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Unless otherwise indicated, all years referred to in this report are fiscal years. Dashes in tables in this report indicate amounts less than $2.5 million. Details in the text and tables of this report may not add to totals because of rounding. The Balanced Budget and Emergency Deficit Control Act of 1985 is also referred to in this volume more briefly as the Balanced Budget Act. |
The Congressional Budget Office (CBO) is required by section 202(f) of the Congressional Budget Act of 1974 to submit an annual report on budgetary options to the Senate and House Committees on the Budget. This year, the report is in two parts, with this report constituting Part II. Part I is entitled The Economic and Budget Outlook: Fiscal Years 1988-1992.
This report provides background information for each major spending area of the budget and for revenues, and analyzes various specific options that would reduce the deficit. The inclusion of an option in the report, or the omission of one, does not imply a recommendation by CBO.
All divisions of the Congressional Budget Office contributed to this report, which was prepared under the supervision of Robert W. Hartman. Alfred B. Fitt was responsible for Section I. John D. Mayer, Maureen McLaughlin, Roger Hitchner, Jenifer Wishart, Earl A. Armbrust, and Rosemarie Nielsen were responsible for coordinating the specific deficit reduction options in Section II of this volume. Budget authority and outlay estimates were coordinated by Charles E. Seagrave, Robert A. Sunshine, Michael A. Miller, and William P. Myers. Revenue and outlay projections were prepared under the supervision of Rosemary D. Marcuss and Paul N. Van de Water, respectively. The Joint Committee on Taxation provided estimates of most of the revenue options.
Paul L. Houts supervised the editing and production of the report, assisted
by Nancy H. Brooks. Major portions were edited by Patricia H. Johnston,
Francis S. Pierce, and Sherry Snyder. Others who assisted in preparing
the manuscript for publication were Mary V. Braxton, Jill Bury, Gwen Coleman,
G. William Darr, Antoinette V. Foxx, Shirley G. Hornbuckle, Patricia A.
Joy, Norma A. Leake, Angela Z. McCullough, Betty J. Miles, Ronald Moore,
and Kathryn Quattrone. Additional assistance was provided by Shelbah Adams.
Rudolph G. Penner
Director
January 1987
SECTION I - REDUCING THE DEFICIT: AN OVERVIEW
SECTION II - SPENDING AND REVENUE OPTIONS
National Defense | |
DEF-01 | Cancel Procurement of the F-15 |
DEF-02 | Cancel the C-17 Program |
DEF-03 | Cancel the Antisatellite Missile |
DEF-04 | Cancel Trident Refit Program |
DEF-05 | Slow Trident SSBN Construction |
DEF-06 | Restructure the Army's Forward Area Air Defense Program |
DEF-07 | Defer New Program Starts Until 1990 |
DEF-08 | Reduce Purchases of MX Missiles |
DEF-09 | Cancel V-22 Aircraft Development |
DEF-10 | Restructure the Army Helicopter Programs |
DEF-11 | Delay the Army's Deep-Attack Weapons |
DEF-12 | Limit Funding for Supporting Procurement |
DEF-13 | Alter Research and Development Funding |
DEF-14 | Slow Growth in the Strategic Defense Initiative |
DEF-15 | Alter Funding for Military Construction |
DEF-16 | Retire Some G-Model B-52 Strategic Bombers Early |
DEF-17 | Alter Operation and Maintenance Funding |
DEF-18 | Reduce Active-Duty End Strength to 1982 Level |
DEF-19 | Slow the Growth in Army Active Guard and Reserve Personnel |
DEF-20 | Limit Military Pay Raise |
DEF-21 | Raise Cost-Sharing for Certain Outpatients |
Entitlements and Other Mandatory Spending | |
ENT-01 | Recalculate Medicare's Prospective Payment Rates Using More Recent Cost Data |
ENT-02 | Reduce Medicare's Payments for the Indirect Cost of Medical Education |
ENT-03 | Reduce Reimbursements for Capital Expenditures Under Medicare |
ENT-04 | Reduce Total Medicare Direct Medical Education Payments |
ENT-05 | Adopt a Fee Schedule for Reimbursing Physicians Under Medicare |
ENT-06 | Include Hospital-Based Physicians' Services in Hospitals' Prospective Payments |
ENT-07 | Increase Medicare's Premium for Physicians' Services |
ENT-08 | Use the Tax System to Impose a Supplementary Income-Related Premium for Physicians' Services |
ENT-09 | Tax a Portion of Medicare Benefits |
ENT-10 | Increase Medicare's Deductible for Physician Services |
ENT-11 | Cap Each Enrollee's Copayment Liability Under Medicare and Impose a Tax on "Medigap" Policies |
ENT-12 | Limit Federal Payments for Long-Term Care |
ENT-13 | Tax Employer-Paid Health Insurance |
ENT-14 | Restrict Cost-of-Living Adjustments in Non-Means-Tested Benefit Programs |
ENT-15 | Reduce the Replacement Rate Within Each Bracket of the Social Security Benefit Formula |
ENT-16 | Eliminate Social Security Benefits for Children of Retirees Aged 62-64 |
ENT-17 | Eliminate Certain Veterans' Compensation Payments for Those with Low-Rated Disabilities or End Allowances for Dependents |
ENT-18 | Require a Two-Week Waiting Period for Unemployment Insurance Benefits |
ENT-19 | Index the Unemployment Insurance Taxable Wage Base |
ENT-20 | Maintain the Current Federal Unemployment Insurance Tax Rate |
ENT-21 | Reduce and Retarget Aid for Dependent Care |
Agricultural Price Supports | |
AGR-01 | Reduce Deficiency Payments by Lowering Target Prices |
AGR-02 | Increase Requirements for Unpaid Acreage Reduction |
AGR-03 | Target Income Support Payments Toward Specific Groups of Producers |
AGR-04 | Limit the Uses of Generic Commodity Certificates |
AGR-05 | Raise Domestic Prices of Supported Agricultural Commodities |
AGR-06 | Reduce Effects of Income Support Payments on Production Decisions |
Nondefense Discretionary Spending | |
NDD-01 | Reduce Federal Support for Agricultural Research and Extension Activities |
NDD-02 | Reduce New Lending or Increase Homeowners' Payments Under Rural Housing Loan Program |
NDD-03 | Reduce Funding for Research Supported by the National Institutes of Health |
NDD-04 | Reduce Subsidies Provided by the Rural Electrification Administration |
NDD-05 | Reduce Federal Funds for Research and Development in Energy Supply and Conservation |
NDD-06 | Eliminate Energy Conservation Grants |
NDD-07 | Change Revenue-Sharing Formula from a Gross to a Net Receipt Basis for the National Forest Timber Sales Program |
NDD-08 | End Funding for the Legal Services Corporation |
NDD-09 | Shift Housing Assistance from New Construction to Vouchers |
NDD-10 | Phase Out Subsidies for Flood Insurance and Crop Insurance |
NDD-11 | Convert Underused Acute-Care Beds in VA Hospitals |
NDD-12 | Recover the Operating Costs of Selected Regulatory Agencies |
NDD-13 | End Direct and Indirect Postal Subsidies |
NDD-14 | Eliminate Federal Support to States for Construction of Sewage Treatment Plants |
NDD-15 | Reduce Credit Subsidies to Federal Power Marketing Administrations |
NDD-16 | Transfer Control and Financing of Water Resources and Transportation Programs to Users and Local Authorities |
NDD-17 | Eliminate Funding for Untargeted Elementary and Secondary Education Programs |
NDD-18 | Reduce Campus-Based Student Aid |
NDD-19 | Eliminate or Restrict Eligibility for Community Development Block Grants |
NDD-20 | End Funding of the Economic Development Administration and Urban Development Action Grants |
NDD-21 | Cancel the NASA International Space Station Program |
NDD-22 | Cancel Funding for a Space Shuttle to Replace the Challenger |
NDD-23 | Eliminate Purchases for the Strategic Petroleum Reserve |
NDD-24 | Modify the Davis-Bacon Act by Raising the Contract Threshold and Allowing Unrestricted Use of Helpers |
Federal Work Force | |
FWF-01 | Alter the Timing and Distribution of Federal Pay Raises |
FWF-02 | Cap Cost-of-Living Adjustments for Federal Retirees Under Age 62 |
FWF-03 | Modify the Federal Employees Health Benefits Program |
FWF-04 | Reduce Federal Travel Expenses |
FWF-05 | Trim the Size of the Federal Civilian Work Force |
Revenues | |
REV-01 | Raise Marginal Tax Rates for Individuals and Corporations |
REV-02 | Amend or Repeal Indexing of Income Tax Schedules |
REV-03 | Impose a Value-Added Tax |
REV-04 | Increase Energy Taxes |
REV-05 | Increase Excise Taxes |
REV-06 | Repeal Exemptions to the Gasoline Excise Tax |
REV-07 | Reduce Tax Credits for Rehabilitation of Older Buildings |
REV-08 | Tax Credit Unions Like Other Thrift Institutions |
REV-09 | Repeal Tax Preferences for Extractive Industries |
REV-10 | Eliminate Private-Purpose Tax-Exempt Bonds |
REV-11 | Tax Capital Gains at Death |
REV-12 | Tax 30 Percent of Capital Gains from Home Sales |
REV-13 | Decrease Limits on Contributions to Qualified Pension and Profit-Sharing Plans |
REV-14 | Impose a 5 Percent Tax on the Investment Income of Qualified Retirement Plans and IRAs |
REV-15 | Further Restrict Deductions for Business Entertainment and Meals |
REV-16 | Limit Mortgage Interest Deductions |
REV-17 | Eliminate Deductibility of State and Local Taxes |
REV-18 | Increase Taxation of Non-Means-Tested Entitlement Benefits |
REV-19 | Tax Nonretirement Fringe Benefits |
REV-20 | Broaden the Social Security Tax Base |
APPENDIX - SUMMARY TABLE OF SPENDING AND TAXATION OPTIONS BY BUDGET
FUNCTION
TABLES | |
I-1. | CBO Baseline Deficit Projections |
I-2. | Baseline Outlay Projections |
II-1. | Alternative Levels of Defense Spending |
II-2. | Levels of Defense Budget Authority Under Alternative Budget Plans and Strategies for $20 Billion Reductions from Administration's Budget Request, Fiscal Year 1988, by Appropriation Account |
II-3. | Federal Work Force and Compensation: Fiscal Year 1987 |
II-4. | Sample Calculation of a Value-Added Tax Base, 1986 |
FIGURES | |
Fiscal Year 1987 Defense Budget Authority by Appropriation Account | |
National Defense Budget Authority, Fiscal Years 1948-1992 | |
National Defense Outlays as a Percent of GNP, Fiscal Years 1948-1992 | |
Composition of Entitlement Outlays by Type of Program, 1986 | |
Composition of Entitlement Outlays by Type of Expenditure, 1986 | |
Entitlement Outlays, 1965-1992 | |
Cumulative Growth Rates in Entitlement Outlays by Type of Expenditure, 1970-1992 | |
BOX | |
Federal Spending Categories |
The Balanced Budget and Emergency Deficit Control Act of 1985 (the Balanced Budget Act) instructs the 100th Congress to adopt a budget plan for 1988 with a deficit no larger than $108 billion. But if the policies left in place by the 99th Congress are continued by its successor, the likely deficit for 1988 will be $169 billion, as shown in Table 1-1.
Unless the maximum deficit targets prescribed in the Balanced Budget Act are amended, the budget resolution for 1988, which is due to be adopted by April 15, 1987, must close a gap of $61 billion.1 That amount corresponds to a 5.7 percent cut in 1988 outlays or a 6.8 percent rise in revenues.
If all of the excess 1988 deficit is eliminated on the spending side of the budget, some programs must be hit much harder than the 5.7 percent mentioned above. This imbalance occurs because still other programs are constitutionally shielded from any reduction at all-interest on the debt, contract obligations, judgments against the United States, and so forth. Technical factors and political consensus insulate yet other programs as well. For example, the Balanced Budget Act protects so many programs--mainly entitlements--from contributing significantly to deficit reduction that CBO estimates the act's rules would force a 14 percent reduction in 1988 budget resources for national defense and a 20 percent cut in the unprotected nondefense programs.2
As for the alternative of reaching the 1988 deficit target entirely by raising taxes, a 6.8 percent rise would mean total federal government revenues that year equal to 20.5 percent of projected Gross National Product (GNP), a higher percentage than any other year since World War II. Such a rise is the equivalent of a 16 percent personal income surtax.
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1. The Balanced Budget Act permits the target to be exceeded by $10 billion before spending reduction procedures are set in motion, but that leeway is not granted in preparing the budget resolution. It must aim for a deficit of no more than $108 billion.
2. CBO and the Office of Management and Budget (OMB) will make a joint estimate for 1988 in August 1987. It will take account of enacted legislation and other developments affecting the budget outlook and will average the estimates of the two agencies. The August report will almost certainly differ from CBO's current estimate of 1988 spending reductions called for by the Balanced Budget Act.