529 August 19, 1986 CUTTING THE WITHOUT DEFICIT HIKING $5 BILLI ON TAXES INTRODUCTION The Congressional Budget Resolution negotiated by House and Senate leaders earlier this summer places the budget squarely on a collision course with the Gramm-Rudman-Hollings spending ceilings.

The timid resolution leaves little marg in for error. Back when congressional leaders put the budget blueprint together, they made only enough spending cuts to just squeeze below the Gramm-Rudman deficit target. This strategy now is coming back to haunt them: there is almost universal agreement that the Budget Resolution will miss the deficit target by a.wide margin. Even the White House Office of Management and Budget, which is normally the most optimistic of forecasters, predicts a deficit for this year of just over $230 billion--far above the congressional estimate. Even if.Congress thus delivers on every budgetary promise made in the Budget Resolution, the Gramm-Rudman deficit target of $144 billion is still likely to be exceeded.

Worse yet, the Budget Resolution may imperil U.S. national sec urity by underfunding defense. Congressls Budget for the Pentagon is $28 billion below the Presidentls request. Reagan has charged that this cut could Ifcripple the combat readiness of our conventional forces M Both of these shortcomings of the Budget Res o lution--insufficient deficit reduction and a gutted defense budget--can be alleviated in part by making use of a special Ifcontingency fund" contained in the Resolution. This provides additional funding for Wnmet critical needs," including defense, which may arise over the course of'the fiscal year.

For the contingency fund to become operative, the President must submit a request to Congress for additional money to finance a critical budgetary need. This request may not increase the deficit it must contain an equal amount of spending reductions in other programs, or it must provide for additional revenue to balance the new spending. In fiscal 1987, which begins this October 1, the President may request 5 billion for the contingency fund, of which a maximum of 3 billion may be used for defense immediately that defense and further deficit reductions are Wnmet critical needs.I1 President's agenda, while helping to avert automatic Gramm-Rudman cuts that would impair both the nation's defense and high priority d o mestic programs Reagan thus should declare This would bring defense spending in line with the Many observers believe that Congress established the contingency fund option to force Ronald Reagan, who wants more money for defense to hike taxes and accept mo r e domestic spending not fall for this. Rather, he could find the extra 5 billion by requesting that Congress raise user fees and invoke spending reductions originally contained in either the Senate or the House budget proposal. This would call the lawmake r s' bluff, making it difficult for Congress to turn the package down The President should By making this request, Reagan can reaffirm the Administrationls solid commitment to strengthening the nation's military while complying with Gramm-Rudman. He also ca n put the big spenders in Congress back on the defensive by proposing a supplemental deficit reduction package, which election-minded Congressmen can reject only at great peril. Finally, this deficit reduction package can demonstrate to the public that the road to a balanced budget is to reach agreement on budget priorities, not to raise taxes I FINDING $5 BILLION FOR THE CONTINGENCY FUND I Money for the contingency fund can be raised by three means 1 cutting existing programs; 2) imposing new user fees on g overnment-provided services; and 3) raising fees for commercial s.ervices that the government currently provides businesses and individuals at subsidized rates. Selling federal assets in theory could rise extra money, but after voting for 3 billion in sal es from the federal loan portfolio and 4 billion from the sales of Conrail and the Naval Petroluem Reserve, Congress seems unlikely to endorse further sales in the near future.

Senate or the House during budget negotiations this year.

Each of the proposals below has been suggested by either the None of 2I them, therefore, is without significant legislative support. Many would bring in new federal revenue without raising taxes would help to shift essentially commercial activities from t he public sector to the private sector, where they belong And each USER FEES 1) Coast Guard User Fees Revenue 100 million.

The House budget resolut.ion proposes 150 million in Coast Guard user fees, but the Conference agreement raises just 50 million. For no defensible reason, fees to be charged for routine towing and other services for recreational boaters were struck from the resolution.

These should be restored. Wealthy yacht owners should pay for the federal services they receive 2) Aariculture User Fees Revenue 100 million.

The House resolution proposes charging users a fee for a number of Agriculture Department activities, including grain inspections market news,services, and plant inspections. The cost of these programs ought to be borne by the user and those who consume the farmer's product and not by all taxpayers 3) Nuclear Enersv Reaulatorv Commission User Fees Revenue 200 million.

The Budget Resolution contains 100 million in NERC user fees down from the 200 million recommended by the Reagan bu dget and the 300 million by the House. These NERC activities include nuclear power plant safety inspections and issuance of licenses and operating standards for the construction of nuclear reactors If the fees were set at $300 million, the nuclear power i ndustry and its users would pay most of the program's cost, as they should 4) Customs Service User Fees Revenue 300 million.

This year's Budget Resolution contains $200 million in new Customs Service user fees, far below the $500 million endorsed by the Senate budget and the Reagan budget. The higher level of fees should be imposed.

Service in conducting border cargo inspections. A mere 500 major These fees would cover the cost incurred by the Customs 3 Iimporters are responsible for 90 percent of these co sts of Management and Budget has computed that these fees would represent on average, less than one-tenth of one percent of the value of the imported goods. Many other countries, including France and Spain charge importers for such services The Office 5 L icense Fee for SDort Fishina in Coastal Waters Revenue 100 million.

This proposal has won the support of the House and the Office of Management and Budget, but not the Senate high value on preservation of marine fisheries. The National Oceanic conserving t he natural resources in federal waters and conducting other activities in support of recreational fishing A $10 to $20 annual licensing fee paid by sports fishermen for the right to fish in federal waters would cover a small portion of this cost Sport fis hermen place a and Atmospheric Administration spends millions of dollars each year Raise the Price for Federally Produced Uranium Revenue 100 million.

The Senate proposes raising $100 million through the Itaccelerated recovery of federal investment" in ura nium enrichment. This simply means that the federal government would start charging the market I I price for uranium produced at government plants. Currently, this I taxpayer-subsidized uranium is sold at below market prices.

I I I 7) Raise the Price for Bureau of Reclamation Water Revenue 200 million.

The Bureau of Reclamations1 water projects in 17 Western states include dams and irrigation systems. The House called for 20 percent across-the-board spending cuts in the Bureau of Reclamations budget which were not adopted in the final Budget Resolution. If the Senate refuses to enact these cuts, an alternative will be to require the Bureau to raise the price it charges on water and to raise the interest rates for repayment of Bureau projects to reflect th e cost of typically sold for as little as one-sixth the actual cost to the government of delivering it 8) Raise Federal Aviation Administration User Fees I I I I long-term Treasury borrowing. Bureau of Reclamations water is I Revenue 200 million.

The Budge t Resolution increases Federal Aviation Administration spending $200 million. This boost should be offset by raising I aviation user fees, such as taxes on airline tickets and fuel taxes on I 4private aircraft. Airport costs, after all, should be paid by a viation users, not general taxpayers. The nonpartisan Congressional Budget Office has endorsed raising aviation user fees, maintaining that this would ''encourage more efficient use of the nation's airports and airway system.I' CBOIs analysis found that s mall private aircraft user fees now cover only 10 percent of their share of FAA expenditures 9) Raise Fees on Exx>ort-Import Bank Loans Revenue 300 million.

The Export-Import Bank should r aise fees and interest rates 300 million to recoup some of the $1 billion annual cost to taxpayers of operating the bank. The Senate budget, in fact, implicitly cuts the Bank's budget by this amount 10) Raise Fees to Make the Small Business Administration Loan Proarams Self-Sumortinq Revenue 300 million.

The Senate Budget Resolution proposes that the Small Business Administration raise interest rates on its loans to cover the program's default costs. This was dropped in Conference. While the measure would not reduce or restrict eligibility for SBA loans, it would nudge credit terms closer to market levels the agency to improve its poor performance in selecting the recipients of SBA loans-the default rate at the SBA is now between 20 and 30 percent It also would prod 11) Increase Student Loan Interest Pavments and AdoDt More Strinaent Debt ReDavment Measures I Revenue 400 million.

The Senate budget proposes extensive reforms in the Guaranteed Student Loan Program, including increasing student interest payments and reducing yields to state agencies and banks that make the loans.

This would yield a three-year savings of $1.3 billion, but it was dropped in Conference. The Senate's proposal was sound. The current interest rate charged on student loans is 8 perce nt, far below the level the federal government reimburses the lender--the T-Bi11 rate plus 3.5 percent 3.25 percent as the Senate suggests would save $600 million over five years without chasing lenders away from the $10 billion of new business the GSL pr o gram brings to the nation's banks should allow the Department of Education to be more assertive in collecting on delinquent loans percent, costing taxpayers over $1 billion. Congress should permit I I Simply reducing this rate to the T-Bill rate plus Cong ress I The default rate in 1985 was 11.7 5the Education Department to begin a pilot program of selling delinquent loans to banks and private debt collectors 12) Sell Naval Petroleum Reserve Oil Revenue 100 million.

The Conference agreement promises to sell,.the naval petroleum oil reserves to the private sector in 1988 for an estimated $2 billion.

While this is to be applauded, past experience teaches that the sale could take years. Until that time, Congress should require the Department of Energy to sell oil from those reserves at market levels instead of at the $4 a barrel below market levels mandated by law.

The Department of Energy is expected to sell over 30 million barrels in 1986 13) Raise Entrance Fees at National Parks Revenue 100 million.

The Se nate Budget Resolution proposes raising new revenue by charging higher entrance fees at the national parks. At least $100 million could be raised with only a modest increase in admission charges cost of operating and maintaining the parks environmental or g anizations, who in the past have objected to raising these fees, now recognize that higher fees may help alleviate the chronic overcrowding at many of the more popular areas General taxes would still be required to pay the bulk of the A number of 14) Rais e the Medicare Sumlemental Medical Insurance Proaram Premium Pavment Revenue 400 million I The House budget proposal cuts fiscal 1987 Medicare expenditures by $450 million more than the Conference agreement. would be achieved by limiting payments ta certai n hospitals and physicians. After criticism from the medical community, however, the proposal was abandoned. Similar savings could be achieved by raising the monthly premiums of upper-income recipients for participating in the Supplemental Medical Insuranc e Program (SMI), as recommended in the Reagan budget. SMI is an optional supplement to the standard Medicare Hospital Insurance coverage. It is 75 percent financed from general tax revenue and 25 percent financed through the premium I payments of recipient s . Recipients' contributions should be raised to 35 percent of total program cost by a sliding scale so that higher-income recipients would pay up to 50 percent of the program's per patient cost, and lower-income elderly no more than they do at These savin gs I I present 615) Raise Fees for Filincr Oil and Gas Leases on Public Lands and Waters and for Other Services I Revenue 100 million.

The House budget proposes doubling the noncompetitive filing fees for oil and gas leases from $75 .to $1

50. This.was rejected by the Senate despite mounting evidence that the leases are underpriced.

Other user fees in the Natural Resources and Environment budget function were deleted from the Conference agreement. Example: the House rejected a Senate plan to raise $25 mil lion through raising fees for maps produced by the National Oceanic and Atmospheric Administration and for recovering the full cost of U.S. Geological Survey mapping and surveying private industries, which should be charged for the services.

Example: the House budget seeks to collect an extra 10 million by raising public lands grazing fees paid by ranchers Both activities benefit primarily SPENDING CUTS 1) Reduce Federal Subsidies to the U.S. Postal Sewice Deficit Reduction 100 million.

The House 100 million reduction in Postal Service outlays was dropped by the Conferees. Direct federal subsidies to the USPS will cost taxpayers about 600 million in 19

87. Indirect subsidies, which include taxpayer contributions to the postal workers' retirement and health plans, bring the total subsidy to well over $1 billion. The taxpayer should not be required to subsidize the cost of mailing Newsweek, Voaue, Plavbov , and other commercial magazines. And postal workers, who receive average salaries and benefits of $19.00 per hour, should contribute a greater share of their pension and health plans 2) NASA Commercial Research and DeveloDment Deficit Reduction $200 milli on.

The House and the President requested a 50 percent cut in funds for NASA's civilian aeronautical research and development program.

The Senate demanded full funding and won in conference projects are simply a subsidy to the civilian aircraft industry.

Halving this subsidy still would allow NASA to fund projects with military applications Yet research 73) Car> Federal Civilian Federal Emlovee Pay Increases at 2 Percent Deficit Reduction 300 million.

The Senate approved a 2 percent cost of living increa se for civilian federal employees, but the.House insisted on a13 percent pay hike. The Grace Commission on reducing federal spending found that the vast majority of federal employees are paid more than their private sector counterparts. And when job secur ity, health benefits and pensions are considered, the disparity is even wider. Taxpayers should not be supporting inflated salaries; the pay raise should be only 2 percent.

Emenses 4) Reduce Federal Matchina of State Medicaid Administrative Deficit Reduction 300 million.

The Senate endorses an Administration proposal to limit Medicaid costs by reducing federal reimbursement of state administrative expenditures. This was dropped in conference. The current Medicaid reimbursement system, requiring the federal government to pay half the states' Medicaid overhead costs, predictably rewards bureaucratic inefficiency and discourages states from trying innovative cost cutting. It also costs federal taxpayers approximately 1.2 billion annually. A reduced federal co ntribution to the states for administrative costs would create a stronger incentive for creative management and consolidation of state welfare programs 5) Reform the Federal Emr>lovee Health Benefits Proqram Deficit Reduction 200 million.

The Senate budget plan recommends a $300 million reduction in federal employee health benefits program (FEHBP) outlays by changing the method by which health care providers are reimbursed. This was whittled down to a $100 million savings in the House-Senate Conference. Th e higher savings level should be restored. The current FEHBP benefit structure is a model of inefficiency. It discourages employees from choosing low cost health plans, rewards physicians and hospitals for raising their prices and does not capture cost sav i ngs that result from competition among health care providers. The Office of Management and Budget estimates that over $1 billion could be saved over four years by opening the door to greater competition and encouraging federal workers to enroll in Health Maintenance Organizations aI 6) Eliminate Increases for Child Nutrition Proarams Deficit Reduction 100 million.

The Senate calls for keeping spending on the Women, Infants, and Children (WIC) Program at 1986 levels plus an inflation adjustment.

But in Con ference the House won an.extra $75 million for WIC.. At the Senate spending level, the child nutrition program would have ample funds to serve its intended constituency: pregnant mothers and children under five from low-income families. The House also won a 50 million increase in the school lunch program, on which the Senate had sought to freeze spending. There is no reason to increase spending on a program that still includes children from middle- and upper-income families 7) Reduce Outlays for Conaressio nal Newsletters Deficit Reduction 100 million.

The Senate Budget proposes a $100 million reduction in outlays for congressional newsletters. The item was shelved in Conference.

These constituent mailings are paid for wholly by the taxpayers: there are few restrictions on volume or content for this franking privilege subsidies of Congressional campaign material.

In many cases these mass mailings are simply taxpayer 8) Limit Growth in New Subsidized Housins Units Deficit Reduction 200 million.

The Senate recommends authorization for 71,000 new subsidized housing units each year through 1989; the House version calls for funding of 95,000 units. In Conference the Senate agreed to the House totals past twelve years on subsidized housing for over 1 3 million Americans.

Since the federal government already finances about 6 million subsidized housing units, there is little justification for adding almost 100,000 new units annually. The Senate's lower number of new additions should be adopted The federa l government has spent over $85 billion during the 9) Reduce Spendina on U.S. Forest Service Operations and Maintenance Costs Deficit Reduction 100 million.

The House recommends sp.ending $350 million less for IINatural Resources" than does the Senate. In Conference, the Senate's higher levels were chosen A major spending reform that was dropped was a 100 million reduction in the U.S. Forest Servicels road construction program. If the Senate does not reconsider the House reform, it 9- should find an equiv a lent savings. Such popular programs as the maintenance and operation of the National Parks and the U.S. Forest Service, meanwhile, would not be endangered by potential Gramm-Rudman cuts if Congress would permit the sale of a small fraction of federal land reserves. The federal government owns 400 million acres, about one-fifth of the nation's land area. The Grace Commission identifies about 12 million acres of this as "excess acreage If Congress were to allow the sale of less than one-tenth of theselexcess :.holdings about $100 million could be raised No parks, no wilderness areas and no environmentally sensitive land areas would be touched by these sales 10) Freeze Social Securitv Administrative Costs Deficit Reduction 100 million.

The Senate budget freezes Social Security administrative costs at 1986 .levels; the House has rejected this. The Social Security program constitutes over 20 percent of the federal budget, and taxpayers contribute about $5 billion each year just to support the pension system's arm y of bureaucrats. Unlike most federal agencies, Social Security is exempt from Gramm-Rudman sequestration. As such, no fiscal austerity measures were imposed upon it this past year. Yet the Social Security Administration would benefit from belt tightening as much as have the bureaucracies subject to Gramm-Rudman 11) Freeze Spendina on the Low-Income Enerav Assistance Proaram Deficit Reduction 100 million.

The House secured a $70 million budget increase for the Low-Income Energy Assistance Program despite th e Senate's call for a budgetary freeze at 1986 spending levels. At a time when energy and home heating costs are falling, cutting program outlays would,seem more rational than adding funding.

Ground Transriortation Block Grant 12) Consolidate Federal Transportation Grants into a Sinale Deficit Reduction 200 million.

The House budget for Transportation is $350 million below the amount set by the Conference. Much of the higher spending adopted in the final report is due to the insertion of a $200 million re serve fund for "unspecified increases in appropriated transportation programs above the House passed assumptions to live without such a fund, the Senate should do so as well.

If the House is willing If this additional spending is not deleted, Congress sho uld cut outlays elsewhere in the transportation function. In particular, the President's proposal to consolidate dozens of transportation grant lo - I I I programs into a single Ground Transportation Block Grant ought to be considered. The current system of discretionary grants provides cities with little incentive to weigh the benefits and costs of newly constructed transit systems with that of alternative systems.

Congressional Budget Office has recommended consolidating discretionary grants The CONCLUSI ON Over the past three months Congress has conjured up a number of ingenious ploys to prod Ronald Reagan into accepting new taxes. In each case he has kept his 1984 campaign promise and steadfastly refused to play ball with the pro-tax lobby contingency f u nd is Congress's desperation move to tempt Reagan into accepting new taxes. Again he must refuse, and instead,.call for financing the fund through the revenue from user fees and reductions on the spending side of the budget equation The 5 billion The budg et cuts in the Congressional Budget Resolution are timid at best.

Gram-Rudman target. The implications of this failure are disturbing a 1987 sequestration would likely be deeper and more painful than the 12 billion 1986 cuts. And half the Gram-Rudman autom atic cuts would fall on defense spending, jeopardizing American military preparedness They will not bring the deficit within sight of the Reagan must keep legislators' feet to the fire on the budget if the Gramm-Rudman automatic cuts are to be avoided. Th r ough skillful lobbying, the white House should be able to push the proposed reforms through Congress. Many have already passed the Democrat-controlled House--normally the major stumbling block to budgetary reforms. And the President must remind Senators a nd Representatives that, if they refuse to enact this new set of reforms, he has but one alternative left--to pull out his veto pen.

Stephen Moore Policy Analyst 11