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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

• The Context for Making Budget Decisions
• Uses of This Volume

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.