eliminated in 1981, the five-year savings by 1985 would be

about $250 million. About 53,000 veterans would be affected in

1981, and about 16,000 in 1985.

Those who question these benefits point to the fact that

veterans' flight training is known to be used mainly for recreational purposes, and that correspondence training—with its low

completion and placement rates—confers little benefit in return

for the expenditure. The argument against eliminating the benefits is that individuals would be deprived of an earned benefit

promised to them by the government when they were in the armed

forces. A few veterans, moreover, make use of the training to

advance their careers.

15
Restructuring of Military Retirement Pay

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

-100 -90 -60 -20 20 -250

Military pay reforms almost invariably involve higher costs

in the first few years, although they may save large sums in

future years. The example used here is just such a case.

Under the current military retirement system, most of those

who leave before completing 20 years of service receive no pension;

at 20 years, retirees become eligible for a pension, payable

immediately and equal to half the basic pay rate in effect on the

day of retirement. This scheme may contribute to the departure of

too many persons after 4 or 5 years1 service, at a time when they

have become trained and experienced, and the retention of too many

with between 10 and 19 years' service, who may contribute to an

excess of supervisors.

The proposal presented here has three elements: (1) to base

military retirement pay on the individual's highest three pay

years, phasing in this change over a three-year period; (2) to

provide a deferred annuity at age 60 for those who leave after

fewer than 20 years' service, beginning immediately; and (3)

immediately to increase selective bonuses after 10 years' service

to retain enlisted men and women whose skills are in short supply.

Savings from such steps would not begin to appear until the

fifth year, but they could grow to $360 million annually by

1990, and they would continue to increase until after the turn of

the century.

The shift to "high-3" pay as a basis for retirement checks

may be opposed on the ground that it would eventually result in

entitlements about 10 percent smaller than under the present system

of using the final pay rate as the basis. Opponents may also argue

that any change in retirement pay must apply only to those entering

the military after enactment of the change, which would delay

savings for 20 years. But if the change is phased in over three

16
years, the effect would be to honor all retirement credits actually

earned before the change. The shift to "high-3" would make the

military system consistent with that of the federal civil service,

and it would eliminate the advantage available to those who can

time their retirements to coincide with pay increases. The deferred annuity and bonuses would help to retain a larger proportion

of persons with 5 to 10 years of experience, which is consistent

with many analysts1 judgments about sound force management.

17
Change in Enlisted/Officer Ratio in the Armed Forces

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

16 35 57 83 110 301

Some observers believe that the ratio of enlisted personnel

to officers in the armed forces could be increased with no loss

of military effectiveness. The ratio in recent years has been

about 6.4 enlisted persons for every officer. Before the Vietnam

buildup, the ratio was about 6.8 to 1. If over the next five

years the ratio was gradually increased to 6.6 to 1, the cumulative savings would be about $300 million; in the following five

years the savings would be considerably greater. (This assumes

that promotion policies would be adjusted to keep average grades

at today's levels.)

A possible explanation for the current high proportion of

officers is that the drawdown since the peak of force numbers in

the late 1960s has been heavier in enlisted ranks, where turnover

is greater and tenure guarantees are fewer. Increases in technical

complexity may, however, justify having more officers relative to

enlisted personnel than in earlier years. The science of defining

officer requirements is sufficiently inexact and subjective to

preclude a firm case for any particular ratio.

18
Elimination of Dual Pay for Reservists Who Are Federal Employees

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

35 39 42 46 50 212

Federal civilian employees who are reservists in the armed

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

their regular vacation entitlement (13, 20, or 26 days, depending

on length of service) in addition to the two-week absence for

military training. The Administration has repeatedly recommended

paying such federal employees the greater of their civilian or

reserve salaries, rather than both. Adopting this change would

save over $200 million in the next five years.

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

practice is generally not followed by private employers, nor

by the federal government itself when a reservist is called up for

state duty. Under those circumstances, the employee receives only

the higher salary. Moreover, the practice may attract disproportionately large numbers of federal employees to the reserves,

despite the greater likelihood that their civilian jobs would

excuse them from a military mobilization. The counterargument is

that the change could have an adverse effect on reserve recruiting

and retention—in a force already falling short of its manning

goals.

19
Closing of the Clinch River Breeder Reactor Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

220 430 560 160 80 1,450

The Clinch River Breeder Reactor (CRBR) project has been a

subject of controversy for years. Although it was not included

in the President's budget for 1980, the Congress appropriated

$173 million for the purpose; the President's 1981 budget recommendation is once again to stop funding the CRBR.

The project aims to demonstrate that a commercial-scale

liquid metal fast breeder reactor could be operated reliably and

safely as part of a public utility electric supply system.

Objections have been based on cost and safety grounds, on concern

over proliferation of nuclear weapons materials, and on engineering and technical doubts. Some authorities assert that a Frenchdesigned breeder reactor is more highly developed and could be

licensed in the United States with only minor design changes.

The five-year savings of almost $1.5 billion from a CRBR

shutdown would be net, allowing an estimated $150 million for

termination costs.

Accepting the President's recommendation with respect to

fiscal year 1981 funding for the CRBR does not necessarily imply

permanent rejection of the idea of having fast breeder reactors

in the United States. In consequence, the savings achievable

under this option might someday be overmatched by spending on

more technologically advanced fast breeder reactors.

20
Modifications in Federal Compensation Practices

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

Workmen's Compensation 5 14 27 44 63 153

Civil Service

Disability 30 90 158 233 316 827

Civil Service

Retirement 14- 44 78 117 160 413

Total 49 148 263 394 539 1,393

In a series of reports, the General Accounting Office (GAO)

has recommended stricter eligibility requirements for federal

workmen's compensation and civil service disability, as well as

certain technical changes that would reduce regular civil service

annuities for future retirees. All the changes combined might

reduce 1985 outlays for the affected programs by about 2 percent.

Federal Workmen's Compensation. GAO believes that this

program is subject to abuse, both in the determination of initial

eligibility and in the continuation of benefits. It recommends

that the employing agency be allowed to appeal workmen's compensation awards and to require physical examinations by physicians

chosen by the agency. GAO also recommends reinstating an initial

three-day waiting period before any compensation is payable.

These changes, according to some observers, would bring the program

more in line with state workmen's compensation practices.

Civil Service Disability. A federal employee is eligible

for civil service disability retirement if unable to perform one

or more significant functions of his or her present job, whereas

to qualify for Social Security disability the applicant must be

unable to hold any gainful employment. The probability that

males aged 30 to 50 will receive civil service disability is at

least 50 percent greater than it would be if private sector

standards were adopted. Outlay reductions resulting from stricter eligibility standards would not be large, since most disabled

annuitants are also eligible for regular retirement; but there

would be some general revenue increase, since fewer people would

qualify for the tax advantage that accompanies disability retirement.

21
Civil Service Retirement. GAO notes that federal retirees

benefit from cost-of-living increases that occur before they

actually retire. Under current law, employees have the option of

calculating their annuities as if they had retired before the

previous cost-of-living adjustment. In addition, the first costof-living increase after retirement is not prorated to reflect the

number of months in retirement status. The argument against

changing this is that, because the retiree's benefit is based on

the average of the three highest salary years, the practical effect

in most instances is to make the penultimate year's salary the

base, and consequently the present rules do not result in double

adjustments for cost-of-living increases.

22
Elimination of Farm Deficiency Payments

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

0 914 1,049 353 111 2,427

Since 1965, the level of price support for major export

commodities—wheat, feed grains, cotton, and rice—has been

gradually adjusted downward to world price levels. As part of a

planned, gradual adjusment process, deficiency payments have been

made to participating farmers whenever the market price of a

commodity falls below its target price. In recent years, farmers

have demonstrated a willingness and ability to supply the needs

of consumers at prevailing world prices. Therefore, deficiency

payments have largely fulfilled their function and some believe

that they could now be eliminated without detriment to U.S.

agriculture. Elimination of deficiency payments could result in

savings of $2.4 billion over the next five years.

Those who support elimination of these payments argue that

three other components of the agricultural programs—price support

loans, a multiyear storage program, and acreage diversion payments—could probably hold farm production and income within

reasonable bounds. Furthermore, they believe that deficiency

payments concentrated in the hands of a few large-scale farmers

tend to be capitalized into land values, making it more difficult

to enter farming and resulting in higher food prices.

Proponents of deficiency payments argue that they are needed

to induce farmers to take land out of use when surplus production

threatens. In their judgment, price support loans, the storage

program, and acreage diversion payments would not, by themselves,

offer a sufficient incentive to farmers to participate in commodity

programs and thereby help stabilize agriculture prices and supply.

23
Reduction of Soil and Water Conservation Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

94 128 147 158 169 696

Total federal outlays in fiscal year 1981 on the construction

of erosion control facilities and the channeling of streams will

be about $585 million under current law; part of this spending is

for obsolete programs begun in the days of the Dust Bowl and

chronic Appalachian erosion. Today, most soil erosion problems

result primarily from modern farming practices. Elimination of

obsolescent soil and water conservation activities could result in

savings of roughly $146 million in 1981 and $775 million over the

next five years. These obsolescent activities, in particular the

channeling of streams, destroy needed wetlands, which other federal

programs attempt to preserve. Wetlands have become much more

valuable to society in recent years because of their relative

scarcity, their importance to wildlife and water quality, and their

ability to store fresh water or maintain water tables.

In many cases, the value of incremental agricultural production from drained land probably does not justify the required

public investment. Even in those cases where direct economic

benefits can be shown, the total benefits of such projects may not

outweigh the economic costs, plus the detrimental effects on

wildlife, water storage, and water quality, according to some

analysts.

Proponents argue that unquantifiable benefits to local

residents and to future generations justify continuation of the

challenged programs.

24
Modification of Indexation of Federal Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

3,500 3,500 5,700 7,600 9,700 30,000

Some people contend that the Consumer Price Index (CPI)

exaggerates the rise in the cost of living because of an inappropriate measurement of home ownership costs. If a different

index, modified to correct for such distortions, were promptly

adopted as the measure for adjusting federal benefits now tied to

the CPI, outlay savings over the next five years could be about

$30 billion. The affected programs would be Social Security,

railroad retirement, Supplemental Security Income, veterans'

pensions, and military and civil service retirement, with about 44

million primary beneficiaries plus their dependents.

If the modified index did not go into effect until the

benefit adjustments due to be made in 1981, the switch could mean

higher rather than lower federal outlays for several years. The

reason for this is that, according to CBO projections, the CPI

will increase at a slower rate than the modified CPI, while the

reverse would hold for 1980 and the 1982-1985 period. Of course,

such projections are subject to great uncertainties. If each

index were to rise as projected, however, and if the CPI was used

for 1980 benefit adjustments and the modified index for benefits in

1981 and later years, there would be higher costs until about

1984, compared to making no switch at all. If the switch were

delayed until the adjustment due in 1982, the cumulative savings

through 1985 would be reduced to about $10 billion.

The goal in indexing benefits is to permit beneficiaries to

enjoy the same standard of living they could "buy" when they first

became beneficiaries, despite subsequent rises in the cost of

living. Consequently, the most accurate and representative

indexing method should be used. But analysts disagreed as to the

"best" index for the purpose. Furthermore, some analysts assert

that use of the CPI has not meant overcompensating most beneficiaries for inflation. They argue that the combination of

indexed benefits and unindexed other income has at best meant that

the total standard of living for beneficiaries has stayed even, and

that many have suffered a real decline in recent years.

25
STRATEGY II: BETTER TARGETING

Modifications in Trade Adjustment Assistance

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

150 200 250 250 250 1,100

Workers who lose their jobs because of foreign competition,

and thus qualify for Trade Adjustment Assistance (TAA) payments,

currently receive both TAA and unemployment insurance benefits.

The General Accounting Office has suggested that TAA payments be

limited to those who have exhausted their unemployment benefits

and be payable at the same level as the unemployment benefits.

This approach could save almost half of current program expenditures, now projected to be $2.35 billion over the next five years.

Assuming continuation of past trends, those most likely to

be affected by the change will be in blue-collar occupations in

manufacturing industries, notably apparel, textiles, coal, leather,

transportation equipment, electronics, and steel.

The argument for the change is that TAA recipients should

not receive more generous payments because they happen to be

unemployed for a specialized reason. The counterargument is

that higher tariffs could prevent this type of unemployment, but

would be costly to consumers generally. Special TAA benefits are

therefore justified as compensation for those who must pay the

price of the government's policy of lowering trade barriers.

Aside from budgetary savings, the proposed changes could

well improve the functioning of labor markets. TAA, like other

unemployment-based assistance programs, creates a disincentive

for seeking work, an effect probably magnified in TAA's case by

the greater relative size of the payments. The likely result is

to deter workers from seeking jobs in other industries, thus

bolstering their attachment to a single industry and vitiating

the adjustment goals the program is intended to attain.

26
Modifications in Child Nutrition Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

School Lunches 300 325 355 390 430 1,800

Food Stamps 1,180 1,312 1,400 1,460 1,530 6,880

Under current law, children from families with incomes of up

to 125 percent of the Department of Agriculture's poverty guidelines may receive free school lunches, which the federal government subsidizes at $1.21 each. In fiscal year 1981, this means

that a family of four with income up to $10,050 may receive an

annual lunch subsidy of about $220 for each child enrolled in a

participating school. Children from families with incomes between

125 and 195 percent of the poverty level pay 10 cents for their

lunches, with the federal government contributing $1.10, or

about $200 per child annually. For all those above 195 percent

of the poverty level ($15,700), the government pays a subsidy of

about 36 cents per meal, or $65 annually for each participating

child.

This proposal would target subsidies more directly to lowincome children, who also tend to benefit the most nutritionally.

Free lunches would be available to families with annual incomes of

up to $8,900; lunches priced at 10 cents would be available up to

$14,090; and the annual federal subsidy to families with incomes

above that amount would be reduced by $9 per child. Under the

proposal, federal costs could be reduced by about $300 million in

fiscal year 19.81 and the five-year savings could reach nearly $1.8

billion.

While there would be some reduction in the numbers of children

participating under the proposal, this would not be likely to have

any significant nutritional impact. Studies have shown that

participants in the income ranges that would be most adversely affected by the proposal have no better diets than nonparticipants.

Savings could be further increased, up to $1.5 billion a

year by 1985, if the present duplication of school lunch and food

stamp subsidies were ended. Food stamp benefits are calculated

27

57-988 0-80- 4
on the assumption that all family members eat three daily meals at

home. School lunch subsidies aim to meet one-third of a child's

daily nutrition requirement. About 43 percent of the households

benefiting from the food stamp program also participate in the

school lunch program. The effect of the overlap is to subsidize

four instead of three meals daily for about 6.8 million children.

28
Reduction of Funding for Youth Employment Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

Youth Conservation 56 58 61 63 66 304

Corp

Young Adult Conservation Corps 227 292 318 344 374 1,545

Summer Youth

Employment Program 264 424 463 501 543

Total 547 774 842 908 983

The Youth Conservation Corps (YCC) and the Young Adult

Conservation Corps (YACC) in combination provide 25,000 yeararound and 40,000 summer jobs to young people aged 15 to 23,

irrespective of family income levels. The Summer Youth Employment Program (SYEP) provides an additional 750,000 summer jobs

for young people who qualify as "economically disadvantaged."

Youth in YCC and YACC work mostly on conservation projects involving state and federal lands, while those in SYEP undertake

a variety of projects determined largely by Comprehensive Employment and Training Act (CETA) prime sponsors. Although the projects undertaken in these programs generally yield tangible

benefits and give the young people an acquaintance with the

demands of real work (promptness, for example), most of the

activities would probably be classified as nonessential, and

they generally do not include useful training^

If the YCC and YACC programs were completely eliminated, and

if funding for the SYEP were cut by 50 percent, the cumulative

five-year savings through 1985 would be about $4.1 billion.

The immediate consequence of funding cuts would obviously be

a loss of jobs and income. While the year-around youth unemployment rate would rise by only 0.4 percentage point, the effects

during the summer would be more serious, particularly in inner-city

neighborhoods.

29
The argument for eliminating the YCC and YACC programs is

that they are not targeted on people in financial need, and that

the work performed through the programs, if it is worth doing,

should be financed in the regular budgets of the state and federal

agencies involved. The argument for reducing SYEP funding is that

its apparent underlying purpose—averting urban unrest during

summer school vacation periods—can be accomplished without such

large federal expenditures. Furthermore, because they lack an

organized training component, SYEP jobs provide few, if any longterm benefits for the participants.

30
Restructuring of College Student Loan Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

400 800 1,100 1,300 1,200 4,800

The federal government has two main student loan programs.

In the Guaranteed Student Loan (GSL) program, the government

pays banks and other lenders a fee (which varies with interest

rates, and is called a special allowance) to induce them to make

loans to students. The loans also carry a 7 percent interest

rate, paid by the government while the student is in school and

by the borrower afterward. The GSL program is not based on need.

Last year, students borrowed about $3 billion in GSLs. The

other main program, under which $600 million in loans were made

during 1979, is the National Direct Student Loan (NDSL) program.

NDSL capital is provided by federal appropriations (90 percent)

and the 3,100 colleges that administer the program (10 percent).

The funds revolve, with repayments helping to finance new loans.

The borrowers pay no interest while in school and 3 percent

thereafter. Over the years, the federal government has contributed about $4.5 billion to the NDSL program. NDSLs are available only to needy students.

The annual federal outlays for GSLs are now about $1.3

billion, having risen rapidly in the last year since the Congress

removed all family income ceilings on those who could have their

interest payments subsidized. NDSL appropriations in recent

years have been about $300 million annually.

Program costs could be substantially reduced by making

three changes: (1) limiting eligibility for the in-school interest

subsidy to needy students; (2) charging a uniform 7 percent rate to

all borrowers on leaving school; and (3) providing all loan capital

through government borrowing instead of by paying a special allowance to private-sector lending institutions. If these changes were

effective for 1981, there would be about 1.9 million highly subsidized loans that year instead of 2.8 million.

31
The main argument for this option is that interest-free

loans are a costly and unnecessary subsidy to students who have

adequate family resources and other means to cover their college

costs. The counterargument is that even middle- and upper-income

families have temporary difficulties in meeting high college

costs, and that the federal government should help such families

spread the costs beyond the immediate college years.

32
Retargeting of Basic Educational Opportunity Grants

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

100 400 400 300 300 1,500

Basic Educational Opportunity Grants (BEOGs) are currently

payable to postsecondary students attending school at least

half time. The amount of a grant is equal to $1,800 less a family

contribution calculated according to a federal formula. Under

the contribution formula, students from families with annual

incomes of up to about $25,000 are generally eligible for BEOGs.

Under the more demanding contribution formula that was in effect

before enactment of the Middle Income Student Assistance Act of

1978, however, the cut-off point for BEOG eligibility was about

$15,000 in family income.

Returning to the pre-1979 contribution formula obviously

would diminish benefits for middle-income students. About 600,000

students would lose all BEOG eligibility, a 24 percent decline, and

most others would receive less than they do under current law.

Reimposing the old schedule would have no impact on students from

very low-income families, nor would it significantly affect awards

for students at low-cost institutions whose grants are already

constrained by the provision that no BEOG may exceed half the cost

of attendance.

It seems unlikely that the 1978 change has made any difference in middle-income student decisions about attending college,

though it may have affected whether they choose to attend high-cost

or low-cost colleges. Thus, reducing BEOG funding might affect the

distribution of students among types of schools. It could also

lead to increased demand for other forms of student assistance,

such as student loans.

The main argument for eliminating grants to less needy

students is that they will attend college anyway, and no high

priority federal purpose is served by enabling them to attend

more costly institutions. The counterargument is that it is

appropriate for the federal government to ease the financial

burdens of middle-income families with children in college, and

to broaden their choice of colleges, whether or not the federal

aid influences the basic decision to attend.

33
Termination of Certain Social Security Benefits

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

Phase Out Student

Benefits 200 800 1,400 1,900 2,100 6,400

Phase Out Survivor

Benefits for Parents

of Children Aged 16

and 17 25 90 500 525 535 1,675

Eliminate Minimum

Benefit 65 135 160 205 225 790

Eliminate Lump Sum

Death Benefit 165 190 220 250 290 1,115

Totals 455 1,215 2,280 2,880 3,150 9,980

Both the Ford and the Carter Administrations have recommended phasing out Social Security student benefits, which are

payable to unmarried dependents between 18 and 21 if they are

full-time students. (Dependent benefits otherwise stop at age

18.) The entitlement was created in 1965 legislation and is not

based on need. The Congress has greatly expanded other forms of

student assistance since 1965; phasing out the Social Security

benefit would eliminate some duplication of payments.

In his 1980 budget, President Carter proposed phasing out

the survivor benefits for parents of children aged 16 and 17,

eliminating the minimum benefit, and eliminating the lump sum

death benefit. None was enacted by the Congress.

Survivor benefits are paid the parent (typically, the mother)

of children until they reach age 18. If the parent's benefit (but

not the children's) was stopped when the dependent turned 16,

annual savings would by 1985 exceed $500 million. The change is

based on the assumption that the parent of a child aged 16 or 17 is

not homebound and can join the work force.

34
The minimum benefit is usually paid to retirees who spent

most of their working careers in noncovered employment, typically

in government. Many of those eligible for the minimum benefit

have earned pensions under other programs. Those actually in

need could be directly protected by Supplemental Security Income

(SSI) and other welfare programs.

This lump sum death benefit ($225) is paid to all surviving

families. Where the need exists, the SSI program is an alternative method by which this support could be provided.

35
Reduction of Funding for EPA Construction Grants

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

0 420 732 973 1,030 3,155

The Environmental Protection Agency (EPA) makes grants to

states and municipalities for the planning, design, and construction of wastewater treatment facilities. EPA usually provides 75

percent of the construction costs, and 85 percent if the project

involves innovative technology. Because the states must use or

lose their allocated funds within specified periods, the projects

receiving funding are those tfready-to-go," rather than those

higher up on the priority ranking but not yet ready. The result

is that about 26 percent of all EPA construction grant money

($22.5 billion between 1973 and 1979) may have been used for

lower-priority projects. If funding eligibility were limited to

three project types—secondary treatment projects, advanced

waste treatment projects, and new interceptor sewers—and if the

use or lose period were lengthened, federal funds could be more

effectively used, even with a 26 percent cut in the program.

The counterargument is that most of the lower-priority

projects ought to be constructed eventually. The consequence of

reduced EPA funding would be a stretching out of the period

before "point sources" of pollution would be controlled. At the

current rate of obligation, that period is about 40 years. While

states and municipalities might still construct the projects no

longer covered, they would have to bear the costs involved.

36
Reduction of Funding for Impact Aid

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

250 325 350 400 450 1,775

For many years, administrations and the Congress have argued

over Impact Aid (also known as School Assistance for Federally

Affected Areas); the principal controversy has been over whether

to continue compensating local school districts for children

whose parents either live or work on federal property, but not

both. In recent years, the Congress has lowered expenditures for

such children, but outlays on their behalf, about $250 million a

year, still go to 4,100 school districts. If the payments were

eliminated altogether, savings over the next five years would

approach $1.8 billion, or about one-third of the projected outlays

if the program were unchanged.

The case for the reduction is that the local school districts involved are not necessarily losing tax revenue or experiencing financial hardship because of the federal presence,

since the parents either live or work on local taxable property.

Indeed, areas with substantial numbers of highly paid federal

workers may have their property values enhanced by the federal

presence. Furthermore, in some states the infusion of federal

dollars serves only to reduce the amount of state aid alloted

under state equalization programs.

The counterargument is that termination of the program would

cause financial and budgeting shocks in the affected districts,

some of whom receive almost 7 percent of their education funding

from this source (although for most the payment is 2 percent or

less).

37
Elimination of Farm Disaster Payments

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

0 0 560 560 560 1,680

The Congress has provided disaster payments to producers of

wheat, feed grains, cotton, and rice for several years. If

pending leigslation is enacted, disaster payments will be made

available through the 1981 crop year, while expansion of a subsidized federal crop insurance program is also underway. These

programs are partly duplicative. Elimination of disaster payments

after the 1981 crop could result in cumulative five-year savings

of about $1.7 billion.

Disaster payments encourage crop production in high-risk

regions that are not ideally suited to farming. They tend to be

distributed to a very few producers, who often receive payments on

a regular basis; and their availability discourages participation

in crop insurance programs.

Elimination of disaster payments would have varied effects.

Some farmers in high-risk producing regions would not be able to

afford federal crop insurance, even at subsidized premium rates.

Others would seek diversification, such as livestock production,

as an alternative to specialized crop farming.

The savings that would accrue from the permanent elimination

of disaster payments could be used to subsidize crop insurance

premium rates, thus spreading the benefit over many more farmers

than under the present arrangements. Alternatively, the savings

could benefit taxpayers generally, with crop insurance premium

rates set to spread overall costs to farmers rather than reduce

them.

38
STRATEGY III; SHIFTING RESPONSIBILITY TO STATE AND LOCAL

GOVERNMENTS

Limiting of Federal Highway Aid

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

200 900 1,600 2,000 2,100 6,800

Expenditures on the Federal Aid Highway System will average

$8.5 billion a year during the next five years. If federal

responsibility were limited to the Interstate System, to the

primary road system (which with the Interstate System forms an

integrated national network), and to bridge replacement, the

1981-1985 savings would approach $7 billion, and savings would in

future years exceed $2 billion annually.

The effect would be to shift back to the states the full

responsibility for a variety of highway programs, including the

secondary road system, urban roads, pavement marking, removal of

hazards, rail-highway crossings projects, and the 3-R program

(resurfacing, rehabilitation, and restoration).

One argument for such a change is that the states are fully

able to decide for themselves the standard of convenience and

safety they wish to achieve on their local road systems, as

well as to raise the funds to meet whatever standards they choose.

Each 1 cent in gasoline taxes applied nationwide raises about $1

billion. A uniform 2.5 cent increase in all states would make up

for the loss of federal grant funding under this option.

A majority of all states—28—have not raised their gasoline

tax rates since the OPEC price rises began in 1973. Their average

tax rate per gallon is 7.7 cents. The average in the 23 jurisdictions that have had tax increases in the last seven years is

9.5 cents. Whereas state gasoline taxes accounted for about 20

percent of the price of gasoline in 1973, the current share is

about 7 percent. One apparent effect of the federal highway

grant program is to permit state legislators to avoid raising

gasoline taxes to pay for the nonfederal highway programs they

favor.

39
An argument against such a change is that the nation's road

network, from the interstate highways to the least-traveled back

road, should be regarded as a whole, and that a loss of federal

funding for the local parts of the whole will have adverse national

effects in terms of transportation costs and lives lost.

40
Elimination of the State Share of the Land and Water

Conservation Fund

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

147 196 259 282 313 1,197

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

for parks, wildlife refuges, and recreation centers; the other 60

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

the acquisition and development of outdoor recreation facilities.

If the state share were reduced in 1981 and ended thereafter,

the annual savings would exceed $300 million by 1985.

Grants to state governments for state park land acquisition

and similar purposes were not a federal responsibility until the

mid-1960s. With virtually no exceptions, the states have provided

the required matching funds since the program's inception, and

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

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

development and acquisition budgets.

The argument for ending grants to the states from the LWCF

is that state recreation programs mainly serve state residents

or vacationers from other states whose expenditures provide

income in the host state. Thus, each state has the responsibility

for deciding what program its own taxpayers are willing to support; it has no claim on taxpayers nationwide.

The case for continuing the federal grant program is primarily on "quality of life" grounds. The quantity of land is fixed

and, as the years go by, the expense of acquiring public recreation areas will inevitably climb. If the land is not acquired

now, future generations of Americans will have less recreational

opportunity than the present generation. While the nationwide

benefits accruing from any particular investment in state park

lands are not directly measurable, it is argued that such investments serve the national interest.

41
Elimination of Urban Park Grant Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

9 58 111 153 166 497

The Congress in 1978 enacted a five-year grant program for

the support of urban park and recreational facilities. The

savings from ending the program (assuming that it would otherwise

be renewed on expiration of the current authorization) would

total almost $500 million during the next five years.

The argument for eliminating the urban park grant program

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

Water Conservation Fund. In both cases, federal funds simply

substitute for local funds. It is not clear that the national

taxpayer should support a level of local recreational opportunity

that local taxpayers are unwilling themselves to support.

The counterargument holds that there is a national interest

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

42
Termination of the Legal Services Corporation

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

250 341 369 399 432 1,791

The Legal Services Corporation (LSC) is a private, nonprofit

corporation established in 1974 legislation. Through about 360

local programs, employing 7,000 lawyers, it provides legal assistance to the poor in civil matters. Most of the poor now have

access to LSC programs, although some persons are barred by

reason of geography and although the effectiveness of the program

is limited by large caseloads.

There is no reliable basis for estimating the costs that

would be incurred if the federal role in the program were ended.

Presumably, some of the existing local programs would be continued, with state or local funding replacing the federal funds.

In other cases, the program would be discontinued altogether.

The American Bar Association takes the position that "every

lawyer, regardless of professional prominence or workload, should

find time to participate in serving the disadvantaged." If the

practicing lawyers in the United States were to give an average of

one hour a week in pro bono legal service to the poor, the effect

would be a level of service equivalent to the current federal

program.

Proponents of direct federal funding point out that the

Legal Services Corporation was created because access by the poor

to civil legal assistance was demonstrably inadequate, and that

there is no reason to suppose that matters would be different

if the corporation were done away with. Opponents argue that the

responsibility, if any, for correcting the situation does not lie

with the federal government; and that a more universal program

could be achieved by regulation at the state and local level—a

change that is not likely to occur so long as federal funding is

available for civil legal assistance to the poor.

43

57-988 0-80- 5
Reduction of Funding for Criminal Justice Assistance

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

74 320 488 560 606 2,048

The Justice System Improvement Act of 1979 revised and

continued a 12-year-old program by which the federal government

makes grants to state and local governments in connection with

efforts to deal with crime and juvenile deliquency. If the federal

government's role were reduced to maintaining a national research

and statistics program, the annual cost would be about $50 million

instead of nearly $600 million. Savings through 1985 would reach

$2 billion.

There is some evidence that many ongoing programs now funded

by the federal government would be continued even if federal

assistance were phased out. Of 3,086 criminal justice projects

ending in 1978 that were eligible or intended to be taken over

entirely by state or local funding, 84 percent were continued.

It is less clear that new innovative projects would be

started if federal assistance were no longer available. Judged

by criteria adopted by the Law Enforcement Assistance Administration, however, fewer than 2.5 percent of the 1978 block grants

supported innovative programs.

Proponents of the present program argue that elimination of

federal grants would be a major threat to the progress that state

and local governments have made in coping with crime and juvenile

delinquency, and that the changes made by the 1979 legislation

have addressed the deficiencies that marked earlier efforts.

Advocates of a limited federal role argue that, after 12 years and

more than $7.7 billion, the federal government and the states

have had ample opportunity to experiment with innovative approaches; that there is no persuasive evidence that the rate of

crime or the quality of criminal justice administration have been

significantly affected by the federal program; and that, if states

place a high priority on criminal justice programs, General

Revenue Sharing funds are available for that purpose.

44
Reduction of Funding for Urban Development Action Grants

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

7 37 85 153 231 513

In 1979 the Congress authorized the use of up to 20 percent

of Urban Development Action Grant (UDAG) funding in connection

with "pockets of poverty"—deterioriated areas of otherwise

financially healthy cities. If this action were reversed and the

total program funding cut back by 20 percent, annual savings by

1985 would approximate $230 million.

The UDAG program assists communities with commercial,

industrial, and housing development. Communities use the grants

either for public works or to provide loans or grants to private

firms or developers.

The southern and southwestern regions of the United States

benefit most from the "pockets of poverty" eligibility concept,

and would bear much of the cost of its loss. The cities that

would be eliminated, however, rank in the top half of all cities

in terms of fiscal condition, and many would probably fund economic development projects from general revenues or other local

sources. But inevitably some UDAG projects would not go forward, with consequent erosion of the local tax base and loss of

prospective jobs and housing.

The case for this reduction proposal is that the affected

cities are in relative terms not distressed, and thus need no help

from a program enacted in the first instance to assist "severely

distressed" cities. The counterargument is that there is no

evidence that "pockets of poverty" grants are spent less efficiently than other UDAG grants.

45
Reduction in the General Revenue Sharing Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

Eliminate

States 2,440 2,660 2,900 3,150 3,420 14,570 a/

Limit

Local Units 240 260 290 310 340 1,440

a./ These savings are estimated against the CBO baseline projection. Against the Administration's proposal, the savings would

be $11,425 million.

General Revenue Sharing (GRS) payments to state governments

have been steadily declining in real terms and were only about 2

percent of state general fund expenditures in 1979. Eliminating

states from GRS would, therefore, have only a small overall

impact, but the effects would be unevenly distributed since states

vary considerably in their financial positions and in the proportion of GRS funding passed through to local units of government.

Rather than prohibiting GRS aid for all jurisdictions of a

given type, eligibility might be based on relative need. The

example used here eliminates local units in which the per capita

personal income exceeds 125 percent of the national average. It

is to some extent arbitrary, for income is not a wholly adequate

measure of either the needs or the capacities of governments.

(The estimated savings are based on limited data; actual savings

may be less.)

General Revenue Sharing was originally viewed as a vehicle

to shift some of the national tax burden from regressive state

and local taxes onto more progressive federal taxes, while allowing

state and local officials broad discretion over the use of the

funds. The issue now arises whether increases in the progressivity

of state and local taxes and increased competition for federal

dollars warrant continuation of the program in its current form.

46
Increase of States' Share in Cost of Army National Guard

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

190 210 230 250 275 1,155

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

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

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

and security forces are inadequate, for assistance after natural

disasters, for holiday traffic patrols, and for other state

purposes. The states pay salary costs only when the Guard is

actively performing a state mission; they pay nothing else toward

the cost of the insurance role the Guard fulfills. This option

would require the states to pay 10 percent of the total cost of

maintaining the Guard.

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

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

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

military units; and that, if the states had to pay some part of

the costs, they would examine more carefully the needed size and

capability of their Guard units. Opponents might well argue that

the Guard's size is determined by federal mobilization requirements and that its state functions are simply auxiliary duties.

47
Phasing Out of Funding for Vocational Education

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

20 213 457 708 966 2,363

Federal support accounts for about 10 percent of national

expenditures for vocational education. Since the program is

funded in advance, first-year outlay savings would be modest

if it were gradually phased out; they would grow rapidly in the

later years, however, reaching nearly $1 billion in 1985.

While some vocational education programs might be jeopardized

if federal support stopped, it is likely that states and localities would increase their own support for such programs to make up

for at least part of the difference. In 1980, 29 percent of

total federal budget authority for vocational education ($226

million) was targeted on programs for handicapped, minority,

economically disadvantaged, and non-English-speaking students.

Historically, states and localities have not made a major effort

to provide vocational education services to the population groups

that might be most affected by a loss of federal funding.

The basic argument for ending federal support for vocational

education is that such education entails relatively high costs per

student, while the available evidence suggests that most vocational education graduates do not command higher wages or enjoy

lower unemployment rates than similar high school graduates

without such training. Supporters of the program contend that

it encourages some students to complete high school, that the

training does improve the earnings potential of some participants,

and that if some aspects of the program are ineffective the remedy

is to improve the training, not end federal support for it.

48
Reduction in Commitments for Subway Construction

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

10 230 420 525 645 1,830

The Urban Mass Transit Administration will have unfunded

commitments of about $1.2 billion at the end of fiscal year 1980

for new subway systems in Atlanta, Baltimore, Buffalo, Detroit,

and Miami. If these commitments are met, but no new ones undertaken, the savings in outlays over the next five years will be in

the range of $250 million. In addition, if the new starts component of the President's Transportation Energy Initiative were

eliminated, the savings would total $300 million over the next

five years. If construction of Washington, D.C.'s new rail system

were halted at the 69 miles of track for which funds are now

available, federal savings would total $1.3 billion through 1985.

Beyond 1985, savings from all these changes would total about $2

billion more.

The argument against embarking on new subway systems is based

on doubts about their cost-effectiveness. Typically, they save

little, if any, energy; have only transitory effects on congestion

and pollution; carry very large operating deficits; and, of themselves, have only a minor effect on land use. Funds spent on

alternatives, such as buses, exclusive lanes for high-occupancy

vehicles, and coordinated traffic signals, are much more productive.

The counterargument is that each proposed new subway system

has its own unique costs and benefits, and that generalizations

about such systems cannot be decisive with respect to any one of

them.

49
STRATEGY IV: SHIFTING RESPONSIBILITY TO THE PRIVATE SECTOR

User Charges for Coast Guard Activities

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

600 650 700 760 820 3,530

The Coast Guard provides short-range navigational aids—

such as buoys and other channel markings—without which commercial

shipping in U.S. inland and coastal waters would be substantially

more hazardous, difficult, and costly. The capital and operating

costs of these navigational aids could be recovered from the

shipping industry, just as highway users pay for the cost of

highways.

The Coast Guard also engages in search and rescue operations

for private mariners who are lost or otherwise in trouble. About

70 percent of such missions involve recreational boaters. With

10 million recreational boats of all kinds, an annual registration

fee of less than $25 would recover the search and rescue costs

attributable to recreational boaters.

The argument for charging the shipping industry for navigational aids is that efficiency is enhanced when users of various

modes of transportation pay the costs of each mode. The argument

for charging recreational boaters is simply that it would be fair

for the beneficiaries of this special service to bear the cost

rather than the average taxpayer.

An argument against imposing such user charges is the likely

disruptive impact on the shipping and boating industries and

the difficulty of establishing fair cost allocations among the

various kinds of users.

50
Increased User Charges for Army Corps of Engineers Waterway

Projects

Savings by Fiscal Year Cummulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

980 1,010 1,070 1,120 1,200 5,380

During the next five years the Army Corps of Engineers

will spend about $5.7 billion for construction and operating

costs in connection with the nationsfs network of inland waterways, and to help maintain deep-draft ports. Under a recent

enactment, an inland waterway user charge in the form of a 4 cents

per gallon fuel tax will take effect in 1981 and rise to 8 cents in

five years. The estimated 1981-1985 collections of that user tax

will cover about 6 percent of the relevant federal expenditures in

the same period.

Full recovery of costs would require an increase of 64 cents

per gallon in the tax paid by inland waterway users, and could

result in five-year taxpayer savings of almost $5.4 billion. In

all likelihood, the threat of such a large tax increase would

cause marginal navigation projects to be dropped, thus reducing

the size of the required tax.

The argument for increasing waterway user charges turns on

both efficiency and equity. More efficient use of the country's

resources will be achieved if the rates for barge transportation

reflect the economic costs of that mode. Shippers choose modes in

part on the basis of rates, and when the rates for one mode are

much more heavily subsidized by taxpayers than the rates for other

modes, some traffic is diverted from more efficient to less

efficient modes. The equity argument is that it is unfair to

ask the taxpayer to subsidize a profitable and growing private

industry.

The argument against full-cost waterway user charges is that

they would disrupt the barge industry, at least in the short

term, and that most of the higher costs would be passed on to

shippers and ultimately to consumers in the form of higher prices.

51
Increased User Charges for Airports and Airways

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

910 980 1,060 1,120 1,200 5,270

The Federal Aviation Administration (FAA) spends over $3

billion a year, mostly on operating the airport and airway system,

on grants-in-aid for airport construction, on purchases of facilities and equipment, and on research and development. Some of these

expenditures are funded through user charges (primarily an 8

percent tax on passenger tickets) paid into the Airport and Airway

Trust Fund.

The FAA estimates that in 1978 commercial users paid 88

percent of their share of the costs while general aviation users

paid 14 percent of their share. Having all users of the airway

system more nearly pay their own way would encourage more efficient use of airports and airways, and would be more fair as

well. Increased user charges would probably permit budget savings

of about $5.3 billion over the next five years. User charges on

general aviation would increase seven-fold, by an average of over

$3,000 per plane. This is equivalent to about a 15 percent increase in average operating costs. Little change would be required

in commercial aviation charges. The general taxpayer would continue to subsidize the roughly 25 percent of FAA expendiures that

represent public interest costs and other nonattributable costs.

An argument against this proposal is that greatly increased

taxes might disrupt the general aviation industry. This disruption could be minimized by using the trust fund surplus (now

around $3.5 billion) to introduce increased user charges gradually.

52
Reduced Spending for Large Airports

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

100 200 300 400 500 1,500

The Federal Aviation Administration budget could be reduced

by eliminating large and medium hub airports from the airport

and airway development grant program. These airports are close

to financial self-sufficiency already, and could replace the

lost funds through user fees on commercial and general aviation.

Commercial airlines are the most important users of these airports, and they would pay most of the increased fees. This

change would reduce federal outlays by about $100 million in 1981

and over $500 million in 1985 for a total five-year savings of

about $1.5 billion.

The Senate Commerce Committee has reported a bill (S. 1648)

proposing this change. In addition, the bill would use the resulting federal savings and the existing surplus in the Airport

and Airway Trust Fund to reduce the 8 percent ticket tax to 2

percent. The loss in revenues from the decreased ticket tax

proposed by this bill would be greater than the projected budget

savings.

53
Elimination of Solar Demonstration and Application Projects

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

85 141 206 227 250 909

Projected expenditures for solar demonstration and application projects for fiscal years 1981-1985 total $1,026 million.

After allowing $117 million for the costs of terminating programs

prematurely, elimination of the solar demonstration and application projects could result in five-year budget savings of $909

million.

Some of the technologies financed by this program, notably

solar (nonphotovoltaic) generation of electricity, have been

criticized as being so costly as to be uneconomical, relative to

other technologies, under all foreseeable circumstances. Critics

of the demonstration and application program have argued that

more basic research on materials, such as corrosion resistance

in solar heating and cooling and silicon production in photovoltaics, would provide a more effective method for the government

to stimulate development of these technologies in commercial

application. Recent moves by the private sector into solar power

suggest that, once the basic research has been provided, the

private sector develops promising technologies rapidly, without

public demonstration programs.

The argument against elimination of the solar demonstration

and application projects is that the cost and performance of many

technologies is so speculative that private industry will avoid

them, even though some may ultimately prove economically viable.

Such technologies, which could not be developed by the private

sector in the near term, could be significantly delayed or permanently overlooked unless the government underwrites the risk

through demonstration projects. In addition, the criteria by

which the private sector might evaluate investments in solar

technology could be narrower than those implied by national energy

policy.

54
Elimination of Subsidies to the U.S. Postal Service

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

Revenue Forgone 878 1,112 1,174 1,301 1,286 5,751

Public Service 736 644 552 460 460 2,852

Total 1,614 1,756 1,726 1,761 1,746 8,603

The Postal Service's "revenue forgone" subsidy reimburses

it for providing free postage to blind and handicapped persons and

for carrying second, third, and fourth class mail at reduced

rates. The lower rates mainly benefit nonprofit organizations,

small newspapers, libraries, and educational institutions.

The public service subsidy is for services that by their

nature cannot be made cost effective, such as delivery to isolated areas and on Saturday. The authorized level of the subsidy

is already scheduled to drop at the rate of $92 million a year

until it reaches $460 million in 1984.

Revenue forgone costs could be shifted to those now paying

reduced rates. Postage for these mailers would increase on

the average by 45 percent. The public service costs could be

shifted by curtailing services (at a cost of inconvenience to the

beneficiaries) or by increasing rates to all mail users by about 2

percent.

Proponents of reduced rates for special classes of mailers

argue that such rates promote the flow of news and of educational, cultural, literary, and charitable materials. Opponents

argue that, with respect to small newspapers, the true effect is

to subsidize the rates paid by advertisers and the profits of

proprietors; with respect to nonprofit institutions, they argue

that the subsidy is not well-targeted and causes overuse of the

mails for charitable appeals.

Proponents of continuing public services such as delivery

to remote areas and delivery six days a week argue that people

have come to depend on them, and that it would be unfair to

abandon such services. Opponents argue that those who live in

55
remote areas are no more entitled to full mail service than they

are to full fire protection at public expense. As for Saturday

deliveries, they argue that because of holidays there are already

at least nine weeks in the year when mail is delivered on only

five days, and that people could readily adjust to such a schedule for all the other weeks in the year.

56
Establishment of Fees to Cover Costs of Food Product Inspections

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 19_83 1984 1985 Savings

310 320 331 343 356 1,660

The Federal Grain Inspection Service is supported in part

by fees, but its administration and field supervision costs are

not covered by the collections. The Food Safety and Quality

Service provides inspection and grading services principally for

the nation's meat and poultry products. The government makes no

charge for such meat and poultry inspections. If the costs of

both services were fully charged to shippers and processors, the

savings to the general taxpayer would exceed $350 million annually

by 1985.

The argument in favor of the charge is that the cost of

inspection is like any other cost of complying with the law and

should be borne by the food industry, especially since the users

of the service are readily identifiable and collection costs

would not be great.

Opponents might well contend that, since the charges would

be passed on to the general public, they would contribute to

inflation and be regressive in the distribution of inspection

costs.

57
Reimbursement of Veterans Administration by Third-Party Insurers

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

200 250 280 330 380 1,440

Virtually all health insurance policies now contain a clause

excluding reimbursement for covered services performed in Veterans

Administration (VA) health care facilities. If a pending legislative proposal to prohibit the inclusion of such clauses is enacted,

the outlay savings would approach $400 million by 1985.

Under the proposal, the VA would remain responsible for the

full cost of treatment for service-connected conditions; but for

treatment of a non-service-connected condition, the third-party

insurer would have to reimburse the VA on the same basis as it

would a private-sector hospital.

About 88 percent of the cost of treatment for 6 percent of

VA patients would be shifted to insurance carriers under this

proposal. Inasmuch as health insurance premiums are actuarially

established, the effect over time would be a slight increase in

premium rates. The general public would still be paying for the

care of veterans, but partly through higher health insurance

premiums instead of entirely through taxes.

58
Elimination of Operating and Construction Subsidies for the

Maritime Industry

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

130 160 189 221 254 954

The Maritime Administration pays a construction cost differential subsidy to U.S. shipyards so that they can meet the

competition of foreign shipbuilders. It also pays operating cost

differential subsidies to U.S. shipping companies, again for the

purpose of meeting competition from foreign countries. If the two

subsidy programs were ended, the savings in the first five years

would approach $1 billion. Because the operating differential

subsidy is a contractual obligation with respect to a particular

ship, and typically for 20 years, it would take about that long to

capture all the savings this option would generate.

The argument for such a step is that only three or four ships

a year are built with the construction sudsidy, so that the

program has minimal effects in maintaining shipbuilding capacity.

If the subsidies were ended, there would be some loss of

emergency naval shipbuilding capacity, some possible adverse

effects on U.S. export and import prices, and some loss of employment in shipbuilding regions and in the industries that furnish

shipbuilding materials.

59

57-988 0-80- 6
STRATEGY V: REVISING JUDGMENTS AS TO WHAT CAN BE AFFORDED

Adjustmen t of Social Security Cost-of-Living Increases; 85

Percent of CPI Instead of 100 Percent

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

2,700 4,800 7,600 10,600 13,900 39,600

Every July, Social Security benefit payments are adjusted

upward by amounts equivalent to the percentage rise in the CPI

during the preceding year. If the law were changed so that the

July 1, 1980, increase and all subsequent annual increases were

limited to 85 percent of the inflation rate instead of 100 percent, the outlay savings would be very large—nearly $14 billion a

year by 1985.

One argument for such a limitation is that Social Security

benefits are not subject to income or payroll taxes, so that a 10

percent cost-of-living adjustment provides greater after-tax

protection for a Social Security beneficiary than it does for a

person whose income is the same, but taxable. While this reasoning supports some limitation on Social Security cost-of-living

adjustments, it does not lead to a specific limitation; an 85

percent limit was chosen as being within a plausible range of

limits.

Opponents of any such change point out that the average total

incomes of Social Security beneficiaries are below those of

persons still in the work force, so that thus they are already

less able to cope with the escalating cost of living. Furthermore, the suggested change would mean abandoning the commitment

made by the Congress in 1972 legislation to protect fully the

elderly and the disabled from the impact of inflation.

The issue ultimately comes down to the question of whether,

when nationally real personal incomes are level or falling, some

groups in the population should be given greater protection

against the effects of inflation than other groups. Current

law gives greater protection to Social Security beneficiaries.

60
If the decision should be that the government cannot afford

to continue to give such protection,, then consistency would require imposing limits on the cost-of-living increases paid under

other federal programs, such as civilian and military retirement.

Whether an identical or a different limit would be appropriate

would depend on further analysis of specific programs and proposals. But extension of the limiting principle to the other

programs could lead to further annual savings in excess of $4

billion in 1985.

61
Once-a-Year Cost-of-Living Adjustments for Federal Retirees

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

803 1,044 1,086 1,141 1,212 5,286

The monthly benefits of federal civilian and military retirees

are adjusted twice a year to reflect current changes in the CPI.

Both Budget Committees have recommended that the cost-of-living

adjustments for federal retirees be made only once a year, as is

the practice for Social Security benefits. If this were done

effective July 1, 1980, the annual outlay savings (based on

the CBO projection of future inflation rates) could exceed $1.2

billion by 1985.

The cost of such savings would, of course, fall on retired

federal personnel, both military and civilian. The argument for

the change is that it would bring about consistency of treatment,

at least with respect to the frequency of inflation adjustments,

for all federal retirement programs. Retired government workers

would no longer receive greater protection against inflationcaused erosion of their benefits than that accorded Social Security

retirees. But the federal retirees could argue that their pay

while in active service was kept below comparability with the

private sector by limits imposed for budgetary reasons, and that

the twice-a-year inflation adjustment they now receive is a proper,

though rough, recompense for the pay caps imposed on them during

their working lifetimes.

62
Capping of Pay Raises for Federal White-Collar Employees

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

950 760 710 630 380 3,430

In the CBO baseline cost projection, salary levels for

federal white-collar employees are assumed to rise 10.3 percent in

1981 and an average of 8.6 percent annually in the next four

years. If, instead, the increases were capped at 7.5 percent, the

savings would exceed $3.4 billion over the five-year period.

White-collar federal workers' salaries are, by law, adjusted

annually in order to maintain comparability with compensation

paid for similar work in the private sector. In recent years,

the annual adjustment has for budgetary reasons usually been

held below the level that surveys indicate is necessary to maintain comparability. The Administration has proposed legislation

that would, if enacted, significantly alter the policies and

procedures for determining comparability, particularly in the

consideration of fringe benefits, and could lead to lower annual

adjustments. Pending enactment and full development of the

Administration's proposed reforms, the Congress could continue the

practice of accepting an arbitrary cap on white-collar pay raises.

Federal workers would argue that repeated pay caps destroy

the principle of comparability and threaten the ability of the

government to maintain a qualified and competent work force. Although federal benefits may differ from those available in the

nonfederal sector, opponents of arbitrary limits on white-collar

pay increases believe that further caps would be both unfair and

unwarranted.

63
Reduction of Funding for Community Development Block Grant Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

25 140 290 420 530 1,405

NOTE: The estimated year-by-year and cumulative savings are

based on six-year old data, and are thus subject to severe

qualification.

Outlays for the Community Development Block Grant (CDBG)

program could be reduced by eliminating assured funding for the

one-third least-needy large cities, or about 200 out of nearly

600.

The loosely restricted CDBG funds are currently used by

cities for a large number of purposes, making it difficult to

estimate the precise effect of any loss of funds. But program

regulations require some targeting on neighborhoods with concentrations of needy persons, with a large share of all CDBG spending

going to housing rehabilitation and neighborhood upgrading programs. If funding were eliminated, such services could be cut

back.

The CDBG program is second only to CETA as a source of

relatively unrestricted federal funds for those cities that are

eligible, and for some of these cities CDBG funding accounts for

more than half of all federal grants received.

There is no evidence that the almost 200 least-needy beneficiary cities spend their CDBG funds less wisely or efficiently

than the other beneficiary cities. The argument for a funding

cutback must therefore rest on the general ground that the federal

government cannot afford to continue all programs at current

levels.

64
Reduction of Support for Health Professions Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

50 250 350 450 500 1,600

Eliminating capitation grants to all medical and other health

professions schools would save about $600 million over the next

five years. If the schools chose to increase tuition to offset

the lost revenues, tuitions would increase by $140-$230 for nursing

students and as much as $780 for medical students. Students might

choose to cover such tuition charges through increased borrowing,

which already averages about $18,000 (over four years) for medical

students. While the debt load is high in absolute terms, it is

low in relation to the beginning net income of physicians, now

over $50,000 a year.

Another $1 billion could be saved over the next five years by

phasing out the National Health Service Corps (NHSC) scholarships

and the NHSC itself. The scholarships now average about $12,700 a

year for each recipient and are given to 6,660 students, including

9 percent of all medical students. Eliminating the scholarships

would probably not affect total medical school enrollments, but the

students would increasingly come from higher-income families.

Ending the NHSC and the NHSC scholarship program would reduce

access to medical care for people in underserved areas. In 1979,

870 areas and 818,000 people were served by the National Health

Service Corps.

The basic argument against the NHSC is that it represents

excessive federal involvement in the direct delivery of medical

care. The federal government pays the full cost of the health

care providers. The presence of such federally paid practitioners

diminishes the attractiveness of the area for private practitioners, and thus may preclude long-run marketplace solutions

to the problem.

65
Reduction of Funding for CETA Public Service Employment Title VI

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

523 572 630 689 758 3,172

By the end of fiscal year 1980, approximately 200,000 public

service employment (PSE) jobs will be funded under Title VI of the

Comprehensive Employment and Training Act (CETA). If average PSE

enrollments were reduced to 150,000 during each of the next five

fiscal years, the total outlay savings in Title VI would equal

approximately $3.2 billion.

The stated aim of the Congress in reauthorizing CETA in 1978

was to provide Title VI jobs for 20 percent of the number of

unemployed in excess of 4 percent of the total labor force, and

for 25 percent of that number if the national unemployment rate

is above 7 percent. Funding for fiscal year 1980 finances approximately 40 percent of the statutory goal, while fiscal year

1981 funding for an average of 150,000 jobs would fulfill about

15 percent of the statutory goal.

Reducing the number of Title VI jobs would cause an increase

in unemployment; however, the size of this increase depends on

the extent of fiscal substitution—that is, on how many PSE jobs

would have been created anyway by state and local governments or

community-based organizations. The federal government is likely

to bear some of the costs of increased unemployment through other

federal programs, including unemployment compensation, Social

Security, food stamps, public assistance payments, Medicaid, and

veterans' benefits. Those increased costs would offset some of

the direct job cost savings. The size of the offsets would

depend on the extent of substitution, but expenditures would be

likely to increase by $100 to $300 million in fiscal year 1981.

Recent changes in CETA in 1978—increased targeting and PSE wage

restrictions—decrease the likelihood of substitution in comparison to prior, less restricted PSE programs.

66
Reduction of Funding for Lower-Income Housing Assistance Programs

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

100 100 200 500 900 1,800

Every year, the federal government increases the number of

lower-income families for which it makes long-term rent subsidy

commitments. About 240,000 families will be added during 1980

to the 2.8 million households for which such commitments are

currently outstanding. The Administration has requested funding

sufficient to aid what it estimates will be an additional 300,000

families in 1981. Maintaining the 1980 increment of 240,000 in

1981 and thereafter would result in annual savings of $500 million

by 1985. Raising tenant rent payments in subsidized housing

from the current maximum of 25 percent of family income to 30

percent of income would result in additional savings and would

reduce outlays even relative to current policy, rising to $900

million in 1985.

Lowering the number of new subsidy commitments would, of

course, reduce the number of additional families receiving housing

assistance. The 1980 increment of 240,000 represents one of the

lowest program growth rates in recent years; even so, it is an 8

percent increase in the number of lower-income persons receiving aid.

Raising tenant rent payments would cost assisted families an

average of about $25 extra a month; but their out-of-pocket

housing costs would still be well below the 39 percent of income

that the typical unassisted lower-income renter now pays.

Long-term funding requirements could also be reduced if

more reliance were placed on existing housing instead of on

new construction or substantial rehabilitation. The Administration's proposed program mix in fiscal year 1981 is 40 percent

existing housing and 60 percent new construction or substantial

rehabilitation. If instead the mix were 50-50, outlays would be

about $350 million more during the five-year period (because of

the shorter lead time required to lease existing units), but

savings would begin to appear in 1986 and would amount to several

billion dollars over the 30-year life of the subsidy commitments.

To the extent that the program also serves to bolster the housing

construction industry, this change would mean somewhat less

support for that purpose.

67
Relaxation of Davis-Bacon Wage Requirements

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

134 144 153 160 168 759

The 1931 Davis-Bacon Act and 77 related federal statutes

require that wages paid on most federal and federally assisted

construction projects equal the prevailing wage in the local area

of the project. Where there is no majority of workers paid at an

identical rate, the wage scale paid to at least 30 percent of

local workers is used. The practical effect, particularly in

urban areas, is that workers on federal projects receive union

scale, instead of an average locality rate. Repeal of Davis-Bacon

might result in outlay savings of more than $160 million a year by

1985 in just the three largest federal construction programs:

military, Environmental Protection Agency construction grants, and

ground transportation construction.

The estimated cost of the Davis-Bacon requirement, as given

above, is based on recent studies by the General Accounting Office

and the Council on Wage and Price Stability. Those studies have

been criticized for using limited data and failing to adjust for

asserted productivity differences. To the extent that higher-paid

workers are more productive, higher wages may not translate

directly into higher costs.

Defenders of Davis-Bacon argue that it saves the government

money by excluding unqualified contractors and by preventing

labor relations problems at construction sites. They also contend

that the law's requirements add stability to the construction

industry, thereby making less difficult the recruitment, training,

and maintenance of skilled labor.

It is probable that repeal of Davis-Bacon would lead not only

to some reduction in construction costs on federal projects, but

would also tend to reduce upward pressures on wage rates at

nonfederal projects in the same localities. While there would

probably be some offsetting costs of the kind claimed by the

critics of repeal, their magnitude cannot be calculated.

68
Reduction of Spending by the Small Business Administration

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

50 125 160 195 230 760

The Small Business Administration (SBA) provides management,

technical, and financial assistance to small businesses. If its

projected spending were cut back by 20 percent, the outlay

savings during the next five years would be over $750 million.

Several different measures would permit a reduction in

SBA expenditures. A 20 percent cut in both the direct and the

guarantee loan programs would lower outlays for loans, losses,

guarantee repurchases, and administrative costs. If SBA borrowers

were charged the government's cost for the capital loaned—

instead of about 2 percent less—annual savings after several

years would exceed $40 million. Another measure to limit SBA

spending would be to revise the definition of a small business.

Under the current definition, about 96 percent of all nonfarm

businesses now qualify for SBA assistance.

69
Imposition of Fees for Outpatient Visits at Military Hospitals

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

76 76 76 77 77 382

Free medical treatment tends to generate excessive use of

medical services. Outpatient visits to military hospitals are now

free to all eligible beneficiaries. Last year the President's

Defense Resource Management Study (DRMS) recommended a charge of

$3 for all outpatient visits except by persons on active duty. If

such a charge were made, the estimated direct savings would be

about $75 million a year. A probable additional advantage, not

subject to costing, is that the quality of care would be likely to

go up as the number of unnecessary visits went down.

The costs of this change would fall entirely on those using

the military hospital system for their care, of which the largest

group would be the dependents of enlisted personnel. The imposition of outpatient charges for dependents could adversely affect

recruitment and reenlistment. But the change would improve equity

to some extent, for many military dependents receive their care in

nonmilitary facilities, and they are not reimbursed for the first

$100 spent annually for such care.

70
Reduction in Procurement of Aegis Cruisers

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

25 155 356 651 877 2,064

The CBO baseline projection used in estimating 1981-1985

spending assumes that 11 Aegis cruisers will be procured in that

period. If the number were cut back to one a year, the five-year

outlay reduction would exceed $2 billion. (The Administration has

recently proposed 1981-1985 procurement of 16 Aegis cruisers.)

The Navy contends that carrier strikes near the Soviet

homeland would be an important means of gaining control of the

seas during a major European conflict. The Aegis cruiser would

have sophisticated missile-defense systems that, the Navy argues,

are necessary to protect U.S. carriers within the range of Soviet

land-based airpower. In peacetime, the existence of such highly

capable ships in the fleet could increase the credibility of a

U.S. naval presence, wherever the fleet is deployed.

Proponents of a slowdown in Aegis procurement point out that

the sophisticated systems involved have yet to be proved in sea

trials. They also argue that the combat scenario for which the

Aegis cruiser is ultimately designed is an unlikely one, and that

it would be better to keep up procurement of less-expensive

(though less-capable) ships, thereby making it easier to sustain

the widespread deployments that may be required of the Navy.

71
Elimination of Procurement of the KC-10 Tanker

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

14 147 245 145 72 623

This option would end procurement of all 14 KC-10 tankers

assumed in the CBO baseline projection for fiscal years 1981-1985.

(The Administration recently increased its procurement objective

for this period to 20.)

The KC-10 is a wide-bodied jet (the DC-10) modified to

accomplish aerial refueling. Its purchase is justified by the need

to refuel cargo and tactical aircraft during long, nonstop transits

associated with Persian Gulf and other Third World contingencies.

Because of its large size and range, the KC-10 is much better

suited to long-range deployments than the existing, smaller KC-135

tankers. The fleet of about 600 KC-135s is primarily committed to

refueling strategic bombers in the event of a nuclear war.

The long range of the KC-10 is much less important for a

faraway conflict, however, if the United States secures overflight

and landing rights at intermediate stops, as it has in most previous airlift operations. Furthermore, even without overflight

and landing rights, KC-135s could refuel U.S. cargo and tactical

aircraft in a Third World mission. The KC-135s devoted to this

effort would not, however, then be immediately available for

stratgic bomber refueling, were a nuclear war to occur with little

warning.

72
Termination of MX Missile Program and Expansion of Sea-Based

Deterrent

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

873 1,507 1,574 2,035 3,905 9,894

If the MX missile program were halted, and if a portion of

the savings were shifted to the more rapid development of the

Trident II missile and to the procurement of eight Trident submarines during the next five years (instead of the five assumed in

the CBO baseline projection), the 1981-1985 savings could approach

$10 billion. Some of these savings would be offset in the long run

by the higher operating costs of a sea-based system and, if Trident

procurement were limited to an additional eight submarines, the

United States would have less strategic capability than is currently planned.

The case for and against the MX is too complex to be thoroughly summarized in a page. The points below merely highlight

some of the issues.

Advocates of the MX believe that the United States should

maintain a triad of strategic forces—consisting of bombers,

ballistic missile submarines, and land-based missiles—each capable

of surviving a Soviet first strike. The MX missile system, they

argue, is needed because existing land-based missiles could be

vulnerable to a Soviet strike by the mid 1980s. The MX could also

provide other advantages, including the capability for more reliable command and control links and an increased capability to

attack such "hard" targets as missile silos and command bunkers.

Opposition to the MX missile system has centered on its

hard-target destruction capabilities, and the potential cost of

insuring that a reasonable number of missiles could survive a

Soviet first strike. Without the restraints of the Salt II treaty,

the Soviets could expand their arsenal of missiles aimed at the MX

system, which could substantially increase the costs of a survivable MX missile system. These costs, and environmental problems

associated with the MX, have led some to think that, if federal

spending must be reduced, development and deployment of the more

accurate Trident II missile aboard additional Trident submarines

might provide sufficient capability.

73
Elimination of the Military Assistance Program

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

0 110 120 130 150 510

The Military Assistance Program (MAP) provides military

equipment and services to support the military forces of U.S.

allies. Today eight countries receive significant amounts of MAP

funds, with the Phillipines and Portugal receiving the most. The

Administration has greatly reduced MAP in favor of credits and

foreign military sales backed by U.S. guarantees. This option

would eliminate MAP entirely beginning in fiscal year 1982.

The Administration has supported the elimination of MAP,

apparently on the judgment that the U.S. allies can retain strong

forces without this aid. On the other hand, the high cost of

importing petroleum, coupled with the weak world economy, has

created serious problems in some countries of strategic importance to the United States (Turkey, for example). Thus, it may

be necessary to continue providing equipment and services to some

countries, either through MAP or through other means.

74
Hospital Cost Containment

Savings by Fiscal Year Cumulative

(in millions of dollars) Five-Year

1981 1982 1983 1984 1985 Savings

370 1,400 3,000 5,000 7,200 16,970

Federal outlays for Medicare and Medicaid would be reduced by

an estimated $370 million in 1981, increasing to $7.2 billion in

1985, if the Congress were to enact the Administration's legislative proposal for limiting hospital revenue increases from

1979 levels. Other payers, such as state governments, private

insurers, and individuals, would benefit proportionately. Total

savings, public and private, are estimated at $40 billion over the

next five years. The impact of the proposal would be large enough

to lower the estimated 1985 CPI by 0*6 percentage point.

The rationale for the proposal lies in the nature of the

market for hospital services. The role of physicians in medical

decision making, combined with extensive third-party payment

arrangements, eliminates much of the pressure to contain costs

that is found in markets for other services.

Opponents of the measure allege that the limitation on

revenue growth would force hospitals to cut down on essential

services and expose them to increased deficits or reduced surpluses. Physicians might suffer a reduction in hospital-provided

resources available in their practices. Patients might lose

access to some services, and could find the quality of care not

improving as much as it otherwise would have (although they would

pay less for care).

The advantages of the approach include substantial savings

in expenditures, a relatively small amount of red tape for a

regulatory proposal, and the opportunities provided for states to

substitute their own cost containment programs. Disadvantages

include a brake on investment by hospitals in new technologies

and unequal treatment of similar hospitals.

75

57-988 0-80- 7

CHAPTER III. SAVINGS ON THE REVENUE SIDE: REDUCTIONS IN TAX

EXPENDITURES AND TIGHTER ENFORCEMENT OF EXISTING LAW

The previous chapter discussed ways of reducing federal

spending. But a significant amount of government economic

activity involves not direct spending but the giving of subsidies

in the form of lower taxes to certain groups or categories of

people. These subsidies are called "tax expenditures" since they

are in most respects equivalent to spending.

Tax expenditures are designed to stimulate or encourage

particular kinds of activity, or to provide benefits or ease hardships for specified kinds of taxpayers. Like most "entitlement"

spending programs, all those who meet the established eligibility

requirements are entitled to receive the tax savings; the total

revenue losses cannot be controlled by the Congress without making

changes in the underlying eligibility rules. And like direct

spending programs, these tax subsidies provide real economic benefits to those who receive them. Efforts to cut back the subsidies

are resisted just as strongly as are cutbacks in direct spending

programs. This chapter describes 16 illustrative examples of

reductions in tax expenditure subsidies.

Additional revenue could be raised under current law if some

of the taxable income that now goes unreported were collected and

if existing laws were better enforced. Three illustrative

examples are given for establishing a system of withholding taxes

on interest and dividends, and on the income of some "independent

contractors," and for increasing Internal Revenue Service (IRS)

resources for audits and enforcement.

The revenue estimates in this chapter are based in some cases

on CBO's fiscal year 1981-1985 revenue projections, but many of

the estimates come from the Treasury Department or the staff of

the Joint Committee on Taxation and are based on different economic assumptions and estimating techniques. Because of this and

because of complex interactions among the illustrative changes,

the separate estimates cannot simply be added up to obtain a total

revenue increase estimate.

77
REDUCTION IN TAX EXPENDITURES

Termination of Tax-Exempt Bond Subsidies for Mixed Public/Private

Activities

States and localities have issued tax-exempt bonds for decades to finance a wide variety of public projects, such as

schools, roads, sewer systems, and government buildings. In

recent years, however, these bonds have been used increasingly to

finance activities that are partly private and partly public.

Since the interest on the bonds is exempt from federal taxes,

states and localities can issue them at lower interest rates. The

federal government thus indirectly subsidizes the activities

financed with the bonds. Some possible reductions in these federal subsidies for partly private activities are described on the

following pages.

Industrial Development Bonds

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law 1.0 1.2 1.5 1.8 2.2

Revenue Increase

from Eliminating

Tax Exemption on

New Issues 0.1 0.3 0."5 0.8 1.1 2.8

Tax-exempt industrial development bonds (IDBs) are issued by

state and local agencies to finance plant and equipment for private businesses. The exemption from federal tax makes it possible

for IDS beneficiaries to obtain financing at lower rates than they

would ordinarily have to pay.

Although the use of IDBs in the past was largely for manufacturing, most states now also issue them for retail trade and other

commercial ventures, including shopping centers, supermarkets,

office buildings,and even country clubs. For large national cor78
porations, investment banking firms often underwrite several IDE

issues at one time, making it convenient to finance the opening or

expansion of a number of outlets or facilities simultaneously in

one or more states. In 1979 the volume of new IDBs reached $7.7

billion, nearly double the 1978 total.

The argument for repeal is that the public interest is not

served by subsidizing interest rates for private businesses,

particularly when IDB financing is rarely targeted to geographic

areas in need of assistance and probably has little effect on

investment decisions. The counter claim is that lower interest

rates stimulate investment and promote job development.

79
Pollution Control Bonds

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1983 1985

Cumulative

Five-Year

Revenue

Increase

Revenue Loss Under

Current Law

Revenue Increase

From Eliminating

Tax Exemption on

New Issues

0.5 0.6 0.6 0.7 0.7

0.1 0.1 0.2 0.2 0.3 0.9

From a modest 1971 total of $80 million, the volume of pollution control bonds (PCBs) rose steadily to an estimated $2.8

billion in 1978. PCBs finance 40 percent of all pollution control

investments.

The availability of PCBs can have only limited influence on a

company's decision to invest in pollution control equipment.

Federal pollution control regulations are highly prescriptive, so

that an existing firm must choose between making the required

improvement or closing.

The main argument for eliminating this subsidy is that

private industry should pay its own pollution control bills, just

as it pays for complying with other requirements imposed by law.

On the other hand, some argue that industry's efforts to avoid

contaminating the environment confer a public benefit and thus

warrant some subsidy from the public.

80
Single-Family Housing Bonds

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 J.983 1984 1985 Increase

Revenue Loss Under

Current Law 1.1 2.8 5.4 9.1 13.8

Revenue Increase

from H.R. 5741 0.6 2.1 4.8 8.4 12.0 27.9

Beginning in the summer of 1978, the volume of local taxexempt bond issues for single-family housing increased sharply.

The proceeds were used to provide low-interest mortgage loans to

selected homebuyers. While federal legislation introduced early

in 1979 slowed the increase in these bonds, they still accounted

for 15 to 20 percent of all long-term tax-exempt bonds issued in

1979. The current version of this legislation (H.R. 5741) would

sharply limit the volume of single-family housing bonds, concentrating them primarily on low- and moderate-income home purchasers

and in targeted economically distressed areas.

The argument for limiting these bonds is that they are not

well-targeted to needy families or areas, cause large federal

revenue losses, and tend to push up interest rates on other forms

of state and local borrowing, imposing additional costs on state

and local taxpayers.

The argument against limiting the bonds is that they make it

possible for some families to obtain homes who would not otherwise

be able to do so, and they assist localities in pursuing

innovative area redevelopment strategies.

81
Private Hospital Bonds

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981_ 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law 0.5 0.6 0.6 0.7 0.8

Revenue Increase

from Repeal of

Tax Exemption on

New Issues 0.1 0.1 0.2 0.2 0.3 0.9

The use of tax-exempt bonds to finance private hospital construction has increased significantly in recent years. A total of

$3.4 billion in tax-exempt hospital bonds was issued in 1979,

accounting for about 8 percent of all long-term tax-exempt financing in that year. Over half of all new hospital construction in

1979 was financed with tax-exempt bonds.

The argument for repealing the tax exemption for private

hospital bonds is that most evidence indicates that there is a

surplus of hospital beds in the United States, and that excess

hospital beds contribute to increases in hospital prices. As a

result, direct federal subsidies for hospital construction have

been sharply cut back in recent years.

The argument against repealing the tax exemption for private

hospital bonds is that, even though there may be an excess of

hospital beds nationally, some areas still lack adequate hospital

facilities. But tax-exempt bond financing may not be the best way

of assisting such areas, since the local governments may not have

the financial strength to obtain favorable bond ratings and thus

gain access to tax-exempt bond markets.

82
Student Loan Bonds

Revenue Loss Under

Current Law

Revenue Increase

from Eliminating

Tax Exemption on

New Issues

Outlay Savings from

Lower Special Allowance on New Issues

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

0.1 0.1 0.2 0.2 0.2

Cumulative

Five-Year

Effect

0.1 0.1 0.1 0.2 0.2

a/ a/ 0.1 0.1 0.1

0.7

0.3

a/ Less than $50 million.

Student loan bonds are issued to finance loans to college

students. The federal government guarantees repayment of the

loans and also pays the state or local lending agency a "special

allowance" interest subsidy in addition to the 7 percent interest

paid by students. This special allowance payment—currently 9

percent—is also paid to banks and other private lenders who make

student loans, and is designed to make up for the difference

between the 7 percent students pay and current commercial interest

rates of about 16 percent. Because of the tax exemption on their

bonds, however, state and local agencies pay less for funds than

private commercial lenders. The combination of the tax exemption

and the special allowance designed for commercial lenders thus

gives state and local lenders a double federal subsidy.

About $1.4 billion in student loan bonds has been issued to

date, including $600 million in 1979. By 1985, CBO estimates that

the annual volume will be between $900 million and $2.3 billion.

While state and local lending agencies may make loans available to students who are unable to obtain them from private lenders, it is not clear that the agencies need a double subsidy to do

so. The subsidy could be cut back either by making future student

loan bonds taxable, or by lowering the special allowance paid to

state lending agencies to reflect their lower cost of funds.

83
Limiting the Exclusion from Tax of Employer-Paid Health Insurance

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law

Revenue Increase

from H.R. 5740

15.2 17.8 21.0 24.5 28.7

2«0 1.7 1.4 1.1 1.0 7.2

Employer contributions for employee health insurance plans

are now tax-free income to the employee, in addition to being a

deductible business expense.

The argument for limiting the exclusion from tax of employerpaid health care premiums is that it has led to overly liberal

health insurance coverage, thereby driving up medical spending.

One proposal for limiting the present exclusion is in H.R. 5740.

It would restrict tax-free employer contributions to $120 a month

for family coverage. Such a limitation would affect about onethird of all employees by 1984.

The major benefit of a tightened exclusion would be the creation of incentives for taxpayers to reduce their spending for

health insurance coverage, thereby generating incentives for the

more economical use of medical resources. Over the long run, this

change could generate sizable reductions in medical spending.

The principal argument against this limitation is that it

could impose hardships on some workers and their families.

Limiting the exclusion might also have little effect on the cost

of medical services in the short run, since medical practitioners

will need some time to change their procedures in response to new

forms of health insurance coverage.

84
Reduction of Medical Expense Deduction

Revenue Loss Under

Current Law

Revenue Increase

from Eliminating

Separate Deduction

for Individual-Paid

Health Insurance

Revenue Increase

from Raising Floor

for Deductible Outof-Pocket Expenses

to 5 Percent of

Adjusted Gross Income

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

4.1 4.6 5.2 5.8 6.6

Cumulative

Five-Year

Revenue

Increase

0.3 0.3 0.3 0.3 0.3 1.3

1.0 1.1 1.2 1.3 1.5 6.0

Under current law, taxpayers who itemize their deductions can

deduct half the cost of health insurance premiums (up to $150 a

year), plus most out-of-pocket medical expenses to the extent they

exceed 3 percent of the taxpayer's adjusted gross income.

Eliminating the separate deduction for individual-paid health

insurance premiums would increase the tax bills of about 7 million

taxpayers by an average of $40 to $45 a year. Restoring the floor

on deductible medical expenses to the pre-1954 level of 5 percent

would cost an average of about $100 a year for 10 million

taxpayers.

The deduction of medical expenses above 3 percent is defended

on the ground that such expenses are extraordinary, involuntary,

and reduce a person's ability to pay income taxes. The separate

deduction for health insurance premiums is based in part on the

belief that the purchase of health insurance should be encouraged,

and that some such provision is required to provide comparable

treatment to those who pay for their own insurance and those whose

coverage is financed by their employers.

85
Both of these rationales are subject to question. The widespread holding of health insurance, for example, makes the medical

deduction in many cases a supplementary form of coverage that subsidizes uninsured expenditures, many of which involve elective

services (for example, orthodontia and cosmetic surgery). Similarly, there is little indication that the separate deduction for

health insurance premiums has much impact on the extent of private

insurance coverage.

The proposals discussed here would probably have no significant impact on overall health care spending. If enacted, however,

they would target the subsidy more narrowly on the "medically

needy" instead of on the broad class of taxpayers who itemize

their deductions.

86
Repeal of Percentage Depletion Allowance for Oil and Gas

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss from

Percentage Depletion Allowance for

All Minerals 2.6 2.9 3.1 3.3 3.6

Revenue Increase

from Disallowing

Percentage Depletion

for Oil and Gas 1.8 2.1 2.2 2.2 2.5 10.8

Most firms engaged in oil, gas, and mineral extraction are

currently allowed to deduct a fixed percentage of their gross

income as a "depletion" allowance. Calculating the depletion

allowance in this way increases producers1

 deductions substantially over what they would be if cost depletion accounting were

used. While this allowance has been eliminated for major oil and

gas producers, "independents" can still use it. The percentage

depletion rate for independents will be reduced over the next four

years under current law, dropping from 22 percent in 1980 to 15

percent in 1984. Substituting a complete repeal would gain $1.8

billion in increased revenues in 1980 and $2.5 billion in 1985.

The argument for repeal is that the dramatic increase in the

selling price of domestic oil has made this additional subsidy

superfluous. The argument against repeal is that it might discourage some domestic production and thus increase U.S. dependence

on foreign oil.

87

57-988 0 - 80 -
Repeal of Expensing of Oil and Gas Intangible Drilling Costs

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law

Revenue Increase

from Repeal of

Expensing of IDCs

2.6 2.7 3.1 3.5 4.0

2.6 2.7 3.1 3.5 4.0 15.9

Under standard accounting practices, expenditures that improve assets yielding income over several years must be capitalized and deducted over the period in which the assets produce

income. Taxpayers engaged in oil, gas, and mineral extraction

can, however, deduct amounts spent for labor, materials, supplies,

and repairs in the year they are paid—they may "expense" these

costs rather than "capitalize" them. The result is equivalent to

an interest-free loan to these taxpayers.

The argument for repeal is that, in light of recent increases

in oil prices and the decontrol of all domestically produced oil,

the subsidy provided by this provision is no longer necessary. It

has usually been defended as a risk-reducing subsidy that encourages domestic production of oil, gas, and other minerals. Replacing expensing of costs with capitalization will not, however,

affect the cost to a producer of unsuccessful exploratory drilling. Under normal capitalization rules, if no income-producing

asset results, all costs are currently deductible in any event.

Expensing of IDCs is thus largely a subsidy for low-risk drilling

in already developed and producing fields.

The argument for retaining the subsidy is that repeal might

discourage some domestic production and further increase U.S.

dependence on foreign oil.

88
Repeal of Home Insulation Tax Credit

Revenue Loss Under

Current Law

Revenue Increase

from Repeal

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

0.4 0.4 0.4 0.5 0.5

0.4 0.4 0.4 0.5 0.5

Cumulative

Five-Year

Revenue

Increase

2.2

In the Energy Tax Act of 1978, the Congress established a 15

percent tax credit, up to a maximum of $300, for home insulation

and other energy conservation devices.

The argument for repeal of the credit is that it generally

does not provide an effective incentive to marginal purchasers of

insulation, but instead is a windfall to those who would have

purchased insulation in any case. The credit has been used

primarily by higher-income taxpayers who, in response to a near

tripling in home heating costs, probably would have insulated

without the credit. The credit may also have contributed to

artificial increases in the cost of insulation.

The argument for the credit is that, although many of the

beneficiaries would have insulated sooner or later without the

credit, the subsidy may accelerate their purchases by a few years,

thus reducing short-term U.S. dependence on foreign oil.

89
Repeal of Domestic International Sales Corporation Provisions

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law 1.5 1.6 1.7 1.9 2.0

Revenue Increase

from Repeal of DISC 0.2 0.6 1.2 1.7 2.0 5.6

Domestic International Sales Corporations (DISCs) are paper

corporations established as a conduit for export sales and

afforded a lower effective tax rate on their income as a general

inducement to increase export sales. Most DISCs are wholly-owned

subsidiaries of large corporations.

A tax expenditure arises because export-related profits of

the parent corporation allocated to the DISC receive favorable tax

treatment: one-half of the tax liability on these profits over a

base level is allowed to be deferred indefinitely.

The principal objective of the legislation establishing DISC

in 1971 was to increase exports as one means of improving the U.S.

balance of trade and of increasing domestic employment. In

addition, the statute was intended to partially offset existing

tax incentives, both U.S. and foreign, that encourage U.S.

companies to favor production abroad over production at home for

sale abroad, and that give tax shelter to foreign companies

competing in the U.S. comestic market.

If DISCs are to have the effect of increasing exports, the

tax savings provided must be used either to reduce export prices

or to increase export promotional activities over what they would

have been without DISCs. Evidence indicates that some increase in

promotional activities can be attributable to DISCs. There is no

evidence, however, that the availability of DISCs has affected

export prices or credit terms.

Critics of DISCs contend that this type of tax expenditure

has many inefficiencies. They maintain that it is not flexible

90
enough to respond to changes in the overall U.S. trade position.

In addition, they argue that DISCs benefit mostly the largest corporations, those in the least need of aid; and that other countries see it as an unfair tax subsidy under the terms of the

General Agreement on Tariffs and Trade.

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

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

would be to phase out the tax benefits over a three-year period,

beginning in 1981. The revenue effects are shown above.

The accumulated past earnings of DISCs could continue to be

tax deferred as long as they remain invested in export-related

assets. Alternatively, some or all of the accumulated tax

liability could be recaptured over a specified period of years.

91
Taxation of a Portion of Social Security Benefits

Revenue Loss from Exclusion of OASI and

Railroad Retirement

Benefits

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

Revenue Increase from

Taxing Half of

Benefits

10.3 12.4 14.5 17.0 19.6

5.0 6.0 7.1 8.3 9.6

Revenue Increase from

Taxing Benefits of

Recipients with Incomes Over $20-25,000 1.1 1.3 1.6 2.5 3.0

Cumulative

Five-Year

Revenue

Increase

36.0

9.5

When Social Security benefits were first paid in the 1940s,

they were exempted from income taxation by the Internal Revenue

Service (not by the Congress) on the theory that they were general

assistance to the elderly, who typically were poor. The revenue

loss was negligible, because total annual Social Security payments

then amounted to $35 million and income tax rates were low. But

in 1981, the exclusion from tax of Social Security and railroad

retirement benefits will cost more than $10 billion in revenues,

and in 1985 nearly $20 billion.

Critics assert that, while this tax exemption had its origin

as a subsidy to the elderly, many of whom were poor, it now serves

primarily to subsidize upper-income recipients who benefit most

from the tax-free status of social security payments.

Taxing half of Social Security benefits has been proposed as

a rough way of making the treatment of these payments similar to

that of other retirement benefits. If this were done, Social

Security recipients in the lowest income group, who make up nearly

half of all beneficiaries, would pay on average $1 more a year in

income taxes than they do now. By contrast, the 1 percent of

92
beneficiaries whose incomes exceed $50,000 a year would pay an

average of more than $1,000 in added income tax under this

proposal (Table 3).

A more limited approach would tax benefits only for those

taxpayers whose joint income, including Social Security, exceeds

$25,000 or whose individual income is above $20,000. This change

would be consistent with the current tax treatment of unemployment

insurance benefits.

TABLE 3. INCOME TAX INCREASES RESULTING FROM THE TAXATION OF HALF OF OASDI

BENEFITS, BY INCOME CLASS

Income Class

( thousands

of dollars)

Less than 5

5-1 0

10 - 15

15 - 20

20 - 30

30 - 50

50 - 100

100 - 200

Above 200

Total Number

of OASDI

Beneficiaries

Filing Returns

(thousands)

10,883

6,574

3,210

1,536

1,215

505

186

40

14

OASDI

Beneficiaries

in Income Class

as a Percent

of All OASDI

Beneficiaries

Filing Returns

45.0

27.2

13.3

6.3

5.0

2.1

0.8

0.2

0.1

Average

Increase in

Income Tax

Liability

(dollars)

1

103

321

447

528

791

1,111

1,448

1,272

Total 24,163 100.0 155

SOURCE: Department of Treasury Individual Income Tax Model, 1979 law at 1978

income levels.

93
Taxation of All Unemployment Insurance Benefits

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

Revenue Loss Under

Current Law

Revenue Gain from

1978 Act (compared

to old law)

3.1 2.9 2.5 2.1 1.8

0.3 0.3 0.3 0.3 0.3

Additional Revenue

Increase from Full

Taxation of Benefits 3.1 2.9 2.5 2.1 1.8

Cumulative

Five-Year

Revenue

Increase

12.4

Before 1979, a series of Internal Revenue Service rulings

served as the basis for exempting from taxation unemployment compensation paid under most government programs. The Revenue Act of

1978 altered this treatment by partially taxing benefits received

by individuals with incomes over $20,000 and married couples with

incomes over $25,000.

The revenue gain from the 1978 law change will amount to

about $300 million a year over the next five years. Because the

income limits specified in the provision were set so high, however, the 1978 act did not affect the majority of taxpayers. If

unemployment payments were made fully taxable for all individuals,

the additional revenue gain would be about $3.1 billion in 1981.

Expanding the current taxability of unemployment payments to

include all workers would remove any differences in the tax treatment between privately paid unemployment compensation and government benefits. Supplementary unemployment benefits from private

employers have always been considered fully taxable income because

they are intended to replace lost taxable earnings. Removing the

tax exclusion for unemployment benefits would also reduce the

current law's incentives to low- and middle-income individuals to

remain unemployed; the level of payments made to unemployed

workers is now frequently close to the after-tax income they could

receive from working.

94
Increase in Tax Rates on First $100,000 of Corporate Income

Cumulative

Revenue Change in Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss from Low

Rates on First

$100,000 of

Corporate Income

Revenue Increase

from Higher Rates

7.5 7.9 8.4 8.7 9.1

2.5 2.8 3.1 3.4 3.7 15.5

Under current law, the first $25,000 of corporate income is

taxed at 17 percent, the second at 20 percent, the third at 30

percent, the fourth at 40 percent, and all income over $100,000 at

46 percent.

If the purpose of the lower rates on the first $100,000 of

corporate income is to stimulate corporate investment, the current

rate structure has certain drawbacks. Since investment decisions

are affected primarily by the tax rate paid on the extra dollars

of new income earned by the investment, the current rates have

little effect on the decisions of corporations with incomes over

$100,000, since they must pay the top rate of 46 percent on all

new income. The maximum benefit from the lower rates for any

single corporation is also only $19,250 a year, a relatively small

amount for many large corporations.

On the other hand, if the lower rates are seen as a way to

subsidize small businesses, the current subsidy is poorly targeted. The majority of small businesses are not incorporated and

thus do not benefit at all from the lower rates, despite the fact

that those rates provide substantial incentives to incorporate for

tax shelter purposes.

A less graduated rate structure with a higher bottom rate

would counteract some of these drawbacks. One such illustrative

rate structure is shown below. It would add an estimated $2.5

billion to revenues in 1981, and $3.7 billion in 1985.

95
Taxable Current Proposed

Income Law Rate Rate

(dollars) (percent) (percent)

$ 0 - 25,000 17 30

25,001 - 50,000 20 30

50,001 - 75,000 30 35

75,001 - 100,000 40 40

100,001 and above 46 46

The revenue that would be gained from these changes might be

used to fund other, possibly more effective, ways of helping small

businesses. One possibility would be a special lower capital

gains rate for "venture capital" investments in new small

businesses.

96
Limiting of Home Mortgage Interest Deductions

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 J.9.33 1984 1985 Increase

Revenue Loss Under

Current Law 14.8 17.4 20.5 24.2 28.6

Revenue Increase

from $5,000 Cap 0.8 0.9 1.0 1.1 1.3 5.1

Revenue Increase From

Converting the

Deduction to a 25

Percent Credit 0.8 0.9 1.0 1.1 1.3 5.1

Home mortgage interest payments have always been deductible

under the federal tax system, providing a substantial and widely

popular subsidy for home ownership. The subsidy has been incorporated into prices and investment decisions throughout the economy and could not be eliminated without causing serious unfairness and dislocation.

At the same time, the tax revenue loss is large, and the subsidy has probably contributed to the serious decline in rental

housing construction, because unsubsidized rents cannot compete

with the tax advantages of home ownership.

While the tax advantages are substantial for taxpayers with

incomes over $30,000, the great majority of homeowners with

incomes below $20,000 receive little or no benefit from the mortgage interest deduction; almost 40 percent of all homeowners use

the standard deduction and gain no direct benefit from the deductibility of mortgage interest.

One way to target the subsidy more directly on those who have

greater need for assistance would be to place a cap on the amount

of mortgage interest that may be deducted. If the cap were set

high enough, most homeowners would not be affected, but the cap

might reduce increases in the prices of more expensive homes,

could lead to more rental housing construction, and would reduce

the revenue loss to the federal government.

97
If the cap were set at $5,000, only homeowners with mortgage

principal of more than $47,000 would be affected, assuming a 10.5

percent mortgage interest rate.

Alternatively, a credit equal to 25 percent of mortgage

interest payments could be substituted for the deduction. . This

would provide tax savings to all homeowners, not just higherincome homeowners who itemize their deductions. The tax savings

would also be a constant 25 percent of interest paid, rather than

varying from 14 percent to 70 percent depending on the taxpayer's

marginal tax rate. The revenue increase would be about the same

as from a $5,000 cap.

98
Reduction of $100,000 Capital Gains Exclusion on Home Sales by

Persons Aged 55 or Over

Cumulative

Revenue Change by Fiscal Year Five-Year

(in billions of dollars) Revenue

1981 1982 1983 1984 1985 Increase

Revenue Loss Under

Current Law

Revenue Increase

from Reducing Exclusion to $50,000

0.6 0.6 0.7 0.8 0.9

0.5 0.5 0.6 0.6 0.7 2.8

The Revenue Act of 1978 contained a once-in-a-1ifetime

exclusion from capital gains tax of up to $100,000 of profit on

homes sold by persons aged 55 or over. This replaced a much more

limited provision that applied only to less expensive homes and

only to persons aged 65 or over.

One effect of this subsidy

homeowners to sell their residences

thus freeing up some larger homes

But the provision also considerably

of homes and may divert investment

more productive investments, such

ment. Another disadvantage may be

become willing to pay more in the

gains.

will be to encourage older

and move to smaller quarters,

for younger, larger families,

increases the investment value

funds away from other possibly

as business plant and equiphigher home prices, as buyers

expectation of future tax-free

If the $100,000 exclusion were cut back to $50,000, and taxpayers were allowed to use it cumulatively, rather than for only

one sale, the revenue loss would be cut back substantially. (All

homeowners would continue to be able to shelter gains on home

sales by reinvesting the full proceeds in another residence.)

99
ADDITIONAL WITHHOLDING AND BETTER ENFORCEMENT

Institution of Withholding on Interest and Dividend Income

Revenue Increase from

15 Percent Withholding on Interest and

Dividends

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

6.5 3.3 3.7 4.2 4.6

Cumulative

Five-Year

Revenue

Increase

22.3

It has been estimated that as much as $14 billion in interest

and dividend income goes unreported by taxpayers each year, resulting in billions of uncollected tax dollars. If 15 percent of

such income were withheld at the source, more revenue would be

collected, and tax evasion and fraud could be reduced. The revenue gain would result from a one-time speed-up of receipts in the

initial year of enactment, and the collection of taxes on previously unreported income. While some taxpayers would undoubtedly

continue not to report all of their interest and dividend income

(and thus only 15 percent of it would be collected as a tax), many

others would probably be induced into a full disclosure and would

be taxed at an average marginal rate of 25 percent.

The proposal has been consistently and strongly opposed by the

financial community on the grounds of excessive administrative

costs and inconvenience. Yet banks, savings and loan associations, and dividend payers are already required to file annual

information reports for all taxpayers who receive over $10 in

interest or dividend income, and the additional chore of withholding should not be unduly burdensome. The Internal Revenue Service

would also incur additional administrative and compliance costs.

100
Institution of Withholding on Independent Contractors

Revenue Increase from

10 Percent Withholding on Independent

Contractor Income

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

Cumulative

Five-Year

Revenue

Increase

0.6 0.6 0.7 0.9 1.1 3.9

Recent studies have indicated substantial underreporting of

income by so-called "independent contractors." These include

realtors, insurance agents, construction workers, truck drivers,

and others whose relationship with those from whom they receive

income is not as close as the normal employer-employee relationship. A 1979 study by the Internal Revenue Service suggested that

almost 50 percent of all workers who are currently treated as

independent contractors by the IRS do not report any of their

compensation.

The Administration has proposed legislation that would

require that 10 percent of payments to independent contractors be

withheld at the source for taxes. A subcommittee of the House

Committee on Ways and Means reported a bill (H.R. 5460) late last

year incorporating this Administration proposal, and action by the

full committee is expected this year. The Administration estimates that 10 percent withholding would result in a revenue increase of at least $600 million a year.

101
Increase in IRS Audit and Collection Resources

Revenue Change by Fiscal Year

(in billions of dollars)

1981 1982 1983 1984 1985

Cumulative

Five-Year

Revenue

Increase

Increase in Tax

Revenues

Increase in IRS

Resources

(Outlays)

Net Revenue

Increase

0.3 0.8 1.2 1.7 2.1

0.1 0.1 0.2 0.2 0.3

0.2 0.7 1.1 1.5 1.9

Note: Details may not add to totals because of rounding.

6.1

0.8

5.3

According to the Internal Revenue Service, every additional

dollar appropriated for tax examination purposes generates $4 to

$5 of tax revenues, and every additional dollar appropriated to

collect unpaid accounts generates $18 to $20. On the basis of

these estimates, an increase in IRS appropriations of $50 million

(5 percent of the current budget) in each of the next five years

could provide net budget savings of about $0.2 billion in 1981,

growing to $1.9 billion in 1985, with a five-year cumulative

savings of $5.3 billion. This option entails no increase in tax

rates but only the more efficient collection of sums already owed

the government under current law.

102
APPENDIX. SUMMARY TABLES OF ILLUSTRATIVE EXAMPLES CATEGORIZED BY

BUDGET FUNCTION

TABLE A-l. ILLUSTRATIVE SAVINGS FROM CBO BASELINE PROJECTIONS, BY BUDGET FUNCTION, FISCAL YEARS 1981-1985: IN MILLIONS OF DOLLARS

Budget Function 1981 1982 1983 1984 1985

Cumulative

Five-Year

Savings

050 National Defense

Elimination of World War II Destroyers

Restructuring of Military Retirement Pay

Change in Enlisted/Officer Ratio in the Armed Forces

Imposition of Small Fees for Outpatient Visits at Military Hospitals

Reduction in Procurement of Aegis Cruisers

Elimination of Procurement of the KC-10 Tanker

Termination of MX Missile Program and Expansion of Sea Based Deterrent

Increase of States' Share in Cost of Army National Guard

150 International Affairs

Elimination of the Military Assistance Program

250 General Science Space and Technology

None

129

•100

16

76

25

14

873

190

27

-90

35

76

155

147

1,507

210

20

-60

57

76

356

245

1,574

230

31

-20

83

77

651

145

2,035

250

35

20

110

77

877

72

3,905

275

110 120 130 150

242

-250

301

382

2,064

623

9,894

1,155

510

270 Energy

Closing of the Clinch River Breeder Reactor Program

Elimination of Solar Demonstration and Application Projects

300 Natural Resources and Environment

Reduction of Funding for EPA1

s Construction Grants

Elimination of the State Share of the Land and Water Conservation Fund

Elimination of Urban Park Grant Program

Reduction of Soil and Water Conservation Program

350 Agriculture

Establishment of Fees to Cover Costs of Food Product Inspections

Elimination of Farm Deficiency Payments

Elimination of Farm Disaster Payments

370 Commerce and Housing Credit

Elimination of Subsidies to the U.S. Postal Service

Reduction of Spending by the Small Business Administration

220

85

0

147

9

94

310

0

0

1,614

50

430

141

420

196

58

128

320

914

0

1,756

125

560

206

732

259

111

147

331

1,049

560

1,726

160

160

227

973

282

153

158

343

353

560

1,761

195

80

250

1,030

313

166

169

356

111

560

1,746

230

1,450

909

3,155

1,197

497

696

1,660

2,427

1,680

8,603

760
TABLE A-l. (Continued)

Budget Function

400 Transportation

Limiting of Federal Highway Aid

Reduction in Commitments for Subway Construction

User Charges for Coast Guard Activities

Elimination of Operating and Construction Subsidies for the Maritime Industry

Increased User Charges for Airports and Airways

Reduced Spending for Large Airports

Increased User Charges for Army Corps of Engineers Waterway Projects

450 Community and Regional Development

Reduction of Funding for Community Development Block Grant Program

Reduction of Funding for Urban Development Action Grants

500 Education, Training, Employment, and Social Services

Reduction of Funding for Youth Employment Programs

Restructuring of College Student Loan Programs

Retargeting of Basic Educational Opportunity Grants

Reduction of Funding for Impact Aid

Reduction of Funding for CETA Public Service Employment, Title VI

Phasing Out of Funding for Vocational Education

550 Health

Hospital Cost Containment

Reduction of Support for Health Professions Programs

600 Income Security

Administrative Improvements in Public Assistance Programs

Change in Trigger for Unemployment Insurance Extended Benefits

Modifications in Trade Adjustment Assistance

Modifications in Child Nutrition Programs

School Lunch

Food Stamps

1981

200

10

600

130

910

100

980

25

7

547

400

100

250

523

20

370

50

325

1,000

150

300

1,180

1982

900

230

650

160

980

200

1,010

140

37

774

800

400

325

572

213

1,400

250

350

1,000

200

325

1,312

1983

1,600

420

700

189

1,060

300

1,070

290

85

842

1,100

400

350

630

457

3,000

350

375

0

250

355

1,400

1984

2,000

525

760

221

1,120

400

1,120

420

153

908

1,300

300

400

689

708

5,000

450

400

0

250

390

1,460

1985

2,100

645

820

254

1,200

500

1,200

530

231

983

1,200

300

450

758

966

7,200

500

440

0

250

430

1,530

Cumulative

Five-Year

Savings

6,800

1,830

3,530

954

5,270

1,500

5,380

1,405

513

4,054

4,800

1,500

1,775

3,172

2,363

16,970

1,600

1,890

2,000

1,100

1,800

6,880
TABLE A-l. (Continued)

Budget Function

600 Income Security

Modifications in Federal Compensation Practices

Termination of Certain Social Security Benefits

Adjustment of Social Security Cost-of-Living Increases: 85

Percent of CPI Instead of 100 Percent

Reduction of Funding for Lower-Income Housing Assistance Programs

Modification of Indexation of Federal Programs

700 Veterans' Benefits and Services

Elimination of Certain GI Bill Benefits

Reimbursement of Veterans Administration by Third-Party Insurers

750 Administration of Justice

Termination of the Legal Services Corporation

Reduction of Funding for Criminal Justice Assistance

1981

49

455

2,700

100

3,500

70

200

250

74

1982

148

1,215

4,800

100

3,500

60

250

341

320

1983

263

2,280

7,600

200

5,700

50

280

369

488

1984

394

2,880

10,600

500

7,600

40

330

399

560

1985

539

3,150

13,900

900

9,700

30

380

432

606

Cumulative

Five-Year

Savings

1,393

9,980

39,600

1,800

30,000

250

1,440

1,791

2,048

800 General Government

None

850 General Purpose Fiscal Assistance

Reduction in the General Revenue Sharing Program

Eliminate States

Limit Local Units

900 Interest

None

950 Undistributed Offsetting Receipts

None

Several

Reform of the Wage Board Pay System

Elimination of Dual Pay for Reservists Who Are Federal Employees

Once a Year Cost-of-Living Adjustments for Federal Retirees

Capping of Pay Raises for Federal White-Collar Employees

Relaxation of Davis-Bacon Wage Requirements

2,440

240

2,660

260

2,900

290

3,150

310

3,420

340

260

35

803

950

134

610

39

1,044

760

144

780

42

1,086

710

153

870

46

1,141

630

160

950

50

1,212

380

168

14,570

1,440

3,470

212

5,286

3,430

759
TABLE A-2. ILLUSTRATIVE REVENUE INCREASES BY BUDGET FUNCTIONS, FISCAL YEARS 1981-1985: IN BILLIONS OF DOLLARS

Budget Function 1981 1982 1983 1984

Cumulative

Five-Year

1985 Savings

050 National Defense

None

150 International Affairs

Repeal of Domestic International Sales Corporation (DISC) Provisions

250 General Science Space and Technology

None

270 Energy

Repeal of Home Insulation Tax Credit

Repeal of Expensing of Oil and Gas Intangible Drilling Costs

Repeal of Percentage Depletion Allowance for Oil and Gas

300 Natural Resources and Environment

Termination of Tax Exemption for Pollution Control Bonds

350 Agriculture

None

370 Commerce and Housing Credit

Termination of Tax Exemption for Single-Family Housing Bonds

Termination of Tax Exemption for Industrial Development Bonds

Increase in Tax Rates on First $100,000 of Corporate Income

Limiting of Home Mortgage Interest Deductions

Revenue Increase From $5,000 Cap

Revenue Increase From Converting the Deduction to a 25 Percent Credit

Reduction of $100,000 Capital Gains Exclusion on Home Sales by Persons

Aged 55 or Over to $50,000

400 Transportation

None

0.2

0.4

2.6

0.1

0.6

0.1

2.5

0.8

0.8

0.5

0.6

0.4

2.7

2.1

0.1

2.1

0.3

2.8

0.9

0.9

0.5

1.2

0.4

3.1

2.2

0.2

4.8

0.5

3.1

1,0

1.0

0.6

1.7

0.5

3.5

2.2

0.2

8.4

0.8

3.4

1.1

1.1

0.6

2.0

0.5

4.0

2.5

0.3

12.0

1.1

3.7

0.7

5.6

2.2

15.9

10.8

0.9

27.9

2.8

15.5

5.1

5.1

2.8

450 Community and Regional Development

None
TABLE A-2. (Continued)

Budget Function 1981 1982 1983 1984 1985

Cumulative

Five-Year

Savings

o

500 Education, Training, Employment, and Social Services

Termination of Tax Exemption for Student Loan Bonds

550 Health

Termination of Tax Exemption for Private Hospital Bonds

Limiting the Exclusion from Tax of Employer-Paid Health Insurance

Reduction of Medical Expense Deduction

Eliminating separate deduction for individual-paid health insurance

Raising floor for deductible out-of-pocket expenses to 5 percent

of adjusted gross income

600 Income Security

Taxation of All Unemployment Insurance Benefits

Taxation of a Portion of Social Security Benefits

Revenue Increase from Taxing Half of Benefits

Revenue Increase from Taxing Benefits of Recipients with Incomes

Over $20-25,000

700 Veterans' Benefits and Services

None

750 Administration of Justice

None

800 General Government

Institution of Withholding on Interest and Dividend Income

Institution of Withholding on Independent Contractors

Increase in IRS Audit and Collection Resources

0.1

0.1

2.0

0.3

1.0

3.1

5.0

1.1

0.1

0.1

1.7

0.3

1.1

2.9

6.0

1.3

0.1

0.2

1.4

0.3

1.2

2.5

7.1

1.6

0.2

0.2

1.1

0.3

1.3

2.1

8.3

2.5

0.2

0.3

1.0

0.3

1.5

1.8

9.6

3.0

0.7

0.9

7.2

1.3

6.0

12.4

36.0

9.5

6.5

0.6

0.2

3.3

0.6

0.7

3.7

0.7

1.1

4.2

0.9

1.5

4.6

1.1

1.9

22.3

3.9

5.3