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Investing in the Future: Reducing the Deficit to Increase Private Investment

Why this plan?

The Federal budget deficit is too high, and must be reduced. But how fast? A lower deficit will strengthen the economy in the long run by increasing national saving, lowering long-term interest rates, and encouraging private investment. But reducing the deficit too rapidly could weaken the economy in the near term. Every dollar of Federal spending, worthy or unworthy, is someone's income. If that income is cut, and that recipient reduces his or her spending as a result, the loss of income cascades through the economy. Tax increases produce the same effect. So deficit reduction must be prudently sized, carefully timed, and coordinated with other Government policies (and with the Federal Reserve's monetary policy) to limit the economic cost.

The impact of a deficit reduction package on the economy is best measured by the relative sizes of the two that is, by the amount of the deficit reduction amount as a percentage of the gross domestic product (GDP). The larger the deficit reduction at any given time, the greater the risk of economic dislocation. History suggests that annual deficit reduction of less than one-half of 1 percent of the GDP is safe, and that deficit reduction of under 1 percent of the GDP is manageable, as long as the Federal Reserve cooperates by easing the money supply. Further, to limit that risk in a substantial program of multiyear deficit reduction, the size of the bite out of the deficit should be held to a relatively even percentage from year to year.

Relying on these principles, this Administration's economic program is designed to impose policy deficit reduction savings of slightly less than one-half of 1 percent of the GDP per year over four years. This pace maintains a substantial margin of safety and provides the Federal Reserve with ample notice to expand the supply of credit in compensation, but also accumulates to a significant reduction of the Federal Government's drain on the Nation's savings by the end of the period.

Apart from growth miracles, there are only two ways to reduce a deficit: spending can be cut or taxes can be raised. Both are controversial and bound to arouse vociferous opposition. We have attempted to put together a balanced plan of deficit reduction that includes both spending cuts and tax increases.

We believe the plan is fair. It spreads the necessary contributions broadly. It does not bear heavily on any one group or region or industry. The proposed spending cuts do not fall on the most vulnerable members of our society, but on those best able to shoulder the cost. The tax increases included in the plan fall disproportionately on the wealthiest. They place a fair share of the burden of deficit reduction on those who profited the most from the uneven prosperity of the last decade and who enjoyed the greatest reduction in their share of the burden of Government. Those earning more than $100,000 will contribute over 70 percent of the total new revenue.

We believe that the specifics of the plan contain many desirable policies that could be defended on their merits, quite apart from the need to reduce the deficit. On the spending side, cuts have been aimed at low-priority programs. The purpose of deficit reduction is to transfer resources within the economy from low-priority uses to additional public and private investments that add more to our economic strength. A changing world makes some Government programs obsolete just as it leaves some private businesses in abandoned corners of the marketplace. The Administration proposes to rationalize or eliminate programs that have outlived their usefulness; that provide unnecessary or excessive subsidies to narrow groups at great expense to society at large; or that reduce the overall efficiency of Government. Continued support for such programs would weigh down the economy as a whole with a burden that can only grow in the future. It is time to put the national interest ahead of the special interests. On the tax side, the proposed new tax on energy will encourage socially responsible behavior such as energy conservation and environmental protection.

We also believe that the plan is bold. There is no way to reduce the deficit without incurring the opposition of politically powerful groups and lobbies. This Administration has not shrunk from proposing necessary spending cuts or tax increases for fear of offending powerful interests. Deficit reduction is essential to the economic health of the nation, and all groups must contribute to the solution of this common problem.

Much of the deficit reduction that we propose can and should be legislated in this fiscal year. Some of it, however, will depend upon actions in later years that cannot be determined now. For this reason, we propose an extension of the Budget Enforcement Act of 1990 to set the conditions for decisions in the future; and we also propose an enhanced rescission procedure that will give this President and all future Presidents the opportunity to require a simple majority vote on individual spending items. These procedural changes will safeguard the deficit reduction we need.

The heart of the benefit from deficit reduction is the additional private investment that it allows. Those investment dollars, driven to their best uses by an intensely competitive marketplace, will add to wages for workers and profit for entrepreneurs. However, the private sector also needs tools that only the public sector can efficiently provide: the skills and the infrastructure upon which businesses can build.

Accordingly, this Administration proposes to dedicate a modest share of its deficit reduction about one dollar in five in 1997 to selected public investments in physical infrastructure; technology development and dissemination; environmental protection and energy conservation; the education and training of our work force; incentives for work; and preventive health care and public health. A further share of the deficit reduction less than 10 percent will go toward tax incentives for private investment and work effort.

This combination of increased private investment through deficit reduction and targeted incentives and increased public investment through a reorientation of Federal Government priorities will help to reverse the self-destructive consumption binge of the last decade and to solidify the economic base upon which our nation can grow in the competitive world of the next century.

Based on cautious economic assumptions, this program will begin to rein in the Federal budget deficit, which now is growing faster than the economy; that is an unsustainable condition that will deal with us if we do not deal with it. We chose that cautious base to avoid the overconfidence that has led to foolish and impossible commitments in the past, and to the resultant reversals of economic policies. However, the Administration is confident that the additional public and private investment will stimulate growth and reduce interest rates, both of which will narrow the deficit gap still further. There remain unfinished economic policy tasks. Other commitments must be addressed and other economic policies reformed. These will be identified later in this report.

The Clinton Administration's approach to deficit reduction accepts change as its point of departure. Because the world has changed, America's armed forces must redefine their roles and missions, and translate those updated missions into new resource requirements. Similarly, old verities no longer work on the domestic side. Indeed, a drastic restructuring of Federal priorities is overdue on both fronts.

Facing New International Challenges and Opportunities

While this report focuses on our economic plan, the nation faces a host of new international challenges and opportunities that will affect the prospects for domestic economic renewal. World economic growth, our national security and the health of our domestic economy are integrally linked. When our economy is growing, we have more strength in international negotiations, our institutions and values hold more attraction abroad, and our international engagement is more affordable and sustainable. Moreover, our willingness to confront the global issues and problems of the post-Cold War era will determine whether we will shape global change in ways that advance our interests, or let those changes engulf us. The agencies of government that defend and promote American interests and values abroad must be redesigned to deal directly with new international challenges and to operate efficiently in a streamlined government.

This economic plan and the budget that will follow redirect and reinvigorate our national security priorities and institutions to meet new international challenges and take advantage of new opportunities. This plan is an investment in preventing regional wars and international crises that could consume scarce resources. It also invests in new initiatives that will yield economic and environmental benefits for the American people.

International Affairs

United States foreign policy seeks a world community increasingly receptive to democracy, market economics and international cooperation as we face new international challenges. While spending for international affairs must share in the reductions we are carrying out across the government, our budget plan has made room for a number of important new initiatives, while maintaining those existing programs that advance our enduring interests.

Few issues are more vital to our long-term security than the progress made in Russia and other states, from Eastern Europe to Latin America and Africa, toward democracy and the establishment of market economies. We already have made a significant investment in supporting this evolution; our new budget increases our commitment to progress in this area. For example, we are committing funds to such new initiatives as a Radio Free Asia, to carry news and hope to China and other Asian nations.

Our national security is also linked to helping prevent or resolve conflicts that can grow out of ethnic, regional, or religious tensions throughout the world. International peacekeeping and peacemaking activities have increasing value in such conflicts. Somalia, Bosnia, Cambodia and Mozambique provide current examples of multilateral peacekeeping efforts; more such exercises are likely in the future. Our budget plan accommodates the likelihood of greater peacekeeping commitments.

The proliferation of weapons of mass destruction and the means of their delivery poses a serious long-term threat to international peace and stability. This administration is shaping a coherent non-proliferation strategy, which will be supported by our budget plan.

The competitiveness of U.S. firms in the global market is another foreign policy priority. We will create a dynamic two-way relationship with the business community that responds to its needs rapidly and creates a more level playing field for international trade.

We also plan to address more coherently the many challenges posed by the degradation of the global environment, through strong support for international agreements and programs to protect that environment. We are building a strong base for a new approach to global environment problems. Finally, our budget plan increases our commitment of resources to active population programs, and significant on-going support for refugee and humanitarian assistance festering problems that, unattended, will create tomorrow's crises.

In order to fund these priorities and initiatives, we are also working to streamline and modernize the structure of our national security machinery. Some current programs, designed to meet the needs of the Cold War era, need new focus. We are reshaping the Department of State, as well as the Office of the Secretary of Defense and the National Security Council staff, to give new strategic emphasis to problems such as assisting the former Soviet Union, non-proliferation, new global issues and our economic competitiveness. We are reviewing such programs as international security assistance, development assistance, and information and broadcasting, many of which were designed for the Cold War. We will be taking a close look at future priorities for international development lending through multilateral development banks, and at export guarantee and promotion programs. Over time, we hope to restructure many of these activities, streamline their operations or redesign them, while meeting our existing international commitments and enhancing American interests.

National Defense

The world remains a dangerous place, but the nature of those dangers has dramatically changed. Our military forces and intelligence capabilities must, therefore, continually be redesigned in a changing world. Unquestioned American military power remains essential to the success of our diplomacy and to strengthening our international relationships.

Reducing the size of the military to provide funds for other needs, therefore, is not our purpose. Rather, our goal is to reshape our forces to provide us with the capabilities we need to defend our continuing interests, deal with new problems and threats, and contribute to the promotion of democracy, prosperity, and security in a new world.

Our defense strategy will be driven by a fresh assessment of the challenges that require the use of American military force because they threaten our interests or require our engagement. Many of these already are known: from the continuing confrontation in Iraq, to our humanitarian operations in Somalia. Other risks are equally real: the potential for new conflict in such places as Korea or the Middle East; the international dangers of ethnic, religious or regional conflicts in other regions, such as the Balkans; and the proliferation of weapons of mass destruction and the means of their delivery.

The forces we design to address these challenges will continue to be built on the superb capabilities and training of our military personnel and the continuing technological superiority of our weapons. The men and women who proudly serve America in our military constitute the finest fighting force in the history of the world; we must ensure they remain so. We are determined to avoid a hollow military. Our defense program will fulfill this promise. Together with active diplomacy and a strong economy, our military will maintain deterrence, reduce the incentive for others to proliferate, reassure our friends and democratic allies and discourage potential adversaries, preserve freedom on the high seas, protect our global economic interests, combat terrorism and drug-trafficking, and enable us to take part in global peacekeeping and peacemaking activities.

These forces will be consistent with the design we have promised: 1.4 million men and women on active duty, a strong, integrated reserve and a capable forward presence of roughly 100,000 troops in Europe. Our military will be mobile (with the sealift and airlift it requires), agile (with new technologies and integrated doctrine which allows it to dominate by maneuver, speed and technological superiority), precise (to reduce the loss of life in combat), flexible (to operate with diverse partners in diverse regions), smart (with the intelligence and communications it needs for the diverse threats it will face) and, especially, ready (given the unpredictability of new threats).

Our defense planning also confronts a new fiscal and management challenge. The most recent five-year budget projection of the previous administration may underestimate the true costs of the forces and hardware in their plan. In addition, we may well face greater than previously anticipated liabilities, such as environmental cleanup costs at our bases and facilities, as we downsize the Cold War defense establishment. Finally, the budget we inherited may overstate the savings that would result from planned defense management reforms and overhead consolidations. A task force has been appointed to review this problem and report back to the Secretary of Defense. Our defense plan delivers on the savings we promised; we plan to deliver, as well, on our commitment to honest budgeting and tight management in the Defense Department.

Our plan will also redesign defense administration and operations to carry out new initiatives and face post-Cold War challenges. A restructured Defense Department will focus on the new issues and threats, on sound financial and cost management, on military personnel and readiness, and on creating a streamlined, efficient acquisition process. In addition, we intend to do more to integrate and harmonize the roles and missions of the services.

Finally, we plan to attend to the needs and problems of the nation's defense industrial and technology base, defining the core skills and industries we require for our defense and working to integrate more closely defense and commercial technology and manufacturing. As we reduce the size of our forces, we must repay the debt of gratitude we owe to the men and women in the services and the defense industries who have served their nation over the past 45 years. Our budget plan includes a firm commitment to assist the transition for military and civilian personnel to private life and other work. Elsewhere, we have described our defense reinvestment and transition program, including new technology investments and programs, job retraining, and community diversification assistance.

This military program will also be affordable. Planned funding for national defense over the next four years fulfills the promise of an additional $60 billion in program savings. Combined with government-wide pay and benefit changes and additional reductions to offset projected underfunding, this program will yield $37 billion in outlay savings in 1997. (See Table 3-3.) We will implement those reductions carefully as part of our effort to redesign the force. As we undertake a major strategic review over the coming months, we will identify new changes, savings and additions that will fit our new strategy.

TABLE 3-3. SUMMARY OF NATIONAL DEFENSE BUDGET ADJUSTMENTS (In billions of dollars) 1997 Outlays Bush adjusted baseline 287 Adjustments to baseline: Program reductions/1 -26 Pay and benefit changes -6 Additional reductions to offset projected underfunding -5 Total adjustments -37

Revised budget level/2 249

Note: Details may not add due to rounding. outlay savings reflect 1994-1997 budget authority reductions of about $60 billion from national defense programs estimates do not include the investment package initiatives for defense conversion and for energy efficiency in Federal buildings.

Restructuring Domestic Government

Our founders saw themselves in the light of posterity. We can do no less. Anyone who has ever watched a child's eyes wander into sleep knows what posterity is. Posterity is the world to come the world for whom we hold our ideals; from whom we have borrowed our planet; and to whom we bear sacred responsibility.

Bill Clinton

It is critical that we reduce long-term budget deficits in order to make room for greater private investment in the economy. Some savings are justified on those grounds alone. But part of the effort to remake government means eliminating spending that is unnecessary or wasteful, that provides unjustified subsidies to particular industries or areas, that goes to programs that simply do not work or which are no longer useful in a changed world, or that contribute to growing health care costs. There are some savings we must also enact to ensure that all groups contribute to the success of our efforts. The detailed deficit reduction plan follows. Unless otherwise noted, savings are in outlays for 1997 and the four-year period of 1994-1997.

Reform programs that don't work or are no longer needed

Making government work for the next century means reforming programs that don't work and updating policies and programs that were designed to meet the needs of an earlier era.

USDA/Federal Crop Insurance. The Federal crop insurance program suffers from high losses and low farmer-participation. Over the period 1981-1990, total Federal Crop Insurance Corporation (FCIC) indemnities exceeded total premiums by $2.5 billion. For every dollar paid in premiums, one dollar and forty cents is paid out by FCIC in indemnities. The Administration proposal for reform builds on an ongoing FCIC pilot project by changing to "area-yield" insurance. Area-yield would set premiums and pay indemnities based on an area's (e.g. a county's) performance, rather than that of an individual farmer. Farmers who purchase area-yield insurance would be paid whenever the county yield for a particular crop dropped below a specified level for a given area. Farmers could select a desired "trigger" yield and amount of protection per acre. Higher, individual insurance coverage would be available only through the private sector without Federal subsidies. Discretionary savings would result from reduced loss adjustment activities. Entitlement savings would come from a reduced FCIC loss ratio, from the present 1.4 to roughly 1.1. The estimated savings are $171 million in 1997, $551 million over four years.

USDA/Economic Research Service. USDA's Economic Research Service (ERS) provides economic and other social science information and analysis to USDA and others. However, much of its work duplicates that of other USDA bureaus. This proposed reform would result in reduced duplication as well as direct ERS efforts toward the most essential information activities. The estimated savings are $17 million in 1997, $61 million over four years.

Commerce/Economic Development Administration Trade Adjustment Assistance Program. The Administration proposes to eliminate the Department of Commerce's Trade Adjustment Assistance Program (TAAP), which provides technical assistance to firms that are adversely affected by increased imports. There is no evidence that the TAAP succeeds in restoring the international competitiveness of the firms it assists. It simply diverts resources and attention away from competitive businesses and eases the problems of non-competitive businesses. This proposal would not affect the Department of Labor's Trade Adjustment Assistance Program for individuals in industries affected by international trade. Estimated savings are $14 million in 1997, $30 million over four years.

State Justice Institute. The Administration proposes to eliminate the State Justice Institute, a Federally-assigned agency. The program serves States well but fulfills no clear Federal purpose. The estimated savings are $17 million in 1997, $51 million over four years.

Energy/Eliminate unnecessary nuclear reactor research. The Administration proposes necessary funding in the research and development area for maintaining the operation of the current generation of reactors and the licensing actions for reactors that have commercial interest. It also includes the necessary funding to support the high-level waste program. This proposal eliminates the research and development funding support and related facility funding for nuclear reactors that have no commercial or other identified application. It provides necessary funding for termination costs as well as for safety-related activities that are required to place the test facilities in a safe-shutdown condition.

Termination of Commissions. The Administration proposes to eliminate a number of commissions which are no longer necessary, for savings of $11 million in 1997, $41 million over four years. They are:

* National Space Council

* National Critical Materials Council

* Commission on the Bicentennial of the U.S. Constitution

* Competitiveness Policy Council

* National Advisory Council on the Public Service

In addition, the President has issued an executive order requiring the elimination of more than 200 advisory committees now operating throughout the government.

USDA/Rural Electrification Administration. The Administration proposes to maintain electric and telephone loan levels but eliminate loan subsidies on most REA loans by increasing loan interest rates from 5 percent (and in some cases 2 percent) to Treasury rates (currently 6.8 percent). $25 million in 5 percent loans for electric distribution "hardship" borrowers would be maintained each year through 1998. REA was created in 1935, when only 11 percent of farms in the U.S. had electric service. Now nearly 100 percent of rural areas have this service. Many REA loans are currently made to suburban and resort areas. In addition, many current telephone borrowers are subsidiaries of major telephone corporations. The vast majority of REA borrowers can afford private financing without significant increase in rural subscriber rates. The estimated savings are $150 million in 1997, $374 million over four years.

USDA/Farmers Home Administration. The Administration proposes to reduce Farmers Home Administration (FmHA) direct farm loans 25 percent and replace them with an equal amount of subsidized guaranteed loans. Lower interest rates have created greater opportunities for use of subsidized guaranteed loans rather than direct loans, and given the projected continuation of these lower rates, the same individuals can be assisted at less cost to the taxpayer, while farmers gain valuable, lasting relationships with their local lending institutions. Estimated savings are $10 million in 1997, $31 million over four years.

Commerce/Bureau of Export Administration. The Bureau of Export Administration is the principal Federal export control agency. Since the break-up of the Soviet bloc and the dissolution of the Soviet Union, the workload associated with export control licenses on dual use technologies has precipitously declined. Estimated savings are $7 million in 1997, $27 million over four years.

HHS/Health Professions Curriculum Assistance Grants. The Federal government, through HHS, awards health professions curriculum assistance grants to support the training of various types of health professionals. Recognizing that most health professionals are no longer in short supply, targeted support through the health professions curriculum assistance grants would continue to be available for primary care, nursing, and the effective elements of disadvantaged student assistance. Estimated savings are $27 million in 1997, $87 million over four years.

Environmental Protection Agency/Completion of Wastewater Treatment Construction Grants. This proposal reflects savings due to the completion of the current wastewater treatment grant funding authorization that was designed to end Federal assistance for wastewater funding. With the $846 million in wastewater stimulus funding provided in 1993, the $18 billion authorization under the 1987 Water Quality Act will have been largely completed a year ahead of schedule. Under this authorization, wastewater State Revolving Funds will have been capitalized at $10.3 billion (including the State 20-percent match) for the purpose of making loans to municipalities for construction of wastewater treatment plants. As these loans are repaid, States will be able to make a new round of loans due to the self-sustaining nature of the State Revolving Funds. Also, one of the long-term investments proposed by the Administration is a new $2 billion annual authorization for capitalizing Clean Water State Revolving Funds for low-interest loans to municipalities to address water quality problems. Estimated savings resulting from the completion of the wastewater treatment authorization are $1.9 billion in 1997 and $4.1 billion over four years.

Commerce/Appalachian Regional Commission. The Administration proposes to freeze spending for the Appalachian Regional Commission at the 1993 level of spending. The Commission was established in 1965 to help improve economic and social conditions in the 13-state Appalachian region. Approximately 70 percent of its funding supports highway construction. More than two-thirds of the Appalachian Highway System has been funded. Increases in federal-aid highway funding will more than compensate for the reductions necessitated by this proposal, which saves $11 million in 1997 and $20 million over four years.

Community Investment Program. This program will be fully funded in 1994. However, the new crime initiative proposed by the Administration provides substantially increased funding for the social service and anti-crime programs supported by the Community Investment Program, making this program duplicative. Streamlining these programs will allow for increased Federal coordination and lead to efficient and effective policies of community revitalization and crime fighting throughout the country. Estimated savings are $552 million in 1997, $1.2 billion over four years.

Tennessee Valley Authority. The Administration proposes to terminate the Tennessee Valley Authority's fertilizer research activities and its economic development program. The fertilizer industry is fully capable of financially supporting fertilizer research without the need for taxpayer subsidized work in TVA. With regard to economic development, while these activities have a long and noted history, other much larger programs with similar purposes have been put into place, and are slated to receive substantial increases from the Administration's stimulus and investment proposals. The estimated savings from this proposal are $188 million from 1994 to 1997, including $50 million in 1997.

Eliminating Subsidies; Charging Fees for Government Services

The nation can no longer afford subsidies and giveaways to those who don't need them, and we must assure that the taxpayer is fairly compensated for services or resources provided by government.

USDA/Phase out below-cost timber sales. Timber sales from some National Forests do not cover the costs to the government of making the timber available for sale. This proposal would gradually eliminate sales in those forest regions where timber-sale program costs exceed timber-sale revenue. This gradual phase-out would reduce the economic impacts on rural communities dependent on the timber industry. Below-cost forests would be reviewed periodically to determine if sales could proceed at no net loss to the Government. Estimated savings are $86 million in 1997, $274 million over four years.

Expand Agriculture user fees. New user fees for three USDA agencies (the Federal Grain Inspection Service, the Agricultural Marketing Service, and the Agricultural Cooperative Service) to recover costs for Federal services being provided to a specific group. Estimated savings are $16 million in 1997, $59 million over four years.

USDA/Meat and poultry fees. Requires all slaughterhouses and processing plants with overtime shifts to reimburse the government for the full cost of Federal meat and poultry inspections. Estimated savings are $104 million in 1997, $416 million over four years.

HHS/Food and Drug Administration user fees. Identifiable beneficiaries of government services should pay for the value conferred by certifying the safety and efficacy of drugs and medical devices. Estimated savings are $336 million in 1997, $1 billion over four years.

Bureau of Alcohol, Tobacco and Firearms (BATF) user fees. BATF is required to approve all alcoholic beverage labels and conduct various laboratory analyses to assure compliance with Federal law. There is currently no charge for these services, though manufacturers receive real, tangible benefits from them. Collection of these fees to cover BATF's costs will save $20 million over the 1994-1997 period, and $5 million in 1997.

SEC/Higher registration fees for securities being sold to the public. The Administration proposes to raise this charge to corporations to cover the SEC's costs. The proposal would raise the rate at which this fee is collected, and at the same time increase the amount that helps to fund the SEC directly. Estimated savings are $54 million in 1997, $203 million over four years.

DOE/Power Marketing Agencies (PMAs) debt repayment reform and market incentives for conservation. The Federal Government owns and operates five Power Marketing Agencies (PMAs), which sell electric power generated at 123 Corps of Engineers and Bureau of Reclamation dams across the country. Congress intended that the full cost of the power portions of these facilities be repaid by power customers. Proposals to cover the full cost of PMA-supplied power have been studied for years. The Administration's initiative, however, is different from previous proposals. It combines a modest repayment reform, which does not involve changing interest rates, with a powerful market-based incentive for customers to reduce electricity consumption through demand side management programs and switching to the direct use of natural gas. Under the proposal, the PMAs would use straight line amortization of project appropriation debt to help recover more of the government's full cost of providing the power. The proposal also creates incentives for conservation by allowing PMA wholesale customers to resell power saved through demand side management activities or through switching to the direct use of natural gas. Customers' profits from the resale of the conserved power would be shared 50/50 with the Federal government until the power portions of the projects were repaid. The Federal government would collect over $500 million in 1997 from both of these initiatives, about $1.7 billion from 1994 to 1997. The straight line amortization schedule (requiring a fixed percent of the outstanding principal to be repaid each year) would have a de minimus effect on retail rates.

Phase-in increased Inland Waterway user fees. The Nation's inland waterways are the most heavily subsidized form of commercial freight transportation. Since the system was constructed for commercial navigation beneficiaries, they should pay for all operation and maintenance costs. Existing inland waterway fuel taxes collected on applicable segments of the system only offset half of the Corps of Engineers' cost of construction and major rehabilitation (estimated at $430 million in 1993). This proposal would increase the 1994 Federal inland waterway fuel tax from 19 cents to $1.19 per gallon in a series of increasing steps to a total of $1.00. Estimated savings are $460 million in 1997, $820 million over four years.

USDA and Interior/Increase grazing fees. The Administration proposes an increase in grazing fees on public lands as negotiated by the Secretaries of Interior and Agriculture. Grazing fees are the charge for an annual permit to graze cattle, sheep, or horses on Federal lands. The permits are based on a fee per "Animal Unit Month" (AUM). The AUM for cattle is the acreage needed to support a cow and calf with one month's worth of forage. Today, grazing fees are based on a formula established by the 1978 Public Rangelands Improvement Act for a seven-year trial period. The formula was continued by Executive Order in 1985 when the trial period ended. Th formula calculation resulted in a fee of $1.92 per AUM in 1992, and a reduction to $1.86 per AUM for 1993. Recent estimates of fair market value for public range are two to five times higher. This proposal would give Secretaries of the respective departments the authority to negotiate a fee schedule that would generate estimated revenues of $76 million in 1994-1997 ($35 million in 1997).

Interior/Implement a Federal irrigation water surcharge. Authorize a per acre-foot surcharge on water sales to Reclamation projects throughout the West (except for the Central Valley Project in California, for which a similar surcharge was recently enacted). Revenue from the surcharge would be deposited into a special fund for use (subject to appropriations) in mitigating harm to fish and wildlife caused by irrigation. These costs are currently paid by the Federal taxpayer or repaid by project beneficiaries (without interest) over 50 years. The surcharge would also encourage more rational water use that would reduce the harmful impacts of non-point source pollution. Estimated savings are $15 million in 1997, $45 million over four years.

Army Corps of Engineers/Increase recreation fees at existing Corps of Engineers areas. This proposal would give the Corps of Engineers authority to increase certain camping fees and eliminate free camping sites in order to increase the amount of Corps of Engineers' costs that are offset by the users of these facilities. Additionally, the Corps could add fees for use of some facilities. The fee increases would be in the range of $1 to $3 per site or activity, but in no case greater than $3 per site or activity. Fees would not be charged for wayside exhibits, overlook sites, general visitor information, or comfort facilities. The increased fees would be collected in a special account to be used (subject to appropriation) to offset recreation program costs. No Corps of Engineers entrance fees would be charged. The Corps of Engineers currently charges camping fees, averaging $6 per site, and special-use fees for activities such as use of group picnic shelters. Estimated savings over four years, $72 million, including $18 million in 1997.

Interior/Increase recreation fees at certain national parks and other recreation areas. Authority would be given to the Secretary of the Interior to increase entrance fees for certain National Park Service and Fish and Wildlife Service areas. Also establish entrance fees at other National Park units and Bureau of Land Management developed recreation sites where justifiable. Where appropriate, the Bureau of Land Management would also increase special-use permit charges. With the exception of entrance to national parks, increases in current fees would be no greater than $3 per entry. This proposal would generate an anticipated $147 million in 1994-1997 receipts ($45 million in 1997) to be used, subject to appropriation, to maintain and enhance recreational opportunities furnished by the Department of the Interior.

Interior/Permanently extend hardrock mining holding fees. There are over one million hardrock mining claims on Federal lands operating under the 1872 Mining Law. Hardrock minerals include gold, silver, lead, copper, zinc, and numerous other minerals. The 1872 Law requires claimants to annually perform $100 worth of work to develop and maintain their claims. Claimants must pay only a filing fee to the Federal government for the right to mine this land. This proposal would permanently authorize charging a $100 per claim holding fee on all hardrock claims on Federal lands (extending a fee enacted for 1993). The claimant would be relieved of annual work requirements, which should increase his or her flexibility on timing the development of claims. It will also reduce unnecessary ground disturbance to satisfy current law. The proposal would increase revenues to the Treasury by an estimated $80 million per year, after covering the costs of administering the entire hardrock mining program, including environmental compliance. It would generate estimated revenues of $320 million in 1994-1997.

Interior/Institute hardrock mining royalties. Establish a 12.5 percent royalty on the gross value of the hardrock minerals extracted from mining claims on public lands. There are over one million hardrock mining claims on Federal public lands operating under the 1872 Mining Law. Hardrock minerals include gold, silver, lead, copper, zinc, and numerous other minerals. The 1872 Law was one of many laws intended to encourage the settlement and development of the West. It allows miners to prospect, make claims, and extract minerals from Federal lands for the cost of filing a claim. There is no current authorization to charge a royalty on hardrock minerals privately extracted from public lands. Laws enacted early in this century provide for Federal leasing and collection of royalties from oil, gas, coal and certain other minerals extracted from Federal lands. Hardrock mining, however, remains under the rules of the 1872 Law. The new royalty would be phased in over three years. The time necessary to set up and administer the royalty in the most effective way would delay initiation of royalty collection until 1995. Receipts from hard rock mining royalties would be shared with the States where the mining occurs. This proposal is expected to pay for the costs of enforcement and collection. It would generate estimated revenues of $471 million in 1994-1997, including $277 million in 1997.

Treasury/Improve enforcement of harbor maintenance fees. Provide up to $5 million annually from the Harbor Maintenance Trust Fund for the Department of the Treasury (Customs Service) to improve compliance with existing harbor maintenance fees. Harbor maintenance fees paid by shippers consist of an ad valorem tax applied to the value of cargo shipped through U.S. harbors. Currently, the Customs Service administers the Harbor Maintenance Fee only at a minimum level, and many fee collections are on a voluntary basis. Estimated savings: over four years, $165 million; 1997, $65 million.

USDA and Interior/Permanently extend 50 percent net receipt sharing (on shore minerals). Permanently extend 50 percent net receipt sharing for on-shore minerals. States sharing mineral receipts should also share the costs of administering the mineral receipts program. Net receipt sharing occurs when the Federal government, prior to distribution of gross mineral receipts to the States and Federal Treasury, deducts a portion of the costs of administering the Federal minerals program. Since 1991, Congress has placed language in the Interior Appropriations bills directing 50 percent net receipt sharing (deducting 50 percent of the cost of the programs before distribution to States and the Federal Treasury). This proposal would save an estimated $170 million in 1994-1997 outlays ($45 million in 1997).

USDA/Increase Forest Service recreation fees. The Forest Service manages 156 national forests that provide a wide spectrum of outdoor activities, including over 33 million acres of wilderness, 5,800 facilities, and approximately 116,000 miles of trails. Currently, the Forest Service charges user fees for fully equipped camping sites. In order to generate revenue to maintain and enhance recreation on National Forests, the Forest Service would selectively charge entrance fees for developed recreation areas, such as areas where all-terrain vehicles are allowed. These fees would range from $1 to $3. User fees would be increased by no more than $3 per site or activity. These proposed recreation fees would generate an additional $10 million in 1994 and would be placed in a special account to be used, subject to appropriation, to maintain and enhance recreational opportunities in National Forests. Estimated savings are $13 million in 1997, $46 million over four years.

USDA/Eliminate subsidies to honey producers. All Commodity Credit Corporation (CCC) price-support payments to honey producers would be terminated. There are roughly 3,500 individuals enrolled in USDA's honey program. These represent slightly more than 1 percent of all honey producers in the U.S. Roughly 350 individuals get over 50 percent of payments made by the honey program. Due to the large number of pollination servicers whose bees are not in the program, pollination of the Nation's crops would not be significantly affected by this proposal. Estimated savings: $4 million in 1997, $32 million over four years.

USDA/Target CCC farm subsidy payments to farmers with off-farm incomes below $100,000. Make ineligible from receiving CCC crop subsidies (price support loans and income support payments) any producer receiving $100,000 or above in off-farm adjusted gross income. USDA farm programs are criticized for unfairly supporting large farms and wealthy producers rather than smaller farms and lower-income farmers. U.S. farm producers have an annual income more than twice the national average. The Congressional Office of Technology Assessment concluded that most big farms "do not need direct government payments and/or subsidies to compete and survive." The proposed targeting of subsidies would direct farm payments to smaller, family farms, which deserve Federal financial help more than large agricultural enterprises. It would cause an estimated 1-2 percent of program participants to drop out of USDA farm programs. Most of these wealthiest participants include corporations and individuals for whom farming is not their primary occupation or source of income. Savings: $470 million in CCC outlays during 1994-1997, and $140 million in 1997.

USDA/Increase non-eligible payment acres (triple base) starting in 1996. Under "triple base," instituted in the 1990 Omnibus Budget Reconciliation Act, 15 percent of a farm's crop acreage base is ineligible for CCC deficiency payments (authorized for wheat, feedgrains, cotton, and rice). Most crops still can be raised on those acres, and the farm's crop acreage base for future CCC payments in later years is preserved. This proposal raises the percentage of "triple base" acres from 15 percent to 25 percent in the 1995 Farm Bill. The resulting budget savings do not reduce farm income dollar-for-dollar. Crops raised on the ineligible acres receive the market price, and the producer responds more directly to markets, rather than to CCC rules for its farm programs. Since triple base began in 1991, farm income has been at record levels. The triple base provision in CCC programs is good for the environment. It gives farmers more flexibility to plant as the market indicates, and to rotate crops as sound environmental practice indicates, rather than as the goal of maximum Federal subsidies dictates. Triple base moves the U.S. farm sector toward the global future of less subsidized, competitive production. Savings: $1 billion during 1994-1997 and $720 million in 1997.

USDA/Eliminate 0/92 and 50/92 (PAY/92) programs starting in 1996. USDA's PAY/92 program is an example of paying farmers not to plant. The program allows farmers to not plant their crop base ordinarily devoted to wheat, feed grains, cotton, or rice in return for receiving income-support payments. The producer must set aside a minimum of 8 percent of his maximum payment acres without pay, while all additional set-aside acreage may receive income-support payments. For wheat and feed grains, producers may elect to plant none of their acreage the "0/92 option" and then receive 92-percent of their normal deficiency payments. For cotton and rice, producers must plant at least 50 percent of their acreage base ("50/92"), with most of the rest eligible for clover and deficiency payments. PAY/92 was introduced in the 1985 Farm Bill during a time of substantial excess production. Because CCC target prices and loan rates have been capped or reduced since the 1985 Farm Bill, excess production has declined. Other Farm Bill provisions, like the marketing loan and the Acreage Reduction Program, help to ensure that USDA will not be forced to purchase large quantities of commodities under CCC loan. Also, because of the paid set-aside of the PAY/92, exports have been less than they would have been otherwise. While U.S.-planted acreage fell by 10 percent over the period when PAY/92 was introduced from the previous decade (1975-1984), planted acreage in other countries virtually replaced America's idled acres on an acre-for-acre basis. Estimated savings are $937 million over four years, including $664 million in 1997.

USDA/Increase assessments on "non-program" Federally-subsidized crops starting 1996. This proposal would increase projected receipts on "non-program" crops such as sugar, tobacco, honey, peanuts, soybeans, wool and mohair by 67 percent in the 1995 Farm Bill, in line with the percentage increase in non-eligible acres in the Administration's "triple base" proposal. Some crops receive a subsidy through Federally-restricted markets rather than from the Treasury directly. Federal support for these crops arises not from direct subsidy payments from the U.S. Treasury but from U.S. government loans and restrictions on production or imports. These laws cause consumers, rather than taxpayers, to pay most of the subsidy through higher market prices. A proposal to increase triple base non-eligible acres for subsidy payments affects the "program" crops and so favors the "non-program" crops. For equitable treatment of all subsidized crops, fees on "non-program" crops should be increased in tandem with the triple base increase. If not, crop production patterns could be distorted, leading to increased CCC costs. These assessments will be designed so as to avoid, to the extent possible, any serious impact on small family farmers. The proposal would reduce net CCC outlays by $900 million during 1994-1997, and $450 million in 1997.

USDA/Limit payments on wool and mohair to $50,000 per person. USDA's wool program was authorized in 1954 to ensure the Nation a strategic reserve of wool in times of war and other emergencies. Wool can no longer be considered a "strategic" material. Mohair never was. Under this proposal, income-support payments from the wool and mohair program would be limited to $50,000 per producer. The 1993 payment limitation is currently $150,000 each for both wool production and mohair production (a maximum of $300,000 per producer). Payments are heavily concentrated. In 1991, less than 1 percent of producers received 54 percent of the payments. Thirty percent of all producers receive checks for $100 or less. Producers on average receive from the Federal government almost 210 percent of the market value of their production. Estimated savings over four years, $212 million; in 1997, $66 million.

FDIC/Assess examination fees for state-chartered, FDIC-insured banks. Although all FDIC-insured banks and thrifts must be examined every year, State-chartered banks (unlike federally-chartered banks and thrifts) are not assessed fees for their Federal examinations. Many federally-chartered banks and thrifts have converted to state charters to avoid the higher Federal examination fees. The Administration proposes that state-chartered banks pay the same rates as national banks, but that they also be allowed to take credit for amounts they pay to state regulators. Estimated savings are $286 million in 1997, $1.1 billion over 4 years.

CFTC/Institute a fee on all U.S. futures exchange transactions. Currently, traders, brokers, hedgers, speculators, exchanges and others who benefit from Federal regulation of U.S. futures exchanges do not pay for its cost. The Administration proposes to institute a fee on all U.S futures exchange transactions. The revenue from this fee would cover the costs of the CFTC. To the extent this fee may adversely affect the competitiveness of U.S. futures exchanges, the Commodity Futures Trading Commission (CFTC) would be given the discretion to correct for any adverse competitive effects that may arise. Estimated savings are $235 million over four years, including $63 million in 1997.

SEC/Higher registration fees for securities being sold to the public. Corporations which raise money through our securities markets must file a registration statement with the Securities and Exchange Commission (SEC) and pay a fee. The revenues collected from this fee cover a portion of the SEC's costs. The Administration proposes to raise the rate at which this fee is collected, and at the same time increase the amount that is deposited to the General Fund of the Treasury. Estimated savings over four years, $188 million; $50 million in 1997.

Postal Service/Require payment of outstanding retirement and health care costs. When the U.S. Postal Service (USPS) was reorganized in the early 1970s, it assumed assets and liabilities. One of the liabilities was the retirement costs associated with former USPS workers. These workers, however, have been covered by health and benefit payments managed by the Office of Personnel Management (OPM). The USPS has made payments towards OPM's costs but only well after the costs have been incurred. As a consequence, when the Federal Government's interest costs are included USPS's payments have fallen $1 billion short of OPM's costs. This proposal would require USPS to make payments of $347 million in 1995, 1996 and 1997. Estimated savings over four years are $1.0 billion, $347 million in 1997.

Commerce/Permanently extend patent and trademark fees. The Patent and Trademark Office (PTO) is self-financed through various user fees. The standard patent fee was increased by the Omnibus Budget Reconciliation Act (OBRA) of 1990 by adding a surcharge, which is set to expire in 1995. This proposal raises the standard fee to incorporate the surcharge and allows the standard fee to fully cover patent operation costs with annual adjustments to the Consumer Price Index (CPI). It does not propose new fees. The proposal also assures that the patent and trademark process continue to be fully funded by fees. Estimated savings: $115 million in 1997, $226 million over 1994-1997.

DOT/Increase registration fees for general aviation aircraft. General aviation aircraft account for about 26 percent of the Federal Aviation Administration's cost of running our aviation system, but pay fees covering just 7 percent of these costs. Airlines and their passengers pay all the costs they impose on the system. As a result, taxpayers provide general aviation operators with an annual subsidy of about $2 billion. This proposal would gradually increase current general aviation registration fees over 4 years and require annual, rather than 3-year, renewals. The increased fees will result in general aviation operators still paying only a fraction of their "fair share" costs. Estimated savings over four years are $151 million, including $58 million in 1997.

Social Security Administration/Fee for State SSI administration. The Administration proposes that states reimburse part of the cost of Federal administration of state supplements to the Federal Supplemental Security Income (SSI) benefit. Estimated savings: over four years, $520 million; in 1997, $180 million.

VA/Increase housing loan fees to 2 percent. The VA Home Loan Program guarantees mortgages made by private lenders to veterans, active duty service-persons, and selected reservists. Beneficiaries obtain mortgage credit on favorable terms (e.g., no-downpayment and a loan fee that is below the fees for a private mortgage). The Administration will propose legislation to increase most loan fees by .75 percent (e.g., the no-downpayment fee would go from 1.25 to 2 percent). This fee increase would reduce the taxpayer subsidy to this program, while continuing to offer veterans a downpayment and fee package that would be below conventional loan requirements. Estimated savings are $157 million in 1997, $620 million over four years.

Treasury/Permanently extend Customs Service merchandise and passenger processing fees. The current fees are set to expire in 1995. The Administration will propose legislation extending them indefinitely, in order that the government may continue receiving payment to cover the costs of these necessary services. Over the 1994-1997 period, this will save $1.1 billion; in 1997, savings will be $579 million.

FCC/Auction spectrum for communication services. Today many multimillion dollar industries including television and radio are built around the free use of a scarce and valuable Federal resource: the electromagnetic spectrum. The traditional practice of assigning spectrum rights by lottery or hearing has often resulted in huge windfalls being distributed to individuals and businesses at the taxpayers expense. In the cellular industry alone, for example, many overnight fortunes were made by speculators who won spectrum rights through a lottery and resold them days later to large communications companies. The bottom line is that an "auction" of these rights already occurs today; the question is whether the taxpayer will benefit. The Administration will seek legislation to transfer 200 megahertz now used by the Federal Government to the FCC for private use, and to grant the FCC authority to assign this new spectrum, and make all other future license assignments, using auctions. Enactment of the legislation will help to ensure that new licensees do not reap large financial windfalls at the taxpayer's expense. The proposal does not apply any fees or royalties to existing licensees so as not to disturb settled arrangements. Estimated savings are $2.1 billion in 1997, $4.1 billion over four years.

The Administration is concerned about so-called "earmarking" of projects in various Federal programs. The following options for deficit reduction identify such projects with the understanding that the Congress may find offsetting savings within the same program areas to preserve these initiatives.

USDA/Cooperative State Research Service (CSRS) earmarked research grants. Congressional earmarking of CSRS research funding has increased significantly in recent years. In report language for the 1993 appropriations, 126 grants, totaling over $50 million, were funded through specific earmarks. These grants were not peer-reviewed, competitively awarded, or specifically authorized. Many of the research projects funded could be financed by the agribusinesses that directly benefit from the research (e.g., the floral, timber, and seafood industries). Another source of funds for projects with scientific merit is the National Research Initiative (NRI) competitive grants program, also administered by CSRS, which is proposed at higher funding levels in 1994. Estimated savings over four years are $96 million, $42 million in 1997.

USDA/Cooperative State Research Service (CSRS) earmarked facilities construction. The CSRS Buildings and Facilities account has become a main example of Congressional earmarking of scarce Federal research dollars. The projects funded often are not high national priorities and would be better funded by States, or the agribusinesses that directly benefit from them. Estimated savings over four years are $86 million, including $44 million in 1997.

USDA/Earmarked special ES grants. Each of the Extension Service's (ES) earmarked special extension grants that would be eliminated could be financed through funds each State receives from USDA to support the Extension Service's general operations in each State. The use of these State funds, which are awarded by formula, is not restricted and can be used to address high-priority projects identified by each State. Estimated savings are $14 million in 1997, $54 million over four years.

Commerce/Low-priority NOAA programs, projects, and demonstrations. Approximately 47 National Oceanic and Atmospheric Administration projects have been identified as low priority. Many of these projects have had funding "earmarked" for them in the past, thereby bypassing NOAA's project competitive review process. Estimated savings: $70 million in 1997, $220 million over 1994-1997.

Army Corps of Engineers, Interior/Reduce or stretch out construction funding for low priority water projects. Funding for these projects is not high priority because the projects are either: (1) not economically justified, (2) not a Federal responsibility, (3) exempted from standard non-Federal cost sharing, or (4) environmentally unacceptable. Estimated savings are $398 million over four years, including $92 million in 1997.

DOT/Lower-priority programs and projects. There are a wide variety of lower-priority projects which have been funded by the Department of Transportation. Estimated savings over four years, $1.3 billion, including $428 million in 1997.

HUD/Eliminate individual HUD grants (special purpose). For the past three years, Congress has added money for 408 projects that are awarded by HUD's Appropriations Act. Past projects included art centers, drainage improvements, health care facilities, and business centers. The ten states with the highest per capita income receive 33 percent of the funding in 1992. Estimated savings over four years: $565 million; in 1997: $278 million.

SBA/Funding for SBA earmarked grants. Appropriations were provided to SBA in 1993 for a number of unnecessary earmarked grants. Estimated savings over four years, $315 million; $110 million in 1997.

Managing Government for Cost-Effectiveness and Results

Making our government more effective and efficient means abandoning structures and practices that impede flexibility, waste resources, and frustrate service delivery.

White House staff reductions. The Administration will share in the sacrifices all Americans will be asked to make in working together to reduce the Federal deficit. The President has already taken action to reduce the size of the White House staff by 25 percent. The newly reorganized White House will be better suited to promote the agenda for change and economic growth. Through greater emphasis on policy councils and the Cabinet, the President will reach beyond the White House for policy development and ideas. Estimated savings are $40 million in 1997, $129 million over four years.

Federal salaries. Reflecting the President's intention to ensure that government makes the first contribution to the major deficit reductions that he is calling for, the Administration proposes that there be no national pay increase or locality pay increase for Federal employees in calendar year 1994. National pay increases in 1995-1997 would be one percent less than current law in each year. Locality pay would be implemented beginning in 1995 under a revised system that will permit more equitable and accurate determinations to be made than would occur under the current, flawed methodology. The savings from these initiatives are $2.7 billion in 1997 and $8.0 billion over four years.

Agency streamlining, employee reductions, administrative cost-cutting. The Federal Government today employs over two million workers, not counting the armed forces or the Postal Service, with an annual payroll of about $100 billion. Many are employed in inefficient work settings, using obsolete equipment and antiquated work processes. The use (and abuse) of government-owned aircraft and limousines, executive dining facilities, and attendance at conferences held at vacation resorts have in the past entailed unjustifiable costs to the taxpayers. Overhead costs of Federal agencies are excessive and can be reduced significantly by more efficient and frugal management and by modernization of equipment, facilities and processes.

The Administration has taken a number of steps to reduce administrative and overhead costs, increase productivity, streamline agency operations, and improve delivery of services to the public. The President has issued Executive Orders requiring a reduction of 100,000 civilian personnel positions by the end of 1995; reduction of at least 50 percent in the number of executive motor vehicles owned or leased by Federal agencies by the end of 1993; elimination of non-essential air travel and use of government-owned aircraft where commercial air travel is available; guidelines for selection of conference sites and Federal employee attendance at conferences; closing or placing on a full-cost-recovery basis all executive dining facilities; abolition of at least one-third of the 700 non-statutory Federal advisory commissions now in existence; and reduction of Federal administrative costs by 14 percent by 1997. These measures are estimated to save taxpayers $15.6 billion over the next four years.

Agriculture/Consolidation into one Farm Service Agency. The Administration proposes to create a new Farm Service Agency (FSA) from the USDA programs and staffs serving farmers from county offices. The agencies that would be consolidated are the Agricultural Stabilization and Conservation Service (ASCS), the Soil Conservation Service (SCS) and the Farmers Home Administration (FmHA). Currently USDA maintains more than 12,000 offices for these county-based agencies, with separate computer systems and State and National office support staffs. Most farmers must visit different county offices of these agencies and often are required to fill out redundant paperwork. The proposed FSA would maintain a USDA field office at the county level, and would improve service to farmers. Savings would result from a streamlined county office structure and from efficiencies at the National and State offices, as these agencies are consolidated. Estimated savings are $307 million in 1997, $730 million over four years.

Agriculture/Reform agricultural crop disaster payments made by the CCC. Each year since 1987, Congress and the Administration have provided ad hoc disaster payments to farmers. Under existing 1990 Farm Bill law, disaster payments are subject to appropriations. This proposal would reform ad hoc disaster payments. The option assumes a continuation of the Federal Crop Insurance Corporation (FCIC). Under 1990 Farm bill law, a farmer must suffer a 35 percent loss (40 percent if the farmer has not purchased Federal crop insurance, even though it was available). In addition, disaster payments would only be available contingent upon a Presidential declaration of an emergency as defined by the Budget Enforcement Act. Because disaster payments are not assumed in the baseline, no savings are scored for this proposal. However, savings would be realized upon the enactment of the next disaster bill.

Justice/Prison construction. There remains a need for new prison construction to accommodate the rapidly increasing prison population. However, more than $1.6 billion already authorized has not been spent due to a construction lag. The Administration proposal permits the continued spending of already authorized funds, so that the current rate of overcrowding 40 percent, compared to 70 percent in 1990 will be reduced to less than 6 percent by 1997. It allows limited new construction in 1994 and 1995. Estimated savings are $181 million in 1997, $331 million over four years.

Education/Reform campus-based aid. Today, the three campus-based student aid programs (supplemental grants, work-study, Perkins loan capital) overlap and duplicate aid available from the much larger Pell Grant and Family Federal Education Loan Programs. They represent less than 9 percent of total aid made available by the Department of Education's major student aid programs. Pell and guaranteed loans have requirements that assure that those who are most in need benefit most from Federal funds. Campus-based programs, however, while need-tested, permit schools to select less needy students for awards. The Administration proposal reduces spending for campus-based student aid programs by $200 million but gives schools complete flexibility to use the remaining $1.2 billion for whichever aid approaches best meet student needs. In combination with other budget policies, total aid available from the Education Department's major student aid programs is estimated to increase, despite the reduction in campus-based funding. Also, the new flexibility increases the efficiency of the campus-based programs in addressing student needs and should enable more funding to be used for high priority purposes, such as funding additional community service jobs. The estimated savings from the proposal are $275 million in 1997, $732 million over four years.

Education/Impact Aid "b" Payments. The proposal would phase out Impact Aid "b" payments to school districts over a three-year period. The Impact Aid program makes payments to school districts to partially offset the presumed adverse impact on the school district of the presence of Federal property and federally connected children. However, "b" payments, unlike "a" payments, are based on children who either do not actually live on Federal property or whose parents do not work on that property. Most "b" children live in the community on property that is taxed by the school district and have families who pay State and local taxes used to finance local education. Estimated savings are $145 million in 1997, $404 million over four years.

DOE/Superconducting Super Collider. The Administration is committed to the development of the superconducting super collider as a major contribution to scientific information for the future. The Administration believes, however, that in order to ensure that all of the components of this project are technologically effective, the project schedule should be extended.

Energy/Uranium enrichment. The Department of Energy's uranium enrichment program will become a government corporation, known as the U.S. Enrichment Corporation, on July 1, 1993. It will be required to operate as a commercial business enterprise on a profitable and efficient basis. The Administration is moving in this direction by proposing several actions to enhance the cost effectiveness of Federal uranium enrichment-related activities while reinforcing the Administration's nuclear non-proliferation policies. These Administration initiatives provide for: (1) the phase-out by 1996 of one of the operating diffusion plants; (2) lower Federal costs for power purchased for Federal uranium enrichment operations; and (3) speed-up of the purchase of highly enriched uranium from the republics of the former Soviet Union. This will allow former weapons grade uranium to be recycled into commercial power reactor fuel, provide a valuable commercial activity for the former Soviet republics, and advance mutual nuclear weapons non-proliferation goals. Estimated savings are $386 million in 1997, $1.3 billion over four years.

Energy/Strategic Petroleum Reserve. The Strategic Petroleum Reserve currently contains over 570 million barrels of oil. This stockpile has served well in defusing the impacts of oil disruptions such as that experienced during Iraq's invasion of Kuwait, and in deterring market manipulations by oil-exporting countries. The U.S. today obtains less than one-quarter of its oil from OPEC countries, and the rate at which we continue to fill the Reserve can be slowed, saving money for the taxpayer. The Administration proposes to reduce the fill rate by one-third, from 20,000 barrels of oil per day to 13,300 barrels per day.

Transportation/Federal Aviation Administration streamlining. Major growth has occurred in the budget of the Federal Aviation Administration (FAA) to upgrade operations following the 1981 firing of almost 10,000 striking air traffic controllers. The controller work force has been reestablished. In addition, air traffic growth has slowed. These factors lead the Administration to propose a modest decrease in operational funding. This reflects reduced requirements as the agency transitions from a period of rapid growth to one of maintaining existing operating levels in the face of slowed aviation traffic growth. Estimated savings are $62 million in 1997, $241 million over four years.

Housing and Urban Development/Modify fees for Federal housing. The Administration proposes to reduce gradually to a uniform level the fee that the Department of Housing and Urban Development pays to local entities to administer several Federal housing subsidy programs. Independent studies by the General Accounting Office and a HUD contractor determined that the current fee substantially exceeds the costs of services the local administrative agents provide. The plan will reduce Federal housing costs and eliminate windfall gains to administrative agents. Estimated savings are $193 million in 1997, $454 million over four years.

Housing and Urban Development/Consolidate several HUD programs into HOME. This proposal to consolidate funding for several HUD housing programs into the HOME program allows states and large urban cities greater flexibility and efficiency in providing low-income housing assistance. HOME allows local officials to determine and pay for the housing assistance new construction, tenant based assistance, rehabilitation of existing housing that best meets the needs of the community. Several current HUD housing programs are very costly. Budget pressures have continuously reduced the number of additional housing subsidies these specific programs can provide. Consolidation will increase the amount of total resources available to mayors and governors to address their most critical low-income housing needs. The HOME program calls for states and locals to match 25-30 percent of the Federal funds provided to the community. With this leveraging of local resources, this proposal to shift funding to HOME provides savings for the Federal government without reducing the amount of public resources dedicated to meeting the housing needs of low-income people. Estimated savings over four years: $178 million. Estimated savings in 1997: $150 million.

Housing and Urban Development/Low-income housing preservation, homeownership grants. Preserving the affordability of as many as 360,000 units of low-income housing is one of the Administration's investment proposals. To avoid paying excess subsidies to landlords to ensure preservation, this proposal limits the maximum preservation subsidy that landlords can receive to the same amount that a tenant would receive in the same circumstances. In addition, the proposal eliminates homeownership grants from the Preservation program. The Administration supports the goal of helping low-income tenants to become homeowners through other programs. This proposal would save over $190 million from 1994 to 1998.

EPA/Increase private sector financing of Superfund cleanups. In line with the "polluter pays" principle, this proposal will increase the proportion of hazardous waste sites cleaned up by private parties (as allowed by law). The proposal would preserve Federal Superfund money only for sites where there are no viable private parties to undertake the cleanup. Estimated four-year savings are $308 million, including $109 million in 1997.

NASA programs. The Administration is committed to a cost-effective space station program. To control serious cost overruns in the present program, the Administration recommends a restructuring of the space station. Employment associated with the program would be maintained, and additional funds would be directed to other NASA space missions.

Small Business Administration/Reduce subsidies. The Administration proposes to reduce losses on loans made to small businesses by private lending institutions under the SBA Section 7(a) loan program. This would be accomplished by decreasing the Federal guarantee on loans to an average of 75 percent. Requiring private lenders to take a greater share of the risk would increase their scrutiny of loan applications, ultimately resulting in a lower default rate and better recovery rate on loans repurchased. Estimated savings are $118 million in 1997 and $423 million over four years.

U.S. Postal Service/Reduce subsidy payments. The Administration proposes to reduce the subsidy paid to the Postal Service for the reduced postal rates paid by certain non-profit organizations. This postal subsidy is an inefficient means of supporting charitable and non-profit organizations, particularly compared to the support provided by the tax deduction allowed for charitable contributions. Additionally, loopholes exist that allow some mailers to take advantage of this system; for example, certain special interest lobbying groups can mail at reduced rates. The estimated savings from this proposal are $43 million in 1997, $152 million over four years.

Justice/Freeze grants. The Administration proposes to freeze at 1993 levels funding for Office of Justice Programs grants. Estimated savings are $56 million in 1997, $138 million over four years.

Education/Streamline programs and other program reform. This proposal saves $620 million in 1997 and $1.5 billion over four years by eliminating, restructuring, or combining some of the many small programs in the Department of Education that are low priority, have achieved their purpose or can be made more effective by merger with other authorities, as well as by maintaining funding at 1993 levels for other categorical programs for which there are not compelling policy reasons to increase or decrease funding.

Education/Require States to share default costs in the Student Loan Program. Student loan defaults cost the Federal Government $2.5 billion in 1992. This proposal would require States to share default costs for student loans, as a way of encouraging better State management to prevent excessive defaults. The fee, assessed against new loan volume, would be equal to one half the percentage by which the default rate in the state exceeds 20 percent: a 22 percent default rate would yield a one-percent fee on new loan volume.

States would be authorized to charge schools in their State a fee based on the school's default rate and the State's implementation costs. States would have an additional incentive to tighten licensing provisions, monitor schools more intensely and take corrective action early to prevent high defaults. Schools would work harder to avoid defaults. Schools that could justify high default rates would be exempt. Savings would be $131 million in 1997 and $459 million over four years.

Agriculture/Foreign Agricultural Service. The Administration proposes to streamline Foreign Agricultural Service (FAS) programs to better assist U.S. agricultural overseas market development. The proposal would decrease funding for FAS program operations, while making changes to enable FAS to utilize its funds more effectively. Savings from this proposal are $10 million in 1997, $35 million over four years.

Overhead costs for university research and development. Federal research grants to colleges and universities by the Departments of Agriculture, Health and Human Services, and Defense, and the National Science Foundation and other agencies, cover both direct research costs and overhead administrative costs. In 1972, each dollar of direct research funding paid to universities cost an additional 30 cents for the overhead allocated to Federal research. By 1990, 46 cents in overhead was paid for each dollar spent on direct research. Consistent with the Administration's actions to streamline overhead costs in Federal departments and agencies, the budgets for civilian research and development grant-making agencies have been adjusted to place an upper limit on overhead charges. This proposal and the substantial new investment in civilian research and development included in the President's economic plan represent a concerted effort to shift national spending from overhead to funding research. Savings from this overhead change are $383 million in 1997, $1.2 billion over four years.

Veterans Affairs/Improving management of construction. The Major Construction program of the Department of Veterans Affairs primarily supports the veterans' direct delivery health care system. To meet veterans' future needs, the Administration proposes $362 million in 1994 budget authority for construction, maintenance and improvements of VA medical facilities. In addition, to improve the planning and management of VA's construction program, the Department will take into account the following major factors in planning and proposing future construction projects: (1) the projected demand from veterans who are likely to use the VA system; (2) the relationship of the project to the VA system as a whole; and (3) the health care resources available to veterans in the community. Estimated savings are $134 million in 1997, $282 million over four years.

Veterans Affairs/Improve management of VA hospitals. To ensure that VA resources are used more efficiently, the Administration proposes to use a prospective payment system, similar in concept to Medicare's, for allocating funds to VA medical centers. In general, the current resource allocation system simply retains the past year's allocation among medical centers and then adds funds for inflation and special projects. Little or no changes are made to the "base budget" to reflect potential improvements or efficiencies in current operations. Estimated savings from this proposal are $400 million in 1997 and $1 billion over four years.

Agriculture/Market Promotion Program. The Market Promotion Program provides commodity associations, cooperatives and private for-profit companies subsidies in order to promote the utilization of U.S. commodities overseas. Because the program has a large and fixed funding level, the Department acts to use all funds. Consequently, a number of questionable and controversial funding decisions have been made. Therefore, the Administration proposes freezing the program at the 1993 level, encouraging the Foreign Agricultural Service to more effectively target the funding toward those industries that would otherwise be unable to promote their products abroad. Estimated savings are $52 million in 1997, $208 million over four years.

Housing and Urban Development/Real Estate Mortgage Investment Conduits (REMICs). The Administration proposes to have the Government National Mortgage Association (GNMA) guarantee prompt payment to all investors in secondary mortgage market securities known as Real Estate Mortgage Investment Conduits or REMICs. These mortgage-backed securities, established after the 1986 Tax Act removed a tax impediment, will increase the funds available to make Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) insured mortgages, and consequently decrease mortgage interest rates for FHA and VA homebuyers. This proposal saves $146 in 1997, $584 million over four years.

Housing and Urban Development/FHA insurance reforms. The Department of Housing and Urban Development (HUD) provides mortgage insurance through its FHA programs to help low and moderate income homebuyers obtain mortgage financing and to help owners and developers finance the construction or rehabilitation of low and moderate income rental properties. The Congress enacted reforms in the 1990 National Affordable Housing Act (NAHA) to restore the single family FHA insurance program to an actuarially sound financial position. Unfortunately, the original financial goals established in NAHA have not yet been achieved and further reforms appear necessary. In addition, HUD continues to encounter major losses in its insurance for multifamily properties. Legislative and regulatory impediments, as well as poor management, have added to these excessive insurance losses. Reforms will be proposed to help reduce these insurance losses and reestablish these FHA insurance programs as effective government financing vehicles. Savings from these reforms are expected to reduce spending by $81 million in 1997 and by $336 million between 1994 and 1998.

Education/Reform student loan programs. The Administration proposes to modify and expand the current direct lending pilot program, with the goal of replacing guaranteed lending now provided under the Federal Family Education Loan Program (FFELP) with direct loans in 1997. Federal capital and schools largely would replace private capital and banks as loan originators. The direct lending program is to be built up gradually, to permit development and implementation of the administrative systems necessary while maintaining proper management of the outstanding guaranteed loan portfolio. At the same time, as part of the President's goal of enhancing people's ability to work in community service jobs, new systems will be devised to permit eligible borrowers to repay their loans under flexible repayment options, including options where repayment varies with annual income. This will permit many individuals to take lower paying community service jobs without fear of inability to pay their student loan debt. Estimated savings over five years are $3.2 billion, including $1.3 billion in 1997.

Office of Personnel Management/Federal employee child-survivor benefits. Under the Federal employee retirement programs, child survivors may continue to receive survivor benefits until age 22 if they are full-time students, 18 if not. (Disabled children may receive benefits indefinitely and would not be affected by this proposal.) The Administration proposes to conform the maximum entitlement age for CSRS/FERS child-survivor benefits to that of Social Security. Child survivors would receive benefits until age 18 unless they are full-time students in a primary or secondary school, in which case they would receive benefits until age 19. The proposal does not affect those receiving benefits before October 1, 1994. Estimated four-year savings are $50 million, including $20 million in 1997.

Office of Personnel Management/Federal employee survivor annuities. CSRS/FERS retirees may elect survivor benefits in exchange for a reduced annuity for themselves. The survivor benefits are equal to a percentage (up to 55 percent) of the retiree's unreduced annuity. This proposal would base the survivor annuity on the retiree's reduced annuity, thus slightly reducing the government's subsidy to survivors. Estimated savings over 1994-97: $350 million. Estimated 1997 savings: $140 million.

Veterans Affairs/Down payment, fee for multiple use of loan guarantees. Under current law, there is no limit on how many times a beneficiary may use the VA loan guaranty program. Multiple-users are charged the same fees as one-time users, and are not required to make a down payment. Allowing borrowers who have already received home-ownership assistance to remove the equity from their existing homes and purchase another home (with zero equity) with VA-guaranteed financing, exposes the Government to additional risk. The Administration proposes to require a 2.5 percent fee and a 10 percent down payment for multiple-use of the loan guaranty benefit. This will provide savings because of the fees and because it will reduce foreclosures. Estimated savings are $17 million in 1997, $68 million over four years.

Veterans Affairs/Permanently extend resale loss provision. When a private lender forecloses on a VA guaranteed property, VA uses a formula for determining whether to pay the guarantee to the lender or acquire the property from the lender and resell it. The Administration proposes to make permanent the inclusion in that formula of expected losses on the resale of foreclosed properties. This requirement makes property acquisition more cost-effective to the Federal government and is consistent with the practices of private mortgage lender. Estimated savings over four years are $80 million, including $21 million in 1997.

Treasury/Reform U.S. Customs Inspector overtime laws. Customs Inspectors receive compensation for overtime work at rates different from most other Federal employees. Current law contains quirks that tend to provide strong incentives for wasteful overtime scheduling practices and other abuses. The Administration proposes to eliminate these opportunities for abuse, reducing required overtime payments by an estimated $72 million over the 1994-1997 period, and $18 million in 1997 and to make necessary changes in the law to ensure that savings from overtime reform are used to reduce the deficit.

Interior/Mariana Islands funding agreement. A recent agreement with the Commonwealth of Northern Mariana Islands, a U.S. territory, reduces Federal support for the Commonwealth and directs it toward infrastructure projects only. In addition, the agreement gradually eliminates Federal funding. Implementation of this agreement would save an estimated $31 million in 1994-1997, including $10 million in 1997.

Veterans Affairs/Insurance administration costs. The Administration proposes that the administrative costs of three of the five VA life insurance programs be paid with excess revenues from those programs, rather than from annual appropriations. This would reduce the $30-million-a-year taxpayer subsidy to these programs, which pay dividends of over $1 billion per year to policyholders. The estimated savings are $31 million in 1997 and $113 million over four years.

Veterans Affairs/Internal Revenue Service income verification. The Administration proposes to extend permanently the Department of Veterans Affairs' authority to access IRS tax data to verify income reported by pension and medical care beneficiaries. There are no savings from this extension in the 1994-97 period. Savings in 1998 are $197 million.

Veterans Affairs/Permanently extend pensions-Medicaid nursing home provisions. The Administration proposes to extend permanently the current $90 monthly limit on pension benefits paid to any veteran or survivor without dependents who receives Medicaid coverage in a Medicaid-approved nursing home. This proposal would reduce an indirect federal subsidy from veterans programs to state Medicaid programs. There are no savings in the 1994-97 period. Savings in 1998 would be $300 million.

Veterans Affairs/Service members' contributions to the Montgomery GI Bill Education Program. The Montgomery GI Bill program provides monthly benefit payments to eligible service members and veterans who are enrolled in a post-secondary education program. To become eligible, military personnel agree to contribute to the program through a reduction in their basic pay during their first year of service. In two steps over the last three years, Congress has increased the monthly benefits by 33 percent without increasing individuals' payroll contributions to the program. Before the increases in benefits, the program funding match was 9:1 (government:service members). This proposal would prospectively increase their contributions to restore the 9:1 match. Estimated savings are $339 million over four years, including $98 million in 1997.

Controlling Health Care Costs

Systemwide health care reform is a top Administration priority, but some additional short-term savings proposals, focusing on providers rather than beneficiaries, make immediate sense.

Medicare:

HHS/10 percent capital reduction, inpatient. The proposal would extend current law beyond 1995. Hospitals receive payments for Medicare's share of capital expansions and improvements of both inpatient and outpatient department (OPD) facilities. The current payment level was reduced in OBRA 90 by 10 percentage points to 90 percent of Medicare's share of capital costs in every year. Estimated savings: over four years $680 million; 1997 $380 million.

HHS/10 percent capital reduction, OPD. The proposal would extend current law beyond 1995. Hospitals receive payments for Medicare's share of capital expansions and improvements of both inpatient and outpatient department (OPD) facilities. The current payment level was reduced in OBRA 90 by 10 percentage points to 90 percent of Medicare's share of capital costs in every year. Estimated savings: over four years $260 million; 1997 $150 million.

HHS/Maintain calendar year 1995 ratio of premium collections to program outlays with a 27 percent ceiling. Under this proposal, beginning in January, 1996, the monthly Part B premium would be set to maintain the percentage of program costs covered by premium collections in the previous year, but with a ceiling of 27 percent. The monthly Part B premium amount currently is set in law through the end of calendar year 1995 ($36.60 in CY93, $41.10 in CY94, $46.10 in CY95), and premium collections are projected to cover about 27.5 percent of program costs in 1995. When originally established, SMI premiums were intended to cover 50 percent of program costs. They eroded significantly over the years, however, and TEFRA 1982 established a temporary 25 percent premium floor, beginning in 1984. Congress extended the floor twice, and OBRA90 set fixed premium amounts in law through 1995 at levels then estimated to be approximately 25 percent of program costs. Beginning in 1996, calculation of the premium is scheduled to increase by the lower of the OASI COLA adjustment to the previous year's premium, or to be set at 50 percent of program costs. Estimated savings: over four years $5 billion; 1997 $3.9 billion.

HHS/Eliminate add-on payment for hospital-based HHAs. This proposal would eliminate the separate add-on payment that hospital-based home health agencies (HHAs) receive in addition to payment under the Medicare cost limits. Eliminating the add-on would create a level playing field on which all home health agencies can compete. Estimated savings: over four years $840 million; 1997 $250 million.

HHS/Eliminate skilled nursing facility return on equity payments. The proposal would eliminate the Medicare payment policy that pays proprietary skilled nursing facilities (SNFs) a return on equity (ROE) invested in the SNF. Medicare should pay for services rendered to beneficiaries; it should not subsidize private investment. Estimated savings: over four years $560 million; 1997 $160 million.

HHS/Lower IME to 5.65 percent. This proposal would gradually lower the Medicare indirect medical education (IME) from 7.7 percent to 5.65 percent for each .1 increase in the intern and resident to be a ratio (IRB ratio). Teaching hospitals currently receive an additional 7.7 percent payment to the Medicare DRG payment for each .1 increase in their IRB ratio, above their base year levels. The adjustment is intended to compensate these hospitals for the higher costs of delivering care incurred by inexperienced residents. In addition, teaching hospitals tend to have sicker case mixes than non-teaching hospitals. The General Accounting Office (GAO) and the Prospective Payment Assessment Commission (ProPAC) have both found that the 7.7 percent adjustment overcompensates teaching hospitals for these costs and have recommended that the adjustment be reduced. ProPAC has recommended setting the adjustment at 5.4 percent. Lowering the IME adjustment would also encourage teaching hospitals to instill within their residents more cost-effective patterns of care at an early stage in the residency. Estimated savings: over four years $1.94 billion; 1997 $1.4 billion.

HHS/Permanently extend 2 percent laboratory fee update. This proposal would extend the 2 percent annual update of Medicare reimbursement rates for clinical laboratory services. OBRA 90 established a 2 percent update through the end of 1993, after which laboratory fees would be updated by the urban component of the Consumer Price Index (CPI-U), approximately 3.5 percent annually. There is no evidence, however, to indicate that laboratory costs are increasing by the rate of inflation. Medicare payments to laboratories should more closely reflect decreasing costs due to technological advances, such as increased automation, and changes in the market, such as lower-cost equipment. Medicare payments to laboratories are already excessive. An OIG study found that Medicare paid laboratories 90 percent more than physicians paid for the same tests. Moreover, a GAO study indicated that laboratories use higher profits from Medicare to subsidize discounts to other, private payers. Estimated savings: over four years $740 million; 1997 $380 million.

HHS/Provide incentive to encourage submission of claims via electronic format. In total, Medicare Part B outlays were projected to be $59.8 billion in 1993. The proposal would save 0.1 percent of the 1994-98 Medicare Part B baseline. The proposal would encourage physicians and other Part B providers to submit claims via the more administratively efficient electronic format by charging physicians and other providers $1 for each paper claim filed. The proposal would not take effect until January 1, 1996, to give providers lead time to adjust their filing systems. Estimated savings: over four years $265 million; 1997 $175 million.

HHS/Medicare Secondary Payer (MSP) reforms. The MSP requirements currently vary depending upon the category of enrollee. This proposal would create a consistent MSP threshold for the aged, disabled, and end stage renal disease (ESRD) patients all employers of 20 or more would be primary payers. Current law already requires that Medicare enrollees with employer-based health insurance use their private health insurance before drawing upon their Medicare policies. This applies more consistent standards and more efficient enforcement of these provisions to save Medicare costs. Estimated savings are $947 million for 1994 through 1997; and $305 million in 1997.

HHS/Permanently extend reduction of payments for hospital outpatient services by 5.8 percent. OBRA 1990 reduced Medicare reimbursement for hospital outpatient department (OPD) reasonable costs by 5.8 percent through 1995. This proposal would extend that provision permanently. Depending on the service, OPDs are paid based upon varying formulas, some of which take into account the OPDs' reasonable costs. The overall reduction to OPDs would be much less than 5.8 percent, because less than half of Medicare reimbursement is based on reasonable costs. Because hospital inpatient reimbursement rates are constrained by DRGs, hospitals have shifted services and costs to the outpatient setting. As a result, outpatient services are one of the fastest growing components of the Medicare program, rising by an average of 17 percent per year in the 1980s. Legislators approved a 5.8 percent reduction in OBRA 1990 in an attempt to counter this rapid growth. If this provision is allowed to expire, outpatient costs, which continue to grow in the double-digits, will start growing even faster. Support for this proposal is well-established through previously approved legislation. Estimated savings are $950 million for 1994 through 1997; and $525 million in 1997.

HHS/Reduce hospital outpatient department reimbursement by an additional 4.2 percent. In total, Medicare Part B outlays were projected to be $59.8 billion in 1993. The proposal would save 0.5 percent of the 1994-98 outpatient services base. Currently, Medicare reimbursement for outpatient services is based in part on the OPD's reasonable costs minus 5.8 percent, while reimbursement for outpatient capital costs is reduced by 10 percent. This proposal would reduce reimbursement for OPD services by an additional 4.2 percent beginning in 1996, to a 10 percent reduction. This would make payment for both categories consistent by reimbursing both at 90 percent of costs. Estimated savings: over four years $690 million; 1997 $375 million.

HHS/Ban physician self-referrals. A Physicians may not refer a Medicare or Medicaid patient to a clinical laboratory in which the physician or the physician's relatives have a financial interest. Several exceptions are specified in statute. This proposal would extend ownership and referral prohibitions to additional services, such as physical and occupational therapy, durable medical equipment, and parenteral/enteral nutrition equipment and supplies. Estimated savings: over four years $250 million; 1997 $100 million.

HHS/Set EPO at non-U.S. market rates. The proposal would reduce the amount Medicare pays for erythropoietin (EPO) from $11 per 1,000 units to $10 per 1,000 units. EPO is the drug used by patients suffering from kidney failure, to counter anemia by increasing the body's production of red blood cells. Medicare is virtually the sole purchaser of EPO and should exercise its market power to pay reasonable costs while maintaining access for all Medicare beneficiaries. Estimated 1997 savings are $50 million. Estimated savings 1994-1997 $160 million; savings for 1994-1998 $210 million.

HHS/Resource-based practice expense phase-in. This proposal is an interim step toward a resource-based system for practice expenses. It would reduce practice expenses in relation to the relative value work units by one-half of the difference between practice expense and physician work relative value units, rent no lower than 110 percent. Phase-in to a resource-based system for practice or overvalued expenses under the physician fee schedule would begin in 1997. The recently implemented physician payment reform system divided payment into three distinct components overhead, work, and malpractice expenses. The work component is based on an extensively-researched relative value system, developed in 1991. The existing practice expense component is based upon an obsolete fee schedule and bears no relationship to the reformed work component of the fee schedule. This proposal would only reduce the practice component in extreme instances when it exceeds the value of the work component. More comprehensive reform of the practice component is expected to take several years to develop. This proposal provides a simple, intermediate step to address immediately the most egregious inequities in the reimbursement framework. Estimated 1997 savings $875 million. Estimated savings 1994-1997 $2,025 million; savings for 1994-1998 $2,975 million.

HHS/Pay hospitals for inpatient services by hospital-based physicians. Include payment for radiology, anesthesia, and pathology (RAP) services as an add-on to the hospital DRG payment. Separate billing by physicians for these services would not be allowed. Quality of care would be improved and unnecessary utilization would be minimized. Estimated 1997 savings are $160 million; 1994-1997 $390 million.

HHS/Single fee for surgery. The fee paid to a primary surgeon would be reduced by the amount paid to assistants-at-surgery. HHS would establish exceptions by regulation in which the difficulty of the procedure or the condition of the patient necessitated the use of physicians as assistants-at-surgery. Whether assistants are used and what type of personnel are used are primarily dependent on geographic practice patterns and the practice styles of individual surgeons, rather than on characteristics related to the specific patient and the surgery performed. Evidence does not show that quality of care would be jeopardized. Estimated 1997 savings is $120 million; 1994-1997 $380 million.

HHS/Durable Medical Equipment (DME) options Set DME at market levels. Initially, fee schedules for DME would be adjusted downward with an upper limit based upon the median DME fee schedule, rather than the national average. The fee schedule for prosthetics and orthotics would also be recomputed with a national median cap. The HHS Secretary would be authorized to adjust DME rates based upon market factors, including surveys of what other providers, such as the VA, DoD and the private sector, pay for DME. The Secretary also would be authorized to initiate competitive bidding programs for DME supplies where appropriate. Granting broader HHS discretion would allow adjustments to be made to reflect changes in technology, utilization patterns and other market factors. Estimated savings are $510 million for 1994-97; and $160 million in 1997.

HHS/Direct medical education. This proposal would base Medicare direct medical education payments on a national per resident amount derived solely from the average of salaries paid to residents. Direct medical education payments would reflect differential weighing of the national average resident salary, based on the specialty area a resident is pursuing and the length of the residency. A resident in a primary care specialty would be weighted at 240 percent, a non-primary care resident in the initial residency period would be weighted at 140 percent, and a non-primary care resident beyond the initial residency period would be weighted at 100 percent. The average weight would be 175 percent of the national average resident salary, down from the average weight of about 215 percent under current law. Estimated savings: over four years $1.4 billion; 1997 $330 million.

HHS/Set laboratory rates at market levels. The proposal initially would limit the Medicare Part B laboratory fee schedule to 76 percent of the median of all fees (as opposed to current maximum of 88 percent). Later, based on market surveys, the Secretary of HHS would adjust Medicare payment rates to laboratories to account for technological changes or other market factors. This proposal would address excessive Medicare payments for laboratory tests. An OIG study found that Medicare paid laboratories 90 percent more than physicians paid for the same tests. Moreover, a GAO study indicated that laboratories use higher profits from Medicare to subsidize discounts to private payers. In addition, the proposal would control growth in Medicare Part B laboratory payments, which more than doubled from 1985 to 1990. Estimated savings: over four years $3.1 billion; 1997 $1.1 billion.

HHS/Reduce default Medicare volume performance standard and update. The effect of this proposal is to reduce the amount of increases in physician fees in future years. This proposal would reduce the Medicare volume performance standard (MVPS) default formula and the default update for Medicare payments to physicians. These two factors determine annual aggregate physician payment levels. Estimated savings: over four years $850 million; 1997 $650 million.

HHS/Permanently extend three current Medicare Secondary Payer (MSP) provisions. The proposal would extend three OBRA '90 Medicare Secondary Payer provisions due to expire at the end of 1995 including: (1) 1862(b) of the Social Security Act authorizing MSP for disabled active individuals with employer group health plan (EGHP) coverage; (2) 1826(c) of the Social Security Act amended by OBRA '90 authorizing MSP for individuals with ESRD after 18 months (expanded from 12 months); and (3) 8051 of OBRA '90 authorizing an IRS/SSA data match for MSP. The data match authorizes access to tax data to identify the existence of EGHP for MSP purposes. Estimated savings over four years $1.845 billion; 1997 savings $1.115 billion.

HHS/Put hospitals on calendar year update. Medicare payments to hospitals for inpatient care are updated October 1 of each year. Most other Medicare services are updated January 1 or July 1. This proposal would move the hospital update to January 1. Estimated savings: over four years $4.6 billion; 1997 $1.3 billion.

HHS/Fully increase primary care fees; modestly increase doctor fees in 1994. The proposal would update in full the physician fee schedule in CY 1994 for primary care services only. For all other physician services, the update would be two percentage points less than the full update. Estimated savings: over four years $1.3 billion; in 1997 $400 million.

HHS/Reduce Medicare hospital update market basket by 1 percent in 1994 and 1 percent in 1995. This proposal would extend the current law practice of PPS updates of less than the hospital market basket index (HMBI). The 1993 update of the PPS standardized amount is set at the HMBI minus 1.55 percent for urban hospitals and HMBI minus 0.55 percent for rural hospitals, as set in OBRA 1990. Under current law, the update for urban hospitals will equal the market basket rate of increase in 1994 and 1995. For rural hospitals the update is set at market basket plus 1.5 percent for 1994 and the HMBI plus an adjustment needed to match the urban rate in 1995. Estimated savings: over four years $5.19 billion; 1997 $1.7 billion.

HHS and others: Third party liability enhanced identification of other health coverage. Federal and State taxpayers spend over $1.5 billion a year for health care that should be paid for by others. Inappropriate payments have been identified in most federally-assisted or financed health programs including: Medicare, Medicaid, Veterans Affairs Health, CHAMPUS/DOD Direct Care, and the Indian Health Service. This proposal removes many of the structural impediments hindering proper identification and billing of third party liability (TPL) by: (1) requiring employers to report employment based health coverage data annually on the W-2; (2) granting access to this data to all federally-assisted and financed health programs; (3) reinforcing existing coordination of benefits (which payer pays and in what order) laws and regulations; and (4) removing impediments that hinder states from collecting from private insurers. Rather than the current `pay and chase' procedures where federal programs pay first and chase payers afterwards, this proposal focusses on avoiding erroneous payments by identifying the appropriate coverage before payment.

Medicaid:

HHS/Tighten estate recovery/transfer of assets rules. Total Federal Medicaid outlays for 1993 are projected to be $80.3 billion. This proposal would save approximately 0.1 percent of the 1994-98 Medicaid baseline. This proposal would strengthen transfer-of-asset rules to restrict further the diverting of property to qualify for Medicaid. In addition, the Federal government would require States to operate estate recovery programs and would enhance States' abilities to implement these programs. Estimated savings: over four years $395 million; 1997 $155 million.

HHS/Remove prohibition on State use of drug formularies. This proposal would repeal the OBRA 1990 statutory provisions that prohibit States from using formularies. Before OBRA 1990, States were allowed to limit the number of drugs listed on their formularies, e.g., States could cover only the generic alternative of a multiple-source drug. The OBRA 1990 formulary restriction resulted in increased expenditures for States and the Federal government. Estimated savings: over four years $70 million; 1997 $25 million.

HHS/Eliminate mandatory Medicaid personal care. This proposal would ensure that personal care remains an optional benefit after 1994. The Medicaid statute requires States to cover home health services for all individuals who are eligible for nursing home services. Currently, States also have the option to pay for personal care services to these individuals. Due to a legislative drafting error, OBRA-90 designated personal care as a home health service. Therefore, coverage of personal care services would become mandatory for all States in 1995, if Congress does not amend the statute. In an era of increasing fiscal pressures and growing Medicaid spending, Congress should avoid imposing additional mandates upon State Medicaid programs. Moreover, maintaining personal care as an optional service would allow States continued flexibility in designing and administering Medicaid long-term care strategies. Estimated savings: for four years $4.1 billion; 1997 $1.5 billion.

Shared Contribution

For deficit reduction to succeed, all groups must contribute. Only if there is a sharing of the load can the entire country be sure that everyone is participating.

Social Security/Conform taxation of benefits to private pensions. Up to 50 percent of Social Security and Railroad Retirement (Tier I) benefits are currently included in taxable income for those recipients with income and benefits exceeding $25,000 for individuals, and $32,000 for couples. The Administration proposes including up to 85 percent of benefits in adjusted gross income, for those with income and benefits exceeding the current $25,000/$32,000 thresholds. This would move the treatment of Social Security and Railroad Retirement Tier I benefits toward that of private pensions. Under current law, pension benefits that exceed an employee's after-tax contributions to qualified pension plans are subject to tax at distribution. Extending this approach to Social Security would mean including at least 85 percent of benefits in taxable income for nearly all recipients. However, maintaining the existing income thresholds protects most low- and middle-income beneficiaries from benefit taxation.

HHS/Strengthening child support enforcement. Of the over 10 million women living alone with their children, only half have child support orders and only half of those women receive full payment. Child support enforcement will be strengthened by streamlining paternity establishment; using the IRS to collect seriously delinquent child support; making sure that absent parents who can pay child support do; setting up a national registry to track down deadbeat parents; requiring employees to report child support obligations on IRS W-4 forms; and improving medical support for children. Better child support enforcement will ensure both parents' responsibility for the well being of their children and decrease the burden of welfare on the taxpayer. Estimated Savings: over four years $328 million; 1997 $109 million..

HHS/Equate matching rates for welfare programs. Currently, States are reimbursed by the Federal Government at different rates for the various costs of administering Aid to Families with Dependent Children (AFDC), Food Stamps, and Medicaid. The Administration proposes to set the Federal reimbursement rate at a uniform 50 percent for all administrative costs of each of these three programs. There will be waivers for some States, in hardship cases. Estimated savings: over four years $1.8 billion; 1997 $600 million.

OPM/End lump-sum benefit retirement. The lump-sum retirement option allows Federal civilian employees to elect upon retirement to receive a lump sum roughly equal to employee contributions in exchange for a reduced annuity for life. The Omnibus Budget Reconciliation Act suspended the lump sum for 5 years, through 1995, for all employees except those who are critically ill, involuntarily separated or activated for Desert Shield/Storm. This proposal would eliminate the lump sum for all employees retiring on or after October 1, 1995. Estimated 1994-97 savings: $5.1 billion. Estimated 1997 savings: $3 billion.

Veterans Affairs/Permanently extend medical care cost recovery. The VA operates a nationwide health care delivery system for our nation's veterans. This proposal would make permanent VA's authority to collect the cost of medical care from health insurers of veterans with service-connected (military related) disabilities when the care is provided for non-service-connected conditions. This proposal would hold private health insurance companies responsible for the costs of their beneficiaries' care. VA already has permanent authorization to collect costs from insurers of veterans without service-connected conditions. Estimated savings: over four years $1.2 billion; 1997 $407 million.

Veterans Affairs/Permanently extend prescription charge/copayment. The VA operates a nationwide health care delivery system for our nation's veterans. This proposal would make permanent VA's authority to collect from most veterans a $2 copayment for each 30-day supply of outpatient prescription drugs that is not related to treatment of a service-connected (military related) disability. Cost sharing encourages more appropriate utilization of prescription drugs. This proposal has been enacted three times by the Congress (currently through 1997). Estimated savings in 1998 $42 million.

Deficit Reduction: Revenues

The Administration had hoped to achieve the twin goals of economic growth and deficit reduction without asking those who were squeezed the hardest in the 1980s to contribute more. But the deficit has grown substantially and, if we are to invest in our people and achieve fundamental change, we must all do our part.

Revenue increases, by necessity, must play a role. In raising new revenue, we had two goals. First, raise the bulk of new revenue from those who can most afford to pay. Second, minimize any increases in the burden on the middle class and the working poor. These goals were met; those earning more than $100,000 will contribute over 70 percent of the total new revenues.

Most Americans, however, will be asked to contribute a small amount towards reducing pollution and lowering our dependence on foreign oil through a new broad-based energy tax. The direct impact of the new energy tax, even when fully phased in, will be less than $10 per month for a typical family of four earning $40,000. And special offsets will fully insulate low-income households from any increase in their tax burden.

In 1997, the deficit reduction package will yield a net increase of $74 billion, the result of $78 billion in new revenues minus $4 billion to offset the impact of the energy tax. Non-energy sources will account for approximately three of every four dollars of this increase. Those who can most afford to pay will bear the vast majority of the burden.

Raising taxes on the wealthiest. The 1980's saw the personal income tax rate on the most affluent Americans drop from 70 percent to 28 percent; at the same time, middle income families paid a rising share of their incomes in income and payroll taxes. Our plan reverses that trend.

Personal Income Taxes. The plan increases the top income tax rate from 31 percent to 36 percent for taxpayers with high incomes. The 36% tax rate will apply to taxable income in excess of $140,000 for couples and $115,000 for individuals, beginning this year. Average taxpayers with taxable income in excess of the $140,000/$115,000 thresholds will have adjusted gross income in excess of $180,000 on joint returns and $140,000 on individual returns. In addition, the package applies an additional 10 percent surtax for those people with taxable income over $250,000, resulting in a 39.6% tax rate for those income levels; and increases the Alternative Minimum Tax rate to 26 percent on AMT income of less than $175,000 and 28 percent on AMT income over $175,000.

These changes affect just over 1 percent of taxpayers and produce $26 billion of new revenues in 1997. Yet tax rates remain well below previous highs, preserving incentives to work and save.

The plan also extends existing law rules on itemized deduction limitations and the personal exemption phaseout that are targeted to high income taxpayers. Those provisions are scheduled to expire in calendar years 1996 and 1997, respectively.

The package also includes a number of other personal income tax changes that are designed to improve fairness. It reduces compensation that can be taken into account for purposes of benefits and contributions under qualified retirement plans to $150,000 (1993 cap is $235,840). This change will better target the benefit of tax deferral to middle income Americans and will raise almost $1 billion in 1997. It also disallows deductions for closing costs and meals incurred as a result of moving to a new residence. These expenses that are generally not deductible for other taxpayers should improve the equity of the tax system. The change in the moving expense rules raises $0.5 billion in 1997.

Hospital Insurance Taxes. Higher income individuals are also required to increase their payments under the Medicare tax. The proposal eliminates the current cap ($135,000) on earnings subject to the Hospital Insurance (HI) portion of the Social Security tax. Imposing the HI tax on all earnings increases revenues by $7 billion in 1997 and ensures that those who can afford to pay more for their health care in retirement do so. The additional revenue will bolster the HI Trust Fund, which is estimated to be exhausted by about 2002.

Estate Taxes. Current law imposes a tax on the cumulative value of gifts and bequests. The rates range from 18 percent on the first $10,000 of taxable estate to 50 percent on transfers of more than $2.5 million as of January 1993. Our proposal extends the additional marginal rates of 53 percent and 55 percent that were in effect in 1992. Extending these rates will affect only the wealthiest taxpayers, while raising nearly a $1 billion in 1997.

Business Taxes. The investment tax credits, the corporate alternative minimum tax changes and the favorable capital gains provisions in the stimulus and investment packages will spur investment and encourage the growth of all businesses, especially small business. At the same time however, large highly profitable companies will have to pay a greater portion of their net earnings in taxes. The package increases the corporate tax rate from 34 percent to 36 percent for taxable income above $10 million, raising $6 billion in 1997. Of the 2.2 million corporations, only about 2,700 large corporations will be affected by this proposal in any year.

Deductions. The package also contains a proposal to reduce the deductible portion of meals and entertainment from 80 percent to 50 percent. This will increase revenues by almost $4 billion in 1997. Meals and entertainment expenses involve a substantial component of personal consumption. A 50 percent split reasonably balances the mixed benefits of meals and entertainment expenses.

The plan would deny certain other business deductions, including the deduction for compensation in excess of $1 million, unless linked to productivity. The goal is to encourage corporations to focus more carefully on their compensation policies and to shift business spending from excess pay to investment. This proposal would raise $.2 billion in 1997.

Possessions tax credit. In a package in which enterprise zones are being established throughout the United States for economically distressed areas, we must reassess the extremely costly tax incentives provided in Puerto Rico. At the same time, we must recognize our unique relationship with Puerto Rico and its unusual circumstances. The package seeks to strike a balance by capping the tax incentives available to American corporations in Puerto Rico at 65 percent of compensation paid to workers there.

Tax compliance. The package also contains a series of international compliance reforms and related provisions. Two provisions are designed to improve the tax compliance of both foreign and domestic corporations by preventing the improper shifting of U.S. profits to foreign jurisdictions. The principal provision would require multinational enterprises to establish their transfer prices before they file their tax returns. A related provision restricts the ability of U.S. corporations with foreign shareholders to avoid tax on their earnings distributed as interest. In addition, the Administration will institute a sweeping new enforcement initiative targeted at transfer pricing abuses. It is expected that marked improvement in compliance will result from this investment of IRS resources.

Another set of provisions will reduce the tax incentives for U.S. corporations to operate abroad. These include encouraging research and development to be performed in the United States and the related products to be manufactured here as well, preventing multinational oil companies from sheltering foreign earnings by inflating their working capital reserves abroad, and compelling multinationals to pay tax on excessive passive earnings accumulated abroad.

Securities dealers will no longer be permitted inventory accounting rules that have allowed the recognition of losses, but not gains and will generally be required to conform their tax treatment to their accounting practices. This will result in additional revenues of $1.1 billion in 1997. In addition, certain businesses which have acquired troubled savings and loans will not be allowed deductions for asset losses subject to Government reimbursement. This proposal will result in additional revenues of $200 million in 1997.

The tax gap the difference between what people owe in taxes and what is actually paid is a persistently large number. The lion's share of this shortfall is attributable to unreported income, often by business. The package includes several provisions raising over $2 billion in 1997 to get at this problem and improve compliance with the tax laws in other ways.

Introducing a broad-based energy tax. The package introduces a broad-based tax on all types of energy, based on the energy content of the fuel (measured in British Thermal Units or BTUs), to be collected at the source. The tax is designed to promote energy conservation and to reduce harm to the environment. Coal and natural gas will be taxed at the rate of $.257 per million BTUs, while oil will be taxed at the rate of $.599 per million BTUs. The higher rate on oil is intended to promote energy security and the use of cleaner burning fuels. The new tax raises $18.3 billion in 1997 (net of the offsets described below).

Energy taxes will encourage conservation by making energy more expensive, reducing pollution, and decreasing the country's dependence on foreign energy suppliers. Despite a drop in oil prices during the Persian Gulf War, this country still depends on foreign sources for nearly half of its oil and about one-fifth of its total energy.

Without some form of adjustment or offset, the broad-based energy tax would impose a particularly heavy burden on low-income households. To avoid such an outcome, the energy tax is accompanied by proposed increases in transfers under the Low-Income Home Energy Assistance (LIHEAP) and Food Stamp Programs. Since many low-income households are outside of the labor force and the tax system, these programs are needed to alleviate the` burden of the energy tax.

Other Provisions. The package includes a number of other miscellaneous revenue-raising proposals, including extension of the 2.5 cents per gallon gasoline tax currently scheduled to expire in 1995.

Distribution of Burden Among Taxpayers. The plan distributes the burden of the changes in tax treatment in a fair way, ensuring that taxes rise proportionately more for high-income households than for households with less income. Those earning more than $100,000 will contribute over 70 percent of the total new revenue. The impact of the revenue raising component of the deficit reduction package is shown below.

Budget Enforcement Proposals

A strong, workable enforcement mechanism is essential to the credibility of any deficit reduction package. As part of the process of implementing the President's economic program, the Administration will propose specific measures to ensure that the deficit reduction contained in the plan, once enacted, is maintained.

The current Budget Enforcement Act (BEA) expires at the end of 1995. If the BEA is not extended, there will not be an adequate mechanism for enforcing deficit reduction decisions. The budget will propose to extend the BEA with limited modifications, including specifically the extension of discretionary spending caps through 1998, and extension of "Pay-As-You-Go" provisions through 2003 in order to reach the outyear effects of entitlement and tax legislation and the use of sequestration to enforce compliance. In addition, the budget will support enactment of enhanced rescission authority legislation that would require expeditious Congressional action on Presidential rescissions, similar to H.R. 2164 as passed by the House last year.