The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Analytical Perspectives BUDGET OF THE U. S. GOVERNMENT Fiscal Year 2018 Office of Management and Budget Analytical Perspectives BUDGET OF THE U. S. GOVERNMENT Fiscal Year 2018 Office of Management and Budget THE BUDGET DOCUMENTS Budget of the United States Government, Fiscal Year 2018 contains the Budget Message of the President, information on the President’s priorities, and summary tables. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2018 contains analyses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective. This volume includes economic and accounting analyses; information on Federal receipts and collections; analyses of Federal spending; information on Federal borrowing and debt; baseline or current services estimates; and other technical presentations. The Analytical Perspectives volume also has supplemental materials that are available on the internet at www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM. These supplemental materials include tables showing the budget by agency and account and by function, subfunction, and program. Appendix, Budget of the United States Government, Fiscal Year 2018 contains detailed information on the various appropriations and funds that constitute the budget and is designed primarily for the use of the Appropriations Committees. The Appendix contains more detailed financial information on individual programs and appropriation accounts than any of the other budget documents. It includes for each agency: the proposed text of appropriations language; budget schedules for each account; legislative proposals; narrative explanations of each budget account; and proposed general provisions applicable to the appropriations of entire agen- cies or group of agencies. Information is also provided on certain activities whose transactions are not part of the budget totals. ELECTRONIC SOURCES OF BUDGET INFORMATION The information contained in these documents is available in electronic format from the following sources: Internet. All budget documents, including documents that are released at a future date, spreadsheets of many of the budget tables, and a public use budget database are available for downloading in several formats from the internet at www.budget.gov/budget. Links to documents and materials from budgets of prior years are also provided. Budget CD-ROM. The CD-ROM contains all of the printed budget documents in fully indexed PDF format along with the software required for viewing the documents. The Internet and CD-ROM also include many of the budget tables in spreadsheet format, and supplemental materials that are part of the Analytical Perspectives volume. It also includes Historical Tables that provide data on budget receipts, outlays, surpluses or deficits, Federal debt, and Federal employment over an extended time period, generally from 1940 or earlier to 2018 or 2022. For more information on access to electronic versions of the budget documents (except CD-ROMs), call (202) 512-1530 in the D.C. area or toll-free (888) 293-6498. To purchase the Budget CD-ROM or printed documents call (202) 512-1800. GENERAL NOTES 1. All years referenced for budget data are fiscal years unless otherwise noted. All years referenced for economic data are calendar years unless otherwise noted. 2. At the time of this writing, only one of the annual appropriations bills for 2017 had been enacted (the Military Construction and Veterans Affairs Appropriations Act), as well as the Further Continuing and Security Assistance Appropriations Act, which provided 2017 discretionary funding for certain Department of Defense accounts; therefore, the programs provided for in the remaining 2017 annual appropriations bills were operating under a continuing resolution (Public Law 114-223, division C, as amended). For these programs, references to 2017 spending in the text and tables reflect the levels provided by the continuing resolution. 3. Detail in this document may not add to the totals due to rounding. U.S. GOVERNMENT PUBLISHING OFFICE, WASHINGTON 2017 For sale by the Superintendent of Documents, U.S. Government Publishing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 TABLE OF CONTENTS Page List of Charts and Tables��������������������������������������������������������������������������������������������������������������������� iii Introduction 1. Introduction ����������������������������������������������������������������������������������������������������������������������������������3 Economic Assumptions and Interactions with the Budget 2. Economic Assumptions and Interactions with the Budget���������������������������������������������������������9 3. Long-Term Budget Outlook��������������������������������������������������������������������������������������������������������19 4. Federal Borrowing and Debt�������������������������������������������������������������������������������������������������������27 Performance and Management 5. Social Indicators��������������������������������������������������������������������������������������������������������������������������45 6. Building and Using Evidence to Improve Government Effectiveness �������������������������������������55 7. Strengthening the Federal Workforce����������������������������������������������������������������������������������������59 Budget Concepts and Budget Process 8. Budget Concepts��������������������������������������������������������������������������������������������������������������������������69 9. Coverage of the Budget���������������������������������������������������������������������������������������������������������������93 10. Budget Process�����������������������������������������������������������������������������������������������������������������������������99 Federal Receipts 11. Governmental Receipts�������������������������������������������������������������������������������������������������������������115 12. Offsetting Collections and Offsetting Receipts������������������������������������������������������������������������121 Federal Receipts 13. Tax Expenditures�����������������������������������������������������������������������������������������������������������������������127 Special Topics 14. Aid to State and Local Governments����������������������������������������������������������������������������������������171 15. Strengthening Federal Statistics����������������������������������������������������������������������������������������������185 16. Information Technology�������������������������������������������������������������������������������������������������������������191 17. Federal Investment�������������������������������������������������������������������������������������������������������������������197 18. Research and Development�������������������������������������������������������������������������������������������������������203 19. Credit and Insurance����������������������������������������������������������������������������������������������������������������209 i Page 20. Budgetary Effects of the Troubled Asset Relief Program��������������������������������������������������������231 21. Federal Drug Control Funding�������������������������������������������������������������������������������������������������241 Technical Budget Analyses 22. Current Services Estimates������������������������������������������������������������������������������������������������������245 23. Trust Funds and Federal Funds�����������������������������������������������������������������������������������������������257 24. Comparison of Actual to Estimated Totals�������������������������������������������������������������������������������271 *Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives/ and on the Budget CD-ROM ii LIST OF CHARTS AND TABLES iii LIST OF CHARTS AND TABLES LIST OF CHARTS Page 2–1. Range of Uncertainty for the Budget Defecit�����������������������������������������������������������������������������18 3-1. Comparison of Publicly Held Debt����������������������������������������������������������������������������������������������19 3-2. Comparison of Annual Surplus/Defecit��������������������������������������������������������������������������������������20 3-3. Alternative Productivity and Interest Assumptions������������������������������������������������������������������21 3-4. Alternative Health Care Costs����������������������������������������������������������������������������������������������������22 3-6. Alternative Revenue Assumptions���������������������������������������������������������������������������������������������23 3-5. Alternative Discretionary Assumptions�������������������������������������������������������������������������������������23 3-7. Long Term Uncertainties������������������������������������������������������������������������������������������������������������24 7–1. Changes from 1975 to 2016 in Employment/Population by Sector�������������������������������������������60 7–2. Masters Degree or Above by Year for Federal and Private Sector��������������������������������������������62 7–3. High School Graduate or Less by Year for Federal and Private Sectors����������������������������������63 7–4. Average Age by Year for Federal and Private Sectors���������������������������������������������������������������63 7–5. Pay Raises for Federal vs. Private Workforce�����������������������������������������������������������������������������64 8–1. Relationship of Budget Authority to Outlays for 2018��������������������������������������������������������������81 16–1. Trends in Federal IT Spending�������������������������������������������������������������������������������������������������191 16–2. IT Portfolio Summary����������������������������������������������������������������������������������������������������������������192 16–3. Number of Investments by Percentage of IT Spending, 2018�������������������������������������������������193 16–4. CIO Risk Ratings for Investments�������������������������������������������������������������������������������������������193 16–5. IT Spending by Category�����������������������������������������������������������������������������������������������������������194 16–6. Digital Projects in Production to Which Digital Experts have Contributed��������������������������195 19–1. Face Value of Federal Credit Outstanding�������������������������������������������������������������������������������226 v LIST OF TABLES Page Economic Assumptions and Interactions with the Budget Economic Assumptions and Interactions with the Budget 2–1. Economic Assumptions ����������������������������������������������������������������������������������������������������� 2–2. Comparison of Economic Assumptions in the 2017 and 2018 Budgets ������������������������ 2–3. Comparison of Economic Assumptions ���������������������������������������������������������������������������� 2–4. Sensitivity of the Budget to Economic Assumptions ������������������������������������������������������� 2–5. Forecast Errors, January 1982-Present ���������������������������������������������������������������������������� 2–6. Differences Between Estimated and Actual Surpluses or Deficits for Five-Year Budget Estimates Since 1986 ����������������������������������������������������������������������� 11 12 13 16 17 18 Long-Term Budget Outlook 3–1. Debt Projections in 25 Years Under Alternative Budget Scenarios �������������������������������� 22 3–2. Intermediate Actuarial Projections for OASDI And HI, 2016 Trustees’ Reports ����������� 24 3–3. Intermediate Actuarial Projections for OASDI And HI ������������������������������������������������������ * Federal Borrowing and Debt 4–1. Trends in Federal Debt Held by the Public and Interest on the Debt Held by the Public ������������������������������������������������������������������������������������������������� 4–2. Federal Government Financing and Debt ������������������������������������������������������������������������ 4–3. Debt Held by the Public Net of Financial Assets and Liabilities ������������������������������������ 4–4. Agency Debt ����������������������������������������������������������������������������������������������������������������������� 4–5. Debt Held by Government Accounts ��������������������������������������������������������������������������������� 4–6. Federal Funds Financing and Change in Debt Subject to Statutory Limit ������������������� 4–7. Foreign Holdings of Federal Debt ������������������������������������������������������������������������������������� 28 30 34 36 37 40 41 Performance and Management Social Indicators 5–1. Social Indicators ���������������������������������������������������������������������������������������������������������������� 47 5–2. Sources for Social Indicators ��������������������������������������������������������������������������������������������� 51 Strengthening the Federal Workforce 7–1. Federal Civilian Employment in the Executive Branch �������������������������������������������������� 7–2. Total Federal Employment ������������������������������������������������������������������������������������������������ 7–3. Personnel Pay and Benefits ����������������������������������������������������������������������������������������������� 7–4. Occupations of Federal and Private Sector Workforces ��������������������������������������������������� 61 62 65 66 Budget Concepts and Budget Process Budget Concepts Budget Calendar �������������������������������������������������������������������������������������������������������������������������� 71 8–1. Totals for the Budget and the Federal Government �������������������������������������������������������� 76 Coverage of the Budget 9–1. Comparison of Total, On-Budget, and Off-Budget Transactions ������������������������������������� 94 Budget Process 10–1. Program Integrity Discretionary Cap Adjustments, including Mandatory Savings ���� 101 10–2. Mandatory and Receipt Savings from Other Program Integrity Initiatives ���������������� 103 vii Page 10–3. Discretionary Pell Funding Needs ���������������������������������������������������������������������������������� 108 Federal Receipts Governmental Receipts 11–1. Receipts by Source—Summary ��������������������������������������������������������������������������������������� 116 11–2. Effect of Budget Proposals ���������������������������������������������������������������������������������������������� 119 11–3. Receipts by Source ���������������������������������������������������������������������������������������������������������������� * Offsetting Collections and Offsetting Receipts 12–1. Offsetting Collections and Offsetting Receipts from the Public ����������������������������������� 122 12–2. Summary of Offsetting Receipts by Type ����������������������������������������������������������������������� 123 12–3. Gross Outlays, User Charges, Other Offsetting Collections and Offsetting Receipts from the Public, and Net Outlays ����������������������������������������������������������������� 124 12–4. Offsetting Receipts by Type ������������������������������������������������������������������������������������������������� * Federal Receipts Tax Expenditures 13–1. Estimates of Total Income Tax Expenditures for Fiscal Years 2016-2026 �������������������� 13–2A. Estimates of Total Corporate Income Tax Expenditures for Fiscal Years 2016-2026 ������������������������������������������������������������������������������������������������ 13–2B. Estimates of Total Individual Income Tax Expenditures for Fiscal Years 2016–2026 ������������������������������������������������������������������������������������������������ 13-3. Income Tax Expenditures Ranked by Total Fiscal Year 2017-2026 Projected Revenue Effect �������������������������������������������������������������������������������������������������������������� 13–4. Present Value of Selected Tax Expenditures for Activity in Calendar Year 2016 �������� 130 135 140 145 149 Special Topics Aid to State and Local Governments 14–1. Trends in Federal Grants to State and Local Governments ����������������������������������������� 173 14–2. Federal Grants to State and Local Governments—Budget Authority and Outlays ���� 175 14–3. Summary of Programs by Agency, Bureau, and Program �������������������������������������������������� * 14–4. Summary of Programs by State ������������������������������������������������������������������������������������������� * 14–5.–39. 2016 Budget State-by-State Tables ������������������������������������������������������������������������������ * Strengthening Federal Statistics 15–1. 2016-2018 Budget Authority for Principle Statistical Agencies ����������������������������������� 189 Information Technology 16–1. Federal IT Spending �������������������������������������������������������������������������������������������������������� 191 16–2. FY 2018 IT Spending by Agency ������������������������������������������������������������������������������������� 192 Federal Investment 17–1. Composition of Federal Investment Outlays ������������������������������������������������������������������ 198 17–2. Federal Investment Budget Authority and Outlays: Grant and Direct Federal Programs ��������������������������������������������������������������������������������������������������������� 200 Research and Development 18–1. Total Federal R&D Funding by Agency at the Bureau or Account Level �������������������� 203 *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM viii Page 18–2. Federal Research and Development Spending ������������������������������������������������������������� 206 Credit and Insurance 19–1. Estimated Future Cost of Outstanding Direct Loans and Loan Guarantees �������������� 227 19–2. Direct Loan Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 ��������������� 228 19–3. Loan Guarantee Subsidy Rates, Budget Authority, and Loan Levels, 2016-2018 �������� 229 19–4. Summary of Federal Direct Loans and Loan Guarantees ��������������������������������������������� 230 19–5. Reestimates of Credit Subsidies on Loans Disbursed Between 1992-2016 ������������������������� * 19–6. Face Value of Government-Sponsored Lending ��������������������������������������������������������������������� * 19–7. Lending and Borrowing by Government-Sponsored Enterprises (GSEs) ���������������������������� * 19–8. Direct Loan Transactions of the Federal Government ���������������������������������������������������������� * 19–9. Guaranteed Loan Transactions of the Federal Government ������������������������������������������������ * Budgetary Effects of the Troubled Asset Relief Program 20–1. Change in Programmatic Costs of Troubled Asset Relief Program ����������������������������� 20–2. Troubled Asset Relief Program Current Value �������������������������������������������������������������� 20–3. Troubled Asset Relief Program Effects on the Deficit and Debt ���������������������������������� 20–4. Troubled Asset Relief Program Effects on the Deficit and Debt Calculated on a Cash Basis ������������������������������������������������������������������������������������������������������������ 20–5. Troubled Asset Relief Program Reestimates ������������������������������������������������������������������ 20–6. Detailed TARP Program Levels and Costs ��������������������������������������������������������������������� 20–7. Comparison of CBO and OMB TARP Costs ������������������������������������������������������������������� 231 232 234 234 235 236 237 Federal Drug Control Funding 21–1. Drug Control Funding FY 2016—FY 2018 ��������������������������������������������������������������������� 241 Technical Budget Analyses Current Services Estimates 22–1. Category Totals for the Baseline ������������������������������������������������������������������������������������� 245 22–2. Summary of Economic Assumptions ������������������������������������������������������������������������������ 248 22–3. Baseline Beneficiary Projections for Major Benefit Programs �������������������������������������� 249 22–4. Impact of Regulations, Expiring Authorizations, and Other Assumptions in the Baseline * 22–5. Receipts by Source in the Projection of Adjusted Baseline ������������������������������������������� 250 22–6. Effect on Receipts of Changes in the Social Security Taxable Earnings Base ������������� 250 22–7. Change in Outlay Estimates by Category in the Baseline �������������������������������������������� 251 22–8. Outlays by Function in the Baseline ������������������������������������������������������������������������������ 252 22–9. Outlays by Agency in the Baseline ��������������������������������������������������������������������������������� 253 22–10. Budget Authority by Function In the Baseline �������������������������������������������������������������� 254 22–11. Budget Authority by Agency in the Baseline ����������������������������������������������������������������� 255 22–12. Current Services Budget Authority and Outlays by Function, Category, and Program ��� * Page Trust Funds and Federal Funds 23–1. Receipts, Outlays and Surplus or Deficit by Fund Group ��������������������������������������������� 258 *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM ix 23–2. Comparison of Total Federal Fund and Trust Fund Receipts to Unified Budget Receipts, Fiscal Year 2016 ������������������������������������������������������������������������������� 23–3. Income, Outgo, and Balances of Trust Funds Group ����������������������������������������������������� 23–4. Income, Outgo, and Balance of Major Trust Funds ������������������������������������������������������� 23–5. Income, Outgo, and Balance of Selected Special Funds ������������������������������������������������ Comparison of Actual to Estimated Totals 24–1. Comparison of Actual 2016 Receipts with the Initial Current Services Estimates ����� 24–2. Comparison of Actual 2016 Outlays with the Initial Current Services Estimates ������ 24–3. Comparison of the Actual 2016 Deficit with the Initial Current Services Estimate ��� 24–4. Comparison of Actual and Estimated Outlays for Mandatory and Related Programs Under Current Law ������������������������������������������������������������������������������������ 24–5. Reconciliation of Final Amounts for 2016 ���������������������������������������������������������������������� 260 262 263 269 271 272 273 274 275 Detailed Functional Tables 25–1. Budget Authority and Outlays by Function, Category and Program �������������������������������� * Federal Budget by Agency and Account 26–1. Federal Budget by Agency and Account ������������������������������������������������������������������������������ * California Bay-Delta Federal Budget Crosscut Report �������������������������������������������������������������������������� ** *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM **Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives only INTRODUCTION 1 2 1. INTRODUCTION The Analytical Perspectives volume presents analyses that highlight specific subject areas or provide other significant data that place the President’s 2018 Budget in context and assist the public, policymakers, the media, and researchers in better understanding the budget. This volume complements the main Budget volume, which presents the President’s budget policies and priorities, and the Budget Appendix volume, which provides appropriations language, schedules for budget expenditure accounts, and schedules for selected receipt accounts. Presidential budgets have included separate analytical presentations of this kind for many years. The 1947 Budget and subsequent budgets included a separate section entitled “Special Analyses and Tables” that covered four, and later more, topics. For the 1952 Budget, the section was expanded to 10 analyses, including many subjects still covered today, such as receipts, investment, credit programs, and aid to State and local governments. With the 1967 Budget this material became a separate volume entitled “Special Analyses,” and included 13 chapters. The material has remained a separate volume since then, with the exception of the Budgets for 1991–1994, when all of the budget material was included in one volume. Beginning with the 1995 Budget, the volume has been named Analytical Perspectives. Several supplemental tables as well as several longer tables that were previously published within the volume are available at http://www.budget.gov/budget/ Analytical_Perspectives and on the Budget CD-ROM. These tables are shown in the List of Tables in the front of this volume with an asterisk instead of a page number. OVERVIEW OF THE CHAPTERS Economic and Budget Analyses Economic Assumptions and Interactions with the Budget. This chapter reviews recent economic developments; presents the Administration’s assessment of the economic situation and outlook; compares the economic assumptions on which the 2018 Budget is based with the assumptions for last year’s Budget and those of other forecasters; provides sensitivity estimates for the effects on the Budget of changes in specified economic assumptions; and reviews past errors in economic projections. Long-Term Budget Outlook. This chapter assesses the long-term budget outlook under current policies and under the Budget’s proposals. It focuses on 25-year projections of Federal deficits and debt to illustrate the long-term impact of the Administration’s proposed policies, and shows how alternative long-term budget assumptions affect the results. It also discusses the uncertainties of the long-term budget projections and discusses the actuarial status of the Social Security and Medicare programs. Federal Borrowing and Debt. This chapter analyzes Federal borrowing and debt and explains the budget estimates. It includes sections on special topics such as trends in debt, debt held by the public net of financial assets and liabilities, investment by Government accounts, and the statutory debt limit. Management Social Indicators. This chapter presents a selection of statistics that offers a numerical picture of the United States and illustrates how this picture has changed over time. Included are economic, demographic and civic, socioeconomic, health, security and safety, and environmental and energy statistics. Building and Using Evidence to Improve Government Effectiveness. This chapter discusses evidence and its role in improving government programs and policies. It articulates important principles and practices including building and using a portfolio of evidence, developing a learning agenda, building an evidence infrastructure, and making better use of administrative data. Strengthening the Federal Workforce. This chapter presents summary data on Federal employment and compensation, and discusses the initial approach the Administration is taking with Federal human capital management. Budget Concepts and Budget Process Budget Concepts. This chapter includes a basic description of the budget process, concepts, laws, and terminology, and includes a glossary of budget terms. Coverage of the Budget. This chapter describes activities that are included in budget receipts and outlays (and are therefore classified as “budgetary”) as well as those activities that are not included in the Budget (and are therefore classified as “non-budgetary”). The chapter also defines the terms “on-budget” and “off-budget” and includes illustrative examples. Budget Process. This chapter discusses proposals to improve budgeting and fiscal sustainability within individual programs as well as across Government. Federal Receipts Governmental Receipts. This chapter presents information on estimates of governmental receipts, which consist of taxes and other compulsory collections. It includes descriptions of tax-related legislation enacted in 3 4 the last year and describes proposals affecting receipts in the 2018 Budget. Offsetting Collections and Offsetting Receipts. This chapter presents information on collections that offset outlays, including collections from transactions with the public and intragovernmental transactions. In addition, this chapter presents information on “user fees,” charges associated with market-oriented activities and regulatory fees. A detailed table, “Table 12–4, Offsetting Receipts by Type” is available at the Internet address cited above and on the Budget CD-ROM. Tax Expenditures. This chapter describes and presents estimates of tax expenditures, which are defined as revenue losses from special exemptions, credits, or other preferences in the tax code. Special Topics Aid to State and Local Governments. This chapter presents crosscutting information on Federal grants to State and local governments. The chapter also includes a table showing historical grant spending, and a table with budget authority and outlays for grants in this Budget. Tables showing State-by-State spending for major grant programs are available at the Internet address cited above and on the Budget CD-ROM. Strengthening Federal Statistics. This chapter discusses the vital role of the Federal government’s statistical agencies and programs in generating data that citizens, businesses, and governments need to make informed decisions. This chapter also provides examples of innovative developments and applications throughout the Federal statistical community and highlights 2018 Budget proposals for the Government’s principal statistical programs. Information Technology. This chapter addresses Federal information technology (IT), highlighting initiatives to improve IT management through modern solutions to enhance service delivery. The Administration will engage agencies with PortfolioStat reviews of IT investments, advancing modernization and cost reduction through the Data Center Optimization Initiative, use of shared services, migrations to cloud-computing, and leveraging Federal buying power. Digital experts will continue to transform many of the Government’s highest impact programs, while cybersecurity will be strengthened through the Continuous Diagnostics and Mitigation (CDM) program, and developing new strategies to meet emerging threats. Federal Investment. This chapter discusses Federallyfinanced spending that yields long-term benefits. It presents information on annual spending on physical capital, research and development, and education and training. Research and Development. This chapter presents a crosscutting review of research and development funding in the Budget. Credit and Insurance. This chapter provides crosscutting analyses of the roles, risks, and performance of Federal credit and insurance programs and Governmentsponsored enterprises (GSEs). The chapter covers the major categories of Federal credit (housing, education, ANALYTICAL PERSPECTIVES small business and farming, energy and infrastructure, and international) and insurance programs (deposit insurance, pension guarantees, disaster insurance, and insurance against terrorism-related risks). Five additional tables address transactions including direct loans, guaranteed loans, and Government-sponsored enterprises. These tables are available at the Internet address cited above and on the Budget CD-ROM. Budgetary Effects of the Troubled Asset Relief Program. The chapter provides special analyses of the Troubled Asset Relief Program (TARP) as described in Sections 202 and 203 of the Emergency Economic Stabilization Act of 2008, including information on the costs of TARP activity and its effects on the deficit and debt. Federal Drug Control Funding. This chapter displays enacted and proposed drug control funding for Federal departments and agencies. Note: Previous Analytical Perspectives volumes included a “Homeland Security Funding Analysis” chapter, and provided additional detailed information on the Internet address cited above and on the Budget CD-ROM. P.L. 115–31 eliminated the statutory reporting requirement for this information. Therefore, this information is not included in this year’s Budget and it will not be included in future Budgets. Technical Budget Analyses Current Services Estimates. This chapter presents estimates of what receipts, outlays, and the deficit would be if current policies remained in effect, consistent with the baseline rules in the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). Two detailed tables addressing factors that affect the baseline and providing details of baseline budget authority and outlays are available at the Internet address cited above and on the Budget CD-ROM. Trust Funds and Federal Funds. This chapter provides summary information about the two fund groups in the budget—Federal funds and trust funds. In addition, for the major trust funds and certain Federal fund programs, the chapter provides detailed information about income, outgo, and balances. Comparison of Actual to Estimated Totals. This chapter compares the actual receipts, outlays, and deficit for 2016 with the estimates for that year published in the 2016 Budget, published in February 2015. The following materials are available at the Internet address cited above and on the Budget CD-ROM: Detailed Functional Table Detailed Functional Table. Table 25–1, “Budget Authority and Outlays by Function, Category, and Program,” displays budget authority and outlays for major Federal program categories, organized by budget function (such as health care, transportation, or national defense), category, and program. Federal Budget by Agency and Account The Federal Budget by Agency and Account. Table 26–1, “Federal Budget by Agency and Account,” displays 1. Introduction budget authority and outlays for each account, organized by agency, bureau, fund type, and account. The following report is available at the Internet address cited above: California Bay-Delta Federal Budget Crosscut California Bay-Delta Federal Budget Crosscut. The California Bay-Delta interagency budget crosscut report 5 includes an estimate of Federal funding by each of the participating Federal agencies to carry out its responsibilities under the California Bay-Delta Program, fulfilling the reporting requirements of section 106 of Public Law 108-361. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET 7 8 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET This chapter presents the economic assumptions that underlie the Administration’s Fiscal Year 2018 Budget.1 It describes the recent performance of the U.S. economy, explains the Administration’s projections for key macroeconomic variables, compares them with forecasts prepared by other prominent institutions and discusses the uncertainty inherent in producing an eleven-year forecast. After contracting by more than 4 percent over 2007 to 2009, the United States economy has experienced stable but only relatively modest growth, especially when compared with past recoveries. From the trough in the second quarter of 2009, it took about two years for the economy to recover its previous output peak, much longer than in the other recoveries since World War II. Over the first three years of recoveries from previous postwar recessions, average output growth was a little over 5 percent annually. In the first three years following the most recent recession, average annual growth was only about 2.3 percent. The disappointing recovery is motivating this Administration’s aggressive economic strategy, which entails policies aimed at reforming the tax code and the regulatory framework. In addition, the Administration will introduce policies to encourage domestic energy development and investments in infrastructure, reform the health care system, negotiate more attractive trade agreements, and reduce (and eventually eliminate) Federal budget deficits. Such actions should encourage investment by American firms, stimulate productivity growth, and slow the expected decline in the labor force participation rate, leading to stronger growth in output and putting more Americans to work. This chapter proceeds as follows: • The first section reviews the performance of the U.S. economy since the publication of the 2017 Budget, examining a broad array of economic outcomes. • The second section provides a detailed exposition of the Administration’s economic forecast for the 2018 Budget, discussing how a number of macroeconomic variables are expected to evolve over the years 2017 to 2027. • The third section compares the forecast of the Ad- ministration with those prepared by the Congressional Budget Office, the Federal Open Market Committee of the Federal Reserve, and the Blue Chip panel of private sector forecasters. • The fourth section discusses the sensitivity of the Administration’s projections of Federal receipts and 1 Economic performance is discussed in terms of calendar years. Budget figures are discussed in terms of fiscal years. outlays to fluctuations in the main macroeconomic variables discussed in the forecast. • The fifth section considers the errors and possible biases2 in past Administration forecasts, comparing them with the errors in forecasts produced by the Congressional Budget Office and the Blue Chip panel. • The sixth section combines results on the sensitiv- ity of the budget deficit to economic assumptions with information on past accuracy of Administration forecasts to provide a sense of the uncertainty associated with the Administration’s forecast of the budget balance. Recent Economic Performance3 The U.S. economy continued to exhibit subdued growth throughout 2016. In the fourth quarter of 2016, real Gross Domestic Product (GDP) was 2.0 percent higher than it had been in the fourth quarter of the preceding year. This came on the heels of real GDP growing at a 1.9 percent rate over the four quarters of 2015, and an average growth rate of 2.1 percent (fourth quarter-on-fourth quarter) since 2010. Among the demand components of GDP, real consumer spending accounted for most of the growth in 2016, with consumption of nondurables and services contributing 1.5 percentage points and consumption of durable goods contributing a further 0.7 percentage point, on a fourth quarter-over-fourth quarter basis. Gross private domestic investment and government consumption and gross investment made only minor positive contributions to growth, while net exports had a negative impact. On the supply side, weak productivity growth limited overall growth during 2016, as it has over the past several years. Over the four quarters of 2016, real output per hour in the nonfarm business sector grew by only 1.1 percent, well below the long run average of 2.1 percent during the post-World War II period. Labor Markets—Labor markets improved in 2016 across a broad array of metrics. The unemployment rate continued to decline, falling from 5.0 percent at the end of 2015 to 4.7 percent at the end of 2016, and further to 4.4 percent in April of 2017, below the long-term average of 5.8 percent. During the first three months of 2017, the labor force participation rate averaged 63.0 percent, up from 62.7 percent in 2015 and and 62.8 percent in 2016. Although the participation rate has stabilized somewhat 2 As discussed later in this chapter, “bias” here is defined in the statistical sense and refers to whether previous Administrations’ forecasts have tended to make positive or negative forecast errors on average. 3 The statistics in this section are based on information available in early May 2017. 9 10 following a steep decline since 2000, it is expected to fall further as the baby boom generation continues retiring in large numbers. The proportion of the labor force employed part-time for economic reasons has fallen to 3.3 percent in April 2017, well below its peak of over 6.0 percent during the Great Recession. Furthermore, the proportion of the labor force unemployed for longer than 27 weeks has fallen to 1.0 percent from a peak of nearly 4.4 percent. In spite of these improvements, several metrics suggest that the economy has not regained the ground it had lost. Compared with the last business cycle peak at the end of 2007, the proportion of the labor force working part-time for economic reasons and the proportion unemployed for more than 27 weeks are still elevated, as are the shares of the working-age population only marginally attached to the labor force or too discouraged to look for work. The labor force participation rate among men aged 20 years old or older has fallen faster than that of the population as a whole, and the same is true of those who have only a high school diploma. Real average hourly wages for production and nonsupervisory workers have grown more slowly than real output since the end of 2007. At the end of 2016, the employment-to-population ratio for Americans aged between 25 and 34 years old was still a full percentage point below where it was at the start of the Great Recession. Even among workers older than 25 with a bachelor’s degree or higher, the unemployment rate has stopped falling and remains above the rates seen before the recession started. Housing—The housing market continued to bolster the broader economy in 2016. House prices, as measured by the Federal Housing Finance Agency’s (FHFA) purchase-only index, were 6.2 percent higher in December 2016 than in December 2015, while the S&P-Case Shiller price index (another closely watched measure) estimated the appreciation at 5.5 percent. Higher house prices help fortify household balance sheets and support personal consumption expenditures. They also encourage further activity in the housing sector. Residential fixed investment increased 1.1 percent over the four quarters of 2016. The number of housing starts rose from an annual rate of less than 1.2 million in December 2015 to nearly 1.3 million in December 2016, or a 9.9 percent increase. Building permits increased 2.2 percent over the same period. Some weakness still remains in the housing market, however. As of February, while the FHFA index was about 8.0 percent higher than its pre-crisis peak, the S&P-Case Shiller index had only barely regained its previous apex. Homeownership rates have steadily declined since the recession began and were near an all-time low at the end of 2016. Consumption—Consumer spending was a primary driver of growth in 2016, and at close to 70 percent of the economy, it is essential to overall growth. Consumption growth was spread over a number of different categories, including motor vehicles and parts (8.6 percent over the four quarters of 2016), furnishings and household equipment (6.1 percent), recreational goods and vehicles (11.3 percent), food and beverages (4.9 percent), and medical care (4.7 percent). ANALYTICAL PERSPECTIVES Investment—Disappointingly, growth in nonresidential fixed investment was negative in 2016. A 3.8 percent decline in spending on equipment over the four quarters of 2016 offset a modest (1.9 percent) increase in spending on structures and a more robust (4.3 percent) rise in intellectual property products. Growth in overall private investment (residential and nonresidential) has been below its postwar average in each of the last three years. Such weakness is likely to be problematic for future productivity growth. Government—Overall demand from the government added modestly to GDP in 2016, with the State and local sector driving growth in this component. Government consumption and gross investment rose by 0.2 percent over the four quarters of 2016, with 0.4 percent growth coming from State and local governments. Federal purchases, in contrast, were negative. The Federal deficit edged up to 3.2 percent of GDP in fiscal year 2016, the first increase since the end of the Great Recession. While deficits might be expected to lead to higher interest rates and subsequent crowding out of private investment, the low interest rate environment that has obtained in recent years has mitigated this potentially negative force. Monetary Policy—After holding nominal interest rates near zero for seven years, the Federal Open Market Committee of the Federal Reserve raised the target range for the federal funds rate by 25 basis points at the end of 2015. After a moderate pause, the Federal Reserve continued normalization of monetary policy, with a 25 basis point increase in December 2016 and another in March 2017. In its March policy statement, the FOMC cited “solid” job gains and expectations for continued strengthening of labor markets, as well as rates of inflation around the 2.0 percent target, as reasons for tightening policy. Similarly, the yield on the 10-year Treasury note has also increased recently, from an average of 1.6 percent in the third quarter of 2016 to an average of 2.4 percent during the first quarter of 2017. Oil and Gas Production—After reaching a post-financial crisis peak above $100 per barrel, crude oil prices began to tumble in mid-2014. They continued to fall in 2015 and bottomed out around $30 in early 2016. Prices have since rebounded, rising above the $50 mark in late 2016. Higher oil prices act as a kind of tax on consumers’ purchasing power, so their net decline from $100 per barrel in early 2014 to just above $50 per barrel recently has effectively raised disposable incomes, which has supported consumer spending. With new technology such as hydraulic fracturing, U.S. oil producers have emerged as important swing producers in global oil markets, helping to lower prices and moderate price fluctuations. Domestic production of crude oil averaged about 8.9 million barrels per day in 2016, up from 7.5 million barrels per day in 2013, although slightly down from 9.4 million barrels per day in 2015. The decline from 2015 reflects the decline in oil prices. Production of natural gas has experienced a qualitatively similar path, with production averaging about 72.3 billion cubic feet per day in 2016, down 2.5 percent from 2015 production levels, but still 9.1 percent higher than in 2013. 11 2. Economic Assumptions and Interactions with the Budget External Sector—Although real exports grew by 1.5 percent over the four quarters of 2016, real imports grew by an even faster 2.6 percent. As a result, net exports became slightly more negative in 2016, coming in at -$563.0 billion, compared with -$540.0 billion in 2015. Worldwide, 2016 was a weak year for economic growth. The growth rate of real GDP was below 2 percent in all of the other G-7 countries, according to International Monetary Fund (IMF) data.4 Many large emerging market countries (with the exception of India) have experienced lower growth rates in recent years, while countries such as Brazil and Russia have gone through deep recessions. 4 The other G-7 countries are Canada, France, Germany, Italy, Japan, and the United Kingdom. These developments, as well as a strengthening dollar, have contributed to the soft performance of U.S. exports. Looking ahead, it is possible that faster global growth and better trade agreements will help U.S. export performance to improve. Economic Projections The Administration’s economic forecast is based on information available at the end of February 2017 and includes projections for a number of important macroeconomic variables. The forecast is used to inform the Fiscal Year 2018 Budget and rests on the central assumption that all of the President’s policy proposals will be enacted. Table 2–1. ECONOMIC ASSUMPTIONS 1 (Calendar Years, Dollar Amounts In Billions) Actual Projections 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Levels, Dollar Amounts in Billions: Current Dollars ������������������������������������������������������������� Real, Chained (2009) Dollars ��������������������������������������� Chained Price Index (2009=100), Annual Average ������ 18037 16397 110.0 18566 16660 111.4 19367 17045 113.6 20237 17458 115.9 21197 17928 118.2 22253 18452 120.6 23379 19005 123.0 24563 19576 125.5 25806 20163 128.0 27111 20768 130.5 28483 21391 133.1 29924 22033 135.8 31439 22694 138.5 Percent Change, Fourth Quarter over Fourth Quarter: Current Dollars ������������������������������������������������������������� Real, Chained (2009) Dollars ��������������������������������������� Chained Price Index (2009=100) ���������������������������������� 3.0 1.9 1.1 3.5 1.9 1.6 4.4 2.3 2.0 4.5 2.5 2.0 4.9 2.8 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 Percent Change, Year over Year: Current Dollars ������������������������������������������������������������� Real, Chained (2009) Dollars ��������������������������������������� Chained Price Index (2009=100) ���������������������������������� 3.7 2.6 1.1 2.9 1.6 1.3 4.3 2.3 1.9 4.5 2.4 2.0 4.7 2.7 2.0 5.0 2.9 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 5.1 3.0 2.0 Incomes, Billions of Current Dollars Domestic Corporate Profits ������������������������������������������������ Employee Compensation ��������������������������������������������������� Wages and Salaries ����������������������������������������������������������� Other Taxable Income (2) ����������������������������������������������������� 1702 9693 7855 4290 1684 10102 8189 4385 1806 10556 8551 4587 1859 11037 8950 4785 1928 11572 9384 5025 1972 12171 9880 5325 2033 12801 10387 5669 2086 13466 10922 5990 2154 14169 11489 6314 2228 14909 12085 6628 2311 15698 12725 6938 2452 16497 13371 7253 2581 17339 14066 7545 Consumer Price Index (All Urban) (3): Level (1982–1984 = 100), Annual Average ������������������������ Percent Change, Fourth Quarter over Fourth Quarter ������� Percent Change, Year over Year ����������������������������������������� 237.0 0.4 0.1 240.0 1.8 1.3 246.2 2.5 2.6 251.8 2.3 2.3 257.5 2.3 2.3 263.3 2.3 2.3 269.3 2.3 2.3 275.4 2.3 2.3 281.6 2.3 2.3 288.0 2.3 2.3 294.5 2.3 2.3 301.1 2.3 2.3 307.9 2.3 2.3 Unemployment Rate, Civilian, Percent Fourth Quarter Level ���������������������������������������������������������� Annual Average ������������������������������������������������������������������ 5.0 5.3 4.7 4.9 4.5 4.6 4.4 4.4 4.7 4.6 4.7 4.7 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 Federal Pay Raises, January, Percent Military (4) ���������������������������������������������������������������������������� Civilian (5) ���������������������������������������������������������������������������� 1.0 1.0 1.3 1.3 2.1 2.1 1.9 2.1 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 3.1 3.8 3.1 3.8 3.1 3.8 3.1 3.8 Gross Domestic Product (GDP) Interest Rates, Percent 91-Day Treasury Bills (6) ������������������������������������������������������ * 0.3 0.8 1.5 2.1 2.6 2.9 3.0 3.0 10-Year Treasury Notes ������������������������������������������������������ 2.1 1.8 2.7 3.3 3.4 3.8 3.8 3.8 3.8 1 Based on information available as of end of Febuary 2017 2 Rent, interest, dividend, and proprietors’ income components of personal income 3 Seasonally adjusted CPI for all urban consumers 4 Percentages apply to basic pay only; percentages to be proposed for years after 2018 have not yet been determined. 5 Overall average increase, including locality pay adjustments. Percentages to be proposed for years after 2018 have not yet been determined. 6 Average rate, secondary market (bank discount basis) * 0.05 percent or less 12 ANALYTICAL PERSPECTIVES The Administration’s projections are reported in Table 2-1 and summarized below. Real GDP—In the near term, real GDP is expected to grow faster than in recent years, with a 2.3 percent growth rate in 2017 and a 2.5 percent rate in 2018, on a fourth quarter-over-fourth quarter basis. The Administration’s policies for simplifying taxes, cutting regulation, building infrastructure, reforming health care, boosting domestic energy production and eliminating deficits are expected to improve the supply side of the U.S. economy to allow these growth rates. As for demand, lower taxes and an expected pick up in global growth in 2017 and 2018 should bolster demand for American goods and services. Long-Run Growth—In the longer term, the rate of growth in GDP is expected to increase gradually to 3.0 percent by 2020, and the Administration expects it to remain at that pace for the duration of the forecast window. The Administration projects a permanently higher trend growth rate as a result of its productivity-enhancing policies, such as tax reform, infrastructure investments, reductions in regulation, and a greatly improved fiscal outlook. Expected GDP growth of 3.0 percent per year is slightly below the average growth rate seen in the postWorld War II period. Unemployment—As of April 2017, the unemployment rate stood at 4.4 percent. The Administration expects the unemployment rate to stay low over the next several years, with an annual average of 4.4 percent in 2018. After that, the forecast assumes that it will gradually rise back toward 4.8 percent, a rate roughly consistent with stable inflation. Theory suggests that when the unemployment rate is at this rate, pressures on inflation are broadly in balance, threatening neither excessive inflation nor deflation. Interest Rates—As growth increases, the Administration expects that interest rates will begin to rise to values more consistent with historical experience. The rate on the 91-day Treasury bill is expected to increase gradually from 0.8 percent in 2017 to 3.1 percent in 2024. The interest rate on the 10-year Treasury note is expected to rise in a similar fashion, from 2.7 percent in 2017 to 3.8 percent in the long run. Economic theory suggests that real GDP growth rates and interest rates are positively correlated, so interest rates are likely to be propelled higher by the stronger growth that the Administration anticipates. Inflation—Since the onset of the financial crisis, inflation, whether measured by the GDP price index, the Consumer Price Index (CPI), or the price index for Personal Consumption Expenditures (PCE), has been subdued compared with the post-World War II average. This observation holds even when looking at the “core” indexes that exclude volatile food and energy prices. The Administration expects CPI inflation to rise to 2.5 Table 2–2. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 2017 AND 2018 BUDGETS (Calendar Years, Dollar Amounts In Billions) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Nominal GDP: 2017 Budget Assumptions 1 ������������������������������������������������������������ 2018 Budget Assumptions ��������������������������������������������������������������� 18780 18566 19626 19367 20466 20237 21363 21197 22287 22253 23258 23379 24272 24563 25329 25806 26428 27111 27576 28483 28773 29924 Real GDP (2009 Dollars): 2017 Budget Assumptions 1 ������������������������������������������������������������ 2018 Budget Assumptions ��������������������������������������������������������������� 16839 16660 17273 17045 17694 17458 18108 17928 18524 18452 18950 19005 19386 19576 19832 20163 20288 20768 20754 21391 21232 22033 Real GDP (Percent Change)2: 2017 Budget Assumptions 1 ������������������������������������������������������������ 2018 Budget Assumptions ��������������������������������������������������������������� 2.7 1.6 2.5 2.3 2.4 2.4 2.3 2.7 2.3 2.9 2.3 3.0 2.3 3.0 2.3 3.0 2.3 3.0 2.3 3.0 2.3 3.0 GDP Price Index (Percent Change)2: 2017 Budget Assumptions 1 ������������������������������������������������������������ 2018 Budget Assumptions ��������������������������������������������������������������� 1.6 1.3 1.8 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Consumer Price Index (All-Urban; Percent Change)2: 2017 Budget Assumptions ��������������������������������������������������������������� 2018 Budget Assumptions ��������������������������������������������������������������� 1.5 1.3 2.1 2.6 2.1 2.3 2.3 2.3 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 Civilian Unemployment Rate (Percent)3: 2017 Budget Assumptions ��������������������������������������������������������������� 2018 Budget Assumptions ��������������������������������������������������������������� 4.7 4.9 4.5 4.6 4.6 4.4 4.6 4.6 4.7 4.7 4.7 4.8 4.8 4.8 4.9 4.8 4.9 4.8 4.9 4.8 4.9 4.8 91-Day Treasury Bill Rate (Percent)3: 2017 Budget Assumptions ��������������������������������������������������������������� 2018 Budget Assumptions ��������������������������������������������������������������� 0.7 0.3 1.8 0.8 2.6 1.5 3.1 2.1 3.3 2.6 3.4 2.9 3.4 3.0 3.3 3.0 3.3 3.1 3.2 3.1 3.2 3.1 2.9 1.8 3.5 2.7 3.9 3.3 4.1 3.4 4.2 3.8 4.2 3.8 4.2 3.8 4.2 3.8 4.2 3.8 4.2 3.8 4.2 3.8 10-Year Treasury Note Rate (Percent)3: 2017 Budget Assumptions ��������������������������������������������������������������� 2018 Budget Assumptions ��������������������������������������������������������������� 1 Adjusted for July 2016 NIPA Revisions 2 Calendar Year over Calendar Year 3 Calendar Year Average * 0.05 percent or less 13 2. Economic Assumptions and Interactions with the Budget percent in 2017 (on a fourth quarter-over-fourth quarter basis), before settling down to 2.3 percent in the long run. The GDP price index is forecast to rise to 2.0 percent in 2017 (on a fourth-quarter-over-fourthquarter basis) and maintain that rate throughout the forecast window. Changes in Economic Assumptions from Last Year’s Budget—Table 2-2 compares the Administration’s forecast for the 2018 Budget with that from the 2017 Budget, submitted by the previous Administration. The most notable difference is the upward revision to medium- and longer-term GDP growth. Compared with the previous forecast, the Administration expects much faster output growth, as a result of its policies designed to boost productivity and labor force participation. These include deregulation, tax reform, an improved fiscal outlook, inducements for infrastructure investment, and health care reform, which should boost investment and bolster the incentives to save. The Administration’s expectations for inflation differ little from the previous forecast, except for the slight boost in CPI inflation in 2017 and 2018 due to higher demand. The forecast for the unemployment rate is also broadly similar, although the Administration’s projections have the unemployment rate dropping to a trough of 4.4 percent, lower than was previously expected, and it has a slightly lower estimate of the unemployment rate at which inflation pressures are broadly balanced. On 91-day Treasury bills, the Budget’s terminal rate is Table 2–3. COMPARISON OF ECONOMIC ASSUMPTIONS (Calendar Years) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Nominal GDP: 2018 Budget ��������������������������������������������������������������������������������������������������������� 18566 19367 20237 21197 22253 23379 24563 25806 27111 28483 29924 31439 CBO ���������������������������������������������������������������������������������������������������������������������� 18563 19352 20114 20838 21565 22381 23261 24182 25143 26142 27181 28258 Blue Chip �������������������������������������������������������������������������������������������������������������� 18570 19336 20221 21099 21973 22883 23831 24843 25872 26943 28059 29222 Real GDP (Year-over-Year): 2018 Budget ��������������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������������� 1.6 1.6 1.6 2.3 2.3 2.1 2.4 2.0 2.4 2.7 1.7 2.1 2.9 1.5 2.0 3.0 1.8 2.0 3.0 1.9 2.0 Real GDP (Fourth Quarter-over-Fourth Quarter): 2018 Budget ��������������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������������� Federal Reserve Median Projection ��������������������������������������������������������������������� 1.9 1.8 1.9 1.9 2.3 2.3 2.1 2.1 2.5 1.9 2.4 2.1 2.8 1.6 2.1 1.9 3.0 1.6 2.0 3.0 1.9 2.0 3.0 1.9 2.0 GDP Price Index 1: 2018 Budget ��������������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������������� 1.3 1.3 1.3 1.9 1.9 2.0 2.0 1.9 2.1 2.0 1.9 2.2 2.0 1.9 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 Consumer Price Index (CPI-U) 1: 2018 Budget ��������������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������������� 1.3 1.3 1.3 2.6 2.4 2.4 2.3 2.3 2.2 2.3 2.3 2.3 2.3 2.4 2.4 2.3 2.4 2.3 2.3 2.4 2.3 2.3 2.4 2.3 Unemployment Rate 2: 2018 Budget ��������������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������������� Federal Reserve Median Projection 3 ������������������������������������������������������������������� 4.9 4.9 4.9 4.9 4.6 4.6 4.5 4.5 4.4 4.4 4.3 4.5 4.6 4.5 4.5 4.5 4.7 4.9 4.6 4.8 5.0 4.6 4.8 5.0 4.7 0.3 0.3 0.3 0.8 0.7 1.0 1.5 1.1 1.8 2.1 1.7 2.4 2.6 2.3 2.7 2.9 2.7 2.8 3.0 2.8 2.8 3.0 1.9 2.1 3.0 1.9 2.0 3.0 1.9 2.0 3.0 1.9 2.0 3.0 1.9 2.0 3.0 3.0 1.9 1.9 2.1 2.0 1.8 longer run 3.0 1.9 2.0 3.0 1.9 2.0 3.0 1.9 2.0 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.1 2.1 2.0 2.0 2.1 2.3 2.4 2.4 2.3 2.4 2.4 2.3 2.4 2.4 2.3 2.4 2.4 4.8 4.8 5.0 4.9 4.7 4.7 4.7 longer run 4.8 4.9 4.7 4.8 4.9 4.7 4.8 4.9 4.7 3.1 2.8 2.9 3.1 2.8 2.9 3.1 2.8 2.9 Interest Rates 2: 91-Day Treasury Bills (discount basis): 2018 Budget ��������������������������������������������������������������������������������������������������� CBO ���������������������������������������������������������������������������������������������������������������� Blue Chip �������������������������������������������������������������������������������������������������������� 3.0 2.8 2.8 3.1 2.8 2.9 10-Year Treasury Notes 2018 Budget ��������������������������������������������������������������������������������������������������� 1.8 2.7 3.3 3.4 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 CBO ���������������������������������������������������������������������������������������������������������������� 1.8 2.3 2.5 2.8 3.1 3.4 3.5 3.6 3.6 3.6 3.6 3.6 Blue Chip �������������������������������������������������������������������������������������������������������� 1.8 2.6 3.1 3.6 3.7 3.8 3.8 3.8 3.9 3.9 3.9 3.9 Sources: Administration; CBO, The Budget and Economic Outlook: 2017 to 2027, January 2017; March 2017 and May 2017 Blue Chip Economic Indicators, Aspen Publishers, Inc.; Federal Reserve Open Market Committee, March 15, 2017 1 Year-over-Year Percent Change 2 Annual Averages, Percent 3 Median of Fourth Quarter Values 14 ANALYTICAL PERSPECTIVES just slightly below that of the 2017 Budget. The yield on the 10-year Treasury note is lower at all points of the forecast horizon relative to the 2017 Budget. This decline is largely driven by the secular trend towards lower interest rates observed in the data. If the Administration’s growth forecast had been lower, the interest rate on 10year Treasuries would be lower still. Comparison with Other Forecasts For some additional perspective on the Administration’s forecast, this section compares it with others prepared by the Congressional Budget Office (CBO), the Federal Open Market Committee of the Federal Reserve (FOMC), and the Blue Chip panel of private sector forecasters. There are some important differences to bear in mind when making such a comparison. The most important difference between these forecasts is that they make different assumptions about the implementation of the Administration’s policies. As already noted, the Administration’s forecast assumes full implementation of these proposals. At the opposite end of the spectrum, CBO produces a forecast that assumes no changes to current law. It is not clear to what extent the FOMC participants and the Blue Chip panel incorporate policy implementation. The Blue Chip, in particular, compiles a large number of private sector forecasts, which are marked by considerable heterogeneity across individual forecasters and their policy expectations. A second difference is the publication dates of the various forecasts. While the forecasts put out by the Administration, the Blue Chip, and the FOMC were finalized around March 2017, the CBO forecast was published earlier, in January of 2017. In spite of these differences, the forecasts share several attributes. All of them project a further short-run decline in unemployment, followed by a rise back toward a rate consistent with stable inflation. They all project a minor near-term spike in inflation, followed by a stable path at its long-run rate. The differences among the nearterm forecasts for real output growth are not too large Finally, they all foresee a gradual rise in interest rates over the course of the forecast horizon. What separates the Administration’s forecast from those of the other bodies is their respective views on real output growth in the long run. Real GDP—The Administration forecasts a higher path for real GDP growth compared with the CBO, FOMC, and Blue Chip forecasts. Over 2017 and 2018, its real GDP forecast is fairly similar to those at the high end of the Blue Chip panel. The CBO and FOMC, on the other hand, expect a noticeably slower expansion in output in the very short term. After 2018, the Administration’s forecast diverges from the other forecasts, with a growth rate 0.7 percentage points faster than the next fastest in 2019 and a full percentage point faster than the others at the end of the forecast window. This reflects the Administration’s expectation of full implementation of its policy proposals; other forecasters are unlikely to be operating under the same assumption. Unemployment—On the unemployment rate, the Administration’s expectations are largely aligned with those of the other forecasters. Along with the Administration, the CBO and the Blue Chip panel expect modest further declines in unemployment in 2018. The FOMC expects slightly less improvement, projecting a low point of 4.5 percent. After 2018, all forecasters project a gradual uptick in the unemployment rate to their respective estimates of the long-term rate (4.8 percent for the Administration, 4.9 percent for the CBO, and 4.7 percent for the FOMC and the Blue Chip panel). Interest Rates—For both short- and long-term rates, the CBO’s projections follow a generally lower path throughout the forecast window than those of either the Administration or the Blue Chip panel. The Administration’s forecasts for short- and long-term interest rates finish in similar places relative to the Blue Chip, but the respective paths are slightly different. The Blue Chip panel and the Administration expect relatively steep increases over the next couple of years in the 91day Treasury bill rate, but the Blue Chip path is slightly steeper. The Administration foresees a sharper increase in the interest rate on 10-year Treasury notes in the near term. Inflation—Expectations for inflation are similar across the Administration, the CBO, and the Blue Chip. All three anticipate a bump in CPI inflation in 2017 (with the Administration expecting a slightly greater increase), before it turns back toward its long run rate. The Blue Chip and the CBO expect an inflation rate of 2.4 percent in the long run, while the Administration expects a 2.3 percent long run rate. For the GDP price index, the three forecasts also exhibit little disagreement, other than a marginally higher long-run rate from the Blue Chip panel. Sensitivity of the Budget to Economic Assumptions Federal spending and tax collections are heavily influenced by developments in the economy. Receipts are a function of growth in incomes for households and firms. Spending on social assistance programs may rise when the economy enters a downturn, while increases in spending on Social Security and other programs are dependent on consumer price inflation. A robust set of projections for macroeconomic variables assists in budget planning, but unexpected developments in the economy have ripple effects for Federal spending and revenues. This section seeks to provide an understanding of the magnitude of the effects that unforeseen changes in the economy can have on the budget. To make these assessments, the Administration relies on a set of rules of thumb that can predict how certain spending and revenue categories will react to a change in a given subset of macroeconomic variables, holding almost everything else constant. These rules of thumb provide a sense of the broad changes one would expect after a given development, but they cannot anticipate how policy makers would react and potentially change course in such an event. For example, if the economy were to 15 2. Economic Assumptions and Interactions with the Budget suffer an unexpected recession, the rules of thumb suggest that tax revenues would decline and that spending on programs such as unemployment insurance would go up. In such a situation, however, policy makers might cut taxes to stimulate the economy, and such behavior would not be accounted for by the historical relationships captured by the rules of thumb. Another caveat is that it is often unrealistic to suppose that one macroeconomic variable might change but that others would remain constant. Most macroeconomic variables interact with each other in complex and subtle ways. These are important considerations to bear in mind when examining Table 2-4. For real growth and employment: • The first panel in the table illustrates the effect on the deficit resulting from a 1 percentage point reduction in real GDP growth, relative to the Administration’s forecast, in 2017 that is followed by a subsequent recovery in 2018 and 2019. The unemployment rate is assumed to be half a percentage point higher in 2017 before returning to the baseline level in 2018 and 2019. The table shows that receipts would temporarily be somewhat lower and outlays would temporarily be higher. The long run effect on the budget deficit would be an increase of $110 billion over the eleven-year forecast horizon, due in large part to higher interest payments resulting from higher short-run deficits. • The next panel in the table reports the effect of a reduction of 1 percentage point in real GDP growth in 2017 that is not subsequently made up by faster growth in 2018 and 2019. In addition, the natural rate of unemployment is assumed to rise by half a percentage point relative to that assumed in the Administration’s forecasts. Here, the effect on the Budget deficit is more substantial, as receipts are lowered in every year of the forecast, while outlays rise gradually over the forecast window. This is because unemployment will be higher, leading to lower tax revenues and higher outlays on unemployment insurance, as well as higher interest payments that follow from increased short-run deficits. • The third panel in the table shows the impact of a GDP growth rate that is permanently reduced by 1 percentage point, while the unemployment rate is not affected. This is the sort of situation that would arise if, for example, the economy were hit by a permanent decline in productivity growth. In this case, the effect on the Budget deficit is quite large, with receipts being reduced substantially throughout the forecast window and outlays rising due to higher interest payments. The accumulated effect over the eleven-year horizon is an additional $3.1 trillion of deficits. For inflation and interest rates: • The fourth panel in Table 2-4 shows the effect on the Budget in the case of a 1 percentage point higher rate of inflation and a 1 percentage point higher nominal interest rate in 2017. Both inflation and interest rates return to their assumed levels in 2018. This would result in a permanently higher price level and level of nominal GDP over the course of the forecast horizon. The effect on the Budget deficit would be fairly modest, although receipts would increase slightly more than outlays over the eleven years. This is because revenues would respond more quickly to price increases than outlays, which are set in advance. Over the years from 2017-2027, the Budget deficit would be smaller by about $32 billion. • The fifth panel in the table illustrates the effects on the Budget deficit of an inflation rate and an interest rate 1 percentage point higher than projected in every year of the forecast. As in the previous case, the overall effect on the deficit over the forecast is modest (only $85 billion accumulated), and receipts rise faster than outlays because more spending decisions are determined in advance of price increases. It is still important to note, however, that faster inflation implies that the real value of Federal spending would be eroded. • The next panel reports the effect on the deficit re- sulting from an increase in interest rates in every year of the forecast, with no accompanying increase in inflation. The result is a much higher accumulated deficit, as the Federal Government would have to make much higher interest payments on its debt. Receipts would be slightly higher as the Federal Reserve would earn more on its holdings of securities and households would pay higher taxes on interest income, but these increases would not offset the effect on outlays. • The seventh panel in the table reports the effect on the Budget deficit of an inflation rate 1 percentage point higher than projected in every year of the forecast window, while the interest rate remains as forecast. In this case, the result is a much smaller deficit over the eleven years of the forecast relative to the baseline. Permanently faster inflation results in much higher revenues over the next eleven years, which helps to reduce interest payments on debt. Outlays rise due to higher cost-of-living increases on items such as Social Security, though not so much as to offset the revenue increases. • Finally, the table shows the effect on the budget defi- cit if the Federal government were to borrow an additional $100 billion in 2017, while all of the other projections remain constant. Outlays rise over the forecast window by an accumulated $32.7 billion, due to higher interest payments. It is important to note that these simple approximations that inform the sensitivity analysis are symmetric. This means that the effect of, for example, a 1 percentage point higher rate of growth over the forecast horizon would be of the same magnitude as a 1 percentage point reduction in growth, though with the opposite sign. 16 ANALYTICAL PERSPECTIVES Table 2–4. SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS (Fiscal Years; In Billions Of Dollars) Budget Effect 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Total of Budget Effects: 20172027 Real Growth and Employment: Budgetary effects of 1 percent lower real GDP growth: (1) For calendar year 2017 only, with real GDP recovery in 2018–2019:1 Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Increase in deficit (+) �������������������������������������������������� (2) For calendar year 2017 only, with no subsequent recovery: 1 Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Increase in deficit (+) �������������������������������������������������� (3) Sustained during 2017–2027, with no change in unemployment: Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Increase in deficit (+) �������������������������������������������������� –16.2 6.9 23.1 –26.0 16.5 42.5 –13.4 8.3 21.6 –2.2 2.3 4.5 0.1 2.4 2.3 0.1 2.6 2.5 0.1 2.6 2.5 0.1 2.7 2.6 0.1 2.7 2.6 0.1 2.8 2.7 0.1 2.9 2.8 –57.1 52.7 109.7 –16.2 6.9 23.1 –34.4 20.1 54.5 –40.2 22.3 62.5 –42.1 23.9 66.0 –44.1 26.8 70.9 –46.3 29.1 75.4 –48.5 31.8 80.2 –50.9 34.8 85.7 –53.3 37.7 91.0 –55.9 41.0 97.0 –58.6 44.1 102.7 –490.5 318.5 809.0 –16.2 –0.1 16.2 –51.0 0.1 51.2 –93.0 –138.6 –188.1 –242.0 –300.0 –363.2 –431.1 –504.2 –582.8 1.3 3.9 8.5 14.1 20.7 28.6 37.7 48.3 60.9 94.3 142.5 196.5 256.1 320.6 391.8 468.8 552.5 643.7 –2,910.2 224.0 3,134.2 17.0 20.4 3.4 34.0 39.3 5.3 36.5 36.6 0.2 37.0 37.6 0.7 38.8 37.7 –1.1 40.7 39.0 –1.7 42.6 37.8 –4.8 44.7 38.3 –6.4 46.9 38.6 –8.3 49.2 40.2 –9.0 51.6 41.5 –10.1 439.0 407.0 –31.8 17.0 18.4 1.4 51.8 60.6 8.8 91.4 105.6 14.2 133.9 152.8 18.9 181.2 202.5 21.3 233.1 257.6 24.4 289.7 308.7 19.0 352.2 360.9 8.7 420.0 422.4 2.3 494.1 484.4 –9.7 574.7 550.1 –24.6 2,839.3 2,923.9 84.6 1.0 6.6 5.6 2.3 27.9 25.6 2.9 47.4 44.5 3.2 65.2 62.0 3.6 82.9 79.4 3.9 100.3 96.4 4.3 114.9 110.7 4.6 128.4 123.8 4.9 139.3 134.4 5.1 149.8 144.7 5.3 159.5 154.3 41.0 1,022.3 981.3 16.0 11.8 –4.2 49.5 32.6 –16.9 88.5 58.2 –30.3 130.6 87.6 –43.0 177.5 119.7 –57.8 229.0 157.6 –71.4 285.2 347.3 414.8 488.5 568.9 194.2 233.1 283.9 335.5 391.8 –91.0 –114.1 –130.9 –153.0 –177.1 2,795.6 1,905.9 –889.7 Inflation and Interest Rates: Budgetary effects of 1 percentage point higher rate of: (4) Inflation and interest rates during calendar year 2017 only: Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Decrease in deficit (–) ������������������������������������������������� (5) Inflation and interest rates, sustained during 2017–2027: Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Increase in deficit (+) �������������������������������������������������� (6) Interest rates only, sustained during 2017–2027: Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Increase in deficit (+) �������������������������������������������������� (7) Inflation only, sustained during 2017–2027: Receipts ��������������������������������������������������������������������������� Outlays ���������������������������������������������������������������������������� Decrease in deficit (–) ������������������������������������������������� Interest Cost of Higher Federal Borrowing: (8) Outlay effect of $100 billion increase in borrowing in 2017 �������������������������������������������������������������������������������������� 0.4 1.3 2.0 2.7 3.2 3.5 1 The unemployment rate is assumed to be 0.5 percentage point higher per 1 percent shortfall in the level of real GDP. Forecast Errors for Growth, Inflation, and Interest Rates As with any forecast, the Administration’s projections will not be fully accurate. It is impossible to foresee every eventuality over a one–year horizon, much less ten or more years. This section evaluates the historical accuracy of the forecasts of past Administrations for real GDP, inflation, and short-term interest rates, especially as compared with the accuracy of forecasts produced by the CBO or Blue Chip panel. For this exercise, forecasts produced by all three entities going as far back as the Fiscal Year 1983 Budget are compared with realized values of these important variables. 3.7 3.8 3.9 4.1 4.2 32.7 The results of this exercise are reported in Table 2-5 and contain three different measures of accuracy. The first is the average forecast error. When a forecaster has an average forecast error of zero, it may be said that the forecast has historically been unbiased, in the sense that realized values of the variables have not been systematically above or below the forecasted value. The second is the average absolute value of the forecast error, which offers a sense of the magnitude of errors. Even if the past forecast errors average to zero, the errors may have been of a very large magnitude, with both positive and negative values. Finally, the table reports the square root of the mean of squared forecast error (RMSE). This metric 17 2. Economic Assumptions and Interactions with the Budget Table 2–5. FORECAST ERRORS, JANUARY 1982-PRESENT Administration CBO Blue Chip REAL GDP ERRORS 2-Year Average Annual Real GDP Growth Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.2 1.2 1.5 –0.1 1.0 1.3 –0.1 1.1 1.4 6-Year Average Annual Real GDP Growth Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.4 1.1 1.3 0.1 1.0 1.2 0.1 0.9 1.1 2-Year Average Annual Change in the GDP Price Index Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.3 0.7 0.9 0.3 0.7 0.9 0.4 0.7 0.8 6-Year Average Annual Change in the GDP Index Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.4 0.6 0.8 0.5 0.8 1.0 0.7 0.9 1.0 2-Year Average 91-Day Treasury Bill Rate Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.3 1.0 1.2 0.5 0.9 1.3 0.6 1.0 1.2 6-Year Average 91-Day Treasury Bill Rate Mean Error ��������������������������������������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������������������������������������ Root Mean Square Error ����������������������������������������������������������������������������������������������� 0.9 1.4 1.7 1.4 1.5 1.8 1.5 1.6 1.9 INFLATION ERRORS INTEREST RATE ERRORS applies an especially harsh penalty to forecasting systems prone to large errors. The table reports these measures of accuracy at both the 2-year and the 6-year horizons, thus evaluating the relative success of different forecasts in the short run and in the medium term. For real GDP growth rates, at both the 2-year and 6-year horizons, the mean forecast error suggests that all of the forecasts (Administration, the CBO, and the Blue Chip panel) have been broadly unbiased, with small average errors close to zero. The mean absolute error and the RMSE both suggest that the Administration’s past forecasts have tended to make slightly larger errors than the others, but the difference has been minor. When it comes to inflation, there is more evidence of some systematic bias in all three forecasts. The mean errors at the 2- and 6-year horizons are all positive and larger than the errors in projecting real GDP growth. This implies that the Administration, the CBO, and the Blue Chip have expected faster inflation than ultimately materialized. A closer look at the data reveals that the errors were largest in the 1980s, as the U.S. economy shifted from a period of high inflation in the 1970s to a period of more moderate price rises. The mean absolute error and the RMSE metrics imply that the errors in the Administration’s inflation forecast have tended to be of smaller magnitude than those of the CBO or Blue Chip panel. Finally, on interest rates, the story is similar to that for inflation. All of the forecasts have historically projected interest rates that were higher than what later occurred, probably because they expected higher inflation as shown above. Across the three forecasters, the Administration has generally made errors of lesser magnitude than the other two. Uncertainty and the Deficit Projections This section assesses the accuracy of past Budget forecasts for the deficit or surplus, measured at different time horizons. The results of this exercise are reported in Table 2-6, where the average error, the average absolute error, and the RMSE (as well as the standard deviation of the forecast error) are reported. In the table, a negative number means that the Federal Government ran a greater surplus than was expected, while a positive number in the table indicates a smaller surplus or a larger deficit. In the current year in which the Budget is published, the Administration has tended to understate the surplus (or, equivalently, overstate the deficit). For every year beyond the current year, however, the historical pattern has been for the Budget deficit to 18 ANALYTICAL PERSPECTIVES Table 2–6. DIFFERENCES BETWEEN ESTIMATED AND ACTUAL SURPLUSES OR DEFICITS FOR FIVE-YEAR BUDGET ESTIMATES SINCE 1986 (As A Percent Of Gdp) Estimate for Budget Year Plus: Current Year Estimate Budget Year Estimate One Year (BY + 1) Two Years (BY + 2) Three Years (BY + 3) Four Years (BY + 4) Average Difference 1 ������������������������������������������������������������������������������������� -0.8 0.2 1.1 1.7 2.1 2.5 Average Absolute Difference 2 ���������������������������������������������������������������������� 1.1 1.4 2.2 2.8 3.4 3.7 Standard Deviation ��������������������������������������������������������������������������������������� 1.0 2.0 2.8 3.3 3.5 3.5 Root Mean Squared Error ���������������������������������������������������������������������������� 1.3 2.0 3.0 3.7 4.0 4.2 1 A positive number represents an overestimate of the surplus or an underestimate of the deficit. A negative number represents an overestimate of the deficit or an underestimate of the surplus. 2 Average absolute difference is the difference without regard to sign. be larger than the Administration expected. One possible reason for this is that past Administrations’ policy proposals have not all been implemented.5 The forecast errors tend to grow with the time horizon, which is not surprising given that there is much greater uncertainty in the medium run about both the macroeconomic situation and the specific details of policy enactments. It is possible to construct a probabilistic range of outcomes for the deficit. This is accomplished by taking the RMSE of previous forecast errors and assuming that these errors are drawn from a normal distribution. This exercise is undertaken at every forecast horizon from the current Budget year to five years down the road. Chart 2-1 displays the projected range of possible deficits. In the chart, the middle line represents the Administration’s ex- pected budget balance and can be interpreted as the 50th percentile outcome. The rest of the lines in the chart may be read in the following fashion. The top line reports the 95th percentile of the distribution of outcomes over 2017 to 2022, meaning that there is a 95 percent probability that the actual balance in those years will be more negative than expressed by the line. Similarly, there is a 95 percent probability that the balance will be more positive than suggested by the bottom line in the chart. In 2017, there is a 95 percent chance of a budget deficit greater than 1.0 percent of GDP. By 2022, there is only a 5 percent chance of a budget deficit greater than 8.8 percent of GDP. In addition, the chart reports that there is a substantial probability of a budget surplus by 2022. Chart 2-1. Range of Uncertainty for the Budget Deficit Percent of GDP 6 Percentiles: 95th 4 90th 2 75th 0 Deficit Forecast -2 -4 25th -6 10th -8 5th -10 2017 2018 2019 5 Additionally, CBO has on average underestimated the deficit in their forecasts. 2020 2021 2022 3. LONG-TERM BUDGET OUTLOOK While current Federal budget deficits are down from the string of trillion-dollar deficits that resulted from the 2008-2009 recession, the structural excess of spending over revenue will cause deficits to begin rising again soon and reach the trillion-dollar mark toward the end of the 10-year budget window. The long-term budget projections of current policy in this chapter show that the deficit will continue to rise dramatically beyond the 10-year window and that publicly held debt will exceed the size of the economy by 2036 unless significant reforms are enacted. The Administration is committed to reversing the trend of untenable Federal spending and to charting a path for more efficient, responsible, and sustainable use of taxpayer dollars while promoting economic growth. While the detailed estimates of receipts and outlays in the President’s Budget extend only 10 years, this chapter reviews the longer-term budget outlook, both under a continuation of current policies and under the policies proposed in the Budget. The projections discussed in this chapter are highly uncertain. Small changes in economic or other assumptions can make a large difference to the results. This is even more relevant for projections over longer horizons. The chapter is organized as follows: • The first section details the assumptions used to create the baseline projection and analyzes the long-term implications of leaving current policies in place. This forecast serves as a point of comparison against the proposals in the 2018 Budget in the second section. • The second section demonstrates how the Administration’s policies will significantly alter the current trajectory of the Federal budget by balancing the budget by 2027 and reducing the Federal debt. This course-correction will put the Nation on a sustainable path to maintain the financial health of the Federal government for future generations. • The third section discusses alternative assumptions and uncertainties in the projections. • The fourth section discusses the actuarial projections for Social Security and Medicare. • The appendix provides further detail on data sources, assumptions, and other methods for estimation. Both the Administration and the Congressional Budget Office (CBO) project that, absent any changes in policy, the deficit will increase this year and continue to escalate over the following 10 years. Chart 3-1 shows the path of debt as a percent of GDP under continuation of current policies, without the policy changes proposed in the President’s Budget, as well as the debt trajectory under the President’s policies. Under current policy, the ratio of debt to GDP will rise from 77 percent in 2017 to 85 percent in 2027, an increase of about eight percentage points over that period. In contrast, the debt ratio is projected to be 60 percent in 2027 under the proposed policy changes. By the end of the 25-year horizon, the difference in the debt burden—111 percent of GDP under current policy compared to 25 percent of GDP under Budget policy—is even starker. Long-Run Projections under Continuation of Current Policies For the 10-year budget window, the Administration produces both baseline projections, which show how deficits Chart 3-1. Comparison of Publicly Held Debt Debt as a Percent of GDP 120 Continuation of Current Policies 100 80 60 2018 Budget Policy 40 20 0 2000 2010 2020 2030 2040 19 20 ANALYTICAL PERSPECTIVES and debt would evolve under current policies, and projections showing the impact of proposed policy changes. Like the budget baseline more generally, long-term projections should provide policymakers with information about the Nation’s expected fiscal trajectory in the absence of spending and tax changes. For this reason, the baseline projections in this chapter are based on a set of economic assumptions that remove the growth-increasing effects of the Administration’s fiscal policies. In past Budgets, the baseline and policy projections used the same set of economic assumptions, but this approach would understate the severity of the current-law fiscal problem and fail to illustrate the full impact of the 2018 Budget policies. The baseline long-term projections assume that current policy continues for Social Security, Medicare, Medicaid, other mandatory programs, and revenues.1 For discretionary spending, it is less clear how to project a continuation of current policy. After the expiration of the statutory caps in 2021, both the Administration’s and CBO’s 10-year baselines assume that discretionary funding levels generally grow slightly above the rate of inflation (about 2.5 percent per year). Thereafter, the baseline long-run projections assume that per-person discretionary funding remains constant, which implies an annual growth rate of about three percent. Over the next 10 years, debt rises from 77 percent of GDP last year to 85 percent of GDP in 2027. Beyond the 10-year horizon, debt increases more sharply, reaching 111 percent of GDP by 2042, the end of the 25-year projection window. The key drivers of that increase are an aging population and rapid health care cost growth, which combine to outpace growth in Federal revenues. Without policy changes, the public debt will continue to grow, increasing the burden on future generations. 1 The long-run baseline projections are consistent with the Budget’s baseline concept, which is explained in more detail in Chapter 22, “Current Services Estimates,” in this volume. The projections assume full payment of scheduled Social Security and Medicare benefits without regard to the projected depletion of the trust funds for these programs. Additional baseline assumptions beyond the 10-year window are detailed in the appendix to this chapter. Aging population.—Over the next 10 years, an aging population will put significant pressure on the budget. In 2008, when the oldest members of the baby boom generation became eligible for early retirement under Social Security, the ratio of workers to Social Security beneficiaries was 3.2. By the end of the 10-year budget window, that ratio will fall to 2.4, and it will reach about 2.2 in the early 2030s, at which point most of the baby boomers will have retired. With fewer active workers paying taxes and more retired workers eligible for Social Security, Medicare, and Medicaid (including long-term care), budgetary pressures will increase. Social Security program costs will grow from 4.9 percent of GDP today to 6.6 percent of GDP by 2042, with most of that growth occurring within the 10-year budget window. Likewise, even if per-beneficiary health care costs grew at the same rate as GDP per capita, Medicare and Medicaid costs would still increase substantially as a percent of GDP, due solely to the aging population. Health costs.—Health care costs per capita have risen much faster than per-capita GDP growth for decades, leading both public and private spending on health care to increase as a share of the economy. While spending per enrollee has grown roughly in line with or more slowly than per-capita GDP in both the public and private sectors in recent years, slower per-enrollee growth is not projected to continue. Trends in per-enrollee costs, together with the demographic trends discussed above, are the primary drivers of long-term fiscal projections. Based on projections of Medicare enrollment and expenditures included in the 2016 Medicare Trustees Report, the projections here assume that Medicare perbeneficiary spending growth will accelerate over the next few years, with the growth rate averaging about 0.8 percentage points above the growth rate of per-capita GDP over the next 25 years. (This average growth rate is still below the historical average for the last 25 years.) Under these assumptions, Medicare and Medicaid costs increase by a total of 2.6 percentage points as a percent of GDP by 2042. Chart 3-2. Comparison of Annual Surplus/Deficit Surplus (+)/Deficit (-) as a Percent of GDP 4 2 2018 Budget Policy 0 -2 -4 -6 Continuation of Current Policy -8 -10 -12 2000 2010 2020 2030 2040 21 3. Long-Term Budget Outlook Revenues.—Without any further changes in tax laws, revenues will grow slightly faster than GDP over the long run, but not fast enough to keep pace with the increase in social insurance costs that results from an aging population. The increase in revenues as a percent of GDP occurs primarily because individuals’ real, inflation-adjusted incomes grow over time, and so a portion of their income falls into higher tax brackets. (Bracket thresholds are indexed for inflation but do not grow in real terms.) The Impact of 2018 Budget Policies on the Long-Term Fiscal Outlook To show the long-term effects of implementing new policies, expenditures and revenues are extended through the 25-year timeframe. The President’s 2018 Budget proposal reduces deficits while continuing to invest in national security and other critical priorities that promote economic growth and ultimately balances the budget by decreasing non-defense discretionary and mandatory spending over the next 10 years. Beyond the 10-year window, most categories of mandatory spending grow at the same long-run rates as under the baseline projection, discretionary spending keeps up with inflation, and revenues continue as a fixed percentage of GDP based on their level in 2027. Details about the assumptions are available in the appendix. As shown in Chart 3-2, 2018 Budget policies will reduce the deficit to below two percent of GDP by 2022 and ultimately lead to a balanced budget by 2027. Over the next decade and a half, the debt-to-GDP ratio reaches 47 percent of GDP and subsequently decreases. At the end of the 25-year horizon, the debt ratio would be the lowest since the start of the 1980s, representing significant progress in reducing the Federal debt burden. One way to quantify the size of the Nation’s long-term fiscal challenges is to determine the size of the increase in taxes or reduction in non-interest spending needed to reach a target debt-to-GDP ratio over a given period. There is no one optimal debt ratio, but two illustrative targets are keeping the debt ratio stable and reaching the aver- age postwar debt ratio of 45 percent. Policy adjustments of about 1.4 percent of GDP would be needed each year to keep the debt ratio stable at 77 percent. Alternatively, policy adjustments of about 2.7 percent of GDP would steer the debt ratio to the postwar average by the end of the 25-year horizon. In comparison, the President’s Budget policies are projected to decrease the debt ratio within 10 years and reduce it by 53 percentage points by 2042, more than satisfying the definition of fiscal sustainability. The Budget achieves these fiscal goals through prioritizing expenditures that promote economic growth and security while improving the efficiency of the Federal government. For example, the President’s Budget includes $200 billion to improve the Nation’s crumbling infrastructure and an increase of $54 billion to defense spending for 2018. Reducing the regulatory burden will promote job creation, and tax reform will allow families to keep more of their earnings. At the same time, the Budget eliminates ineffective or duplicative programs and identifies ways to make Federal programs more efficient. Despite all the progress the Budget proposals make towards fiscal goals, some long-term challenges remain, particularly in Social Security and Medicare. Uncertainty and Alternative Assumptions Future budget outcomes depend on a host of unknowns: changing economic conditions, unforeseen international developments, unexpected demographic shifts, and unpredictable technological advances. The longer budget projections are extended, the more the uncertainties increase. These uncertainties make even short-run budget forecasting quite difficult. For example, the budget’s projection of the deficit in five years is 1.8 percent of GDP, but a distribution of probable outcomes ranges from a deficit of 7.2 percent of GDP to a surplus of 3.6 percent of GDP, at the 10th and 90th percentiles, respectively. Productivity and interest rates.— The rate of future productivity growth has a major effect on the long-run budget outlook (see Chart 3–3). Higher productivity growth improves the budget outlook, because it adds di- Chart 3-3. Alternative Productivity and Interest Assumptions Debt as a Percent of GDP 90 80 Lower Productivity Growth 70 60 50 40 30 2018 Budget Policy 20 Higher Productivity Growth 10 0 2000 2010 2020 2030 2040 22 ANALYTICAL PERSPECTIVES Table 3–1. DEBT PROJECTIONS IN 25 YEARS UNDER ALTERNATIVE BUDGET SCENARIOS (Percent of GDP) 2018 Budget Policy ������������������������������������������������������������������������������������������������ 24.5 Health: Excess cost growth averages 1.5% ������������������������������������������������������������������� 36.8 Zero excess cost growth ������������������������������������������������������������������������������������ 16.6 Discretionary Outlays: Grow with inflation and population ��������������������������������������������������������������������� 26.8 Grow with GDP �������������������������������������������������������������������������������������������������� 32.0 Revenues: Revenues rise as as a share of GDP, with bracket creep ���������������������������������� 20.2 Productivity and Interest: 1 Productivity grows by 0.25 percentage point per year faster than the base case �������������������������������������������������������������������������������������������������������������� 10.5 Productivity grows by 0.25 percentage point per year slower than the base case �������������������������������������������������������������������������������������������������������������� 39.7 1 Interest rates adjust commensurately with increases or decreases in productivity. rectly to the growth of the major tax bases while having a smaller effect on outlay growth. Meanwhile, productivity and interest rates tend to move together, but have opposite effects on the budget. Economic growth theory suggests that a 0.1 percentage point increase in productivity should be associated with a roughly equal increase in interest rates. Productivity growth is also highly uncertain. For much of the last century, output per hour in nonfarm business grew at an average rate of around 2.1 percent per year, but there were long periods of sustained output growth at notably higher and lower rates than the long-term average. The base case long-run projections assume that real GDP per hour worked will grow at an average annual rate of 2.0 percent per year and assume interest rates on 10-year Treasury securities of 3.8 percent. The alternative scenarios illustrate the effect of raising and lowering the projected productivity growth rate by 0.25 percentage point and changing interest rates commensurately. At the end of the 25-year horizon, the public debt ranges from almost 11 percent of GDP in the high productivity scenario to 40 percent of GDP in the low productivity scenario. This variation highlights the importance of investment and smarter tax policy, which can contribute to higher productivity. Health spending.—Health care cost growth represents another large source of uncertainty in the long-term budget projections. As noted above, the baseline projections follow the Medicare Trustees in assuming that Medicare per-beneficiary costs grow an average of about 0.8 percentage points faster than per-capita GDP growth over the next 25 years. But historically, especially prior to 1990, health care costs grew even more rapidly. Conversely, over the last few years, per-enrollee health care costs have grown roughly in line with or more slowly than GDP per capita, with particularly slow growth in Medicare and Medicaid. Chart 3-4 shows the large impact that either slower or faster health care cost growth would have on the budget. If health care cost growth averaged 1.5 percentage points faster than per-capita GDP growth, the debt ratio in 25 years would increase from 25 percent of GDP under the base case Budget policy to 37 percent of GDP. If health care costs grew with GDP per capita, the debt ratio in 25 years would be 17 percent of GDP. Policy assumptions.—As evident from the discussion of the 2018 Budget proposals, policy choices will also have a large impact on long-term budget deficits and debt. The base case policy projection for discretionary spending assumes that after 2027, discretionary spending grows with inflation (see Chart 3–5). Alternative assumptions are to grow discretionary spending with GDP or inflation and population. At the end of the 25-year horizon, the debt ratio ranges from 25 percent of GDP in the base case to 27 percent of GDP if discretionary spending grows with inflation and population and 32 percent of GDP if discretionary spending grows with GDP. In the base case policy projection, tax receipts remain a constant percent of GDP after the budget window. Chart 3–6 shows an alternative receipts assumption. Without changes in law, revenues would gradually increase with Chart 3-4. Alternative Health Care Costs Debt as a Percent of GDP 90 80 70 Higher Average Excess Growth Rate 60 50 40 30 2018 Budget Policy 20 Zero Excess Growth Rate 10 0 2000 2010 2020 2030 2040 23 3. Long-Term Budget Outlook Chart 3-5. Alternative Discretionary Assumptions Debt as a Percent of GDP 90 80 70 60 Discretionary Spending Grows with GDP 50 40 30 2018 Budget Policy 20 Discretionary Spending Grows with Inflation and Population 10 0 2000 2010 2020 rising real incomes adding to budget surpluses that can further improve the debt outlook. At the end of the 25year horizon, the debt ratio falls from 25 percent of GDP in the base case to 20 percent of GDP in the alternative case where tax brackets are not regularly increased after 2027. Finally, Chart 3-7 shows how uncertainties compound over the forecast horizon. As the chart shows, under the base case Budget policy projections, debt declines to 25 percent of GDP. Alternatively, assuming a combination of slower productivity growth and higher health care cost growth results in less debt reduction, with debt-to-GDP reaching 53 percent by the end of the window. Meanwhile, assuming a combination of higher productivity growth and slower health care cost growth results in the debt-toGDP reaching 3 percent in 2042. Despite the striking uncertainties, long-term projections are helpful in highlighting some of the known budget challenges on the horizon, especially the impact of an aging population. In addition, the projections highlight 2030 2040 the need for policy awareness and potential action to address drivers of future budgetary costs. Actuarial Projections for Social Security and Medicare While the Administration’s long-run projections focus on the unified budget outlook, Social Security and Medicare Hospital Insurance benefits are paid out of trust funds financed by dedicated payroll tax revenue. Projected trust fund revenues fall short of the levels necessary to finance projected benefits over the next 75 years. The Social Security and Medicare Trustees’ reports feature the actuarial balance of the trust funds as a summary measure of their financial status. For each trust fund, the balance is calculated as the change in receipts or program benefits (expressed as a percentage of taxable payroll) that would be needed to preserve a small positive balance in the trust fund at the end of a specified time pe- Chart 3-6. Alternative Revenue Assumptions Debt as a Percent of GDP 90 80 70 60 50 2018 Budget Policy 40 30 Revenues Rise as a share of GDP, with Bracket Creep 20 10 0 2000 2010 2020 2030 2040 24 ANALYTICAL PERSPECTIVES Chart 3-7. Long-Term Uncertainties Debt as a Percent of GDP 90 80 70 Pessimistic 60 50 2018 Budget Policy 40 30 20 Optimistic 10 0 2000 2010 2020 riod. The estimates cover periods ranging in length from 25 to 75 years. Table 3–2 shows the projected income rate, cost rate, and annual balance for the Medicare HI and combined OASDI trust funds at selected dates under the Trustees’ intermediate assumptions in the 2016 reports. There is a continued imbalance in the long-run projections of the HI program due to demographic trends and continued high per-person costs. The HI trust fund is projected to become insolvent in 2028. As a result of reforms legislated in 1983, Social Security had been running a cash surplus with taxes exceeding costs up until 2009. This surplus in the Social Security trust fund helped to hold down the unified budget deficit. The cash surplus ended in 2009, when the trust fund began using a portion of its interest earnings to cover benefit payments. The 2016 Social Security Trustees’ re- 2030 2040 port projects that the trust fund will not return to cash surplus, but the program will continue to experience an overall surplus for several more years because of the interest earnings. After that, however, Social Security will begin to draw on its trust fund balances to cover current expenditures. Over time, as the ratio of workers to retirees falls, costs are projected to rise further while revenues excluding interest are projected to rise slightly. In the process, the Social Security trust fund, which was built up since 1983, would be drawn down and eventually be exhausted in 2034. These projections assume that benefits would continue to be paid in full despite the projected exhaustion of the trust fund to show the long-run implications of current benefit formulas. Under current law, not all scheduled benefits could be paid after the trust funds are exhausted. However, benefits could still be partially funded from current revenues. According to Table 3–2. INTERMEDIATE ACTUARIAL PROJECTIONS FOR OASDI AND HI, 2016 TRUSTEES’ REPORTS 2015 2020 2030 2040 2080 3.8 4.8 –1.0 50 years –0.7 4.3 5.1 –0.8 75 years –0.7 13.2 16.6 –3.4 50 years –2.2 13.3 17.4 –4.1 75 years –2.7 Percent of Payroll Medicare Hospital Insurance (HI): Income Rate ���������������������������������������������������������������������� Cost Rate ��������������������������������������������������������������������������� Annual Balance ����������������������������������������������������������������� Projection Interval ������������������������������������������������������������ Actuarial Balance ���������������������������������������������� 3.4 3.4 –0.1 3.4 3.5 –* 3.6 4.2 –0.6 25 years –0.6 Percent of Payroll Old Age Survivors and Disability Insurance (OASDI): Income Rate ���������������������������������������������������������������������� Cost Rate ��������������������������������������������������������������������������� Annual Balance ����������������������������������������������������������������� Projection Interval ������������������������������������������������������������ Actuarial Balance ���������������������������������������������� * 0.05 percent or less. 13.0 14.1 –1.1 13.0 14.1 –1.2 13.2 16.1 –2.9 25 years –1.5 25 3. Long-Term Budget Outlook the 2016 Trustees’ report, beginning in 2034, 79 percent of projected Social Security scheduled benefits would be funded. This percentage would eventually decline to 74 percent by 2090. TECHNICAL NOTE: SOURCES OF DATA AND METHODS OF ESTIMATING The long-run budget projections are based on actuarial projections for Social Security and Medicare as well as demographic and economic assumptions. A simplified model of the Federal budget, developed at OMB, is used to compute the budgetary implications of these assumptions. Demographic and economic assumptions.—For the years 2017-2027, the assumptions are drawn from the Administration’s economic projections used for the 2018 Budget. The economic assumptions are extended beyond this interval by holding inflation, interest rates, and the unemployment rate constant at the levels assumed in the final year of the budget forecast. Population growth and labor force growth are extended using the intermediate assumptions from the 2016 Social Security Trustees’ report. The projected rate of growth for real GDP is built up from the labor force assumptions and an assumed rate of productivity growth. Productivity growth, measured as real GDP per hour, is assumed to equal its average rate of growth in the Budget’s economic assumptions—2.0 percent per year. For the baseline projections, GDP growth is adjusted to remove the growth-increasing effects of the Administration’s fiscal policies. Under Budget policies, CPI inflation holds stable at 2.3 percent per year, the unemployment rate is constant at 4.8 percent, the yield on 10-year Treasury notes is steady at 3.8 percent, and the 91-day Treasury bill rate is 3.0 percent. Consistent with the demographic assumptions in the Trustees’ reports, U.S. population growth slows from nearly 1.0 percent per year to about two-thirds that rate by 2035, and slower rates of growth beyond that point. By the end of the 25-year projection period total population growth is slightly above 0.5 percent per year. Real GDP growth is projected to be less than its historical average of around 3.3 percent per year because the slowdown in population growth and the increase in the population over age 65 reduce labor supply growth. In these projections, real GDP growth averages between 2.5 percent and 2.9 percent per year for the period following the end of the 10-year budget window. The economic and demographic projections described above are set by assumption and do not automatically change in response to changes in the budget outlook. This makes it easier to interpret the comparisons of alternative policies and is a reasonable simplification given the large uncertainties surrounding the long-run outlook. Budget projections.—For the period through 2027, receipts and outlays in the baseline and policy projections follow the 2018 Budget’s baseline and policy estimates respectively. Under Budget policies, total tax receipts are constant relative to GDP after 2027. Discretionary spending grows at the rate of growth in inflation outside the budget window. Long-run Social Security spending is projected by the Social Security actuaries using this chapter’s long-run economic and demographic assumptions. Medicare benefits are projected based on a projection of beneficiary growth and excess health care cost growth from the 2016 Medicare Trustees’ report current law baseline. Medicaid outlays are based on the economic and demographic projections in the model, which assume average excess cost growth of approximately 1.0 percentage point above growth in GDP per capita after 2027. For the policy projections, these assumptions are adjusted based on the Budget proposal to reform Medicaid funding to States starting in 2020. Other entitlement programs are projected based on rules of thumb linking program spending to elements of the economic and demographic projections such as the poverty rate. 4. FEDERAL BORROWING AND DEBT Debt is the largest legally and contractually binding obligation of the Federal Government. At the end of 2016, the Government owed $14,168 billion of principal to the individuals and institutions who had loaned it the money to fund past deficits. During that year, the Government paid the public approximately $284 billion of interest on this debt. At the same time, the Government also held financial assets, net of financial liabilities other than debt, of $1,699 billion. Therefore, debt held by the public net of financial assets was $12,469 billion. In addition, at the end of 2016 the Treasury had issued $5,372 billion of debt to Government accounts. As a result, gross Federal debt, which is the sum of debt held by the public and debt held by Government accounts, was $19,539 billion. Interest on the gross Federal debt was $430 billion in 2016. Gross Federal debt is discussed in more detail later in the chapter. The $14,168 billion debt held by the public at the end of 2016 represents an increase of $1,051 billion over the level at the end of 2015. This increase is the result of the $585 billion deficit in 2016 and other financing transactions that increased the need to borrow by $466 billion. Debt held by the public increased from 73.3 percent of Gross Domestic Product (GDP) at the end of 2015 to 77.0 percent of GDP at the end of 2016. Meanwhile, financial assets net of liabilities grew by $464 billion in 2016, so that debt held by the public net of financial assets increased by $587 billion during 2016. Debt held by the public net of financial assets was 66.4 percent of GDP at the end of 2015 and 67.7 percent of GDP at the end of 2016. The deficit is estimated to increase to $603 billion, or 3.1 percent of GDP, in 2017, and then to decrease to $440 billion, or 2.2 percent of GDP, in 2018. The deficit is projected to increase temporarily in 2019, but then to decrease in nominal terms and as a percent of GDP in each of the subsequent years, reaching surplus in 2027. Debt held by the public is projected to grow to 77.4 percent of GDP at the end of 2017 and then to fall in each of the subsequent years, falling to 59.8 percent of GDP in 2027. Debt held by the public net of financial assets is expected to similarly grow to 68.2 percent of GDP at the end of 2017, then to decline in the following years, falling to 52.2 percent of GDP at the end of 2027. Trends in Debt Since World War II Table 4–1 depicts trends in Federal debt held by the public from World War II to the present and estimates from the present through 2022. (It is supplemented for earlier years by Tables 7.1–7.3 in the Budget’s historical tables, available as supplemental budget material.1) Federal debt peaked at 106.1 percent of GDP in 1946, just 1 The historical tables are available at https://www.whitehouse.gov/ omb/budget/Historicals and on the Budget CD-ROM. after the end of the war. From that point until the 1970s, Federal debt as a percentage of GDP decreased almost every year because of relatively small deficits, an expanding economy, and unanticipated inflation. With households borrowing large amounts to buy homes and consumer durables, and with businesses borrowing large amounts to buy plant and equipment, Federal debt also decreased almost every year as a percentage of total credit market debt outstanding. The cumulative effect was impressive. From 1950 to 1975, debt held by the public declined from 78.5 percent of GDP to 24.5 percent, and from 53.3 percent of credit market debt to 17.9 percent. Despite rising interest rates, interest outlays became a smaller share of the budget and were roughly stable as a percentage of GDP. Federal debt relative to GDP is a function of the Nation’s fiscal policy as well as overall economic conditions. During the 1970s, large budget deficits emerged as spending grew faster than receipts and as the economy was disrupted by oil shocks and rising inflation. The nominal amount of Federal debt more than doubled, and Federal debt relative to GDP and credit market debt stopped declining for several years in the middle of the decade. Federal debt started growing again at the beginning of the 1980s, and increased to almost 48 percent of GDP by 1993. The ratio of Federal debt to credit market debt also rose during this period, though to a lesser extent. Interest outlays on debt held by the public, calculated as a percentage of either total Federal outlays or GDP, increased as well. The growth of Federal debt held by the public was slowing by the mid-1990s. In addition to a growing economy, three major budget agreements were enacted in the 1990s, implementing spending cuts and revenue increases and significantly reducing deficits. The debt declined markedly relative to both GDP and total credit market debt, with the decline accelerating as budget surpluses emerged from 1997 to 2001. Debt fell from 47.8 percent of GDP in 1993 to 31.4 percent of GDP in 2001. Over that same period, debt fell from 26.3 percent of total credit market debt to 17.4 percent. Interest as a share of outlays peaked at 16.5 percent in 1989 and then fell to 8.9 percent by 2002; interest as a percentage of GDP fell by a similar proportion. The progress in reducing the debt burden stopped and then reversed course beginning in 2002. A decline in the stock market, a recession, the attacks of September 11, 2001, and two major wars, and other policy changes all contributed to increasing deficits, causing debt to rise, both in nominal terms and as a percentage of GDP. Following the most recent recession, which began in December 2007, the deficit began increasing rapidly in 2008 and 2009, as the Government acted to rescue several major corporations and financial institutions as well as enact a major 27 28 ANALYTICAL PERSPECTIVES Table 4–1. TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC AND INTEREST ON THE DEBT HELD BY THE PUBLIC (Dollar amounts in billions) Fiscal Year Debt held by the public: Current dollars FY 2016 dollars 1 Debt held by the public as Interest on the debt held by Interest on the debt held by a percent of: the public: 3 the public as a percent of: 3 GDP Credit market debt 2 Current dollars FY 2016 dollars 1 Total outlays GDP 1946 ��������������������������������������������������������������������������������������������������������� 241.9 2,450.9 106.1 N/A 4.2 42.4 7.6 1.8 1950 ��������������������������������������������������������������������������������������������������������� 1955 ��������������������������������������������������������������������������������������������������������� 219.0 226.6 1,795.5 1,632.7 78.5 55.7 53.3 42.1 4.8 5.2 39.7 37.4 11.4 7.6 1.7 1.3 1960 ��������������������������������������������������������������������������������������������������������� 1965 ��������������������������������������������������������������������������������������������������������� 236.8 260.8 1,511.8 1,559.2 44.3 36.7 33.1 26.4 7.8 9.6 49.9 57.3 8.5 8.1 1.5 1.3 1970 ��������������������������������������������������������������������������������������������������������� 1975 ��������������������������������������������������������������������������������������������������������� 283.2 394.7 1,410.8 1,449.1 27.0 24.5 20.3 17.9 15.4 25.0 76.6 91.8 7.9 7.5 1.5 1.6 1980 ��������������������������������������������������������������������������������������������������������� 1985 ��������������������������������������������������������������������������������������������������������� 711.9 1,507.3 1,819.0 2,939.4 25.5 35.3 18.5 22.2 62.8 152.9 160.3 298.2 10.6 16.2 2.2 3.6 1990 ��������������������������������������������������������������������������������������������������������� 1995 ��������������������������������������������������������������������������������������������������������� 2,411.6 3,604.4 4,043.6 5,333.4 40.8 47.5 22.5 26.3 202.4 239.2 339.3 353.9 16.2 15.8 3.4 3.2 2000 ��������������������������������������������������������������������������������������������������������� 2005 ��������������������������������������������������������������������������������������������������������� 3,409.8 4,592.2 4,651.0 5,588.4 33.6 35.6 18.8 17.1 232.8 191.4 317.6 232.9 13.0 7.7 2.3 1.5 2010 ��������������������������������������������������������������������������������������������������������� 2011 ��������������������������������������������������������������������������������������������������������� 2012 ��������������������������������������������������������������������������������������������������������� 2013 ��������������������������������������������������������������������������������������������������������� 2014 ��������������������������������������������������������������������������������������������������������� 9,018.9 10,128.2 11,281.1 11,982.7 12,779.9 9,934.8 10,934.6 11,960.0 12,492.8 13,085.1 60.9 65.9 70.4 72.6 74.2 25.2 27.5 29.4 30.1 30.8 228.2 266.0 232.1 259.0 271.4 251.3 287.2 246.0 270.0 277.9 6.6 7.4 6.6 7.5 7.7 1.5 1.7 1.4 1.6 1.6 2015 ��������������������������������������������������������������������������������������������������������� 2016 ��������������������������������������������������������������������������������������������������������� 2017 estimate ������������������������������������������������������������������������������������������� 2018 estimate ������������������������������������������������������������������������������������������� 2019 estimate ������������������������������������������������������������������������������������������� 13,116.7 14,167.7 14,823.8 15,353.0 15,957.4 13,273.5 14,167.7 14,556.5 14,778.0 15,058.6 73.3 77.0 77.4 76.7 76.2 30.6 31.3 N/A N/A N/A 260.6 283.8 324.6 362.0 419.2 263.8 283.8 318.7 348.5 395.6 7.1 7.4 8.0 8.8 9.7 1.5 1.5 1.7 1.8 2.0 2020 estimate ������������������������������������������������������������������������������������������� 2021 estimate ������������������������������������������������������������������������������������������� 2022 estimate ������������������������������������������������������������������������������������������� 2023 estimate ������������������������������������������������������������������������������������������� 2024 estimate ������������������������������������������������������������������������������������������� 16,509.0 17,023.6 17,517.5 17,887.0 18,149.8 15,273.7 15,441.0 15,577.3 15,593.9 15,512.8 75.1 73.7 72.2 70.2 67.8 N/A N/A N/A N/A N/A 479.6 536.6 586.3 628.0 658.6 443.7 486.7 521.4 547.5 563.0 10.7 11.6 12.1 12.7 13.0 2.2 2.3 2.4 2.5 2.5 2025 estimate ������������������������������������������������������������������������������������������� 18,378.9 15,400.6 65.3 N/A 679.2 569.2 12.8 2.4 2026 estimate ������������������������������������������������������������������������������������������� 18,541.3 15,232.1 62.7 N/A 694.0 570.2 12.6 2.3 2027 estimate ������������������������������������������������������������������������������������������� 18,575.2 14,960.7 59.8 N/A 708.8 570.8 12.4 2.3 N/A = Not available. 1 Amounts in current dollars deflated by the GDP chain-type price index with fiscal year 2016 equal to 100. 2 Total credit market debt owed by domestic nonfinancial sectors. Financial sectors are omitted to avoid double counting, since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit market. Source: Federal Reserve Board flow of funds accounts. Projections are not available. 3 Interest on debt held by the public is estimated as the interest on Treasury debt securities less the “interest received by trust funds” (subfunction 901 less subfunctions 902 and 903). The estimate of interest on debt held by the public does not include the comparatively small amount of interest paid on agency debt or the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special funds). stimulus bill. Since 2008, debt as a percent of GDP has grown rapidly, increasing from 35.2 percent at the end of 2007 to 77.0 percent at the end of 2016. Under the proposals in the Budget, the deficit is projected to increase to $603 billion in 2017, and then generally fall in subsequent years, reaching a $16 billion surplus in 2027. Gross Federal debt is projected to increase slightly to 106.2 percent of GDP in 2017 and then decrease in each of the years thereafter. Debt held by the public as a percent of GDP is estimated to be 77.4 percent at the end of 2017, after which it falls in each of the subsequent years. Debt held by the public net of financial assets as a percent of GDP is estimated to grow to 68.2 percent at the end of 2017 and then fall in the following years, to 52.2 percent of GDP by the end of 2027. 4. Federal Borrowing and Debt Debt Held by the Public and Gross Federal Debt The Federal Government issues debt securities for two main purposes. First, it borrows from the public to provide for the Federal Government’s financing needs, including both the deficit and the other transactions requiring financing, most notably disbursements for direct student loans and other Federal credit programs.2 Second, it issues debt to Federal Government accounts, primarily trust funds, that accumulate surpluses. By law, trust fund surpluses must generally be invested in Federal securities. The gross Federal debt is defined to consist of both the debt held by the public and the debt held by Government accounts. Nearly all the Federal debt has been issued by the Treasury and is sometimes called “public debt,’’ but a small portion has been issued by other Government agencies and is called “agency debt.’’3 Borrowing from the public, whether by the Treasury or by some other Federal agency, is important because it represents the Federal demand on credit markets. Regardless of whether the proceeds are used for tangible or intangible investments or to finance current consumption, the Federal demand on credit markets has to be financed out of the saving of households and businesses, the State and local sector, or the rest of the world. Federal borrowing thereby competes with the borrowing of other sectors of the domestic or international economy for financial resources in the credit market. Borrowing from the public thus affects the size and composition of assets held by the private sector and the amount of saving imported from abroad. It also increases the amount of future resources required to pay interest to the public on Federal debt. Borrowing from the public is therefore an important concern of Federal fiscal policy. Borrowing from the public, however, is an incomplete measure of the Federal impact on credit markets. Different types of Federal activities can affect the credit markets in different ways. For example, under its direct loan programs, the Government uses borrowed funds to acquire financial assets that might otherwise require financing in the credit markets directly. (For more information on other ways in which Federal activities impact the credit market, see the discussion at the end of this chapter.) By incorporating the change in direct loan and other financial assets, debt held by the public net of financial assets adds useful insight into the Government’s financial condition. Issuing debt securities to Government accounts performs an essential function in accounting for the operation of these funds. The balances of debt represent the cumulative surpluses of these funds due to the excess 2 For the purposes of the Budget, “debt held by the public” is defined as debt held by investors outside of the Federal Government, both domestic and foreign, including U.S. State and local governments and foreign governments. It also includes debt held by the Federal Reserve. 3 The term “agency debt’’ is defined more narrowly in the budget than customarily in the securities market, where it includes not only the debt of the Federal agencies listed in Table 4–4, but also certain Government-guaranteed securities and the debt of the Government-sponsored enterprises listed in Table 19–7 in the supplemental materials to the “Credit and Insurance” chapter. (Table 19-7 is available on the Internet at: https://www.whitehouse.gov/omb/budget/Analytical_Perspectives and on the Budget CD-ROM.) 29 of their tax receipts, interest receipts, and other collections over their spending. The interest on the debt that is credited to these funds accounts for the fact that some earmarked taxes and user fees will be spent at a later time than when the funds receive the monies. The debt securities are assets of those funds but are a liability of the general fund to the funds that hold the securities, and are a mechanism for crediting interest to those funds on their recorded balances. These balances generally provide the fund with authority to draw upon the U.S. Treasury in later years to make future payments on its behalf to the public. Public policy may result in the Government’s running surpluses and accumulating debt in trust funds and other Government accounts in anticipation of future spending. However, issuing debt to Government accounts does not have any of the credit market effects of borrowing from the public. It is an internal transaction of the Government, made between two accounts that are both within the Government itself. Issuing debt to a Government account is not a current transaction of the Government with the public; it is not financed by private saving and does not compete with the private sector for available funds in the credit market. While such issuance provides the account with assets—a binding claim against the Treasury— those assets are fully offset by the increased liability of the Treasury to pay the claims, which will ultimately be covered by the collection of revenues or by borrowing. Similarly, the current interest earned by the Government account on its Treasury securities does not need to be financed by other resources. Furthermore, the debt held by Government accounts does not represent the estimated amount of the account’s obligations or responsibilities to make future payments to the public. For example, if the account records the transactions of a social insurance program, the debt that it holds does not necessarily represent the actuarial present value of estimated future benefits (or future benefits less taxes) for the current participants in the program; nor does it necessarily represent the actuarial present value of estimated future benefits (or future benefits less taxes) for the current participants plus the estimated future participants over some stated time period. The future transactions of Federal social insurance and employee retirement programs, which own 90 percent of the debt held by Government accounts, are important in their own right and need to be analyzed separately. This can be done through information published in the actuarial and financial reports for these programs.4 This Budget uses a variety of information sources to analyze the condition of Social Security and Medicare, the Government’s two largest social insurance programs. The excess of future Social Security and Medicare benefits rel4 Extensive actuarial analyses of the Social Security and Medicare programs are published in the annual reports of the boards of trustees of these funds. The actuarial estimates for Social Security, Medicare, and the major Federal employee retirement programs are summarized in the Financial Report of the United States Government, prepared annually by the Department of the Treasury in coordination with the Office of Management and Budget, and presented in more detail in the financial statements of the agencies administering those programs. 30 ANALYTICAL PERSPECTIVES Table 4–2. FEDERAL GOVERNMENT FINANCING AND DEBT (In billions of dollars) Actual 2016 Financing: Unified budget deficit/surplus (–) ������������������������������������� Other transactions affecting borrowing from the public: Changes in financial assets and liabilities: 1 Change in Treasury operating cash balance ��������� Net disbursements of credit financing accounts: Direct loan accounts ����������������������������������������� Guaranteed loan accounts ������������������������������� Troubled Asset Relief Program equity purchase accounts ������������������������������������������������������ Subtotal, net disbursements ������������������� Net purchases of non-Federal securities by the National Railroad Retirement Investment Trust Net change in other financial assets and liabilities 2 ���� Subtotal, changes in financial assets and liabilities ������������������������������������������������������� Seigniorage on coins ������������������������������������������������� Total, other transactions affecting borrowing from the public ��������������������������������������������� Total, requirement to borrow from the public (equals change in debt held by the public) ������������������������������������������ Changes in Debt Subject to Statutory Limitation: Change in debt held by the public ����������������������������������� Change in debt held by Government accounts ��������������� Less: change in debt not subject to limit and other adjustments ���������������������������������������������������������������� Total, change in debt subject to statutory limitation ��� Estimate 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 584.7 602.5 440.2 525.9 488.0 455.8 441.7 318.7 209.1 175.6 110.5 –15.8 154.6 –3.3 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 82.4 16.3 67.7 –9.4 88.4 2.4 81.4 –1.4 67.7 –2.4 65.5 –5.1 60.9 –7.1 60.7 –8.6 60.4 –5.3 59.7 –4.9 57.7 –4.7 55.0 –4.4 0.1 98.8 –0.3 58.0 –* 90.8 –* 80.0 –* 65.2 –* 60.4 –* 53.8 –* 52.1 ......... 55.1 ......... 54.7 ......... 53.0 ......... 50.6 0.4 213.0 –0.6 ......... –1.2 ......... –1.0 ......... –1.0 ......... –1.0 ......... –1.1 ......... –0.7 ......... –0.8 ......... –0.6 ......... –0.5 ......... –0.3 ......... 466.9 –0.6 54.1 –0.5 89.6 –0.5 78.9 –0.5 64.2 –0.5 59.3 –0.5 52.7 –0.6 51.4 –0.6 54.3 –0.6 54.1 –0.6 52.5 –0.6 50.3 –0.6 466.4 53.6 89.1 78.4 63.7 58.8 52.2 50.8 53.8 53.5 51.9 49.7 1,051.0 656.1 529.2 604.3 551.7 514.6 493.9 369.5 262.9 229.1 162.3 33.9 1,051.0 368.3 656.1 158.9 529.2 209.6 604.3 142.4 551.7 111.7 514.6 96.2 493.9 39.4 369.5 54.1 262.9 76.0 229.1 0.3 162.3 –20.1 33.9 –139.5 6.1 1,425.5 1.2 816.2 1.6 740.4 2.6 749.3 2.5 665.9 2.2 612.9 1.9 535.2 2.3 425.9 2.0 340.9 1.0 230.3 0.9 143.2 1.7 –103.9 Debt Subject to Statutory Limitation, End of Year: Debt issued by Treasury �������������������������������������������������� 19,513.1 20,327.7 21,067.0 21,814.8 22,479.1 23,090.8 23,624.8 24,049.5 24,389.4 24,619.8 24,762.6 24,657.8 Less: Treasury debt not subject to limitation (–) 3 ������������ –13.5 –11.9 –10.8 –9.3 –7.7 –6.5 –5.3 –4.1 –3.2 –3.2 –2.8 –2.0 Agency debt subject to limitation ������������������������������������� * * * * * * * * * * * * Adjustment for discount and premium 4 ��������������������������� 38.9 38.9 38.9 38.9 38.9 38.9 38.9 38.9 38.9 38.9 38.9 38.9 Total, debt subject to statutory limitation 5 ����������������� 19,538.5 20,354.6 21,095.1 21,844.4 22,510.3 23,123.2 23,658.4 24,084.3 24,425.2 24,655.5 24,798.7 24,694.8 Debt Outstanding, End of Year: Gross Federal debt: 6 Debt issued by Treasury �������������������������������������������� 19,513.1 20,327.7 21,067.0 21,814.8 22,479.1 23,090.8 23,624.8 24,049.5 24,389.4 24,619.8 24,762.6 24,657.8 Debt issued by other agencies ���������������������������������� 26.4 26.7 26.3 25.2 24.2 23.3 22.5 21.5 20.4 19.4 18.8 18.0 Total, gross Federal debt ��������������������������������������� 19,539.4 20,354.4 21,093.3 21,840.0 22,503.3 23,114.1 23,647.4 24,070.9 24,409.8 24,639.2 24,781.4 24,675.8 As a percent of GDP ����������������������������������������� 106.1% 106.2% 105.4% 104.3% 102.4% 100.1% 97.5% 94.4% 91.2% 87.6% 83.8% 79.5% Held by: Debt held by Government accounts �������������������������� 5,371.7 5,530.6 5,740.2 5,882.6 5,994.3 6,090.5 6,129.9 6,184.0 6,260.0 6,260.3 6,240.1 6,100.6 Debt held by the public 7 �������������������������������������������� 14,167.7 14,823.8 15,353.0 15,957.4 16,509.0 17,023.6 17,517.5 17,887.0 18,149.8 18,378.9 18,541.3 18,575.2 As a percent of GDP ���������������������������������������������� 77.0% 77.4% 76.7% 76.2% 75.1% 73.7% 72.2% 70.2% 67.8% 65.3% 62.7% 59.8% *$50 million or less. 1 A decrease in the Treasury operating cash balance (which is an asset) is a means of financing a deficit and therefore has a negative sign. An increase in checks outstanding (which is a liability) is also a means of financing a deficit and therefore also has a negative sign. 2 Includes checks outstanding, accrued interest payable on Treasury debt, uninvested deposit fund balances, allocations of special drawing rights, and other liability accounts; and, as an offset, cash and monetary assets (other than the Treasury operating cash balance), other asset accounts, and profit on sale of gold. 3 Consists primarily of debt issued by the Federal Financing Bank. 4 Consists mainly of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds) and unrealized discount on Government account series securities. 5 The statutory debt limit is approximately $19,809 billion, as increased after March 15, 2017. 6 Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost all measured at sales price plus amortized discount or less amortized premium. Agency debt securities are almost all measured at face value. Treasury securities in the Government account series are otherwise measured at face value less unrealized discount (if any). 7 At the end of 2016, the Federal Reserve Banks held $2,463.5 billion of Federal securities and the rest of the public held $11,704.3 billion. Debt held by the Federal Reserve Banks is not estimated for future years. 4. Federal Borrowing and Debt ative to their dedicated income is very different in concept and much larger in size than the amount of Treasury securities that these programs hold. For all these reasons, debt held by the public and debt held by the public net of financial assets are both better gauges of the effect of the budget on the credit markets than gross Federal debt. Government Deficits or Surpluses and the Change in Debt Table 4–2 summarizes Federal borrowing and debt from 2016 through 2027.5 In 2016 the Government borrowed $1,051 billion, increasing the debt held by the public from $13,117 billion at the end of 2015 to $14,168 billion at the end of 2016. The debt held by Government accounts grew by $368 billion, and gross Federal debt increased by $1,419 billion to $19,539 billion. Debt held by the public.—The Federal Government primarily finances deficits by borrowing from the public, and it primarily uses surpluses to repay debt held by the public.6 Table 4–2 shows the relationship between the Federal deficit or surplus and the change in debt held by the public. The borrowing or debt repayment depends on the Government’s expenditure programs and tax laws, on the economic conditions that influence tax receipts and outlays, and on debt management policy. The sensitivity of the budget to economic conditions is analyzed in Chapter 2, “Economic Assumptions and Interactions with the Budget,’’ in this volume. The total or unified budget consists of two parts: the onbudget portion; and the off-budget Federal entities, which have been excluded from the budget by law. Under present law, the off-budget Federal entities are the two Social Security trust funds (Old-Age and Survivors Insurance and Disability Insurance) and the Postal Service Fund.7 The on-budget and off-budget surpluses or deficits are added together to determine the Government’s financing needs. Over the long run, it is a good approximation to say that “the deficit is financed by borrowing from the public’’ or “the surplus is used to repay debt held by the public.’’ However, the Government’s need to borrow in any given year has always depended on several other factors besides the unified budget surplus or deficit, such as the change in the Treasury operating cash balance. These other factors—“other transactions affecting borrowing from the public’’—can either increase or decrease the Government’s need to borrow and can vary considerably 5 For projections of the debt beyond 2027, see Chapter 3, “LongTerm Budget Outlook.” 6 Treasury debt held by the public is measured as the sales price plus the amortized discount (or less the amortized premium). At the time of sale, the book value equals the sales price. Subsequently, it equals the sales price plus the amount of the discount that has been amortized up to that time. In equivalent terms, the book value of the debt equals the principal amount due at maturity (par or face value) less the unamortized discount. (For a security sold at a premium, the definition is symmetrical.) For inflation-indexed notes and bonds, the book value includes a periodic adjustment for inflation. Agency debt is generally recorded at par. 7 For further explanation of the off-budget Federal entities, see Chapter 9, “Coverage of the Budget.’’ 31 in size from year to year. The other transactions affecting borrowing from the public are presented in Table 4–2 (where an increase in the need to borrow is represented by a positive sign, like the deficit). In 2016 the deficit was $585 billion while these other factors increased the need to borrow by $466 billion, or 44 percent of total borrowing from the public. As a result, the Government borrowed $1,051 billion from the public. The other factors are estimated to increase borrowing by $54 billion (8 percent of total borrowing from the public) in 2017, and $89 billion (17 percent) in 2018. In 2019–2027, these other factors are expected to increase borrowing by annual amounts ranging from $50 billion to $78 billion. Three specific factors presented in Table 4–2 have historically been especially important. Change in Treasury operating cash balance.—The cash balance increased by $40 billion, to $199 billion, in 2015, and by $155 billion, to $353 billion in 2016. The large increases in the cash balance reflect a number of factors. First, in 2015, Treasury announced that, for risk management purposes, it would seek to maintain a cash balance roughly equal to one week of Government outflows, with a minimum balance of about $150 billion. In addition, for debt management purposes, in November 2015 Treasury announced intentions to increase bill financing; because bills mature more frequently than other longer-dated debt, this financing decision effectively increases government outflows during any given week. Finally the timing of end-of-month auction settlements can often increase end-of-month cash balances dramatically. Changes in the operating cash balance, while occasionally large, are inherently limited over time. The operating cash balance is projected to fall by $3 billion, to $350 billion at the end of 2017. Decreases in cash—a means of financing the Government—are limited by the amount of past accumulations, which themselves required financing when they were built up. Increases are limited because it is generally more efficient to repay debt. Net financing disbursements of the direct loan and guaranteed loan financing accounts.—Under the Federal Credit Reform Act of 1990 (FCRA), the budgetary program account for each credit program records the estimated subsidy costs—the present value of estimated net losses—at the time when the direct or guaranteed loans are disbursed. The individual cash flows to and from the public associated with the loans or guarantees, such as the disbursement and repayment of loans, the default payments on loan guarantees, the collection of interest and fees, and so forth, are recorded in the credit program’s non-budgetary financing account. Although the non-budgetary financing account’s cash flows to and from the public are not included in the deficit (except for their impact on subsidy costs), they affect Treasury’s net borrowing requirements.8 In addition to the transactions with the public, the financing accounts include several types of intragovernmental transactions. They receive payment from the 8 The FCRA (sec. 505(b)) requires that the financing accounts be non-budgetary. They are non-budgetary in concept because they do not measure cost. For additional discussion of credit programs, see Chapter 19, “Credit and Insurance,” and Chapter 8, “Budget Concepts.’’ 32 credit program accounts for the subsidy costs of new direct loans and loan guarantees and for any upward reestimate of the costs of outstanding direct and guaranteed loans. They also receive interest from Treasury on balances of uninvested funds. The financing accounts pay any negative subsidy collections or downward reestimate of costs to budgetary receipt accounts and pay interest on borrowings from Treasury. The total net collections and gross disbursements of the financing accounts, consisting of transactions with both the public and the budgetary accounts, are called “net financing disbursements.’’ They occur in the same way as the “outlays’’ of a budgetary account, even though they do not represent budgetary costs, and therefore affect the requirement for borrowing from the public in the same way as the deficit. The intragovernmental transactions of the credit program, financing, and downward reestimate receipt accounts do not affect Federal borrowing from the public. Although the deficit changes because of the budgetary account’s outlay to, or receipt from, a financing account, the net financing disbursement changes in an equal amount with the opposite sign, so the effects are cancelled out. On the other hand, financing account disbursements to the public increase the requirement for borrowing from the public in the same way as an increase in budget outlays that are disbursed to the public in cash. Likewise, receipts from the public collected by the financing account can be used to finance the payment of the Government’s obligations, and therefore they reduce the requirement for Federal borrowing from the public in the same way as an increase in budgetary receipts. Borrowing due to credit financing accounts was $99 billion in 2016. In 2017 credit financing accounts are projected to increase borrowing by $58 billion. After 2017, the credit financing accounts are expected to increase borrowing by amounts ranging from $51 billion to $91 billion over the next 10 years. In some years, large net upward or downward reestimates in the cost of outstanding direct and guaranteed loans may cause large swings in the net financing disbursements. In 2016, there was a net downward reestimate of $5.6 billion, due to a large downward reestimate for Federal Housing Administration (FHA) Mutual Mortgage Insurance guarantees, partly offset by an upward reestimate for direct student loans. In 2017, there is a net upward reestimate of $49.3 billion, due largely to upward reestimates for student loan programs and FHA Mutual Mortgage Insurance guarantees. Net purchases of non-Federal securities by the National Railroad Retirement Investment Trust (NRRIT).— This trust fund, which was established by the Railroad Retirement and Survivors’ Improvement Act of 2001, invests its assets primarily in private stocks and bonds. The Act required special treatment of the purchase or sale of non-Federal assets by the NRRIT trust fund, treating such purchases as a means of financing rather than as outlays. Therefore, the increased need to borrow from the public to finance NRRIT’s purchases of non-Federal assets is part of the “other transactions affecting borrowing from the public’’ rather than included as an increase in ANALYTICAL PERSPECTIVES the deficit. While net purchases and redemptions affect borrowing from the public, unrealized gains and losses on NRRIT’s portfolio are included in both the “other transactions” and, with the opposite sign, in NRRIT’s net outlays in the deficit, for no net impact on borrowing from the public. In 2016, net increases, including purchases and gains, were $0.4 billion. A $0.6 billion net decrease is projected for 2017 and net annual decreases ranging from $0.3 billion to $1.2 billion are projected for 2018 and subsequent years.9 Net change in other financial assets and liabilities.— In addition to the three factors discussed above, in 2015 and 2016, the net change in other financial assets and liabilities was also particularly significant. Generally, the amounts in this category are relatively small. For example, this category decreased the need to borrow by $1 billion in 2012 and increased the need to borrow by $5 billion in 2011. However, in 2015, this “other” category reduced the need to borrow by a net $228 billion. Of the net $228 billion, $203 billion was due to the temporary suspension of the daily reinvestment of the Thrift Savings Plan (TSP) Government Securities Investment Fund (G-Fund).10 The Department of the Treasury is authorized to suspend the issuance of obligations to the TSP G-Fund as an “extraordinary measure” if issuances could not be made without causing the public debt of the United States to exceed the debt limit. The suspension of the daily reinvestment of the TSP G-Fund resulted in the amounts being moved from debt held by the public to deposit fund balances, an “other” financial liability. Once Treasury is able to do so without exceeding the debt limit, Treasury is required to fully reinvest the TSP G-Fund and restore any foregone interest. Accordingly, the TSP G-Fund was fully reinvested in November 2015, returning the amount from deposit fund balances to debt held by the public. The debt ceiling and the use of the TSP G-Fund are discussed in further detail below. Due primarily to the $203 billion reinvestment, the net change in other financial assets of liabilities totaled $213 billion in 2016. Debt held by Government accounts.—The amount of Federal debt issued to Government accounts depends largely on the surpluses of the trust funds, both on-budget and off-budget, which owned 90 percent of the total Federal debt held by Government accounts at the end of 2016. Net investment may differ from the surplus due to changes in the amount of cash assets not currently invested. In 2016, the total trust fund surplus was $185 billion, while trust fund investment in Federal securities increased by $314 billion. This $129 billion difference was primarily due to the Civil Service Retirement and Disability Fund (CSRDF). CSRDF had a surplus of $15 billion but net investment of $156 billion, largely as a result of reinvesting amounts that had been disinvested as part of the extraordinary measures that the Treasury Department is authorized to take with the fund when the Government is at the debt ceiling. For further details on 9 The budget treatment of this fund is further discussed in Chapter 8, “Budget Concepts.’’ 10 The TSP is a defined contribution pension plan for Federal employees. The G-Fund is one of several components of the TSP. 33 4. Federal Borrowing and Debt such measures, see the discussion below. The remainder of debt issued to Government accounts is owned by a number of special funds and revolving funds. The debt held in major accounts and the annual investments are shown in Table 4–5. Debt Held by the Public Net of Financial Assets and Liabilities While debt held by the public is a key measure for examining the role and impact of the Federal Government in the U.S. and international credit markets and for other purposes, it provides incomplete information on the Government’s financial condition. The U.S. Government holds significant financial assets, which can be offset against debt held by the public and other financial liabilities to achieve a more complete understanding of the Government’s financial condition. The acquisition of those financial assets represents a transaction with the credit markets, broadening those markets in a way that is analogous to the demand on credit markets that borrowing entails. For this reason, debt held by the public is also an incomplete measure of the impact of the Federal Government in the United States and international credit markets. One transaction that can increase both borrowing and assets is an increase to the Treasury operating cash balance. When the Government borrows to increase the Treasury operating cash balance, that cash balance also represents an asset that is available to the Federal Government. Looking at both sides of this transaction— the borrowing to obtain the cash and the asset of the cash holdings—provides much more complete information about the Government’s financial condition than looking at only the borrowing from the public. Another example of a transaction that simultaneously increases borrowing from the public and Federal assets is Government borrowing to issue direct loans to the public. When the direct loan is made, the Government is also acquiring an asset in the form of future payments of principal and interest, net of the Government’s expected losses on the loan. Similarly, when NRRIT increases its holdings of non-Federal securities, the borrowing to purchase those securities is offset by the value of the asset holdings. The acquisition or disposition of Federal financial assets very largely explains the difference between the deficit for a particular year and that year’s increase in debt held by the public. Debt held by the public net of financial assets is a measure that is conceptually closer to the measurement of Federal deficits or surpluses; cumulative deficits and surpluses over time more closely equal the debt held by the public net of financial assets than they do the debt held by the public. Table 4–3 presents debt held by the public net of the Government’s financial assets and liabilities. Treasury debt is presented in the Budget at book value, with no adjustments for the change in economic value that results from fluctuations in interest rates. The balances of credit financing accounts are based on projections of future cash flows. For direct loan financing accounts, the balance generally represents the net present value of anticipated future inflows such as principal and interest payments from borrowers. For guaranteed loan financing accounts, the balance generally represents the net present value of anticipated future outflows, such as default claim payments net of recoveries, and other collections, such as program fees. NRRIT’s holdings of non-Federal securities are marked to market on a monthly basis. Governmentsponsored enterprise (GSE) preferred stock is measured at market value. Net financial assets increased by $464 billion, to $1,699 billion, in 2016. This $1,699 billion in net financial assets included a cash balance of $353 billion, net credit financing account balances of $1,255 billion, and other assets and liabilities that aggregated to a net asset of $91 billion. At the end of 2016, debt held by the public was $14,168 billion, or 77.0 percent of GDP. Therefore, debt held by the public net of financial assets was $12,469 billion, or 67.7 percent of GDP. As shown in Table 4–3, the value of the Government’s net financial assets is projected to increase to $1,753 billion in 2017. While debt held by the public is expected to increase from 77.0 percent to 77.4 percent of GDP during 2017, debt held by the public net of financial assets is expected to increase from 67.7 percent to 68.2 percent of GDP. Debt securities and other financial assets and liabilities do not encompass all the assets and liabilities of the Federal Government. For example, accounts payable occur in the normal course of buying goods and services; Social Security benefits are due and payable as of the end of the month but, according to statute, are paid during the next month; and Federal employee salaries are paid after they have been earned. Like debt securities sold in the credit market, these liabilities have their own distinctive effects on the economy. The Federal Government also has significant holdings of non-financial assets, such as land, mineral deposits, buildings, and equipment. The different types of assets and liabilities are reported annually in the financial statements of Federal agencies and in the Financial Report of the United States Government, prepared by the Treasury Department in coordination with the Office of Management and Budget (OMB). Treasury Debt Nearly all Federal debt is issued by the Department of the Treasury. Treasury meets most of the Federal Government’s financing needs by issuing marketable securities to the public. These financing needs include both the change in debt held by the public and the refinancing—or rollover—of any outstanding debt that matures during the year. Treasury marketable debt is sold at public auctions on a regular schedule and, because it is very liquid, can be bought and sold on the secondary market at narrow bid-offer spreads. Treasury also sells to the public a relatively small amount of nonmarketable securities, such as savings bonds and State and Local Government Series securities (SLGS).11 Treasury nonmarketable debt cannot be bought or sold on the secondary market. 11 Under the SLGS program, the Treasury offers special low-yield securities to State and local governments and other entities for temporary investment of proceeds of tax-exempt bonds. 34 ANALYTICAL PERSPECTIVES Table 4–3. DEBT HELD BY THE PUBLIC NET OF FINANCIAL ASSETS AND LIABILITIES (Dollar amounts in billions) Actual 2016 Estimate 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Debt Held by the Public: Debt held by the public ������������������������������������������������������������ 14,167.7 14,823.8 15,353.0 15,957.4 16,509.0 17,023.6 17,517.5 17,887.0 18,149.8 18,378.9 18,541.3 18,575.2 As a percent of GDP ����������������������������������������������������������� 77.0% 77.4% 76.7% 76.2% 75.1% 73.7% 72.2% 70.2% 67.8% 65.3% 62.7% 59.8% Financial Assets Net of Liabilities: Treasury operating cash balance �������������������������������������������� 353.3 350.0 350.0 350.0 350.0 350.0 350.0 350.0 350.0 350.0 350.0 350.0 Credit financing account balances: Direct loan accounts ����������������������������������������������������������� 1,226.5 1,294.2 1,382.6 1,464.0 1,531.6 1,597.1 1,658.0 1,718.7 1,779.2 1,838.8 1,896.5 1,951.5 Guaranteed loan accounts ������������������������������������������������� 27.5 18.1 20.5 19.1 16.7 11.6 4.5 –4.1 –9.4 –14.3 –19.0 –23.4 Troubled Asset Relief Program equity purchase accounts � 0.5 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 Subtotal, credit financing account balances ������������������� 1,254.6 1,312.5 1,403.3 1,483.3 1,548.5 1,608.9 1,662.7 1,714.8 1,769.9 1,824.7 1,877.7 1,928.2 Government-sponsored enterprise preferred stock ����������������� 108.6 108.6 108.6 108.6 108.6 108.6 108.6 108.6 108.6 108.6 108.6 108.6 Non-Federal securities held by NRRIT ������������������������������������ 24.1 23.5 22.4 21.3 20.3 19.3 18.2 17.5 16.7 16.1 15.5 15.3 Other assets net of liabilities ���������������������������������������������������� –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 –42.0 Total, financial assets net of liabilities ��������������������������������� 1,698.5 1,752.6 1,842.2 1,921.1 1,985.4 2,044.7 2,097.5 2,148.8 2,203.1 2,257.2 2,309.7 2,360.0 Debt Held by the Public Net of Financial Assets and Liabilities: Debt held by the public net of financial assets ������������������������ 12,469.2 13,071.2 13,510.9 14,036.2 14,523.7 14,978.9 15,420.0 15,738.1 15,946.7 16,121.7 16,231.5 16,215.1 As a percent of GDP ����������������������������������������������������������� 67.7% 68.2% 67.5% 67.0% 66.1% 64.9% 63.6% 61.7% 59.5% 57.3% 54.9% 52.2% Treasury issues marketable securities in a wide range of maturities, and issues both nominal (non-inflationindexed) and inflation-indexed securities. Treasury’s marketable securities include: Treasury Bills—Treasury bills have maturities of one year or less from their issue date. In addition to the regular auction calendar of bill issuance, Treasury issues cash management bills on an as-needed basis for various reasons such as to offset the seasonal patterns of the Government’s receipts and outlays. Treasury Notes—Treasury notes have maturities of more than one year and up to 10 years. Treasury Bonds—Treasury bonds have maturities of more than 10 years. The longest-maturity securities issued by Treasury are 30-year bonds. Treasury Inflation-Protected Securities (TIPS)— Treasury inflation-protected—or inflation-indexed—securities are coupon issues for which the par value of the security rises with inflation. The principal value is adjusted daily to reflect inflation as measured by changes in the Consumer Price Index (CPI-U-NSA, with a two-month lag). Although the principal value may be adjusted downward if inflation is negative, at maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at original issue. Floating Rate Securities—In 2014, Treasury began to issue floating rate securities, to complement its existing suite of fixed interest rate securities and to support its broader debt management objectives. Floating rate securities have a fixed par value but bear interest rates that fluctuate based on movements in a specified benchmark market interest rate. Treasury’s floating rate notes are benchmarked to the Treasury 13-week bill. Currently, Treasury is issuing floating rate securities with a maturity of two years. Historically, the average maturity of outstanding debt issued by Treasury has been about five years. The average maturity of outstanding debt was 70 months at the end of 2016. Over the last several years there have been many changes in financial markets that have ultimately resulted in significant structural demand for high-quality, shorter-dated securities such as Treasury bills. At the same time, Treasury bills as a percent of outstanding issuance had fallen to historically low levels of around 10 percent. In recognition of these structural changes, in November 2015, the Treasury announced that it would increase issuance of shorter-dated Treasury securities. In addition to quarterly announcements about the overall auction calendar, Treasury publicly announces in advance the auction of each security. Individuals can participate directly in Treasury auctions or can purchase securities through brokers, dealers, and other financial institutions. Treasury accepts two types of auction bids: competitive and noncompetitive. In a competitive bid, the bidder specifies the yield. A significant portion of competitive bids are submitted by primary dealers, which are banks and securities brokerages that have been designated to trade in Treasury securities with the Federal Reserve System. In a noncompetitive bid, the bidder agrees to accept the yield determined by the auction.12 At the close of the auction, Treasury accepts all eligible noncompetitive bids and then accepts competitive bids in ascending order beginning with the lowest yield bid until 12 Noncompetitive bids cannot exceed $5 million per bidder. 35 4. Federal Borrowing and Debt the offering amount is reached. All winning bidders receive the highest accepted yield bid. Treasury marketable securities are highly liquid and actively traded on the secondary market, which enhances the demand for Treasuries at initial auction. The demand for Treasury securities is reflected in the ratio of bids received to bids accepted in Treasury auctions; the demand for the securities is substantially greater than the level of issuance. Because they are backed by the full faith and credit of the United States Government, Treasury marketable securities are considered to be credit “risk-free.” Therefore, the Treasury yield curve is commonly used as a benchmark for a wide variety of purposes in the financial markets. Whereas Treasury issuance of marketable debt is based on the Government’s financing needs, Treasury’s issuance of nonmarketable debt is based on the public’s demand for the specific types of investments. Increases in outstanding balances of nonmarketable debt, such as occurred in 2016, reduce the need for marketable borrowing.13 Agency Debt A few Federal agencies other than Treasury, shown in Table 4–4, sell or have sold debt securities to the public and, at times, to other Government accounts. Currently, new debt is issued only by the Tennessee Valley Authority (TVA) and the Federal Housing Administration; the remaining agencies are repaying past borrowing. Agency debt was $26.4 billion at the end of 2016. Agency debt is less than one-quarter of one percent of Federal debt held by the public. Primarily as a result of TVA activity, agency debt is estimated to grow to $26.7 billion at the end of 2017 and then to decline to $26.3 billion at the end of 2018. The predominant agency borrower is TVA, which had borrowings of $26.2 billion from the public as of the end of 2016, or 99 percent of the total debt of all agencies other than Treasury. TVA issues debt primarily to finance capital projects. TVA has traditionally financed its capital construction by selling bonds and notes to the public. Since 2000, it has also employed two types of alternative financing methods, lease financing obligations and prepayment obligations. Under the lease financing obligations method, TVA signs long-term contracts to lease some facilities and equipment. The lease payments under these contracts ultimately secure the repayment of third party capital used to finance construction of the facility. TVA retains substantially all of the economic benefits and risks related to ownership of the assets.14 Under the prepayment obligations method, TVA’s power distributors may prepay a portion of the price of the power they plan to purchase in the future. In return, they obtain a discount on a specific quantity of the future power they buy from TVA. The 13 Detail on the marketable and nonmarketable securities issued by Treasury is found in the Monthly Statement of the Public Debt, published on a monthly basis by the Department of the Treasury. 14 This arrangement is at least as governmental as a “lease-purchase without substantial private risk.’’ For further detail on the current budgetary treatment of lease-purchase without substantial private risk, see OMB Circular No. A–11, Appendix B. quantity varies, depending on TVA’s estimated cost of borrowing. OMB determined that each of these alternative financing methods is a means of financing the acquisition of assets owned and used by the Government, or of refinancing debt previously incurred to finance such assets. They are equivalent in concept to other forms of borrowing from the public, although under different terms and conditions. The budget therefore records the upfront cash proceeds from these methods as borrowing from the public, not offsetting collections.15 The budget presentation is consistent with the reporting of these obligations as liabilities on TVA’s balance sheet under generally accepted accounting principles. Table 4–4 presents these alternative financing methods separately from TVA bonds and notes to distinguish between the types of borrowing. At the end of 2016, lease financing obligations were $1.8 billion and obligations for prepayments were $0.2 billion. Although the FHA generally makes direct disbursements to the public for default claims on FHA-insured mortgages, it may also pay claims by issuing debentures. Issuing debentures to pay the Government’s bills is equivalent to selling securities to the public and then paying the bills by disbursing the cash borrowed, so the transaction is recorded as being simultaneously an outlay and borrowing. The debentures are therefore classified as agency debt. A number of years ago, the Federal Government guaranteed the debt used to finance the construction of buildings for the National Archives and the Architect of the Capitol, and subsequently exercised full control over the design, construction, and operation of the buildings. These arrangements are equivalent to direct Federal construction financed by Federal borrowing. The construction expenditures and interest were therefore classified as Federal outlays, and the borrowing was classified as Federal agency borrowing from the public. Several Federal agencies borrow from the Bureau of the Fiscal Service (Fiscal Service) or the Federal Financing Bank (FFB), both within the Department of the Treasury. Agency borrowing from the FFB or the Fiscal Service is not included in gross Federal debt. It would be double counting to add together (a) the agency borrowing from the Fiscal Service or FFB and (b) the Treasury borrowing from the public that is needed to provide the Fiscal Service or FFB with the funds to lend to the agencies. Debt Held by Government Accounts Trust funds, and some special funds and public enterprise revolving funds, accumulate cash in excess of 15 This budgetary treatment differs from the treatment in the Monthly Treasury Statement of Receipts and Outlays of the United States Government (Monthly Treasury Statement) Table 6 Schedule C, and the Combined Statement of Receipts, Outlays, and Balances of the United States Government Schedule 3, both published by the Department of the Treasury. These two schedules, which present debt issued by agencies other than Treasury, exclude the TVA alternative financing arrangements. This difference in treatment is one factor causing minor differences between debt figures reported in the Budget and debt figures reported by Treasury. The other factors are adjustments for the timing of the reporting of Federal debt held by NRRIT and treatment of the Federal debt held by the Securities Investor Protection Corporation. 36 ANALYTICAL PERSPECTIVES Table 4–4. AGENCY DEBT (In millions of dollars) 2016 Actual Borrowing/ Repayment(–) 2017 Estimate Debt, End-ofYear Borrowing/ Repayment(–) 2018 Estimate Debt, End-ofYear Borrowing/ Repayment(–) Debt, End-ofYear Borrowing from the public: Housing and Urban Development: Federal Housing Administration �������������������������������������������������������������������� Architect of the Capitol ��������������������������������������������������������������������������������������� National Archives ������������������������������������������������������������������������������������������������ ......... –8 –21 19 98 75 ......... –9 –23 19 89 52 ......... –9 –25 19 80 27 Tennessee Valley Authority: Bonds and notes ��������������������������������������������������������������������������������������������� Lease financing obligations ���������������������������������������������������������������������������� Prepayment obligations ���������������������������������������������������������������������������������� Total, borrowing from the public ������������������������������������������������������������ 298 –114 –100 55 24,171 1,818 210 26,390 593 –120 –100 341 24,763 1,698 110 26,731 –185 –125 –100 –444 24,578 1,573 10 26,287 Borrowing from other funds: Tennessee Valley Authority 1 �������������������������������������������������������������������������������� Total, borrowing from other funds ��������������������������������������������������������� Total, agency borrowing ������������������������������������������������������������������� –2 –2 53 4 4 26,395 ......... ......... 341 4 4 26,735 ......... ......... –444 4 4 26,291 297 24,175 593 24,768 –185 24,583 Memorandum: Tennessee Valley Authority bonds and notes, total ��������������������������������������������� 1 Represents open market purchases by the National Railroad Retirement Investment Trust. current needs in order to meet future obligations. These cash surpluses are generally invested in Treasury debt. The total investment holdings of trust funds and other Government accounts increased by $368 billion in 2016. Net investment by Government accounts is estimated to be $159 billion in 2017 and $210 billion in 2018, as shown in Table 4–5. The holdings of Federal securities by Government accounts are estimated to increase to $5,740 billion by the end of 2018, or 27 percent of the gross Federal debt. The percentage is estimated to decrease gradually over the next 10 years. The Government account holdings of Federal securities are concentrated among a few funds: the Social Security Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds; the Medicare Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds; and four Federal employee retirement funds. These Federal employee retirement funds include two trust funds, the Military Retirement Fund and the Civil Service Retirement and Disability Fund, and two special funds, the uniformed services Medicare-Eligible Retiree Health Care Fund (MERHCF) and the Postal Service Retiree Health Benefits Fund (PSRHBF). At the end of 2018, these Social Security, Medicare, and Federal employee retirement funds are estimated to own 90 percent of the total debt held by Government accounts. During 2016–2018, the Military Retirement Fund has a large surplus and is estimated to invest a total of $205 billion, 28 percent of total net investment by Government accounts. CSRDF is projected to invest $183 billion, 25 percent of the net total. Some Government accounts are projected to have net disinvestment in Federal securities during 2016–2018. Technical note on measurement.—The Treasury securities held by Government accounts consist almost entirely of the Government account series. Most were issued at par value (face value), and the securities issued at a discount or premium are traditionally recorded at par in the OMB and Treasury reports on Federal debt. However, there are two kinds of exceptions. First, Treasury issues zero-coupon bonds to a very few Government accounts. Because the purchase price is a small fraction of par value and the amounts are large, the holdings are recorded in Table 4–5 at par value less unamortized discount. The only two Government accounts that held zero-coupon bonds during the period of this table are the Nuclear Waste Disposal Fund in the Department of Energy and the Pension Benefit Guaranty Corporation (PBGC). The total unamortized discount on zero-coupon bonds was $16.9 billion at the end of 2016. Second, Treasury subtracts the unrealized discount on other Government account series securities in calculating “net Federal securities held as investments of Government accounts.’’ Unlike the discount recorded for zero-coupon bonds and debt held by the public, the unrealized discount is the discount at the time of issue and is not amortized over the term of the security. In Table 4–5 it is shown as a separate item at the end of the table and not distributed by account. The amount was $9.8 billion at the end of 2016. Debt Held by the Federal Reserve The Federal Reserve acquires marketable Treasury securities as part of its exercise of monetary policy. For purposes of the Budget and reporting by the Department of the Treasury, the transactions of the Federal Reserve are considered to be non-budgetary, and accordingly the Federal Reserve’s holdings of Treasury securities are included as part of debt held by the public.16 Federal 16 For further detail on the monetary policy activities of the Federal Reserve and the treatment of the Federal Reserve in the Budget, see Chapter 9, “Coverage of the Budget.” 37 4. Federal Borrowing and Debt Table 4–5. DEBT HELD BY GOVERNMENT ACCOUNTS 1 (In millions of dollars) Description Investment or Disinvestment (–) 2016 Actual 2017 Estimate 2018 Estimate Holdings, End of 2018 Estimate Investment in Treasury debt: Commerce: Public Safety trust fund ���������������������������������������������������������������������������������������������������������������������������� 333 –* 8,740 9,073 Energy: Nuclear waste disposal fund 1 ������������������������������������������������������������������������������������������������������������������ Uranium enrichment decontamination fund ��������������������������������������������������������������������������������������������� 1,746 –686 996 –631 1,043 1,714 37,684 3,580 Health and Human Services: Federal hospital insurance trust fund ������������������������������������������������������������������������������������������������������ Federal supplementary medical insurance trust fund ������������������������������������������������������������������������������ Vaccine injury compensation fund ����������������������������������������������������������������������������������������������������������� Child enrollment contingency fund ���������������������������������������������������������������������������������������������������������� –3,249 –2,793 152 –1,482 6,193 3,025 113 7 19,513 27,120 136 –578 217,915 93,481 3,854 ......... Homeland Security: Aquatic resources trust fund �������������������������������������������������������������������������������������������������������������������� Oil spill liability trust fund ������������������������������������������������������������������������������������������������������������������������� National flood insurance reserve fund ����������������������������������������������������������������������������������������������������� –31 707 784 39 716 –318 –25 736 –337 1,925 6,402 384 Housing and Urban Development: Federal Housing Administration mutual mortgage fund �������������������������������������������������������������������������� Guarantees of mortgage-backed securities �������������������������������������������������������������������������������������������� 21,709 3,031 –7,666 1,714 7,219 496 35,994 18,164 Interior: Abandoned mine reclamation fund ���������������������������������������������������������������������������������������������������������� Federal aid in wildlife restoration fund ����������������������������������������������������������������������������������������������������� Environmental improvement and restoration fund ����������������������������������������������������������������������������������� Natural resource damage assessment fund ������������������������������������������������������������������������������������������� Justice: Assets forfeiture fund ����������������������������������������������������������������������������������������������������������������������� –30 121 31 564 –32 –32 81 14 509 –2,420 –43 55 15 200 –1,644 2,702 2,137 1,457 1,500 2,109 Labor: Unemployment trust fund ������������������������������������������������������������������������������������������������������������������������ Pension Benefit Guaranty Corporation 1 �������������������������������������������������������������������������������������������������� State: Foreign service retirement and disability trust fund ��������������������������������������������������������������������������� 9,408 5,229 201 12,224 2,877 162 14,000 4,173 200 80,000 30,614 18,708 Transportation: Airport and airway trust fund ������������������������������������������������������������������������������������������������������������������� Highway trust fund ����������������������������������������������������������������������������������������������������������������������������������� Aviation insurance revolving fund ������������������������������������������������������������������������������������������������������������ 685 56,962 –254 518 –8,519 326 1,389 –12,427 81 15,307 43,683 2,279 Treasury: Exchange stabilization fund ��������������������������������������������������������������������������������������������������������������������� Treasury forfeiture fund ���������������������������������������������������������������������������������������������������������������������������� Comptroller of the Currency assessment fund ���������������������������������������������������������������������������������������� 1,907 –3,501 121 –620 –78 6 60 –1,075 22 22,120 1,537 1,684 Veterans Affairs: National service life insurance trust fund ������������������������������������������������������������������������������������������������� Veterans special life insurance fund �������������������������������������������������������������������������������������������������������� Corps of Engineers: Harbor maintenance trust fund ������������������������������������������������������������������������������������ –658 –85 93 –647 –123 90 –589 –144 290 3,010 1,433 9,066 Other Defense-Civil: Military retirement trust fund �������������������������������������������������������������������������������������������������������������������� Medicare-eligible retiree health care fund ����������������������������������������������������������������������������������������������� Education benefits fund ��������������������������������������������������������������������������������������������������������������������������� Environmental Protection Agency: Hazardous substance trust fund ������������������������������������������������������������ International Assistance Programs: Overseas Private Investment Corporation ������������������������������������������ 60,086 7,689 –163 –409 46 67,661 11,843 –188 –124 76 76,964 11,508 –62 –120 66 735,671 236,833 964 4,553 5,808 Office of Personnel Management: Civil service retirement and disability trust fund �������������������������������������������������������������������������������������� Postal Service retiree health benefits fund ���������������������������������������������������������������������������������������������� Employees life insurance fund ����������������������������������������������������������������������������������������������������������������� Employees and retired employees health benefits fund �������������������������������������������������������������������������� 155,894 6,258 1,209 708 15,188 3,134 1,226 851 11,981 189 1,431 652 914,330 54,818 47,824 25,232 Social Security Administration: 38 ANALYTICAL PERSPECTIVES Table 4–5. DEBT HELD BY GOVERNMENT ACCOUNTS 1—Continued (In millions of dollars) Investment or Disinvestment (–) Description 2016 Actual Federal old-age and survivors insurance trust fund 2 ������������������������������������������������������������������������������ Federal disability insurance trust fund 2 ��������������������������������������������������������������������������������������������������� District of Columbia: Federal pension fund ��������������������������������������������������������������������������������������������������� Farm Credit System Insurance Corporation: Farm Credit System Insurance fund �������������������������������������� Federal Communications Commission: Universal service fund �������������������������������������������������������������������� Federal Deposit Insurance Corporation: Deposit insurance fund ����������������������������������������������������������������� National Credit Union Administration: Share insurance fund ������������������������������������������������������������������������ Postal Service fund 2 ������������������������������������������������������������������������������������������������������������������������������������� Railroad Retirement Board trust funds ��������������������������������������������������������������������������������������������������������� Securities Investor Protection Corporation 3 ������������������������������������������������������������������������������������������������� United States Enrichment Corporation fund ������������������������������������������������������������������������������������������������� Other Federal funds �������������������������������������������������������������������������������������������������������������������������������������� Other trust funds ������������������������������������������������������������������������������������������������������������������������������������������� Unrealized discount 1 ������������������������������������������������������������������������������������������������������������������������������������ Total, investment in Treasury debt 1 ������������������������������������������������������������������������������������������������ 2017 Estimate 2018 Estimate Holdings, End of 2018 Estimate 30,063 4,242 29 298 –104 11,428 721 1,365 –325 345 7 –636 831 –2,260 368,307 23,348 23,487 6 444 –1,200 10,444 811 –5,418 –23 165 –41 –310 –1,072 ......... 158,863 –1,175 26,561 –46 481 –817 12,444 648 401 –58 110 –1,580 –9 –262 ......... 209,647 2,818,885 95,928 3,713 4,950 6,001 94,412 13,764 3,510 2,138 2,980 ......... 4,889 5,014 –9,793 5,740,225 –2 –2 368,305 ......... ......... 158,863 ......... ......... 209,647 4 4 5,740,229 Investment in agency debt: Railroad Retirement Board: National Railroad Retirement Investment Trust ��������������������������������������������������������������������������������������� Total, investment in agency debt 1 �������������������������������������������������������������������������������������������������� Total, investment in Federal debt 1 ��������������������������������������������������������������������������������������������� Memorandum: Investment by Federal funds (on-budget) ����������������������������������������������������������������������������������������������������� 55,218 20,131 34,373 590,428 Investment by Federal funds (off-budget) ���������������������������������������������������������������������������������������������������� 1,365 –5,418 401 3,510 Investment by trust funds (on-budget) ���������������������������������������������������������������������������������������������������������� 279,677 97,315 149,487 2,241,271 Investment by trust funds (off-budget) ���������������������������������������������������������������������������������������������������������� 34,305 46,835 25,386 2,914,813 Unrealized discount 1 ������������������������������������������������������������������������������������������������������������������������������������ –2,260 ......... ......... –9,793 * $500 thousand or less. ¹ Debt held by Government accounts is measured at face value except for the Treasury zero-coupon bonds held by the Nuclear Waste Disposal Fund and the Pension Benefit Guaranty Corporation (PBGC), which are recorded at market or redemption price; and the unrealized discount on Government account series, which is not distributed by account. Changes are not estimated in the unrealized discount. If recorded at face value, at the end of 2016 the debt figures would be $16.8 billion higher for the Nuclear Waste Disposal Fund and $0.1 billion higher for PBGC than recorded in this table. 2 Off-budget Federal entity. 3 Amounts on calendar-year basis. Reserve holdings were $2,463 billion (17 percent of debt held by the public) at the end of 2016. Over the last 10 years, the Federal Reserve holdings have averaged 15 percent of debt held by the public. The historical holdings of the Federal Reserve are presented in Table 7.1 in the Budget’s historical tables. The Budget does not project Federal Reserve holdings for future years. Limitations on Federal Debt Definition of debt subject to limit.—Statutory limitations have usually been placed on Federal debt. Until World War I, the Congress ordinarily authorized a specific amount of debt for each separate issue. Beginning with the Second Liberty Bond Act of 1917, however, the nature of the limitation was modified in several steps until it developed into a ceiling on the total amount of most Federal debt outstanding. This last type of limitation has been in effect since 1941. The limit currently applies to most debt issued by the Treasury since September 1917, whether held by the public or by Government accounts; and other debt issued by Federal agencies that, according to explicit statute, is guaranteed as to principal and interest by the U.S. Government. The third part of Table 4–2 compares total Treasury debt with the amount of Federal debt that is subject to the limit. Nearly all Treasury debt is subject to the debt limit. A large portion of the Treasury debt not subject to the general statutory limit was issued by the Federal Financing Bank. The FFB is authorized to have outstanding up to $15 billion of publicly issued debt. The FFB has on occasion issued this debt to CSRDF in exchange for equal amounts of regular Treasury securities. The FFB securities have the same interest rates and maturities as the Treasury securities for which they were exchanged. The FFB issued: $14 billion of securities to the CSRDF on November 15, 2004, with maturity dates ranging from June 30, 2009, through June 30, 2019; $9 billion to the CSRDF on October 1, 2013, with maturity dates from June 30, 2015, through June 30, 2024; and $3 billion of securities to the CSRDF on October 15, 2015, with maturity dates from June 30, 2026, through June 30, 2029. The outstanding balance of FFB debt held by CSRDF was $13 4. Federal Borrowing and Debt billion at the end of 2016 and is projected to be $11 billion at the end of 2017. The Housing and Economic Recovery Act of 2008 created another type of debt not subject to limit. This debt, termed “Hope Bonds,” was issued by Treasury to the FFB for the HOPE for Homeowners program. The outstanding balance of Hope Bonds was $494 million at the end of 2015. The bonds were fully redeemed in 2016 and no new issues are projected. The other Treasury debt not subject to the general limit consists almost entirely of silver certificates and other currencies no longer being issued. It was $482 million at the end of 2016 and is projected to gradually decline over time. The sole agency debt currently subject to the general limit, $209 thousand at the end of 2016, is certain debentures issued by the Federal Housing Administration.17 Some of the other agency debt, however, is subject to its own statutory limit. For example, the Tennessee Valley Authority is limited to $30 billion of bonds and notes outstanding. The comparison between Treasury debt and debt subject to limit also includes an adjustment for measurement differences in the treatment of discounts and premiums. As explained earlier in this chapter, debt securities may be sold at a discount or premium, and the measurement of debt may take this into account rather than recording the face value of the securities. However, the measurement differs between gross Federal debt (and its components) and the statutory definition of debt subject to limit. An adjustment is needed to derive debt subject to limit (as defined by law) from Treasury debt. The amount of the adjustment was $38.9 billion at the end of 2016 compared with the total unamortized discount (less premium) of $60.4 billion on all Treasury securities. Changes in the debt limit.—The statutory debt limit has been changed many times. Since 1960, the Congress has passed 82 separate acts to raise the limit, revise the definition, extend the duration of a temporary increase, or temporarily suspend the limit.18 The four most recent laws addressing the debt limit have each provided for a temporary suspension followed by an increase in an amount equivalent to the debt that was issued during that suspension period in order to fund commitments requiring payment through the specified end date. Most recently, the Bipartisan Budget Act of 2015 suspended the $18,113 billion debt ceiling from November 2, 2015, through March 15, 2017, and then raised the debt limit on March 16, 2017, by $1,696 billion to $19,809 billion. At many times in the past several decades, including 2013, 2014, 2015, and 2017, the Government has reached the statutory debt limit before an increase has been enacted. When this has occurred, it has been necessary for the Department of the Treasury to take extraordinary 17 At the end of 2016, there were also $18 million of FHA debentures not subject to limit. 18 The Acts and the statutory limits since 1940 are listed in Table 7.3 of the Budget’s historical tables, available at https://www.whitehouse.gov/omb/budget/Historicals. 39 measures to meet the Government’s obligation to pay its bills and invest its trust funds while remaining below the statutory limit. On March 16, 2017, immediately following the end of the most recent debt limit suspension period, the Secretary of the Treasury sent a letter to Congress announcing that Treasury was beginning to take extraordinary measures. As mentioned above, one such extraordinary measure is the partial or full suspension of the daily reinvestment of the Thrift Savings Plan G-Fund. The Treasury Secretary has statutory authority to suspend investment of the G-Fund in Treasury securities as needed to prevent the debt from exceeding the debt limit. Treasury determines each day the amount of investments that would allow the fund to be invested as fully as possible without exceeding the debt limit. At the end of February 2017, the TSP G-Fund had an outstanding balance of $226 billion. The Secretary is also authorized to suspend investments in the CSRDF and to declare a debt issuance suspension period, which allows him or her to redeem a limited amount of securities held by the CSRDF. The Postal Accountability and Enhancement Act of 2006 provides that investments in the Postal Service Retiree Health Benefits Fund shall be made in the same manner as investments in the CSRDF.19 Therefore, Treasury is able to take similar administrative actions with the PSRHBF. The law requires that when any such actions are taken with the G-Fund, the CSRDF, or the PSRHBF, the Secretary is required to make the fund whole after the debt limit has been raised by restoring the forgone interest and investing the fund fully. Another measure for staying below the debt limit is disinvestment of the Exchange Stabilization Fund. The outstanding balance in the Exchange Stabilization Fund was $22 billion at the end of February 2017. As the debt has neared the limit, including in 2017, Treasury has also suspended the issuance of SLGS to reduce unanticipated fluctuations in the level of the debt. At times, Treasury has also adjusted the schedule for auctions of marketable securities. In October 2015, as Treasury neared the exhaustion of its extraordinary measures, Treasury postponed the 2-year note auction originally scheduled for Tuesday, October 27. After the November 2nd enactment of the Bipartisan Budget Act of 2015, Treasury rescheduled the auction for Wednesday, November 4. In addition to these steps, Treasury has previously exchanged Treasury securities held by the CSRDF with borrowing by the FFB, which, as explained above, is not subject to the debt limit. This measure was most recently taken in October 2015. The debt limit has always been increased prior to the exhaustion of Treasury’s limited available administrative actions to continue to finance Government operations when the statutory ceiling has been reached. Failure to enact a debt limit increase before these actions were exhausted would have significant and long-term negative consequences. The Federal Government would be forced to delay or discontinue payments on its broad range of ob19 Both the CSRDF and the PSRHBF are administered by the Office of Personnel Management. 40 ANALYTICAL PERSPECTIVES ligations, including Social Security and other payments to individuals, Medicaid and other grant payments to States, individual and corporate tax refunds, Federal employee salaries, payments to vendors and contractors, principal and interest payments on Treasury securities, and other obligations. If Treasury were unable to make timely interest payments or redeem securities, investors would cease to view U.S. Treasury securities as free of credit risk and Treasury’s interest costs would increase. Because interest rates throughout the economy are benchmarked to the Treasury rates, interest rates for State and local governments, businesses, and individuals would also rise. Foreign investors would likely shift out of dollar-denominated assets, driving down the value of the dollar and further increasing interest rates on non-Federal, as well as Treasury, debt. The debt subject to limit is estimated to increase to $20,355 billion by the end of 2017 and to $21,095 billion by the end of 2018. The Budget anticipates timely Congressional action to address the statutory limit as necessary before exhaustion of Treasury’s extraordinary measures. Federal funds financing and the change in debt subject to limit.—The change in debt held by the public, as shown in Table 4–2, and the change in debt held by the public net of financial assets are determined primarily by the total Government deficit or surplus. The debt subject to limit, however, includes not only debt held by the public but also debt held by Government accounts. The change in debt subject to limit is therefore determined both by the factors that determine the total Government deficit or surplus and by the factors that determine the change in debt held by Government accounts. The effect of debt held by Government accounts on the total debt subject to limit can be seen in the second part of Table 4–2. The change in debt held by Government accounts results in 14 percent of the estimated total increase in debt subject to limit from 2017 through 2027. The budget is composed of two groups of funds, Federal funds and trust funds. The Federal funds, in the main, are derived from tax receipts and borrowing and are used for the general purposes of the Government. The trust funds, on the other hand, are financed by taxes or other receipts dedicated by law for specified purposes, such as for paying Social Security benefits or making grants to State governments for highway construction.20 A Federal funds deficit must generally be financed by borrowing, which can be done either by selling securities to the public or by issuing securities to Government accounts that are not within the Federal funds group. Federal funds borrowing consists almost entirely of Treasury securities that are subject to the statutory debt limit. Very little debt subject to statutory limit has been issued for reasons except to finance the Federal funds deficit. The change in debt subject to limit is therefore determined primarily by the Federal funds deficit, which is equal to the difference between the total Government deficit or surplus and the trust fund surplus. Trust fund surpluses are almost entirely invested in securities subject to the debt limit, and trust funds hold most of the debt held by Government accounts. The trust fund surplus reduces the total budget deficit or increases the total 20 For further discussion of the trust funds and Federal funds groups, see Chapter 23, “Trust Funds and Federal Funds.’’ Table 4–6. FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT (In billions of dollars) Description Actual 2016 Change in Gross Federal Debt: Federal funds deficit/surplus (–) ����������������������������������������������� 769.4 Other transactions affecting borrowing from the public -Federal funds 1 ��������������������������������������������������������������������� 465.9 Increase (+) or decrease (–) in Federal debt held by Federal funds ������������������������������������������������������������������������������������ 56.6 Adjustments for trust fund surplus/deficit not invested/ disinvested in Federal securities 2 ���������������������������������������� 129.7 Change in unrealized discount on Federal debt held by Government accounts ��������������������������������������������������������� –2.3 Total financing requirements ������������������������������������������� 1,419.3 Change in Debt Subject to Limit: Change in gross Federal debt �������������������������������������������������� 1,419.3 Less: increase (+) or decrease (–) in Federal debt not subject to limit ���������������������������������������������������������������������������������� 0.3 Less: change in adjustment for discount and premium 3 ���������� –6.4 Total, change in debt subject to limit ������������������������������� 1,425.5 Estimate 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 752.9 615.5 626.7 557.8 511.5 441.9 333.3 246.2 138.3 55.8 –198.5 54.2 90.3 79.5 64.7 59.8 53.3 51.5 54.6 54.1 52.4 50.0 14.7 34.8 41.6 41.8 40.5 39.2 39.5 38.9 37.6 34.5 43.2 –6.8 –1.7 –1.0 –1.0 –1.0 –1.1 –0.7 –0.8 –0.6 –0.5 –0.3 ......... 815.0 ......... 738.9 ......... 746.7 ......... 663.3 ......... 610.8 ......... 533.3 ......... 423.6 ......... 338.9 ......... 229.4 ......... 142.2 ......... –105.6 815.0 738.9 746.7 663.3 610.8 533.3 423.6 338.9 229.4 142.2 –105.6 –1.2 ......... 816.2 –1.6 ......... 740.4 –2.6 ......... 749.3 –2.5 ......... 665.9 –2.2 ......... 612.9 –1.9 ......... 535.2 –2.3 ......... 425.9 –2.0 ......... 340.9 –1.0 ......... 230.3 –0.9 ......... 143.2 –1.7 ......... –103.9 Memorandum: Debt subject to statutory limit 4 ������������������������������������������������� 19,538.5 20,354.6 21,095.1 21,844.4 22,510.3 23,123.2 23,658.4 24,084.3 24,425.2 24,655.5 24,798.7 24,694.8 1 Includes Federal fund transactions that correspond to those presented in Table 4-2, but that are for Federal funds alone with respect to the public and trust funds. 2 Includes trust fund holdings in other cash assets and changes in the investments of the National Railroad Retirement Investment Trust in non-Federal securities. 3 Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds). 4 The statutory debt limit is approximately $19,809 billion, as increased after March 15, 2017. 41 4. Federal Borrowing and Debt budget surplus, decreasing the need to borrow from the public or increasing the ability to repay borrowing from the public. When the trust fund surplus is invested in Federal securities, the debt held by Government accounts increases, offsetting the decrease in debt held by the public by an equal amount. Thus, there is no net effect on gross Federal debt. Table 4–6 derives the change in debt subject to limit. In 2016 the Federal funds deficit was $769 billion, and other factors increased financing requirements by $466 billion. The change in the Treasury operating cash balance increased financing requirements by $155 billion, the net financing disbursements of credit financing accounts increased financing requirements by $99 billion, and other Federal fund factors increased financing requirements by $212 billion. As discussed earlier in this chapter, this net $212 billion in other factors was mainly due to the reinvestment of the TSP G-Fund. In addition, special funds and revolving funds, which are part of the Federal funds group, invested a net of $57 billion in Treasury securities. A $130 billion adjustment is also made for the difference between the trust fund surplus or deficit and the trust funds’ investment or disinvestment in Federal securities (including the changes in NRRIT’s investments in nonFederal securities). As discussed above, this unusually large adjustment amount is due primarily to reinvestment following the extraordinary measures taken with the CSRDF. As a net result of all these factors, $1,419 billion in financing was required, increasing gross Federal debt by that amount. Since Federal debt not subject to limit grew by $0.3 billion and the adjustment for discount and premium changed by $6 billion, the debt subject to limit increased by $1,425 billion, while debt held by the public increased by $1,051 billion. Debt subject to limit is estimated to increase by $816 billion in 2017 and by $740 billion in 2018. The projected increases in the debt subject to limit are caused by the continued Federal funds deficit, supplemented by the other factors shown in Table 4–6. While debt held by the public increases by $4,407 billion from the end of 2016 through 2027, debt subject to limit increases by $5,156 billion. Foreign Holdings of Federal Debt During most of American history, the Federal debt was held almost entirely by individuals and institutions within the United States. In the late 1960s, foreign holdings were just over $10 billion, less than 5 percent of the total Federal debt held by the public. Foreign holdings began to grow significantly starting in the 1970s and now represent almost half of outstanding debt. This increase has been almost entirely due to decisions by foreign central banks, corporations, and individuals, rather than the direct marketing of these securities to foreign investors. Table 4–7. FOREIGN HOLDINGS OF FEDERAL DEBT (Dollar amounts in billions) Fiscal Year Change in debt held by the public 2 Debt held by the public Total Foreign 1 Percentage foreign Total Foreign 1965 ������������������������������������������������������������� 260.8 12.2 4.7 3.9 0.3 1970 ������������������������������������������������������������� 1975 ������������������������������������������������������������� 283.2 394.7 14.0 66.0 4.9 16.7 5.1 51.0 3.7 9.1 1980 ������������������������������������������������������������� 1985 ������������������������������������������������������������� 711.9 1,507.3 126.4 222.9 17.8 14.8 71.6 200.3 1.3 47.3 1990 ������������������������������������������������������������� 1995 ������������������������������������������������������������� 2,411.6 3,604.4 463.8 820.4 19.2 22.8 220.8 171.3 72.0 138.4 2000 ������������������������������������������������������������� 2005 ������������������������������������������������������������� 3,409.8 4,592.2 1,038.8 1,929.6 30.5 42.0 –222.6 296.7 –242.6 135.1 2010 ������������������������������������������������������������� 2011 ������������������������������������������������������������� 2012 ������������������������������������������������������������� 2013 ������������������������������������������������������������� 2014 ������������������������������������������������������������� 9,018.9 10,128.2 11,281.1 11,982.7 12,779.9 4,324.2 4,912.1 5,476.1 5,652.8 6,069.2 47.9 48.5 48.5 47.2 47.5 1,474.2 1,109.3 1,152.9 701.6 797.2 753.6 587.9 564.0 176.7 416.4 2015 ������������������������������������������������������������� 13,116.7 6,105.9 46.6 336.8 36.7 2016 ������������������������������������������������������������� 14,167.7 6,155.2 43.4 1,051.0 49.3 1 Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small. The data on foreign holdings are recorded by methods that are not fully comparable with the data on debt held by the public. Projections of foreign holdings are not available. The estimates include the effects of benchmark revisions in 1984, 1989, 1994, and 2000, annual June benchmark revisions for 2002–2010, and additional revisions. 2 Change in debt held by the public is defined as equal to the change in debt held by the public from the beginning of the year to the end of the year. 42 Foreign holdings of Federal debt are presented in Table 4–7. At the end of 2016, foreign holdings of Treasury debt were $6,155 billion, which was 43 percent of the total debt held by the public.21 Foreign central banks and other foreign official institutions owned 63 percent of the foreign holdings of Federal debt; private investors owned nearly all the rest. At the end of 2016, the nations holding the largest shares of U.S. Federal debt were China, which held 19 percent of all foreign holdings, and Japan, which held 18 percent. All of the foreign holdings of Federal debt are denominated in dollars. Although the amount of foreign holdings of Federal debt has grown greatly over this period, the proportion that foreign entities and individuals own, after increasing abruptly in the very early 1970s, remained about 15–20 percent until the mid-1990s. During 1995–97, however, growth in foreign holdings accelerated, reaching 33 percent by the end of 1997. Foreign holdings of Federal debt resumed growth in the following decade, increasing to 48 percent by the end of 2008. Since 2008, foreign holdings as a percent of total Federal debt have remained relatively stable. Foreign holdings fell from 47 percent at the end of 2015 to 43 percent at the end of 2016. The dollar increase in foreign holdings was about 5 percent of total Federal borrowing from the public in 2016 and 31 percent over the last five years. Foreign holdings of Federal debt are around 25 percent of the foreign-owned assets in the United States, depending on the method of measuring total assets. The foreign purchases of Federal debt securities do not measure the full impact of the capital inflow from abroad on 21 The debt calculated by the Bureau of Economic Analysis is different, though similar in size, because of a different method of valuing securities. ANALYTICAL PERSPECTIVES the market for Federal debt securities. The capital inflow supplies additional funds to the credit market generally, and thus affects the market for Federal debt. For example, the capital inflow includes deposits in U.S. financial intermediaries that themselves buy Federal debt. Federal, Federally Guaranteed, and Other Federally Assisted Borrowing The Government’s effects on the credit markets arise not only from its own borrowing but also from the direct loans that it makes to the public and the provision of assistance to certain borrowing by the public. The Government guarantees various types of borrowing by individuals, businesses, and other non-Federal entities, thereby providing assistance to private credit markets. The Government is also assisting borrowing by States through the Build America Bonds program, which subsidizes the interest that States pay on such borrowing. In addition, the Government has established private corporations—Government-sponsored enterprises—to provide financial intermediation for specified public purposes; it exempts the interest on most State and local government debt from income tax; it permits mortgage interest to be deducted in calculating taxable income; and it insures the deposits of banks and thrift institutions, which themselves make loans. Federal credit programs and other forms of assistance are discussed in Chapter 19, “Credit and Insurance,’’ in this volume. Detailed data are presented in tables accompanying that chapter. PERFORMANCE AND MANAGEMENT 43 5. SOCIAL INDICATORS The social indicators presented in this chapter illustrate in broad terms how the Nation is faring in selected areas. Indicators are drawn from six domains: economic, demographic and civic, socioeconomic, health, security and safety, and environment and energy. The indicators shown in the tables in this chapter were chosen in consultation with statistical and data experts from across the Federal Government. These indicators are only a subset of the vast array of available data on conditions in the United States. In choosing indicators for these tables, priority was given to measures that are broadly relevant to Americans and consistently available over an extended period. Such indicators provide a current snapshot while also making it easier to draw comparisons and establish trends. The measures in these tables are influenced to varying degrees by many Government policies and programs, as well as by external factors beyond the Government’s control. They do not measure the impacts of Government policies. Instead, they provide a quantitative picture of the baseline on which future policies are set and useful context for prioritizing budgetary resources. Economic.—The 2008-2009 economic downturn produced the worst labor market since the Great Depression. The employment-population ratio dropped sharply from its pre-recession level, and real GDP per person also declined.1 The unemployment rate stood at 4.9 percent in 2016, down from a high of 10 percent in October 2009, and fell further to 4.4 percent in April 2017. Despite the recovery in the unemployment rate, growth in real GDP per person (5-year annual average) remains lower than in all but 7 years over the period from 1960 to 2007. The employment-population ratio also remains low relative to its pre-recession levels. From 1985 to 2007, the employmentpopulation ratio ranged from 60.1 to 63.1 percent; after the 2008-2009 recession, it fell to 58.4 percent in 2011 and stood at 59.7 percent in 2016. Over the entire period from 1960 to 2016, the primary pattern has been one of economic growth and rising living standards. Real GDP per person has tripled as technological advancements and accumulation of human and physical capital increased the Nation’s productive capacity. The stock of physical capital including consumer durable goods, like cars and appliances, amounted to nearly $54 trillion in 2015, well over four times the size of the capital stock in 1960 after accounting for inflation. However, national saving, a key determinant of future prosperity because it supports capital accumulation, remains low relative to historical standards, standing at 2.9 percent in 2016 versus an average of 6.9 percent over the period from 1960 to 2007. Meanwhile, the labor force participation rate, also critical for growth, has been on the 1 The employment-population ratio is the percent of the civilian, noninstitutionalized population aged 16 and above that is employed. decline since 2000. The labor force participation rates in 2015 and 2016 were the lowest since 1977. In addition to the size of the economy, the structure of the economy has also changed considerably. From 2000 to 2015, goods-producing industries declined from 24.9 to 21.7 percent of total private goods and services (value added as a percent of GDP), while services-producing industries increased from 75.1 to 78.3 percent. This period coincided with a steep decline in manufacturing employment, potentially due to import competition from China and changes in technology.2 The United States has experienced persistent trade deficits since the early 1980s, reaching a high of $714 billion in 2005 and standing at $501 billion in 2016. New business starts fell 29 percent from 2005 to 2010 and only increased 5 percent from 2010 through 2014. Demographic and Civic.—The U.S. population steadily increased from 1970 to 2016, growing from 204 million to 323 million. Since 1970, the foreign born population has rapidly increased, more than quadrupling from about 10 million in 1970 to 43 million in 2015. Remittances from the foreign-born population to households abroad increased from $23.4 billion (0.23 percent of GDP) in 2000 to $44.9 billion (0.24 percent of GDP) in 2016. The U.S. population is getting older, due in part to the aging of the baby boomers, improvements in medical technology, and declining birth rates. For example, the rate of births per 1,000 women aged 15-44 dropped from a high of 118.3 in 1955 to 65.0 in 1976, and has hovered between 62.5 and 71.0 since then; in 2015, the rate was at its lowest ever on record, at 62.5 births.3 From 1970 to 2015, the percent of the population aged 65 and over increased from 9.8 to 14.9, and the percent aged 85 and over increased from 0.7 to 2.0. In contrast, the percent of the population aged 17 and younger declined from 28.0 in 1980 to 22.8 in 2016. The composition of American households and families has evolved considerably over time. The percent of Americans who have ever married continues to decline, as it has over the last five decades, falling since 1960 from 78.0 to 67.8 percent of Americans aged 15 and over. Average family sizes have also fallen over this period, a pattern that is typical among developed countries, from 3.7 to 3.1 members per family household. Births to unmarried women aged 15-17 and the fraction of single parent households both reached turning points in 1995 after increasing for over three decades. From 1995 to 2015, the number of births per 1,000 unmarried women aged 15-17 fell from 30 to 10, the lowest level on record. The fraction 2 Autor, David H., David Dorn, and Gordon H. Hanson (2013). The China Syndrome: Local Labor Market Effects of Import Competition in the United States, American Economic Review, 103(6). 3 Hamilton, B.E. et al. (2016). Births: Final data for 2015. National Vital Statistics Reports, 65(3). Hyattsville, MD: National Center for Health Statistics. 45 46 of single parent households stopped increasing in 1995, stabilizing at about 9 percent of all households. Charitable giving among Americans, measured by the average charitable contribution per itemized tax return, has generally increased over the past 50 years.4 The effects of the 2008-2009 recession are evident in the sharp drop in charitable giving from 2005 to 2010, but that decline was reversed by 2014. Socioeconomic.—Education is a critical component of the Nation’s economic growth and competitiveness, while also benefiting society in areas such as health, crime, and civic engagement. Between 1960 and 1980, the percentage of 25- to 34-year olds who have graduated from high school increased from 58 percent to 84 percent, a gain of 13 percentage points per decade. The rate of increase has slowed since then with a six percentage point gain over the past 35 years. The percentage of 25- to 34-year olds who have graduated from college continues to rise, from only 11 percent in 1960 to 34 percent in 2015. While the percentage of the population with a graduate degree has risen over time, the percentage of graduate degrees in science and engineering fell by half in the period between 1960 and 1980, from 22 percent to 11 percent, and stood at 15 percent in 2015. Although national prosperity has grown considerably over the past 50 years, these gains have not been shared equally. Real disposable income per capita more than tripled since 1960, but for the median household, real income increased by only 19 percent since 1970, and has declined since 2000. The median wealth of households aged 55-64 declined from $311 thousand in 2004 to only $166 thousand in 2013. From 2000 to 2010, the poverty rate, the percentage of food-insecure households, and the percentage of Americans receiving benefits from the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp Program), increased. These measures have declined over the past several years, but still remain high compared with levels prior to the 20082009 economic downturn. After increasing from 1990 to 2005, homeownership rates have fallen continuously since the 2008 housing crisis. The share of families with children and severe housing cost burdens more than doubled from 8 percent in 1980 to 18 percent in 2010, before falling to 15 percent in 2015. The share of families with children and inadequate housing steadily decreased from a high of 9 percent in 1980 to a low of 5 percent in 2013, but has since increased to over 6 percent in 2015. Health.—America has by far the most expensive health care system in the world with historically much higher rates of uninsured than many other countries with comparable wealth. National health expenditures as a share of GDP have increased from 5 percent in 1960 to nearly 18 percent in 2015. This increase in health care spending coincides with improvements in medical technologies that have improved health. However, the level of per capita health care spending in the United States is far greater than in other Organization for Economic Cooperation and Development (OECD) countries that 4 This measure includes charitable giving only among those who claim itemized deductions. It is therefore influenced by changes in tax laws and in the characteristics of those who itemize. ANALYTICAL PERSPECTIVES have experienced comparable health improvements.5 Average private health insurance premiums paid by individuals with private health insurance have increased by 22 percent (10 percent in 2016 dollars) since 2010. Some key indicators of national health have improved since 1960. Life expectancy at birth increased by 9.1 years, from 69.7 in 1960 to 78.8 in 2015. Infant mortality fell from 26 to under 6 per 1,000 live births with a rapid decline occurring in the 1970s. Improvements in health-related behaviors among Americans have been mixed. Although the percent of adults who smoke cigarettes in 2015 was less than half of what it was in 1970, rates of obesity have soared. In 1980, 15 percent of adults and 6 percent of children were obese; in 2014, 38 percent of adults and 17 percent of children were obese. Adult obesity continued to rise even as the share of adults engaging in regular physical activity increased from 15 percent in 2000 to 22 percent in 2015. Security and Safety.—The last three decades have witnessed a remarkable decline in crime. From 1980 to 2015, the property crime rate dropped by 78 percent while the murder rate fell by 52 percent. However, the downward decline in the murder rate ended in 2014, with the rate rising between 2014 and 2015. The prison incarceration rate increased more than five-fold from 1970 through 2005, before declining by 8 percent from 2005 through 2015. Road transportation has become safer. Safety belt use increased by 19 percentage points from 2000 to 2016, and the annual number of highway fatalities fell by 33 percent from 1970 to 2015 despite the increase in the population. The number of military personnel on active duty fell to its lowest level since at least 1960. The highest count of active duty military personnel was 3.1 million in 1970, reached during the Vietnam War. It now stands at 1.3 million. The number of veterans has declined from 29 million in 1980 to 21 million in 2016. Environment and Energy.—Substantial progress has been made on air quality in the United States, with the concentration of particulate matter falling 37 percent from 2000 to 2015 and ground level ozone falling by 32 percent from 1990 to 2015. Gross greenhouse gas emissions per capita and per real dollar of GDP have fallen since at least 1990. As of 2016, 91 percent of the population receives drinking water from community water systems in compliance with water quality standards, which has remained relatively constant since 1995. Technological advances and a shift in production patterns mean that Americans now use less than half as much energy per real dollar of GDP as they did 50 years ago, and per capita energy consumption is at its lowest since the 1960s despite rising income levels. From 2005 to 2016, coal production fell by 36 percent, with most of that decrease occurring from 2014 to 2016. The decrease in coal production since 2005 coincided with increases in the production of natural gas, petroleum, and renewable energy as well as new regulatory proposals and requirements. 5 Squires, D. and C. Anderson (2015). U.S. Health Care from a Global Perspective: Spending, Use of Services, Prices and Health in 13 Countries, The Commonwealth Fund. 47 5. Social Indicators Table 5–1. SOCIAL INDICATORS Calendar Years 1960 1970 1980 1990 1995 2000 2005 2010 2013 2014 2015 2016 Economic 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 General Economic Conditions Real GDP per person (chained 2009 dollars) ��������������������������������� 17,198 23,024 28,325 35,794 38,167 44,475 48,090 47,720 49,317 50,119 51,054 51,523 Real GDP per person change, 5-year annual average �������������� 0.8 2.4 2.6 2.4 1.3 3.1 1.6 –0.1 0.3 1.3 1.4 1.4 Consumer Price Index 1 ������������������������������������������������������������������ 12.5 16.4 34.8 55.2 64.4 72.7 82.5 92.1 98.4 100.0 100.1 101.4 Private goods producing (%) ���������������������������������������������������������� #N/A #N/A #N/A #N/A #N/A 24.9 23.9 22.3 23.0 22.9 21.7 #N/A Private services producing (%) ������������������������������������������������������� #N/A #N/A #N/A #N/A #N/A 75.1 76.1 77.7 77.0 77.1 78.3 #N/A New business starts (thousands) 2 ������������������������������������������������� #N/A #N/A 452 477 513 482 544 385 404 404 #N/A #N/A Business failures (thousands) 3 ������������������������������������������������������ #N/A #N/A 371 371 386 406 416 417 367 392 #N/A #N/A International trade balance (billions of dollars; + surplus / - deficit) 4 ����� 3.5 2.3 –19.4 –80.9 –96.4 –372.5 –714.2 –494.7 –461.9 –490.2 –500.4 –500.6 Jobs and Unemployment Labor force participation rate (%) ��������������������������������������������������� Employment (millions) �������������������������������������������������������������������� Employment-population ratio (%) ��������������������������������������������������� Payroll employment change - December to December, SA (millions) ������������������������������������������������������������������������������������ Payroll employment change - 5-year annual average, NSA (millions) ������������������������������������������������������������������������������� Civilian unemployment rate (%) ������������������������������������������������������ Unemployment plus marginally attached and underemployed (%) Receiving Social Security disabled-worker benefits (% of population) 5 ������������������������������������������������������������������������������ Infrastructure, Innovation, and Capital Investment Nonfarm business output per hour (average 5 year % change) 6 ��� Corn for grain production (million bushels) ������������������������������������� Real net stock of fixed assets and consumer durable goods (billions of chained 2009 dollars) ����������������������������������������������� Population served by secondary wastewater treatment or better (%) 7 ��� Electricity net generation (kWh per capita) ������������������������������������� Patents for invention, U.S. origin (per million population) 8 ������������� Net national saving rate (% of GDP) ���������������������������������������������� R&D spending (% of GDP) 9 ���������������������������������������������������������� 59.4 65.8 56.1 60.4 78.7 57.4 63.8 99.3 59.2 66.5 118.8 62.8 66.6 124.9 62.9 67.1 136.9 64.4 66.0 141.7 62.7 64.7 139.1 58.5 63.2 143.9 58.6 62.9 146.3 59.0 62.7 148.8 59.3 62.8 151.4 59.7 –0.4 –0.5 0.3 0.0 2.2 2.0 2.5 1.1 2.3 3.0 2.7 2.2 0.7 5.5 #N/A 2.0 4.9 #N/A 2.7 7.1 #N/A 2.8 5.6 #N/A 1.6 5.6 10.1 2.9 4.0 7.0 0.4 5.1 8.9 –0.7 9.6 16.7 –0.2 7.4 13.8 1.5 6.2 12.0 2.3 5.3 10.4 2.5 4.9 9.6 0.9 2.0 2.8 2.5 3.3 3.7 4.5 5.5 5.9 5.9 6.0 #N/A 1.8 3,907 2.1 4,152 1.2 6,639 1.6 7,934 1.6 7,400 2.8 3.2 1.9 1.5 1.1 0.6 0.6 9,915 11,112 12,425 13,829 14,216 13,601 15,226 11,383 16,921 23,265 30,870 34,246 40,217 46,305 50,332 52,139 52,930 53,814 #N/A #N/A 41.6 56.4 63.7 61.1 71.4 74.3 72.0 74.5 #N/A #N/A #N/A 4,202 7,486 10,076 12,170 12,594 13,475 13,723 13,335 12,859 12,850 12,707 12,622 #N/A 231 164 190 209 301 253 348 422 453 439 #N/A 10.8 8.5 7.2 3.9 4.0 5.8 2.7 –0.8 2.5 3.3 3.3 2.9 2.52 2.44 2.21 2.54 2.40 2.61 2.50 2.73 2.74 2.75 2.78 #N/A Demographic and Civic 25 26 27 28 29 30 31 32 33 34 35 36 37 38 Population Total population (millions) 10 ����������������������������������������������������������� Foreign born population (millions) 11 ���������������������������������������������� 17 years and younger (%) 10 ���������������������������������������������������������� 65 years and older (%) 10 ��������������������������������������������������������������� 85 years and older (%) 10 ��������������������������������������������������������������� Household Composition Ever married (% of age 15 and older) 12 ���������������������������������������� Average family size 13 ��������������������������������������������������������������������� Births to unmarried women age 15–17 (per 1,000 unmarried women age 15–17) �������������������������������������������������������������������� Single parent households (%) �������������������������������������������������������� Civic and Cultural Engagement Average charitable contribution per itemized tax return (2014 dollars) 14 ����������������������������������������������������������������������������������� Voting for President (% of voting age population) 15 ����������������������� Persons volunteering (% age 16 and older) 16 ������������������������������� Attendance at visual or performing arts activity, including moviegoing (% age 18 and older) 17 ��������������������������������������������������� Reading: Novels or short stories, poetry, or plays (not required for work or school; % age 18 and older) 17 ������������������������������������� #N/A 9.7 #N/A #N/A #N/A 204.0 9.6 #N/A 9.8 0.7 227.2 14.1 28.0 11.3 1.0 249.6 19.8 25.7 12.5 1.2 266.3 #N/A 26.1 12.7 1.4 282.2 31.1 25.7 12.4 1.5 295.5 37.5 24.9 12.4 1.6 309.3 40.0 24.0 13.1 1.8 316.4 41.3 23.3 14.1 1.9 318.9 42.4 23.1 14.5 1.9 321.4 43.3 22.9 14.9 2.0 323.1 #N/A 22.8 #N/A #N/A 78.0 3.7 75.1 3.6 74.1 3.3 73.8 3.2 72.9 3.2 71.9 3.2 70.9 3.1 69.3 3.2 68.6 3.1 68.3 3.1 68.2 3.1 67.8 3.1 #N/A 4.4 17.1 5.2 20.6 7.5 29.6 8.3 30.1 9.1 23.9 8.9 19.4 8.9 16.8 9.1 11.9 9.1 10.6 8.9 9.6 8.8 #N/A 8.7 2,240 63.4 #N/A 2,222 57.0 #N/A 2,563 55.1 #N/A 3,222 56.4 20.4 3,426 49.8 #N/A 4,547 52.1 #N/A 4,654 56.7 28.8 3,962 58.3 26.3 4,462 54.9 25.4 4,790 #N/A 25.3 #N/A #N/A 24.9 #N/A #N/A #N/A #N/A #N/A 71.7 72.1 #N/A 70.1 #N/A 63.9 65.4 #N/A 66.5 #N/A #N/A #N/A 56.4 54.2 #N/A 46.6 #N/A 50.2 45.0 #N/A 43.1 #N/A 58.1 11.0 71.5 15.5 84.2 23.3 84.1 22.7 #N/A #N/A 83.9 27.5 86.4 29.9 87.2 31.1 88.6 32.9 89.1 33.5 89.7 34.1 #N/A #N/A Socioeconomic 39 40 Education High school graduates (% of age 25–34) 18 ����������������������������������� College graduates (% of age 25–34) 19 ������������������������������������������ 48 ANALYTICAL PERSPECTIVES Table 5–1. SOCIAL INDICATORS—Continued Calendar Years 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 1960 20 Reading achievement score (age 17) ����������������������������������������� Math achievement score (age 17) 21 ���������������������������������������������� Science and engineering graduate degrees (% of total graduate degrees) ������������������������������������������������������������������������������������ Receiving special education services (% of age 3–21 public school students) ������������������������������������������������������������������������������������ Income, Savings, and Inequality Real median income: all households (2014 dollars) 22 ������������������ Real disposable income per capita (chained 2009 dollars) ������������ Adjusted gross income share of top 1% of all taxpayers ���������������� Adjusted gross income share of lower 50% of all taxpayers ���������� Personal saving rate (% of disposable personal income) ��������������� Foreign remittances (billions of dollars) 23 �������������������������������������� Poverty rate (%) 24 �������������������������������������������������������������������������� Food-insecure households (% of all households) 25 ����������������������� Supplemental Nutrition Assistance Program (% of population on SNAP) ���������������������������������������������������������������������������������������� Median wealth of households, age 55–64 (in thousands of 2013 dollars) 26 ����������������������������������������������������������������������������������� Housing Homeownership among households with children (%) 27 ��������������� Families with children and severe housing cost burden (%) 28 ������� Families with children and inadequate housing (%) 29 ������������������� 1970 1980 1990 1995 2000 2005 2010 2013 2014 2015 2016 N/A N/A 285 304 285 298 290 305 288 306 288 308 283 305 286 306 287 306 N/A N/A N/A N/A N/A N/A 22.0 17.2 11.2 14.7 14.2 12.6 12.7 12.1 13.2 13.7 15.0 N/A N/A N/A 10.1 11.4 12.4 13.3 13.7 13.0 12.9 13.0 N/A N/A N/A 47,593 48,518 52,684 52,664 57,790 56,224 53,568 54,525 53,718 56,516 N/A 11,877 16,643 20,158 25,555 27,180 31,524 34,424 35,685 36,414 37,415 38,432 39,226 N/A N/A 8.5 14.0 14.6 20.8 21.2 18.9 19.0 20.6 N/A N/A N/A N/A 17.7 15.0 14.5 13.0 12.9 11.7 11.5 11.3 N/A N/A 10.0 12.6 10.6 7.8 6.4 4.2 2.6 5.6 5.0 5.6 5.8 5.8 N/A N/A N/A N/A N/A 23.4 31.3 36.8 39.6 41.8 43.3 44.9 22.2 12.6 13.0 13.5 13.8 11.3 12.6 15.1 14.8 14.8 13.5 N/A N/A N/A N/A N/A 11.9 10.5 11.0 14.5 14.3 14.0 12.7 N/A N/A 3.3 9.5 8.2 9.9 6.1 8.9 13.5 15.0 14.6 14.2 13.5 78 N/A 153 177 175 243 311 192 166 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 8 9 63.6 10 9 65.1 12 7 67.5 11 7 68.4 14.5 5.4 65.5 17.9 5.3 62.5 15.7 5.0 61.0 15.4 5.6 59.5 15.1 6.3 N/A N/A N/A Health 58 59 60 61 62 63 Health Status Life expectancy at birth (years) ������������������������������������������������������ Infant mortality (per 1,000 live births) ��������������������������������������������� Low birthweight [<2,500 gms] (% of babies) ���������������������������������� Activity limitation (% of age 5–17) 30 ���������������������������������������������� Activity limitation (% of age 18 and over) 31 ������������������������������������ Difficulties with activities of daily living (% of age 65 and over) 32 ����� 69.7 26.0 7.7 N/A N/A N/A 70.8 20.0 7.9 N/A N/A N/A 73.7 12.6 6.8 N/A N/A N/A 75.4 9.2 7.0 N/A N/A N/A 75.8 7.6 7.3 N/A N/A N/A 76.8 6.9 7.6 7.0 27.9 6.3 77.6 6.9 8.2 8.0 29.1 6.2 78.7 6.1 8.2 9.2 29.9 6.8 78.8 6.0 8.0 9.2 29.5 7.3 78.9 5.8 8.0 9.3 28.9 6.2 78.8 5.9 8.1 9.8 29.6 6.7 N/A N/A N/A N/A N/A N/A 64 65 66 67 68 Health Behavior Engaged in regular physical activity (% of age 18 and older) 33 ����� Obesity (% of age 20–74 with BMI 30 or greater) 34 ���������������������� Obesity (% of age 2–19) 35 ������������������������������������������������������������� Cigarette smokers (% of age 18 and older) ������������������������������������ Heavier drinker (% of age 18 and older) 36 ������������������������������������� N/A 13.4 N/A N/A N/A N/A N/A N/A 37.1 N/A N/A 15.0 5.5 33.1 N/A N/A 23.2 10.0 25.3 N/A N/A N/A N/A 24.6 N/A 15.0 30.9 13.9 23.1 4.3 16.6 35.1 15.4 20.8 4.8 20.7 36.1 16.9 19.3 5.2 21.0 N/A N/A 17.9 5.3 21.5 38.2 17.2 17.0 5.2 21.6 N/A N/A 15.3 5.0 N/A N/A N/A N/A N/A 5.0 6.9 8.9 12.1 13.3 13.3 15.5 17.4 17.2 17.4 17.8 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 16.9 13.0 N/A 2,655 N/A 18.9 12.6 N/A 3,991 N/A 19.3 9.3 N/A 4,940 2,782 22.3 7.8 56.6 5,571 2,980 20.4 6.5 70.4 5,832 3,107 16.3 5.5 71.6 5,963 3,258 13.0 4.5 72.2 N/A 3,391 N/A N/A N/A N/A N/A 49,610 34,890 31,547 19,043 15,947 12,541 13,144 11,806 11,072 N/A N/A 5.1 N/A 7.9 4,940 10.2 4,410 9.4 7,068 8.2 3,749 5.5 2,842 5.6 1,928 4.8 2,317 4.5 2,010 4.4 1,858 4.9 N/A N/A 118.8 95.8 145.6 311.9 430.4 508.8 518.2 523.3 500.5 491.7 476.7 N/A 69 70 71 72 73 74 Access to Health Care Total national health expenditures (% of GDP) ������������������������������� Average single premium per enrolled employee at private-sector establishments (dollars) 37 ��������������������������������������������������������� Average health insurance premium (dollars) 38 ������������������������������ Persons without health insurance (% of age 18–64) 39 ������������������ Persons without health insurance (% of age 17 and younger) 39 ��� Children age 19–35 months with recommended vaccinations (%) 40 ����� Security and Safety 75 76 77 78 79 80 Crime Property crimes (per 100,000 households) 41 �������������������������������� Violent crime victimizations (per 100,000 population age 12 or older) 42 ������������������������������������������������������������������������������������� Murder rate (per 100,000 persons) ������������������������������������������������� Prison incarceration rate (state and federal institutions, rate per 100,000 persons) 43 ������������������������������������������������������������������� National Security Military personnel on active duty (thousands) 44 ���������������������������� Veterans (thousands) ��������������������������������������������������������������������� 2,475 3,065 2,051 2,044 1,518 1,384 1,389 1,431 1,382 1,338 1,314 1,301 22,534 26,976 28,640 27,320 26,198 26,551 24,521 23,032 22,299 21,999 21,681 21,368 49 5. Social Indicators Table 5–1. SOCIAL INDICATORS—Continued Calendar Years 81 82 Transportation Safety Safety belt use (%) ������������������������������������������������������������������������� Highway fatalities ���������������������������������������������������������������������������� 1960 1970 1980 1990 1995 2000 2005 2010 2013 2014 2015 N/A N/A N/A N/A N/A 70.7 81.7 85.1 87.2 86.7 88.5 36,399 52,627 51,091 44,599 41,817 41,945 43,510 32,999 32,894 32,744 35,092 2016 90.1 N/A Environment and Energy 83 84 85 86 87 88 89 90 Air Quality and Greenhouse Gases Ground level ozone (ppm) 45 ���������������������������������������������������������� Particulate matter 2.5 (ug/m3) 46 ���������������������������������������������������� Annual mean atmospheric CO2 concentration (Mauna Loa, Hawaii; ppm) ������������������������������������������������������������������������������ Gross greenhouse gas emissions (teragrams CO2 equivalent) 47 � Net greenhouse gas emissions, including sinks (teragrams CO2 equivalent) ��������������������������������������������������������������������������������� Gross greenhouse gas emissions per capita (metric tons CO2 equivalent) ��������������������������������������������������������������������������������� Gross greenhouse gas emissions per 2009$ of GDP (kilograms CO2 equivalent) ������������������������������������������������������������������������� Population that receives drinking water in compliance with standards (%) 48 ������������������������������������������������������������������������ N/A N/A N/A N/A 0.101 N/A 0.090 N/A 0.091 N/A 0.082 13.5 0.080 12.8 0.073 9.9 0.067 8.9 0.068 8.8 0.069 8.5 N/A N/A 316.9 N/A 325.7 N/A 338.7 N/A 354.4 6,363 360.8 6,709 369.5 7,214 379.8 7,313 389.9 6,926 396.5 6,680 398.6 6,740 400.8 6,587 404.2 N/A N/A N/A N/A 5,544 5,923 6,462 6,582 6,208 5,917 5,978 5,828 N/A N/A N/A N/A 25.1 24.8 25.2 24.4 22.1 20.8 20.9 20.2 N/A N/A N/A N/A 0.711 0.659 0.574 0.514 0.468 0.428 0.422 0.402 N/A N/A N/A N/A N/A 83.8 90.8 88.5 92.2 91.2 92.5 91.1 91.2 Energy 91 Energy consumption per capita (million Btu) ���������������������������������� 250 331 344 338 342 350 339 315 307 309 303 301 92 Energy consumption per 2009$ GDP (thousand Btu per 2009$) ��� 14.5 14.4 12.1 9.4 9.0 7.9 7.0 6.6 6.2 6.2 6.0 N/A 93 Electricity net generation from renewable sources, all sectors (% of total) 49 ����������������������������������������������������������������������������������� 19.7 16.4 12.4 11.8 11.5 9.4 8.8 10.4 12.8 13.2 13.3 14.9 94 Coal production (million short tons) ������������������������������������������������ 434 613 830 1,029 1,033 1,074 1,131 1,084 985 1,000 897 728 95 Natural gas production (dry) (trillion cubic feet) 50 �������������������������� 12.2 21.0 19.4 17.8 18.6 19.2 18.1 21.3 24.2 25.9 27.1 26.5 96 Petroleum production (million barrels per day) ������������������������������� 8.0 11.3 10.2 8.9 8.3 7.7 6.9 7.5 10.1 11.8 12.8 12.4 97 Renewable energy production (quadrillion Btu) ������������������������������ 2.9 4.1 5.4 6.0 6.6 6.1 6.2 8.1 9.2 9.6 9.5 10.1 N/A=Number is not available. 1 Adjusted CPI-U. 2014=100. 2 New business starts are defined as firms with positive employment in the current year and no paid employment in any prior year of the LBD. Employment is measured as of the payroll period including March 12th. 3 Business failures are defined as firms with employment in the prior year that have no paid employees in the current year. 4 Calculated as the value of U.S. exports of goods and services less the value of U.S. imports of goods and services, on a balance of payments basis. This balance is a component of the U.S. International Transactions (Balance of Payments) Accounts. 5 Gross prevalence rate for persons receiving Social Security disabled-worker benefits among the estimated population insured in the event of disability at end of year. Gross rates do not account for changes in the age and sex composition of the insured population over time. 6 Values for prior years have been revised from the prior version of this publication. 7 Data correspond to years 1972, 1982, 1992, 1996, 2000, 2004, 2008, and 2012. 8 Patent data adjusted by OMB to incorporate total population estimates from U.S. Census Bureau. 9 The R&D to GDP ratio data are now revised to reflect the new methodology introduced in the 2013 comprehensive revision of the GDP and other National Income and Product Accounts by the U.S. Bureau of Economic Analysis (BEA). In late July 2013, BEA reported GDP and related statistics that were revised back to 1929. The new GDP methodology treats R&D as investment in all sectors of the economy, among other methodological changes. The net effects of these changes are somewhat higher levels of GDP year to year and corresponding decreases in the R&D to GDP ratios reported annually by the National Science Foundation (NSF). For further details see NSF’s InfoBrief “R&D Recognized as Investment in U.S. Gross Domestic Product Statistics: GDP Increase Slightly Lowers R&D-to-GDP Ratio” at http://www.nsf.gov/statistics2015 nsf15315 nsf15315.pdf. 10 Data source and values for 2010 to 2015 have been updated relative to the prior version of this publication. 11 Data source for 1960 to 2000 is the decennial census; data source for 2006, 2010, 2011, 2012, 2013, 2014, and 2015 is the American Community Survey. 12 For 1960, age 14 and older. 13 Average size of family households. Family households are those in which there is someone present who is related to the householder by birth, marriage, or adoption. 14 Charitable giving reported as itemized deductions on Schedule A. 15 Data correspond to years 1964, 1972, 1980, 1992, 1996, 2000, 2004, 2008, and 2012. The voting statistics in this table are presented as ratios of official voting tallies, as reported by the U.S. Clerk of the House, to population estimates from the Current Population Survey. 16 Refers to those who volunteered at least once during a one-year period, from September of the previous year to September of the year specified. For 1990, refers to 1989 estimate from the CPS Supplement on volunteers. 17 The 1980, 1990, 2000, and 2010 data come from the 1982, 1992, 2002, and 2008 waves of the Survey of Public Participation in the Arts, respectively. 18 For 1960, includes those who have completed 4 years of high school or beyond. For 1970 and 1980, includes those who have completed 12 years of school or beyond. For 1990 onward, includes those who have completed a high school diploma or the equivalent. 19 For 1960 to 1980, includes those who have completed 4 or more years of college. From 1990 onward, includes those who have a bachelor’s degree or higher. 20 Data correspond to years 1971, 1980, 1990, 1994, 1999, 2004, 2008, and 2012. 21 Data correspond to years 1973, 1982, 1990, 1994, 1999, 2004, 2008, and 2012. 22 Beginning with 2013, data are based on redesigned income questions. The source of the 2013 data is a portion of the CPS ASEC sample which received the redesigned income questions, approximately 30,000 addresses. For more information, please see the report Income and Poverty in the United States: 2014, U.S. Census Bureau, Current Population Reports, P60-252. 50 ANALYTICAL PERSPECTIVES Table 5–1. SOCIAL INDICATORS—Continued 23 Foreign remittances, referred to as ‘personal transfers’ in the U.S. International Transactions (Balance of Payments) Accounts, consist of all transfers in cash or in kind sent by the foreign-born population resident in the United States to households resident abroad. 24 The poverty rate does not reflect noncash government transfers. Beginning with 2013, data are based on redesigned income questions. The source of the 2013 data is a portion of the CPS ASEC sample which received the redesigned income questions, approximately 30,000 addresses. For more information, please see the report Income and Poverty in the United States: 2014, U.S. Census Bureau, Current Population Reports, P60-252. 25 Food-insecure classification is based on reports of three or more conditions that characterize households when they are having difficulty obtaining adequate food, out of a total of 10 such conditions. 26 Data values shown are 1962, 1983, 1989, 1995, 2001, 2004, 2010, and 2013. For 1962, the data source is the SFCC; for subsequent years, the data source is the SCF 27 Some data interpolated. 28 Expenditures for housing and utilities exceed 50 percent of reported income. Some data interpolated. 29 Inadequate housing has moderate to severe problems, usually poor plumbing, or heating or upkeep problems. Some data interpolated. 30 Total activity limitation includes receipt of special education services; assistance with personal care needs; limitations related to the child’s ability to walk; difficulty remembering or periods of confusion; limitations in any activities because of physical, mental, or emotional problems. 31 Activity limitation among adults aged 18 and over is defined as having a basic action difficulty in one or more of the following: movement, emotional, sensory (seeing or hearing), or cognitive. 32 Activities of daily living include personal care activities: bathing or showering, dressing, getting in or out of bed or a chair, using the toilet, and eating. Persons are considered to have an ADL limitation if any condition(s) causing the respondent to need help with the specific activities was chronic. 33 Participation in leisure-time aerobic and muscle-strengthening activities that meet 2008 Federal physical activity guidelines. 34 BMI refers to body mass index. The 1960, 1980, 1990, 2000, 2005, 2010, 2014 data correspond to survey years 1960-1962, 1976-1980, 1988-1994, 1999-2000, 2005-2006, 20092010, and 2013-2014, respectively. 35 Percentage at or above the sex-and age-specific 95th percentile BMI cutoff points from the 2000 CDC growth charts. The 1980, 1990, 2000, 2005, 2010, 2014 data correspond to survey years 1976-1980, 1988-1994, 1999-2000, 2005-2006, 2009-2010, and 2013-2014, respectively. 36 Heavier drinking is based on self-reported responses to questions about average alcohol consumption and is defined as, on average, more than 14 drinks per week for men and more than 7 drinks per week for women. 37 Includes only employees of private-sector establishments that offer health insurance. 38 Unpublished data. This is the mean total private health insurance premium paid by an individual or family for the private coverage that person is on. If a person is covered by more than one plan, the premiums for the plans are added together. Those who pay no premiums towards their plans are included in the estimates. 39 A person was defined as uninsured if he or she did not have any private health insurance, Medicare, Medicaid, CHIP (1999-2015), state-sponsored, other government-sponsored health plan (1997-2015), or military plan. Beginning in 2014, a person with health insurance coverage through the Health Insurance Marketplace or state-based exchanges was considered to have private coverage. A person was also defined as uninsured if he or she had only Indian Health Service coverage or had only a private plan that paid for one type of service such as accidents or dental care. In 1993-1996 Medicaid coverage is estimated through a survey question about having Medicaid in the past month and through participation in Aid to Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) programs. In 1997 to 2015, Medicaid coverage is estimated through a question about current Medicaid coverage. Beginning in the third quarter of 2004, a Medicaid probe question was added to reduce potential errors in reporting Medicaid status. Persons under age 65 with no reported coverage were asked explictly about Medicaid coverage. 40 Recommended vaccine series consists of 4 or more doses of either the diphtheria, tetanus toxoids, and pertussis vaccine (DTP), the diphtheria and tetanus toxoids vaccine (DT), or the diphtheria, tetanus toxoids, and acellular pertussis vaccine (DTaP); 3 or more doses of any poliovirus vaccine; 1 or more doses of a measles-containing vaccine (MCV); 3 or more doses or 4 or more doses of Haemophilus influenzae type b vaccine (Hib) depending on Hib vaccine product type (full series Hib); 3 or more doses of hepatitis B vaccine; 1 or more doses of varicella vaccine; and 4 or more doses of pneumococcal conjugate vaccine (PCV). 41 Property crimes, including burglary, motor vehicle theft, and property theft, reported by a sample of households. Includes property crimes both reported and not reported to law enforcement. 42 Violent crimes include rape, robbery, aggravated assault, and simple assault. Includes crimes both reported and not reported to law enforcement. Due to methodological changes in the enumeration method for NCVS estimates from 1993 to present, use caution when comparing 1980 and 1990 criminal victimization estimates to future years. Estimates from 1995 and beyond include a small number of victimizations, referred to as series victimizations, using a new counting strategy. High-frequency repeat victimizations, or series victimizations, are six or more similar but separate victimizations that occur with such frequency that the victim is unable to recall each individual event or describe each event in detail. Including series victimizations in national estimates can substantially increase the number and rate of violent victimization; however, trends in violence are generally similar regardless of whether series victimizations are included. See Methods for Counting High-Frequency Repeat Victimizations in the National Crime Victimization Survey, NCJ 237308, BJS web, April 2012 for further discussion of the new counting strategy and supporting research. 43 Prior to 1977, the National Prisoners Statistics (NPS) Program reports were based on custody population. Beginning in 1977, the report reoriented to jurisdiction population. Generally, State inmates housed in local jails because of overcrowding are considered to be under State jurisdiction. Most, but not all, States reserve prison for offenders sentenced to a year or more. 44 For all years, the actuals reflect Active Component only excluding full-time Reserve Component members and RC mobilized to active duty. End Strength for 2016 is preliminary. 45 Ambient ozone concentrations based on 212 monitoring sites meeting minimum completeness criteria. 46 Ambient PM2.5 concentrations based on 480 monitoring sites meeting minimum completeness criteria. 47 The gross emissions indicator does not include sinks, which are processes (sometimes naturally occurring) that remove greenhouse gases from the atmosphere. Gross emissions are therefore more indicative of trends in energy consumption and efficiency than are net emissions. 48 Percent of the population served by community water systems that receive drinking water that meets all applicable health - based drinking water standards. 49 Includes net generation from solar thermal and photovoltaic (PV) energy at utility-scale facilities. Does not include distributed (small-scale) solar thermal or photovoltaic generation. 50 Dry natural gas is also known as consumer-grade natural gas. 51 5. Social Indicators Table 5–2. SOURCES FOR SOCIAL INDICATORS Indicator Source Economic 1 2 3 4 5 6 7 8 General Economic Conditions Real GDP per person (chained 2009 dollars) ����������������������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Real GDP per person change, 5-year annual average ���������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Consumer Price Index ���������������������������������������������������������������������������������������������������� Bureau of Labor Statistics, BLS Consumer Price Index Program. https://www.bls.gov/cpi/ Private goods producing (%) ������������������������������������������������������������������������������������������ Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Private services producing (%) ��������������������������������������������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ New business starts (thousands) ����������������������������������������������������������������������������������� U.S. Census Bureau, Business Dynamics Statistics. https://www.census.gov/ces/ dataproducts/bds/ Business failures (thousands) ���������������������������������������������������������������������������������������� U.S. Census Bureau, Business Dynamics Statistics. https://www.census.gov/ces/ dataproducts/bds/ International trade balance (billions of dollars; + surplus / - deficit) �������������������������������� Bureau of Economic Analysis, International Economics Accounts, https://www.bea.gov/ International/index.htm 9 10 11 12 Jobs and Unemployment Labor force participation rate (%) ����������������������������������������������������������������������������������� Employment (millions) ���������������������������������������������������������������������������������������������������� Employment-population ratio (%) ����������������������������������������������������������������������������������� Payroll employment change - December to December, SA (millions) ���������������������������� 13 Payroll employment change - 5-year annual average, NSA (millions) ����������������������� 14 15 16 Civilian unemployment rate (%) �������������������������������������������������������������������������������������� Unemployment plus marginally attached and underemployed (%) �������������������������������� Receiving Social Security disabled-worker benefits (% of population) ��������������������������� 17 18 19 20 21 22 23 24 Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Bureau of Labor Statistics, Current Employment Statistics program. https://www.bls.gov/ ces/ Bureau of Labor Statistics, Current Employment Statistics program. https://www.bls.gov/ ces/ Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Social Security Administration, Office of Research, Evaluation, and Statistics, Annual Statistical Supplement to the Social Security Bulletin, (tables 4.C1 and 5.A4). http:// www.ssa.gov/policy/docs/statcomps/supplement/ Infrastructure, Innovation, and Capital Investment Nonfarm business output per hour (average 5 year % change) ������������������������������������� Bureau of Labor Statistics, Major Sector Productivity Program. https://www.bls.gov/lpc/ Corn for grain production (million bushels) ��������������������������������������������������������������������� National Agricultural Statistics Service, Agricultural Estimates Program. http://www.nass. usda.gov/ Real net stock of fixed assets and consumer durable goods (billions of chained 2009 Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ dollars) ����������������������������������������������������������������������������������������������������������������������� national/ Population served by secondary wastewater treatment or better (%) ���������������������������� U.S. Environmental Protection Agency, Clean Watersheds Needs Survey. http://www.epa. gov/cwns Electricity net generation (kWh per capita) ��������������������������������������������������������������������� U.S. Energy Information Administration (EIA) calculation from: EIA, Monthly Energy Review (March 2017); and Table 7.2a https://www.eia.gov/totalenergy/data/monthly/; and U.S. Census Bureau, Population Division, Vintage 2016 Population Estimates (2010-2016) https://www.census.gov/data/tables/2016/demo/popest/nation-total.html Patents for invention, U.S. origin (per million population) ����������������������������������������������� U.S. Patent and Trademark Office, Patent Technology Monitoring Team, U.S. Patent Statistics Chart, Calendar Years 1963-2015. https://www.uspto.gov/web/offices/ac/ido/ oeip/taf/us_stat.htm; and, U.S. Census Bureau, Population Division. Net national saving rate (% of GDP) ������������������������������������������������������������������������������ Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ R&D spending (% of GDP) ��������������������������������������������������������������������������������������������� National Science Foundation, National Patterns of R&D Resources. http://www.nsf.gov/ statistics/natlpatterns/ Demographic and Civic 25 26 27 28 Population Total population (millions) ����������������������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2016 Population Estimates (2016), Vintage 2015 Population Estimates (2010-2015), 2000-2010 Intercensal Estimates (2000-2005), 1990-1999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). Foreign born population (millions) ���������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Decennial Census and American Community Survey. http://www.census.gov/prod/www/abs/decennial/ and http://www.census.gov/ acs 17 years and younger (%) ���������������������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2016 Population Estimates (2016), Vintage 2015 Population Estimates (2010-2015), 2000-2010 Intercensal Estimates (2000-2005), 1990-1999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). 65 years and older (%) ��������������������������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2016 Population Estimates (2016), Vintage 2015 Population Estimates (2010-2015), 2000-2010 Intercensal Estimates (2000-2005), 1990-1999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). 52 ANALYTICAL PERSPECTIVES Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 29 30 31 32 33 34 35 36 37 38 Source 85 years and older (%) ��������������������������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2016 Population Estimates (2016), Vintage 2015 Population Estimates (2010-2015), 2000-2010 Intercensal Estimates (2000-2005), 1990-1999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). Household Composition Ever married (% of age 15 and older) ���������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Average family size ��������������������������������������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Births to unmarried women age 15-17 (per 1,000 unmarried women age 15-17) ���������� National Center for Health Statistics, National Vital Statistics System (natality); Births: Final data for 2015: https://www.cdc.gov/nchs/data/nvsr/nvsr66/nvsr66_01.pdf. Single parent households (%) ���������������������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Civic and Cultural Engagement Average charitable contribution per itemized tax return (2014 dollars) �������������������������� U.S. Internal Revenue Service, Statistics of Income - Individual Income Tax Returns (IRS Publication 1304). http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-TaxReturns-Publication-1304-(Complete-Report) Voting for President (% of voting age population) ����������������������������������������������������������� The Office of the Clerk of the U.S. House of Representatives and the U.S. Census Bureau, Current Population Survey. http://www.census.gov/cps/ Persons volunteering (% age 16 and older) ������������������������������������������������������������������� Bureau of Labor Statistics, Current Population Survey. https://www.bls.gov/cps Attendance at visual or performing arts activity, including movie-going (% age 18 and The National Endowment for the Arts, Survey of Public Participation in the Arts & Annual older) ������������������������������������������������������������������������������������������������������������������������� Arts Basic Survey. Reading: Novels or short stories, poetry, or plays (not required for work or school; % The National Endowment for the Arts, Survey of Public Participation in the Arts & Annual age 18 and older) ������������������������������������������������������������������������������������������������������ Arts Basic Survey. Socioeconomic 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 Education High school graduates (% of age 25-34) ������������������������������������������������������������������������ U.S. Census Bureau, Decennial Census and American Community Survey. http://www. census.gov/prod/www/decennial.html and http://www.census.gov/acs College graduates (% of age 25-34) ������������������������������������������������������������������������������� U.S. Census Bureau, Decennial Census and American Community Survey. http://www. census.gov/prod/www/decennial.html and http://www.census.gov/acs Reading achievement score (age 17) ����������������������������������������������������������������������������� National Center for Education Statistics, National Assessment of Educational Progress. https://nces.ed.gov/nationsreportcard/ Math achievement score (age 17) ���������������������������������������������������������������������������������� National Center for Education Statistics, National Assessment of Educational Progress. https://nces.ed.gov/nationsreportcard/ Science and engineering graduate degrees (% of total graduate degrees) ������������������� National Center for Education Statistics, Integrated Postsecondary Education Data System. http://nces.ed.gov/ipeds/ Receiving special education services (% of age 3-21 public school students) �������������� National Center for Education Statistics, Digest of Education Statistics, 2012. http://nces. ed.gov/programs/digest/d12/tables/dt12_046.asp Income, Savings, and Inequality Real median income: all households (2014 dollars) ������������������������������������������������������� U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. http://www.census.gov/hhes/www/income/data/historical/household/ Real disposable income per capita (chained 2009 dollars) �������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Adjusted gross income share of top 1% of all taxpayers ������������������������������������������������ U.S. Internal Revenue Service, Statistics of Income. http://www.irs.gov/uac/SOI-TaxStats-Individual-Statistical-Tables-by-Tax-Rate-and-Income-Percentile Adjusted gross income share of lower 50% of all taxpayers ������������������������������������������ U.S. Internal Revenue Service, Statistics of Income. http://www.irs.gov/uac/SOI-TaxStats-Individual-Statistical-Tables-by-Tax-Rate-and-Income-Percentile Personal saving rate (% of disposable personal income) ����������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Foreign remittances (billions of dollars) �������������������������������������������������������������������������� Bureau of Economic Analysis, International Economics Accounts, https://www.bea.gov/ International/index.htm Poverty rate (%) �������������������������������������������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. http://www.census.gov/hhes/www/poverty/publications/pubs-cps.html Food-insecure households (% of all households) ����������������������������������������������������������� Economic Research Service, Household Food Security in the United States report series. http://www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/ readings.aspx Supplemental Nutrition Assistance Program (% of population on SNAP) ���������������������� Food and Nutrition Service, USDA Median wealth of households, age 55-64 (in thousands of 2013 dollars) ���������������������� Board of Governors of the Federal Reserve System, Survey of Consumer Finances 2013 Estimates inflation-adjusted to 2013 dollars (Internal Data) http://www.federalreserve. gov/econresdata/scf/scfindex.htm Housing Homeownership among households with children (%) ��������������������������������������������������� U.S. Census Bureau, American Housing Survey (Current Housing Report). Estimated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census.gov/housing/ahs Families with children and severe housing cost burden (%) ������������������������������������������� U.S. Census Bureau, American Housing Survey. Tabulated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census.gov/ housing/ahs 53 5. Social Indicators Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 57 Source Families with children and inadequate housing (%) ������������������������������������������������������� U.S. Census Bureau, American Housing Survey. Tabulated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census.gov/ housing/ahs Health 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 Health Status Life expectancy at birth (years) �������������������������������������������������������������������������������������� National Center for Health Statistics, National Vital Statistics System: Health, United States 2016 forthcoming, Table 15. Infant mortality (per 1,000 live births) ����������������������������������������������������������������������������� National Center for Health Statistics, National Vital Statistics System: Health, United States, 2016 forthcoming, Table 11. Low birthweight [<2,500 gms] (% of babies) ������������������������������������������������������������������ National Center for Health Statistics, National Vital Statistics System (natality); Births: Final data for 2015: https://www.cdc.gov/nchs/data/nvsr/nvsr66/nvsr66_01.pdf. Activity limitation (% of age 5-17) ����������������������������������������������������������������������������������� National Center for Health Statistics, National Health Interview Survey; America’s Children in Brief: Key National Indicators of Well-Being, 2016, Table HEALTH5, crude percentages; http://www.childstats.gov/americaschildren/tables/health5. asp?popup=true (2000-2014 data); America’s Children in Brief: Key National Indicators of Well-Being, 2017 forthcoming (2015 data). Activity limitation (% of age 18 and over) ����������������������������������������������������������������������� National Center for Health Statistics, National Health Interview Survey, http://www.cdc. gov/nchs/nhis.htm: Health, United States, 2016 forthcoming, Table 42, age-adjusted. Difficulties with activities of daily living (% of age 65 and over) �������������������������������������� National Center for Health Statistics, National Health Interview Survey: http://www.cdc. gov/nchs/nhis.htm (unpublished data). Health Behavior Engaged in regular physical activity (% of age 18 and older) ����������������������������������������� National Center for Health Statistics, National Health Interview Survey, http://www.cdc. gov/nchs/nhis.htm: Health, United States, 2016 forthcoming, Table 57, age adjusted. Obesity (% of age 20-74 with BMI 30 or greater) ����������������������������������������������������������� National Center for Health Statistics, National Health and Nutrition Examination Survey, http://www.cdc.gov/nchs/nhanes.htm. Health E-stat: http://www.cdc.gov/nchs/data/ hestat/obesity_adult_13_14/obesity_adult_13_14.pdf. Obesity (% of age 2-19) �������������������������������������������������������������������������������������������������� National Center for Health Statistics, National Health and Nutrition Examination Survey, http://www.cdc.gov/nchs/nhanes.htm. Health E-stat: http://www.cdc.gov/nchs/data/ hestat/obesity_child_13_14/obesity_child_13_14.pdf. Cigarette smokers (% of age 18 and older) �������������������������������������������������������������������� National Center for Health Statistics, National Health Interview Survey, http://www.cdc. gov/nchs/nhis.htm: Health, United States, 2016 forthcoming, Table 47 and unpublished data (1970 and 1980 data), age adjusted. Heavier drinker (% of age 18 and older) ������������������������������������������������������������������������� National Center for Health Statistics, National Health Interview Survey, http://www.cdc. gov/nchs/nhis.htm: Health, United States, 2014, Table 58 and unpublished data (2014 and 2015 data), age adjusted. Access to Health Care Total national health expenditures (% of GDP) ��������������������������������������������������������������� Centers for Medicare and Medicaid Services, National Health Expenditures Data. http:// www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ NationalHealthExpendData/index.html Average single premium per enrolled employee at private-sector establishments Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey. https:// (dollars) ���������������������������������������������������������������������������������������������������������������������� meps.ahrq.gov Average health insurance premium (dollars) ������������������������������������������������������������������ Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey, 2010-2015, Family Core component. Persons without health insurance (% of age 18-64) ������������������������������������������������������� National Center for Health Statistics, National Health Interview Survey. Persons without health insurance (% of age 17 and younger) ��������������������������������������� National Center for Health Statistics, National Health Interview Survey. Children age 19-35 months with recommended vaccinations (%) ��������������������������������� National Center for Immunization and Respiratory Diseases, National Immunization Survey: http://www.cdc.gov/vaccines/imz-managers/coverage/nis/child/: Health, United States, 2016 forthcoming, Table 66. Security and Safety 75 76 77 78 79 80 Crime Property crimes (per 100,000 households) �������������������������������������������������������������������� Bureau of Justice Statistics, National Crime Victimization Survey. http://www.bjs.gov/ index.cfm?ty=dcdetail&iid=245 Violent crime victimizations (per 100,000 population age 12 or older) ��������������������������� Bureau of Justice Statistics, National Crime Victimization Survey. http://www.bjs.gov/ index.cfm?ty=dcdetail&iid=245 Murder rate (per 100,000 persons) ��������������������������������������������������������������������������������� Federal Bureau of Investigation, Uniform Crime Reports, Crime in the United States. http://www.fbi.gov/about-us/cjis/ucr/ucr Prison incarceration rate (state and federal institutions, rate per 100,000 persons) ������ U.S. Department of Justice, Bureau of Justice Statistics, National Prisoner Statistics Program. https://www.bjs.gov/index.cfm?ty=dcdetail&iid=269 National Security Military personnel on active duty (thousands) ���������������������������������������������������������������� ES actuals for 1960 and 1970 as reported in Table 2-11 of the DoD Selected Manpower Statistics for FY 1997 (DoD WHS, Directorate for Information Operations and Reports). The source for the remaining fiscal year actuals are the Service budget justification books. Veterans (thousands) ����������������������������������������������������������������������������������������������������� U.S. Department of Veterans Affairs. 1960-1999 (Annual Report of the Secretary of Veterans Affairs); 2000-2009 (VetPop07); 2010-2012 (VetPop11); 2013-2015 (VetPop2014), Office of the Actuary. http://www.va.gov/vetdata/Veteran_Population. asp 54 ANALYTICAL PERSPECTIVES Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 81 82 Source Transportation Safety Safety belt use (%) ��������������������������������������������������������������������������������������������������������� National Highway Traffic Safety Administration, National Center for Statistics and Analysis. https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/812351 Highway fatalities ������������������������������������������������������������������������������������������������������������ National Highway Traffic Safety Administration, National Center for Statistics and Analysis. https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/812261 Environment and Energy 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 Air Quality and Greenhouse Gases Ground level ozone (ppm) ���������������������������������������������������������������������������������������������� U.S. Environmental Protection Agency, AirTrends Website. https://www.epa.gov/airtrends/ozone-trends Particulate matter 2.5 (ug/m3) ���������������������������������������������������������������������������������������� U.S. Environmental Protection Agency, AirTrends Website. https://www.epa.gov/airtrends/particulate-matter-pm25-trends Annual mean atmospheric CO2 concentration (Mauna Loa, Hawaii; ppm) �������������������� National Oceanic and Atmospheric Administration. http://www.esrl.noaa.gov/gmd/ccgg/ trends/ Gross greenhouse gas emissions (teragrams CO2 equivalent) �������������������������������������� U.S. Environmental Protection Agency (2017). Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2015 (EPA Publication No. 431-P-17-001. https://www.epa. gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks Net greenhouse gas emissions, including sinks (teragrams CO2 equivalent) ���������������� U.S. Environmental Protection Agency (2017). Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2015 (EPA Publication No. 431-P-17-001. https://www.epa. gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks Gross greenhouse gas emissions per capita (metric tons CO2 equivalent) ������������������� U.S. Environmental Protection Agency (2017). Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2015 (EPA Publication No. 431-P-17-001. https://www.epa. gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks Gross greenhouse gas emissions per 2009$ of GDP (kilograms CO2 equivalent) �������� U.S. Environmental Protection Agency (2017). Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2015 (EPA Publication No. 431-P-17-001. https://www.epa. gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks Population that receives drinking water in compliance with standards (%) �������������������� U.S. Environmental Protection Agency, 2016a. Safe Drinking Water Information System, Federal Version. https://cfpub.epa.gov/roe/indicator.cfm?i=45#1 Energy Energy consumption per capita (million Btu) ������������������������������������������������������������������ U.S. Energy Information Administration, Monthly Energy Review (March 2017), Table 1.7 https://www.eia.gov/totalenergy/data/monthly Energy consumption per 2009$ GDP (thousand Btu per 2009$) ����������������������������������� U.S. Energy Information Administration, Monthly Energy Review (March 2017), Table 1.7 https://www.eia.gov/totalenergy/data/monthly/ Electricity net generation from renewable sources, all sectors (% of total) �������������������� U.S. Energy Information Administration, Monthly Energy Review (March 2017), Table 7.2a https://www.eia.gov/totalenergy/data/monthly/ Coal production (million short tons) �������������������������������������������������������������������������������� U.S. Energy Information Administration, Monthly Energy Review (April 2017), Table 6.1 https://www.eia.gov/totalenergy/data/monthly Natural gas production (dry) (trillion cubic feet) /50 �������������������������������������������������������� U.S. Energy Information Administration, Monthly Energy Review (April 2017), Table 4.1 https://www.eia.gov/totalenergy/data/monthly Petroleum production (million barrels per day) ��������������������������������������������������������������� U.S. Energy Information Administration, Monthly Energy Review (April 2017), Table 3.1 https://www.eia.gov/totalenergy/data/monthly Renewable energy production (quadrillion Btu) �������������������������������������������������������������� U.S. Energy Information Administration, Monthly Energy Review (April 2017), Table 10.1 https://www.eia.gov/totalenergy/data/monthly 6. BUILDING AND USING EVIDENCE TO IMPROVE GOVERNMENT EFFECTIVENESS An effective and efficient Federal government requires evidence—evidence about where needs are greatest, what works and what does not work, where and how programs could be improved, and evidence about how programs of yesterday may no longer be suited for today or prepare us for tomorrow. Strong evidence about policies and programs should be acted upon, suggestive evidence should be considered, and where evidence is weak it should be built to enable better decisions in the future. Agencies should integrate quality evidence and rigorous evaluation into budget, management, and policy decisions through a broad set of activities. Doing so requires the infrastructure and capacity to credibly build and use evidence and develop a culture of learning and continuous improvement. With a strong evidence infrastructure and culture agencies constantly (1) ask and answer questions that help them find, implement, and sustain effective programs and practices, (2) identify and improve or eliminate ineffective programs and practices, (3) test promising programs and practices to see if they are effective and can be replicated, and (4) find lower cost ways to achieve better results. Building a Portfolio of Evidence Government agencies should use a range of evidence types and analytical and management tools to learn what works and what does not, for whom and under what circumstances, and how to improve results. Evidence refers to facts or information indicating whether a belief or proposition is true or valid. Evidence can be quantitative or qualitative and may come from a variety of sources, including performance measurement, program evaluations, statistical series, retrospective reviews, data analytics, and other science and research. A portfolio of evidence may include: • Impact evaluations, including randomized control trials and rigorous quasi-experimental designs, which can answer questions about a program’s impact relative to a counterfactual—i.e. whether the outcome was achieved because of the program or due to some other factor. • Process or implementation evaluations that can answer questions about whether a program is implemented as designed and whether the program structure is sound. • Performance monitoring and measurement that can answer questions about program efficiency, outputs, and outcomes, but not about causal impact. • Statistics and other forms of research and analysis that can provide insight into trends, strategies, and underlying processes. There are multiple ways to assess policies and programs. The best approach or method depends on the specific information that is needed to answer key policy, programmatic, or operational questions, and on practical and methodological considerations. While many forms of evidence are complementary, some evidence that is useful for one purpose may not be useful for another. For example, performance measures are an essential resource for agencies to understand ongoing, real-time program performance so they can use that information to build a culture of continuous improvement, but they often do not answer certain key questions, including the effects of programs. Evaluations provide context for the performance measures and help us better understand what can and cannot be learned from them. In particular, rigorous impact evaluations, especially randomized experiments, can provide the most credible information on the impact of the program on outcomes, isolated from the effects of other factors. Combining performance and evaluation information, and using the results of one to inform the design of the other, can be very powerful in understanding program performance and ensuring that a program is maximizing performance and impact on an ongoing basis. One example of building evidence to improve government effectiveness in the FY 2018 Budget is at the Department of Education, which is refocusing and expanding its signature tiered evidence program, Education Innovation and Research (EIR), to provide grants to implement and evaluate innovative approaches to supporting private school choice. The President’s Budget requests $370 million for EIR, with $250 million reserved for building evidence on the effectiveness of private school choice programs. In another example from the Budget, the Administration is requesting that Congress give the government’s disability programs authority to mandate participation in demonstration projects. With this authority the Administration proposes to conduct an aggressive set of rigorous experiments to improve the labor force participation of people with disabilities. Developing a Learning Agenda Agencies are encouraged to adopt a “learning agenda” in which they collaboratively identify the critical questions that, when answered, will help their programs to be more effective, and to plan to answer those questions using the most appropriate tools. An agency learning agenda will: • Identify the most important questions that need to be answered in order to improve program implementation and performance. These questions should reflect the priorities and needs of Administration and agency leadership, policy and program offices, program partners at state and local levels, researchers 55 56 ANALYTICAL PERSPECTIVES and additional stakeholders, as well as legislative requirements and Congressional interests. • Strategically prioritize these questions given the level of current understanding, available resources, feasibility, and other considerations to determine which studies or analyses will help the agency make the most informed decisions. • Identify the most appropriate tools and methods (e.g. evaluations, research, analytics, and/or performance measures) to answer each question. • Conduct studies, evaluations, and analyses using the most rigorous methods that are feasible and most appropriate. • Disseminate findings in ways that are accessible and useful to Administration and agency leadership, policy and program offices, state and local partners, practitioners, and other key stakeholders—including integrating results into performance measurement and strategic planning. • Act on the results by using the information for policy decisions and continuous program improvement. Implementing a learning agenda approach creates an environment that encourages individuals, offices, and teams to reflect on and learn from their experience and from others. It requires a planned approach to learning in the context of evidence-based decision-making and improving program performance through evaluation and analysis. A learning agenda should be flexible and also reinforce and maximize efforts throughout the life of a program. Once integrated into agency processes, the agenda can help staff and partners learn rapidly to enable iterative course corrections and improvements. Building an Evidence Infrastructure Optimal development and use of evidence is made possible by an integrated infrastructure. A strong evidence infrastructure requires a variety of capacities, and developing and supporting the use of evidence and evaluation in decision-making requires coordination between those managing the operations of a program, including administrative data collection and maintenance, and those responsible for using data and evaluation to understand program effectiveness. It requires strong leadership from multiple levels of an agency—policy officials, program administrators, performance managers, strategic planning, policy and budget staff, evaluators, and statistical staff—to ensure that data and evidence are developed, analyzed, understood, and appropriately acted upon. To build the capacity to generate and use evidence, agencies should: • Ensure that staff with appropriate analytic skills and backgrounds are hired, supported, and effectively deployed. • Safeguard the ability of Federal principal statistical agencies to objectively design, collect, process, edit, com- pile, store, analyze, release, and disseminate data. • Build or support independent evaluation offices to conduct rigorous, independent evaluations. • Invest in improving administrative data infrastructure, access, and quality, including collecting better quality data from entities receiving federal funding. • Make better use of existing administrative data to build evidence. • Utilize new tools and methods such as rapid-cycle iterative evaluation and approaches that utilize behavioral science. • Expand the building and use of evidence in grant programs. • Partner with other agencies to share data or jointly design and fund studies. Centralized or chief evaluation offices play an important role in an evidence infrastructure that can develop and sustain agency capacity to build and use evidence. A recent Government Accountability Office (GAO) report found that Federal agencies with a centralized evaluation authority reported greater evaluation coverage of their performance goals and were more likely to use evaluation results in decision making1. Centralized or chief evaluation offices are often essential for ensuring that key evidence and evaluation principles are reflected in practice. The establishment of a centralized evaluation office and an official, public evaluation policy that reflects these principles is a particularly strong and mutually reinforcing combination. A centralized office allows the agency to credibly establish the independence and transparency of its evaluation activity, develop the specialized expertise required to implement rigorous evaluations, and have a centralized entity responsible for coordinating and disseminating research findings. The Federal evidence infrastructure plays a critical role in supporting State and local efforts to build and use evidence. For example, the Department of Education (ED) has supported a suite of resources that helps States and districts find and develop evidence-based education interventions that work for them, while strongly protecting student privacy. The What Works Clearinghouse’s (WWC) Find What Works tool allows educators and policymakers to find education programs and interventions shown to work in a particular context. The Regional Educational Laboratories serve as the primary dissemination partner for the WWC while also helping States and localities build and use evidence to improve student outcomes. Where existing evidence is weak or nonexistent, States and districts can use ED’s new “RCT-YES” and Rapid Cycle Evaluation Coach tools to rigorously evaluate innovative, locally tailored educational practices and also use the new CostOut tool to estimate an intervention’s costs and cost-effectiveness. ED also provides more inten1 Government Accountability Office Publication No. 15-25, “Program Evaluation: Some Agencies Reported that Networking, Hiring, and Involving Program Staff Help Build Capacity,” November 2014. 6. Building and Using Evidence to Improve Government Effectiveness sive support at low cost through Research Collaborations Grants, which funds partnerships between research institutions and State or local education agencies to promote evidence-building on topics that have important implications for student outcomes, and through Low-Cost, Short Duration Evaluations of Education Interventions Grants, which support rigorous evaluations of education interventions that State or local education agencies believe will provide meaningful improvements in student outcomes within a short period of time. Since protecting student privacy is an essential feature of all education research, ED’s Privacy Technical Assistance Center provides timely information and updated guidance on privacy, confidentiality, and security practices through a variety of resources, including training materials and opportunities to receive direct assistance with improving the privacy, security, and confidentiality of longitudinal data systems. Making Better Use of Administrative Data to Build Evidence Making better use of the administrative data—the data government already collects—is an especially promising strategy for building evidence. Administrative data are data collected by government entities for program administration, transparency, regulatory, or law enforcement purposes. Administrative data, especially when linked across programs or to survey data, can often make both performance measurement and rigorous program evaluations more informative, less costly, and less burdensome to data providers. Federal and state administrative data include rich information on labor market outcomes, health care, criminal justice, housing, and other important topics, but they are often greatly underutilized in evaluating program effects as well as in day-to-day performance measurement and for informing the public about how society and the economy are faring. Given this, a critical part of an evidence infrastructure is helping agencies make better use of administrative data while ensuring individual privacy and data security. In recent years, Federal agencies have steadily made progress improving the use of administrative data for evidence building. Some agencies are creating capacity to support research and evaluation in a particular policy area, but most Federal agencies could make greater use of administrative data to build evidence or allow those outside government to do so. In addition, many agencies have data that would be useful to other agencies, other levels of government, or outside researchers and citizens to help understand and improve programs. Yet not all agencies have the technological infrastructure, legislative authority, or expertise needed to utilize, share, or link data themselves, nor does it make sense to duplicate these capacities at every agency. Federal statistical agencies already play a leading role in bringing together data from multiple sources while protecting privacy, confidentiality, and data security. Statistical agencies use data to create a wide variety of statistical products that can be securely accessed by researchers inside and outside of government to conduct 57 a broad array of policy- and program-relevant analyses. High-capacity statistical agencies have partnered with other Federal agencies to link and analyze administrative and survey data for evidence building purposes. For example, the work of the Census Bureau’s Center for Administrative Records Research and Applications (CARRA) builds on the Bureau’s existing strengths by developing a comprehensive infrastructure to prepare and share administrative data. The Census Bureau’s infrastructure links a variety of different data sets, allowing pilot projects to measure outcomes such as mobility, earnings, and employment. Current pilots are measuring labor market outcomes for individuals with former military service and those who obtained manufacturing credentials, and the Census Bureau continues to enhance its secure infrastructure for processing and linking data sets to support evidence-building pilots. Partnerships such as these build on the critical capacities that statistical agencies already have in order to make better use of existing data without creating unnecessary duplication. Using a Portfolio of Evidence The credible use of evidence in decision-making requires an understanding of what conclusions can and, equally important, cannot be drawn from the information. Evidence should be rigorous, relevant, transparent, independent, and generated in an ethical manner. Evidence has varying degrees of credibility, and the strongest evidence generally comes from a portfolio of high-quality evidence rather than a single study or data point, i.e., from multiple sources and/or multiple studies covering different aspects and nuances of the topic. Whenever possible, critical decisions should be made based on a body of evidence that has been generated about a particular topic or intervention. One example is the Reemployment Services and Eligibility Assessments (RESEA) program at the Department of Labor. The program was originally created in 2005 and was aimed at reducing improper payments in the Unemployment Insurance (UI) program. Initial research of this program suggested that it was effective at reducing State’s UI benefit costs, often in excess of the program’s cost. A 2011 random assignment evaluation again showed the program’s cost-effectiveness, particularly in Nevada, which was providing more intensive reemployment services and reducing UI benefit costs at a higher rate than the other states studied, more than offsetting the additional program costs. A follow-up evaluation of the Nevada program demonstrated that the intensive reemployment services were helping participants get back to work faster and at higher wages than the control group of UI claimants. As a result of this research, Congress increased appropriations for the program, ultimately approving an expanded national program more closely resembling Nevada’s. The FY 2018 Budget proposes to continue this expansion of the RESEA program by proposing mandatory funding to provide these services to the one-half of UI claimants profiled as most likely to exhaust benefits before returning to employment. 58 Conclusion There has been meaningful progress in recent years toward building and using evidence for better government, and a bipartisan consensus has emerged regarding the need for further progress. This is especially the case when considering the potential for using existing administrative data for research and evaluation. The bipartisan Commission on Evidence-Based Policymaking is considering how data, research, and evaluation are currently used to build evidence and improve public programs and policies, and how to strengthen evidence-building ANALYTICAL PERSPECTIVES to inform program and policy design and implementation. The Commission will present its recommendations this Fall, and the Administration looks forward to working with Congress to increase the production and use of evidence throughout the government and for public use. More and better use of evidence would allow us to determine where needs are greatest, and what programs are and are not working and why, in order to develop a more effective and efficient Federal government. Using evidence to improve government is what taxpayers expect—smart and careful use of limited resources to best address national priorities. 7. STRENGTHENING THE FEDERAL WORKFORCE The Federal Workforce Today The Federal Government has more than 2.1 million civilian workers and 1.3 million active duty military serving throughout the country and the world. Chart 7-1 broadly shows the personnel trends in the Federal security related agencies (inclusive of the Departments of Defense, Homeland Security, Justice, State, and Veterans Affairs) and non-security agencies, in comparison to state and local governments and the private sector. Table 7-1 shows actual Federal civilian full-time equivalent (FTE) levels in the Executive Branch by agency for fiscal years (FY) 2015 and 2016, with estimates for 2017 and 2018. When it comes to the FTE estimates for 2017, note that at the time the Budget was prepared, only one of the annual appropriations bills had been enacted. Funding provided for the remaining 2017 annual appropriations bills were operating under a continuing resolution, and FTE estimates reflect this funding. Actual 2017 FTE levels are likely to be different, to account for final appropriations, administrative decisions within agencies, and other factors. Estimated employment levels for 2018 are higher than the 2016 actual FTE levels, but a decrease from the 2017 estimates, all of which are around 2.1 million civilian employees. From 2017 to 2018, increases totaling approximately 23,000 FTE are seen across 7 of the 24 Chief Financial Officers (CFO) Act agencies, and decreases totaling approximately 24,000 FTE occur across 17 of the CFO Act agencies. The increases are primarily driven by growth of civilians in three security-related agencies (Departments of Defense, Veterans Affairs and Homeland Security). Table 7-2 shows actual 2016 total and estimated 2017 and 2018 total Federal employment, including the Uniformed Military, Postal Service, Judicial and Legislative branches. Total compensation (pay and personnel benefits) is summarized in Table 7-3. A Congressional Budget Office (CBO) April 2017 report found Federal employees on average received a combined 17 percent higher wage and benefits package than the private sector average over the 2011-2015 time period. However, that represented a range that was broken down by educational level. Taking into account educational level, employees with a professional degree received about 18 percent less in total compensation, while those with a high school degree or less received 53 percent higher total compensation. The Federal government continues to offer a generous package of retirement benefits. CBO found that on average the cost of benefits was 47 percent higher for Federal civilian employees than for private-sector employees, with the Federal defined benefit pension plan (a predetermined set amount regardless of market fluctuation) being the most important contributing factor to cost differences between the two sectors. Consistent with the goal of reining in Federal government spending in many areas, as well as to bring Federal retirement benefits more in line with the private sector, adjustments to reduce the long term costs associated with these benefits are included in this Budget. These proposals include: increasing employee payments to the defined benefit Federal Employee Retirement System (FERS) pension such that the employee will generally be paying the same amount as the employing agency; and, reducing or eliminating cost of living adjustments for existing and future retirees. Increases to employee pension contributions would be phased in at a rate of one percent per year to lessen the impact on existing Federal employees. Chart 7-5 shows how Federal pay raises have compared to increases in private sector wages since 1978. The Administration proposes a 1.9 percent pay increase for Federal civilian employees, and a 2.1 percent pay increase for uniformed service members for calendar year 2018. Using data from the Bureau of Labor Statistics on fulltime, full-year workers, Table 7-4 breaks all Federal and private sector jobs into 22 occupation groups to demonstrate the differences in composition between the Federal and private workforces. Charts 7-2 and 7-3 present trends in educational levels for the Federal and private sector workforces over the past two decades. Chart 7-4 shows the trends in average age in both the Federal and private sectors over the past two decades. In 2016 (as of September 2016), the Federal workforce is 63.6 percent White, 18.4 percent Black, 8.6 percent Hispanic, 5.8 percent Asian, 0.5 percent Native Hawaiian/ Pacific Islander, 1.6 percent American Indian/Alaska Native, and 1.4 percent Non-Hispanic/Multi-Racial. Men comprised 56.8 percent of all Federal permanent employees and women 43.2 percent. Veterans are 31.1 percent of the entire Federal workforce, with 12.7 percent of the veterans disabled. By comparison, veterans comprise approximately 6 percent of the private sector non-agricultural workforce. The Federal Workforce Going Forward Despite growing citizen dissatisfaction with the cost and performance of the Federal government, too often the focus has been on creating new programs instead of eliminating or reforming ineffective programs. The result has been too many overlapping and outdated programs, rules, and processes, and Federal employees stuck in a system that is not working. The Federal government should be lean, accountable, and more effective. To begin addressing this challenge, on January 23, 2017, the President issued a Presidential Memorandum (Hiring Freeze PM) imposing a Federal “Hiring Freeze.” 59 60 ANALYTICAL PERSPECTIVES Chart 7-1. Changes from 1975 to 2016 in Employment/Population by Sector 50% Federal - Security 40% Federal - Non-Security Private Sector State & Local 30% 20% 10% 0% -10% -20% -30% -40% -50% 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Office of Personnel Management and the Bureau of Labor Statistics. Notes: Federal excludes the military and Postal Service. Security agencies include the Department of Defense, the Department of Homeland Security, the Department of State, and the Department of Veterans Affairs. Non-Security agencies include the remainder of the Executive Branch. State & Local excludes educational workers. This ensured immediate action was taken to halt the growth of the Federal workforce until a “long-term plan to reduce the size of the Federal Government’s workforce” was put in place. On March 16, 2017, the President submitted his Budget Blueprint to Congress proposing to eliminate funding for programs that are unnecessary, outdated, or not working. Additionally, on March 13, 2017, the President issued an Executive Order (Reorganization EO) directing the Office of Management and Budget (OMB) to submit a comprehensive plan to reorganize Executive Branch departments and agencies. OMB Memorandum M-17-22, “Comprehensive Plan for Reforming the Federal Government and Reducing the Federal Civilian Workforce,” provided agencies with guidance on fulfilling the requirements of the Hiring Freeze PM and the Reorganization EO while aligning those initiatives with the Federal budget and performance planning processes. OMB directed agencies to identify workforce reductions over a four-year period (FY 2018 through 2022) consistent with forthcoming OMB guidance on 2019 Budget submissions. The Agency Reform Plans combined with public input and cross-cutting proposals developed by OMB will inform a Government-wide Reform Plan that will be published as part of the President’s 2019 Budget in February 2018. Examining the Government’s Mission As discussed above, the Reorganization EO and the Hiring Freeze PM directed the development of a Government-wide Reform Plan for the Executive Branch, including a long-term plan to reduce the Federal workforce. The objectives of this broad reform effort are to: 1) create a lean, accountable, more efficient government that works for the American people; 2) focus the Federal government on effectively and efficiently delivering those programs that are the highest needs to citizens and where there is a unique Federal role rather than assuming current programs are optimally designed or even needed; 3) align the Federal workforce to meet the needs of today and the future rather than the requirements of the past; and 4) strengthen agencies by removing barriers that hinder front-line employees from delivering results. Agencies are drafting Agency Reform Plans that fundamentally examine the agency’s mission, as well as rethinking how the Federal government can deliver services to its customers, and evaluating options on both cost and quality dimensions. Agencies’ analyses are based on several factors, including whether a function is: duplicative, essential, appropriate as a Federal role, cost-beneficial, efficient and effective, and providing an adequate level of customer service. This analysis will help drive operational changes to improve performance, efficiency, and effectiveness and it will inform agencydriven assessments about whether to restructure, merge, or eliminate certain functions and programs. For example, the growth of the Federal government has included programs and functions that may be better delivered by the private sector, non-profits, or local, state, or tribal governments. In these instances, an Agency Reform Plan might identify these functions and include a plan for divesting these functions to more appropriate entities. In other instances, Federal agencies or programs may have outlived their initial purpose and are performing work that no longer meet the needs of the American public. In some cases, programs were created without the knowledge or coordination of similar programs in other agencies. This has resulted in duplicative programs and functions—such as 16 Federal agencies responsible for food safety, according to the annual Government Accountability Office report on opportunities to reduce 61 7. Strengthening the Federal Workforce Table 7–1. FEDERAL CIVILIAN EMPLOYMENT IN THE EXECUTIVE BRANCH (Civilian employment as measured by full-time equivalents (FTE) in thousands, excluding the Postal Service) Agency Cabinet agencies Agriculture ����������������������������������������������������������������������������������������������������� Commerce ����������������������������������������������������������������������������������������������������� Defense--Military Programs ��������������������������������������������������������������������������� Education ������������������������������������������������������������������������������������������������������� Energy ����������������������������������������������������������������������������������������������������������� Health and Human Services �������������������������������������������������������������������������� Homeland Security ���������������������������������������������������������������������������������������� Housing and Urban Development ������������������������������������������������������������������ Interior ����������������������������������������������������������������������������������������������������������� Justice ����������������������������������������������������������������������������������������������������������� Labor ������������������������������������������������������������������������������������������������������������� State �������������������������������������������������������������������������������������������������������������� Transportation ������������������������������������������������������������������������������������������������ Treasury ��������������������������������������������������������������������������������������������������������� Veterans Affairs ��������������������������������������������������������������������������������������������� Other agencies -- excluding Postal Service Broadcasting Board of Governors ����������������������������������������������������������������� Bureau of Consumer Financial Protection ����������������������������������������������������� Corps of Engineers--Civil Works ������������������������������������������������������������������� Environmental Protection Agency ����������������������������������������������������������������� Equal Employment Opportunity Commission ������������������������������������������������ Federal Communications Commission ���������������������������������������������������������� Federal Deposit Insurance Corporation ��������������������������������������������������������� Federal Trade Commission ���������������������������������������������������������������������������� General Services Administration ������������������������������������������������������������������� International Assistance Programs ���������������������������������������������������������������� National Aeronautics and Space Administration ������������������������������������������� National Archives and Records Administration ��������������������������������������������� National Credit Union Administration ������������������������������������������������������������� National Labor Relations Board ��������������������������������������������������������������������� National Science Foundation ������������������������������������������������������������������������� Nuclear Regulatory Commission ������������������������������������������������������������������� Office of Personnel Management ������������������������������������������������������������������ Securities and Exchange Commission ���������������������������������������������������������� Small Business Administration ���������������������������������������������������������������������� Smithsonian Institution ���������������������������������������������������������������������������������� Social Security Administration ����������������������������������������������������������������������� Tennessee Valley Authority ���������������������������������������������������������������������������� All other small agencies ��������������������������������������������������������������������������������� Total, Executive Branch civilian employment ����������������������������������������������������� * 50 or less. Actual 2015 Estimate 2016 2017 Change: 2017 to 2018 2018 FTE Percent 85.9 40.4 725.0 4.1 14.7 70.6 179.3 8.3 63.5 113.6 16.6 34.0 54.3 95.1 335.3 86.8 40.3 725.3 4.1 14.9 72.6 183.5 8.0 64.2 114.9 16.5 32.1 54.3 93.4 345.1 88.4 43.6 730.6 4.2 15.5 74.6 181.3 7.9 64.0 118.6 16.3 33.8 55.4 93.1 356.4 83.8 42.6 740.1 4.0 15.2 75.1 189.3 7.7 60.0 116.2 15.9 32.4 55.3 87.3 364.1 –4.6 –1.0 9.4 –0.2 –0.2 0.5 8.0 –0.2 –4.1 –2.4 –0.4 –1.4 –0.2 –5.9 7.8 –5.2% –2.2% 1.3% –3.8% –1.4% 0.7% 4.4% –2.7% –6.3% –2.1% –2.3% –4.0% –0.3% –6.3% 2.2% 1.7 1.5 21.6 14.7 2.2 1.7 6.8 1.1 11.1 5.6 17.3 2.8 1.2 1.6 1.4 3.7 5.0 4.3 3.1 4.9 63.9 10.9 13.2 2,042.0 1.6 1.6 21.8 14.7 2.2 1.6 6.5 1.2 11.2 5.7 17.1 2.9 1.2 1.5 1.4 3.5 5.1 4.6 3.2 4.9 63.7 10.7 13.4 2,057.3 1.7 1.7 21.9 15.5 2.1 1.6 6.8 1.2 12.1 5.7 17.4 2.9 1.2 1.6 1.4 3.6 5.7 4.6 3.3 5.2 61.7 10.7 13.9 2,087.0 1.6 1.6 21.9 11.7 2.0 1.4 6.7 1.1 11.6 5.3 17.3 2.8 1.2 1.3 1.4 3.3 5.9 4.5 3.2 5.1 62.0 10.3 13.6 2,086.0 –0.1 –0.2 ......... –3.8 –0.1 –0.2 –0.1 –* –0.5 –0.4 –* –0.1 –* –0.3 * –0.3 0.2 –0.1 –0.1 –* 0.3 –0.3 –0.3 –1.0 –6.5% –9.3% ......... –24.3% –6.2% –12.2% –1.3% –1.9% –3.9% –7.3% –0.2% –2.4% –1.8% –17.3% 0.1% –8.6% 4.1% –2.0% –1.7% –0.5% 0.5% –3.0% –2.2% –* duplication, overlap or fragmentation in Government. In other cases, the complex web of agencies and programs with the same nominal purpose adds unnecessary burden to the public, as it becomes unclear which agency a citizen or business needs to turn to when seeking Government services. While these programs may be well-intentioned, they inhibit the Government from achieving the best results with limited resources. In developing their Agency Reform Plans, agencies will consider each of these scenarios and identify steps for creating a leaner, accountable, more efficient government. This review of agency missions and scopes of function is a critical step to ensure we are building the workforce needed for the future rather than the past. Building Organizational Effectiveness and Efficiency As the Administration reviews the mission and scope of Federal Government, organizations must ensure they have the resources and skills to deliver on the mission. To ensure resources are used effectively and efficiently, agencies are working on proposals outlining ways that 62 ANALYTICAL PERSPECTIVES Chart 7-2. Masters Degree or Above By Year for Federal and Private Sector 30% Federal Private Sector All Firms 25% Private Sector Large Firms 20% 15% 10% 5% 0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: 1992-2016 Current Population Survey, Integrated Public Use Microdata Series. Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. Educational attainment is as of March in the year following the year on the horizontal axis. they could: better use technology and improve underlying business processes; streamline and eliminate processes; shift to alternative delivery models; streamline missionsupport functions; leverage existing solutions for common requirements; and build a portfolio of evidence to show “what works.” The Administration will explore how to improve effectiveness and efficiency based on what will work best within each operational context. While the typical shared service and contracting strategies are available (and are encouraged to the extent practicable), there is flexibility for agencies to propose creative alternative delivery solutions such as co-location of facilities and services, increased Table 7–2. TOTAL FEDERAL EMPLOYMENT (As measured by Full-Time Equivalents) Description 2016 Actual 2017 Estimate 2018 Estimate Change: 2017 to 2018 FTE PERCENT Executive Branch Civilian: All Agencies, Except Postal Service �������������������������������������������������������������������������������������������������������� Postal Service 1 ���������������������������������������������������������������������������������������������������������������������������������������� Subtotal, Executive Branch Civilian ���������������������������������������������������������������������������������������������������� 2,057,256 632,276 2,689,532 2,086,959 588,965 2,675,924 2,085,973 588,380 2,674,353 –986 –585 –1,571 –* –0.1% 0.1% Executive Branch Uniformed Military: Department of Defense 2 ������������������������������������������������������������������������������������������������������������������������ Department of Homeland Security (USCG) �������������������������������������������������������������������������������������������� Commissioned Corps (DOC, EPA, HHS) ������������������������������������������������������������������������������������������������ Subtotal, Uniformed Military ��������������������������������������������������������������������������������������������������������������� 1,343,801 39,992 6,910 1,390,703 1,336,589 40,045 6,930 1,383,564 1,352,081 41,460 7,060 1,400,601 15,492 1,415 130 17,037 1.1% 3.4% 1.8% 1.2% Subtotal, Executive Branch ����������������������������������������������������������������������������������������������������������������� 4,080,235 4,059,488 4,074,954 15,466 0.4% Legislative Branch 3 �������������������������������������������������������������������������������������������������������������������������������������� 29,718 33,154 33,530 376 1.1% Judicial Branch ��������������������������������������������������������������������������������������������������������������������������������������������� 32,657 33,197 33,541 344 1.0% Grand Total ����������������������������������������������������������������������������������������������������������������������������������������� 4,142,610 4,125,839 4,142,025 16,186 Postal Rate Commission. 2 Includes activated Guard and Reserve members on active duty. Does not include Full-Time Support (Active Guard & Reserve (AGRSs)) paid from Reserve Component appropriations. 3 FTE data not available for the Senate (positions filled were used for actual year and extended at same level). * Non-zero less than 0.1% 1 Includes 0.4% 63 7. Strengthening the Federal Workforce Chart 7-3. High School Graduate or Less By Year for Federal and Private Sectors 60% Federal Private Sector All Firms Private Sector Large Firms 50% 40% 30% 20% 10% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: 1992-2016 Current Population Survey, Integrated Public Use Microdata Series. Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. Educational attainment is as of March in the year following the year on the horizontal axis. online service delivery, and inter-agency alignment of services. As agencies are fundamentally rethinking missions and operations, these proposals may alter the composition of skills necessary for the workforce of the future. 48 Reshaping the Workforce Any meaningful discussion of Government reform must include an examination of the Federal workforce to ensure it is aligned to meet the needs of today and the future, rather than adhering to requirements of the past Chart 7-4. Average Age by Year for Federal and Private Sectors Federal Private Sector All Firms Private Sector Large Firms 46 44 42 40 38 36 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: 1992-2016 Current Population Survey, Integrated Public Use Microdata Series. Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. Educational attainment is as of March in the year following the year on the horizontal axis. 64 ANALYTICAL PERSPECTIVES 2% Chart 7-5. Pay Raises for Federal vs. Private Workforce 0% -2% FEPCA Passed -4% -6% -8% -10% Including Increases in Retirement Contributions for New Employees Changes in Federal Pay Scale Relative to Private Pay 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: Public Laws, Executive Orders, and the Bureau of Labor Statistics. Notes: Federal pay is for civilians and includes base and locality pay. Private pay is measured by the Employment Cost Index wages and salaries, private industry workers series, lagged 15 months. In 1993 and 2017 no difference existed between the sectors. that are obsolete. The Hiring Freeze PM put a pause on the hiring of Federal civilian employees across the board in the Executive Branch, while requiring OMB to develop recommendations for a Government-wide long-term workforce reduction plan. The hiring pause allowed the Administration to take the first steps toward a thoughtful effort to reshape the Federal workforce to more optimally meet mission and functional needs. The Hiring Freeze PM applied to all executive departments and agencies regardless of the sources of their operational and programmatic funding, but not to military personnel in the Armed Forces. The Administration allowed exceptions to ensure public safety and security, as well as certain exemptions for critical functions. The hiring freeze ended April 12, 2017 with a requirement for agencies to begin working on long-term Agency Reform Plans to reduce the size of the Federal civilian workforce. Agency plans will be incorporated into a Government-wide Reform Plan. To lift the hiring freeze, OMB also required agencies to take action immediately to achieve near-term workforce reductions and savings, including planning for budget levels that were released in the 2018 Budget Blueprint, and consistent with budget levels in this full 2018 Budget. Agency Heads maintained the discretion to determine the best method to accomplish this task. Notably, agencies were asked to examine the total cost of their operations (and not just FTE counts or headcounts) to incentivize more optimal operational decisions. Agency long-term planning must be done within the broader reorganization effort to align the civilian workforce to evolving needs. As agencies look at how they can operate more efficiently and effectively, it is important to continue monitoring employee engagement as a key indicator of success. The Office of Personnel Management will continue the annual Federal Employee Viewpoint Survey (FEVS), a collection of 84 questions that measure employees’ perceptions of whether, and to what extent, conditions characterizing successful organizations are present in their agencies. Using the FEVS results, agencies will continue to monitor employee engagement trends, using an aggregate Employee Engagement Index derived from a subset of the questions, as well as trends in additional questions relating to other facets of organizational effectiveness. In 2016, agencies were able to analyze data from more than 20,000 distinct work units across the Federal government, which allows for insight into the workforce. The 2016 survey found that while many work units and agencies had a highly engaged workforce, others need leadership and management attention. One issue that is common across agencies is that fewer than 30 percent of employees believe managers will address a poor performer who cannot or will not improve. While FEVS results generally show that managers are not always perceived by employees as effectively managing performance issues, it is important to note that supervisors and agency managers find personnel processes overly complex and difficult to navigate. Most agencies are subject to more than 3,400 Federal personnel regulatory provisions. Agency human resources staff are familiar with many, but often not all, of the rules. This voluminous set of regulations becomes a barrier to managers when it comes to basic human resources functions, including hiring top talent or dealing with poorly performing employees. Rewarding top performers and dealing with poor performers is key to effectively managing the workforce. To directly address this seemingly intractable problem, all agencies must: review their employee performance management policies; provide management with training on how to address performance and conduct issues; eliminate non-statutory barriers to removing those who do not improve; and develop a mechanism to provide managers with real-time guidance to ensure managers take the appropriate steps. Poor performers and those with conduct 65 7. Strengthening the Federal Workforce Table 7–3. PERSONNEL PAY AND BENEFITS (In millions of dollars) Description 2016 Actual 2017 Estimate 2018 Estimate Change: 2017 to 2018 Dollars Percent Civilian Personnel Costs: Executive Branch (excluding Postal Service): Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 181,206 74,580 255,786 189,584 77,809 267,393 195,929 79,908 275,837 6,345 2,099 8,444 3.3% 2.7% 3.2% Postal Service: Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 36,208 19,051 55,259 35,853 18,967 54,820 35,768 18,177 53,945 -85 -790 -875 -0.2% -4.2% -1.6% Legislative Branch: Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 2,036 614 2,650 2,147 680 2,827 2,228 709 2,937 81 29 110 3.8% 4.3% 3.9% Judicial Branch: Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 3,095 988 4,083 3,375 1,047 4,422 3,418 1,073 4,491 43 26 69 1.3% 2.5% 1.6% Total, Civilian Personnel Costs ������������������������������������������������������������������������������������������������������������������������������������������ 317,778 329,462 337,210 7,748 2.4% Department of Defense--Military Programs: Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 96,160 44,135 140,295 96,118 44,261 140,379 97,856 43,693 141,549 1,738 -568 1,170 1.8% -1.3% 0.8% All other Executive Branch uniform personnel: Pay ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Benefits �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 3,294 720 4,014 3,317 698 4,015 3,358 698 4,056 41 --41 1.2% --1.0% Total, Military Personnel Costs ������������������������������������������������������������������������������������������������������������������������������������������ 144,309 144,394 145,605 1,211 0.8% Grand total, personnel costs ������������������������������������������������������������������������������������������������������������������������������������������ 462,087 473,856 482,815 8,959 1.9% Former Civilian Personnel: Pensions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Health benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������������� Life insurance ���������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 83,390 11,695 45 95,130 84,326 12,004 47 96,377 86,468 12,984 48 99,500 2,142 980 1 3,123 2.5% 8.2% 2.1% 3.2% Former Military Personnel: Pensions ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Health benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal ��������������������������������������������������������������������������������������������������������������������������������������������������������������� Total, Former Personnel ���������������������������������������������������������������������������������������������������������������������������������������������������� 57,303 9,629 66,932 162,062 57,828 9,898 67,726 164,103 58,771 10,413 69,184 168,684 943 515 1,458 4,581 1.6% 5.2% 2.2% 2.8% Military Personnel Costs ADDENDUM problems have long tainted the positive contributions of the vast majority of the Federal workforce. Managers spend a disproportionate amount of time addressing these individuals while the rest of the team must work harder to accomplish their mission. Freeing the manag- ers and employees from the extra burden will allow more time and resources to developing and rewarding the rest of the workforce. Dispelling the myth that it is nearly impossible to hold employees accountable in the Federal government will enhance credibility and respect for the 66 ANALYTICAL PERSPECTIVES Table 7–4. OCCUPATIONS OF FEDERAL AND PRIVATE SECTOR WORKFORCES (Grouped by Average Private Sector Salary) Percent Occupational Groups Federal Workers Private Sector Workers Highest Paid Occupations Ranked by Private Sector Salary Lawyers and judges �������������������������������������������������������������������������������������������������������������� Engineers ����������������������������������������������������������������������������������������������������������������������������� Scientists and social scientists ��������������������������������������������������������������������������������������������� Managers ������������������������������������������������������������������������������������������������������������������������������ Pilots, conductors, and related mechanics ��������������������������������������������������������������������������� Doctors, nurses, psychologists, etc. ������������������������������������������������������������������������������������� Miscellaneous professionals ������������������������������������������������������������������������������������������������ Administrators, accountants, HR personnel ������������������������������������������������������������������������� Inspectors ����������������������������������������������������������������������������������������������������������������������������� 2.1% 4.5% 5.0% 12.2% 2.1% 7.2% 16.0% 6.3% 1.1% 0.6% 1.9% 0.7% 13.9% 0.5% 6.4% 9.0% 2.7% 0.3% Total Percentage ��������������������������������������������������������������������������������������������������������������������� 56.5% 36.0% Medium Paid Occupations Ranked by Private Sector Salary Sales including real estate, insurance agents ���������������������������������������������������������������������� Other miscellaneous occupations ����������������������������������������������������������������������������������������� Automobile and other mechanics ����������������������������������������������������������������������������������������� Law enforcement and related occupations ��������������������������������������������������������������������������� Office workers ����������������������������������������������������������������������������������������������������������������������� Social workers ���������������������������������������������������������������������������������������������������������������������� Drivers of trucks and taxis ���������������������������������������������������������������������������������������������������� Laborers and construction workers �������������������������������������������������������������������������������������� Clerks and administrative assistants ������������������������������������������������������������������������������������ Manufacturing ����������������������������������������������������������������������������������������������������������������������� 1.2% 3.3% 1.7% 9.1% 2.3% 1.6% 0.8% 3.1% 13.2% 2.8% 6.2% 4.5% 3.1% 0.7% 5.8% 0.5% 3.3% 9.6% 10.6% 7.5% Total Percentage ��������������������������������������������������������������������������������������������������������������������� 39.1% 51.8% Lowest Paid Occupations Ranked by Private Sector Salary Other miscellaneous service workers ����������������������������������������������������������������������������������� Janitors and housekeepers �������������������������������������������������������������������������������������������������� Cooks, bartenders, bakers, and wait staff ���������������������������������������������������������������������������� 2.3% 1.4% 0.8% 5.9% 2.4% 4.0% Total Percentage ��������������������������������������������������������������������������������������������������������������������� 4.5% 12.2% Source: 2012–2016 Current Population Survey, Integrated Public Use Microdata Series. Notes: Federal workers exclude the military and Postal Service, but include all other Federal workers in the Executive, Legislative, and Judicial Branches. However, the vast majority of these employees are civil servants in the Executive Branch. Private sector workers exclude the self-employed. Neither category includes state and local government workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work. many employees who uphold the nation’s values for public service every day. Fixing human capital issues that have developed over generations is complex and will take time to unwind and rebuild. Overall, the Administration is examining administratively burdensome agency activities and processes, including barriers to efficient human capital management that exist in policy, legislation, and regulation. There is a commitment to advocating for policies to help agencies manage their workforce in a more agile manner, reducing barriers employees face in their jobs, and providing flexibilities for agency leadership and management that will allow managers to adopt practices that are common in high performing organizations. BUDGET CONCEPTS AND BUDGET PROCESS 67 8. BUDGET CONCEPTS The budget system of the United States Government provides the means for the President and the Congress to decide how much money to spend, what to spend it on, and how to raise the money they have decided to spend. Through the budget system, they determine the allocation of resources among the agencies of the Federal Government and between the Federal Government and the private sector. The budget system focuses primarily on dollars, but it also allocates other resources, such as Federal employment. The decisions made in the budget process affect the Nation as a whole, State and local governments, and individual Americans. Many budget decisions have worldwide significance. The Congress and the President enact budget decisions into law. The budget system ensures that these laws are carried out. This chapter provides an overview of the budget system and explains some of the more important budget concepts. It includes summary dollar amounts to illustrate major concepts. Other chapters of the budget documents discuss these amounts and more detailed amounts in greater depth. The following section discusses the budget process, covering formulation of the President’s Budget, action by the Congress, and execution of enacted budget laws. The next section provides information on budget coverage, including a discussion of on-budget and off-budget amounts, functional classification, presentation of budget data, types of funds, and full-cost budgeting. Subsequent sections discuss the concepts of receipts and collections, budget authority, and outlays. These sections are followed by discussions of Federal credit; surpluses, deficits, and means of financing; Federal employment; and the basis for the budget figures. A glossary of budget terms appears at the end of the chapter. Various laws, enacted to carry out requirements of the Constitution, govern the budget system. The chapter refers to the principal ones by title throughout the text and gives complete citations in the section just preceding the glossary. THE BUDGET PROCESS The budget process has three main phases, each of which is related to the others: 1. Formulation of the President’s Budget; 2. Action by the Congress; and 3. Execution of enacted budget laws. Formulation of the President’s Budget The Budget of the United States Government consists of several volumes that set forth the President’s fiscal policy goals and priorities for the allocation of resources by the Government. The primary focus of the Budget is on the budget year—the next fiscal year for which the Congress needs to make appropriations, in this case 2018. (Fiscal year 2018 will begin on October 1, 2017, and end on September 30, 2018.) The Budget also covers the nine years following the budget year in order to reflect the effect of budget decisions over the longer term. It includes the funding levels provided for the current year, in this case 2017, which allows the reader to compare the President’s Budget proposals with the most recently enacted levels. The Budget also includes data on the most recently completed fiscal year, in this case 2016, so that the reader can compare budget estimates to actual accounting data. In a normal year, the President begins the process of formulating the budget by establishing general budget and fiscal policy guidelines, usually by the spring of each year, at least nine months before the President transmits the budget to the Congress and at least 18 months before the fiscal year begins. (See the “Budget Calendar” later in this chapter.) Based on these guidelines, the Office of Management and Budget (OMB) works with the Federal agencies to establish specific policy directions and planning levels to guide the preparation of their budget requests. During the formulation of the budget, the President, the Director of OMB, and other officials in the Executive Office of the President continually exchange information, proposals, and evaluations bearing on policy decisions with the Secretaries of the departments and the heads of the other Government agencies. Decisions reflected in previously enacted budgets, including the one for the fiscal year in progress, reactions to the last proposed budget (which the Congress is considering at the same time the process of preparing the forthcoming budget begins), and evaluations of program performance all influence decisions concerning the forthcoming budget, as do projections of the economic outlook, prepared jointly by the Council of Economic Advisers, OMB, and the Treasury Department. In early fall, agencies submit their budget requests to OMB, where analysts review them and identify issues that OMB officials need to discuss with the agencies. OMB and the agencies resolve many issues themselves. Others require the involvement of White House policy officials and the President. This decision-making process is usually completed by late December. At that time, the 69 70 ANALYTICAL PERSPECTIVES final stage of developing detailed budget data and the preparation of the budget documents begins. The decision-makers must consider the effects of economic and technical assumptions on the budget estimates. Interest rates, economic growth, the rate of inflation, the unemployment rate, and the number of people eligible for various benefit programs, among other factors, affect Government spending and receipts. Small changes in these assumptions can alter budget estimates by many billions of dollars. (Chapter 2, “Economic Assumptions and Interactions with the Budget,’’ provides more information on this subject.) Thus, the budget formulation process involves the simultaneous consideration of the resource needs of individual programs, the allocation of resources among the agencies and functions of the Federal Government, and the total outlays and receipts that are appropriate in light of current and prospective economic conditions. The law governing the President’s budget requires its transmittal to the Congress on or after the first Monday in January but not later than the first Monday in February of each year for the following fiscal year, which begins on October 1. The budget is usually scheduled for transmission to the Congress on the first Monday in February, giving the Congress eight months to act on the budget before the fiscal year begins. In years when a Presidential transition has taken place, this timeline for budget release is commonly extended to allow the new Administration sufficient time to take office and formulate its budget policy. While there is no specific timeline set for this circumstance, the detailed budget is usually completed and released in April or May. However, in order to aid the congressional budget process (discussed below), new Administrations often release a budget blueprint or “skinny budget” that contains broad spending outlines and descriptions of major policies and priorities in February or March. Congressional Action1 The Congress considers the President’s budget proposals and approves, modifies, or disapproves them. It can change funding levels, eliminate programs, or add programs not requested by the President. It can add or eliminate taxes and other sources of receipts or make other changes that affect the amount of receipts collected. The Congress does not enact a budget as such. Through the process of adopting a planning document called a budget resolution (described below), the Congress agrees on targets for total spending and receipts, the size of the deficit or surplus, and the debt limit. The budget resolution provides the framework within which individual congressional committees prepare appropriations bills and other spending and receipts legislation. The Congress provides spending authority—funding—for specified purposes in appropriations acts each year. It also enacts changes each 1 For a fuller discussion of the congressional budget process, see Bill Heniff Jr., Introduction to the Federal Budget Process (Congressional Research Service Report 98–721), and Robert Keith and Allen Schick, Manual on the Federal Budget Process (Congressional Research Service Report 98–720, archived). year in other laws that affect spending and receipts. Both appropriations acts and these other laws are discussed in the following paragraphs. In making appropriations, the Congress does not vote on the level of outlays (spending) directly, but rather on budget authority, or funding, which is the authority provided by law to incur financial obligations that will result in outlays. In a separate process, prior to making appropriations, the Congress usually enacts legislation that authorizes an agency to carry out particular programs, authorizes the appropriation of funds to carry out those programs, and, in some cases, limits the amount that can be appropriated for the programs. Some authorizing legislation expires after one year, some expires after a specified number of years, and some is permanent. The Congress may enact appropriations for a program even though there is no specific authorization for it or its authorization has expired. The Congress begins its work on its budget resolution shortly after it receives the President’s budget. Under the procedures established by the Congressional Budget Act of 1974, the Congress decides on budget targets before commencing action on individual appropriations. The Act requires each standing committee of the House and Senate to recommend budget levels and report legislative plans concerning matters within the committee’s jurisdiction to the Budget Committee in each body. The House and Senate Budget Committees then each design and report, and each body then considers, a concurrent resolution on the budget—a congressional budget plan, or budget resolution. The budget resolution sets targets for total receipts and for budget authority and outlays, both in total and by functional category (see “Functional Classification’’ later in this chapter). It also sets targets for the budget deficit or surplus and for Federal debt subject to statutory limit. The congressional timetable calls for the House and Senate to resolve differences between their respective versions of the congressional budget resolution and adopt a single budget resolution by April 15 of each year. In the report on the budget resolution, the Budget Committees allocate the total on-budget budget authority and outlays set forth in the resolution to the Appropriations Committees and the other committees that have jurisdiction over spending. These committee allocations are commonly known as “302(a)” allocations, in reference to the section of the Congressional Budget Act that provides for them. The Appropriations Committees are then required to divide their 302(a) allocations of budget authority and outlays among their subcommittees. These subcommittee allocations are known as “302(b)” allocations. There are procedural hurdles associated with considering appropriations bills (“discretionary” spending) that would breach or further breach an Appropriations subcommittee’s 302(b) allocation. Similar procedural hurdles exist for considering legislation that would cause the 302(a) allocation for any committee to be breached or further breached. The Budget Committees’ reports may discuss assumptions about the level of funding for major programs. While these assumptions do not 71 8. Budget Concepts bind the other committees and subcommittees, they may influence their decisions. Budget resolutions may include “reserve funds,” which permit adjustment of the resolution allocations as necessary to accommodate legislation addressing specific matters, such as health care or tax reform. Reserve funds are most often limited to legislation that is deficit neutral, including increases in some areas offset by decreases in others. The budget resolution may also contain “reconciliation directives’’ (discussed below) to the committees responsible for tax laws and for mandatory spending—programs not controlled by annual appropriation acts—in order to conform the level of receipts and this type of spending to the targets in the budget resolution. Since the concurrent resolution on the budget is not a law, it does not require the President’s approval. However, the Congress considers the President’s views in preparing budget resolutions, because legislation developed to meet congressional budget allocations does require the President’s approval. In some years, the President and the joint leadership of Congress have formally agreed on plans to reduce the deficit or balance the budget. These agreements were then reflected in the budget resolution and legislation passed for those years. If the Congress does not pass a budget resolution, the House and Senate typically adopt one or more “deeming resolutions” in the form of a simple resolution or as a provision of a larger bill. A deeming resolution may serve nearly all functions of a budget resolution, except it may not trigger reconciliation procedures in the Senate. Once the Congress approves the budget resolution, it turns its attention to enacting appropriations bills and authorizing legislation. Appropriations bills are initiated in the House. They provide the budgetary resources for the majority of Federal programs, but only a minority of Federal spending. The Appropriations Committee in each body has jurisdiction over annual appropriations. These committees are divided into subcommittees that hold hearings and review detailed budget justification materials prepared by the Executive Branch agencies within the subcommittee’s jurisdiction. After a bill has been drafted by a subcommittee, the full committee and the whole House, in turn, must approve the bill, sometimes with amendments to the original version. The House then forwards the bill to the Senate, where a similar review follows. If the Senate disagrees with the House on particular matters in the bill, which is often the case, the two bodies form a conference committee (consisting of some Members of each body) to resolve the differences. The conference committee revises the bill and returns it to both bodies for approval. When the revised bill is agreed to, first in the House and then in the Senate, the Congress sends it to the President for approval or veto. Since 1977, when the start of the fiscal year was established as October 1, there have been only three fiscal years (1989, 1995, and 1997) for which the Congress agreed to and enacted every regular appropriations bill by that date. When one or more appropriations bills has not been agreed to by this date, Congress usually enacts a joint resolution called a “continuing resolution’’ (CR), which is an interim or stop-gap appropriations bill that provides authority for the affected agencies to continue operations at some specified level until a specific date or until the regular appropriations are enacted. Occasionally, a CR has funded a portion or all of the Government for the entire year. The Congress must present these CRs to the President for approval or veto. In some cases, Presidents have rejected CRs because they contained unacceptable provisions. Left without funds, Government agencies were required by law to shut down operations—with exceptions for some limited activities—until the Congress passed a CR the President would approve. Shutdowns have lasted for periods of a day to several weeks. The Congress also provides budget authority in laws other than appropriations acts. In fact, while annual appropriations acts fund the majority of Federal programs, they account for only about a third of the total spending in a typical year. Authorizing legislation controls the rest of the spending, which is commonly called “mandatory spending.” A distinctive feature of these authorizing BUDGET CALENDAR The following timetable highlights the scheduled dates for significant budget events during a normal budget year: Between the 1st Monday in January and the 1st Monday in February ������������������������������ President transmits the budget Six weeks later................................................... Congressional committees report budget estimates to Budget Committees April 15............................................................... Action to be completed on congressional budget resolution May 15................................................................ House consideration of annual appropriations bills may begin even if the budget resolution has not been agreed to. June 10............................................................... House Appropriations Committee to report the last of its annual appropriations bills. June 15............................................................... Action to be completed on “reconciliation bill” by the Congress. June 30............................................................... Action on appropriations to be completed by House July 15................................................................ President transmits Mid-Session Review of the Budget October 1............................................................. Fiscal year begins 72 laws is that they provide agencies with the authority or requirement to spend money without first requiring the Appropriations Committees to enact funding. This category of spending includes interest the Government pays on the public debt and the spending of several major programs, such as Social Security, Medicare, Medicaid, unemployment insurance, and Federal employee retirement. This chapter discusses the control of budget authority and outlays in greater detail under “Budget Authority and Other Budgetary Resources, Obligations, and Outlays.” Almost all taxes and most other receipts also result from authorizing laws. Article I, Section 7, of the Constitution provides that all bills for raising revenue shall originate in the House of Representatives. In the House, the Ways and Means Committee initiates tax bills; in the Senate, the Finance Committee has jurisdiction over tax laws. The budget resolution often includes reconciliation directives, which require authorizing committees to recommend changes in laws that affect receipts or mandatory spending. They direct each designated committee to report amendments to the laws under the committee’s jurisdiction that would achieve changes in the levels of receipts or reductions in mandatory spending controlled by those laws. These directives specify the dollar amount of changes that each designated committee is expected to achieve, but do not specify which laws are to be changed or the changes to be made. However, the Budget Committees’ reports on the budget resolution frequently discuss assumptions about how the laws would be changed. Like other assumptions in the report, they do not bind the committees of jurisdiction but may influence their decisions. A reconciliation instruction may also specify the total amount by which the statutory limit on the public debt is to be changed. The committees subject to reconciliation directives draft the implementing legislation. Such legislation may, for example, change the tax code, revise benefit formulas or eligibility requirements for benefit programs, or authorize Government agencies to charge fees to cover some of their costs. Reconciliation bills are typically omnibus legislation, combining the legislation submitted by each reconciled committee in a single act. Such a large and complicated bill would be difficult to enact under normal legislative procedures because it usually involves changes to tax rates or to popular social programs, generally to reduce projected deficits. The Senate considers such omnibus reconciliation acts under expedited procedures that limit total debate on the bill. To offset the procedural advantage gained by expedited procedures, the Senate places significant restrictions on the substantive content of the reconciliation measure itself, as well as on amendments to the measure. Any material in the bill that is extraneous or that contains changes to the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance programs is not in order under the Senate’s expedited reconciliation procedures. Non-germane amendments are also prohibited. The House does not allow reconciliation bills to increase mandatory spending in net, but does allow such bills to increase deficits by reducing revenues. Reconciliation ANALYTICAL PERSPECTIVES acts, together with appropriations acts for the year, are usually used to implement broad agreements between the President and the Congress on those occasions where the two branches have negotiated a comprehensive budget plan. Reconciliation acts have sometimes included other matters, such as laws providing the means for enforcing these agreements, as described under “Budget Enforcement.” Budget Enforcement The Federal Government uses three primary enforcement mechanisms to control revenues, spending, and deficits. First, the Statutory Pay-As-You-Go Act of 2010, enacted on February 12, 2010, reestablished a statutory procedure to enforce a rule of deficit neutrality on new revenue and mandatory spending legislation. Second, the Budget Control Act of 2011 (BCA), enacted on August 2, 2011, amended the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) by reinstating limits (“caps”) on the amount of discretionary budget authority that can be provided through the annual appropriations process. Third, the BCA also created a Joint Select Committee on Deficit Reduction that was instructed to develop a bill to reduce the Federal deficit by at least $1.5 trillion over a 10-year period and imposed automatic spending cuts to achieve $1.2 trillion of deficit reduction over 9 years after the Joint Committee process failed to achieve its deficit reduction goal. BBEDCA divides spending into two types—discretionary spending and direct or mandatory spending. Discretionary spending is controlled through annual appropriations acts. Funding for salaries and other operating expenses of government agencies, for example, is generally discretionary because it is usually provided by appropriations acts. Direct spending is more commonly called mandatory spending. Mandatory spending is controlled by permanent laws. Medicare and Medicaid payments, unemployment insurance benefits, and farm price supports are examples of mandatory spending, because permanent laws authorize payments for those purposes. Receipts are included under the same statutory enforcement rules that apply to mandatory spending because permanent laws generally control receipts. Discretionary cap enforcement. BBEDCA specifies spending limits (“caps”) on discretionary budget authority for 2012 through 2021. Similar enforcement mechanisms were established by the Budget Enforcement Act of 1990 and were extended in 1993 and 1997, but expired at the end of 2002. The caps originally established by the BCA were divided between security and nonsecurity categories for 2012 and 2013, with a single cap for all discretionary spending established for 2014 through 2021. The security category included discretionary budget authority for the Departments of Defense, Homeland Security, and Veterans Affairs, the National Nuclear Security Administration, the Intelligence Community Management account, and all budget accounts in the international affairs budget function (budget function 150). The nonsecurity category included all discretionary 8. Budget Concepts budget authority not included in the security category. As part of the enforcement mechanisms triggered by the failure of the BCA’s Joint Committee process, the security and nonsecurity categories were redefined and established for all years through 2021. The “revised security category” includes discretionary budget authority in the defense budget function 050, which primarily consists of the Department of Defense. The “revised nonsecurity category” includes all discretionary budget authority not included in the defense budget function 050. The redefined categories are commonly referred to as the “defense” and “non-defense” categories, respectively, to distinguish them from the original categories. Since the Joint Committee sequestration that was ordered on March 1, 2013, the Congress and the President have enacted two agreements to provide more resources to discretionary programs than would have been available under the Joint Committee enforcement mechanisms. These increases to the caps were paid for largely with savings in mandatory spending. The Bipartisan Budget Act (BBA) of 2013 set new discretionary caps for 2014 at $520.5 billion for the defense category and $491.8 billion for the non-defense category and for 2015 at $521.3 billion for the defense category and $492.4 billion for the nondefense category. The BBA of 2015 set new discretionary caps for 2016 at $548.1 billion for the defense category and $518.5 for the non-defense category and for 2017 at $551.1 billion for the defense category and $518.5 billion for the non-defense category. In addition, the BBA of 2013 reaffirmed the defense and non-defense category limits through 2021 and the BBA of 2015 left these in place after 2017. However, these limits are still subject to Joint Committee reductions if those procedures remain in place. BBEDCA requires OMB to adjust the caps each year for: changes in concepts and definitions; appropriations designated by the Congress and the President as emergency requirements; and appropriations designated by the Congress and the President for Overseas Contingency Operations/Global War on Terrorism. BBEDCA also specifies cap adjustments (which are limited to fixed amounts) for: appropriations for continuing disability reviews and redeterminations by the Social Security Administration; the health care fraud and abuse control program at the Department of Health and Human Services; and appropriations designated by Congress as being for disaster relief. BBEDCA requires OMB to provide cost estimates of each appropriations act in a report to the Congress within 7 business days after enactment of such act and to publish three discretionary sequestration reports: a “preview” report when the President submits the budget; an “update” report in August, and a “final” report within 15 days after the end of a session of the Congress. The preview report explains the adjustments that are required by law to the discretionary caps, including any changes in concepts and definitions, and publishes the revised caps. The preview report may also provide a summary of policy changes, if any, proposed by the President in the Budget to those caps. The update and final reports 73 revise the preview report estimates to reflect the effects of newly enacted discretionary laws. In addition, the update report must contain a preview estimate of the adjustment for disaster funding for the upcoming fiscal year. If OMB’s final sequestration report for a given fiscal year indicates that the amount of discretionary budget authority provided in appropriations acts for that year exceeds the cap for that category in that year, the President must issue a sequestration order canceling budgetary resources in nonexempt accounts within that category by the amount necessary to eliminate the breach. Under sequestration, each nonexempt account within a category is reduced by a dollar amount calculated by multiplying the enacted level of sequestrable budgetary resources in that account by the uniform percentage necessary to eliminate a breach within that category. BBEDCA specifies special rules for reducing some programs and exempts some programs from sequestration entirely. For example, any sequestration of certain health and medical care accounts is limited to 2 percent. Also, if a continuing resolution is in effect when OMB issues its final sequestration report, the sequestration calculations will be based on the annualized amount provided by that continuing resolution. During the 1990s and so far under the BCA caps, the threat of sequestration proved sufficient to ensure compliance with the discretionary spending limits. In that respect, discretionary sequestration can be viewed first as an incentive for compliance and second as a remedy for noncompliance. Supplemental appropriations can also trigger spending reductions. From the end of a session of the Congress through the following June 30th, a within-session discretionary sequestration of current-year spending is imposed if appropriations for the current year cause a cap to be breached. In contrast, if supplemental appropriations enacted in the last quarter of a fiscal year (i.e., July 1 through September 30) cause the caps to be breached, the required reduction is instead achieved by reducing the applicable spending limit for the following fiscal year by the amount of the breach, because the size of the potential sequestration in relation to the unused funding remaining for the current year could severely disrupt agencies’ operations. Direct spending enforcement. The Statutory PayAs-You-Go Act of 2010 requires that new legislation changing mandatory spending or revenue must be enacted on a “pay-as-you-go” (PAYGO) basis; that is, that the cumulative effects of such legislation must not increase projected on-budget deficits. Unlike the budget enforcement mechanism for discretionary programs, PAYGO is a permanent requirement, and it does not impose a cap on spending or a floor on revenues. Instead, PAYGO requires that legislation reducing revenues must be fully offset by cuts in mandatory programs or by revenue increases, and that any bills increasing mandatory spending must be fully offset by revenue increases or cuts in mandatory spending. This requirement of deficit neutrality is not enforced on a bill-by-bill basis, but is based on two cumulative scorecards that tally the cumulative budgetary effects 74 of PAYGO legislation as averaged over rolling 5- and 10year periods starting with the budget year. Any impacts of PAYGO legislation on the current year deficit are counted as budget year impacts when placed on the scorecard. Like the discretionary caps, PAYGO is enforced by sequestration. Within 14 business days after a congressional session ends, OMB issues an annual PAYGO report and determines whether a violation of the PAYGO requirement has occurred. If either the 5- or 10-year scorecard shows net costs in the budget year column, the President is required to issue a sequestration order implementing across-the-board cuts to nonexempt mandatory programs by an amount sufficient to offset those net costs. The PAYGO effects of legislation may be directed in legislation by reference to statements inserted into the Congressional Record by the chairmen of the House and Senate Budget Committees. Any such estimates are determined by the Budget Committees and are informed by, but not required to match, the cost estimates prepared by the Congressional Budget Office (CBO). If this procedure is not followed, then the PAYGO effects of the legislation are determined by OMB. During the first year of statutory PAYGO, nearly half the bills included congressional estimates. In the subsequent six years, OMB estimates were used for all but one of the enacted bills due to the absence of a congressional estimate. Provisions of mandatory spending or receipts legislation that are designated in that legislation as an emergency requirement are not scored as PAYGO budgetary effects. The PAYGO rules apply to the outlays resulting from outyear changes in mandatory programs made in appropriations acts and to all revenue changes made in appropriations acts. However, outyear changes to mandatory programs as part of provisions that have zero net outlay effects over the sum of the current year and the next five fiscal years are not considered PAYGO. The PAYGO rules do not apply to increases in mandatory spending or decreases in receipts that result automatically under existing law. For example, mandatory spending for benefit programs, such as unemployment insurance, rises when the number of beneficiaries rises, and many benefit payments are automatically increased for inflation under existing laws. The Senate imposes points of order against consideration of tax or mandatory spending legislation that would violate the PAYGO principle, although the time periods covered by the Senate’s rule and the treatment of previously enacted costs or savings may differ in some respects from the requirements of the Statutory Pay-As-You-Go Act of 2010. The House, in contrast, imposes points of order on legislation increasing mandatory spending in net, whether or not those costs are offset by revenue increases, but the House rule does not constrain the size of tax cuts or require them to be offset. Joint Committee reductions. The failure of the Joint Select Committee on Deficit Reduction to propose, and the Congress to enact, legislation to reduce the deficit by at least $1.2 trillion triggered automatic reductions to discretionary and mandatory spending in fiscal years 2013 through 2021. The reductions are implemented through ANALYTICAL PERSPECTIVES a combination of sequestration of mandatory spending and reductions in the discretionary caps. These reductions have already been ordered to take effect for 2013 through 2018, with some modifications as provided for in the American Taxpayer Relief Act of 2012, the BBA of 2013, and the BBA of 2015. Unless any legislative changes are enacted, further reductions will be implemented by pro rata reductions to the discretionary caps from 2019 through 2021, which would be reflected in OMB’s discretionary sequestration preview report for those years, and by a sequestration of non-exempt mandatory spending for 2019 onward, which would be ordered when the President’s Budget is transmitted to Congress and would take effect beginning October 1 of the upcoming fiscal year. OMB is required to calculate the amount of the deficit reduction required for 2019 onward as follows: • The $1.2 trillion savings target is reduced by 18 percent to account for debt service. • The resulting net savings of $984 billion is divided by nine to spread the reductions in equal amounts across the nine years, 2013 through 2021. • The annual spending reduction of $109.3 billion is divided equally between the defense and non-defense functions. • The annual reduction of $54.7 billion for each func- tional category of spending is divided proportionally between discretionary and direct spending programs, using as the base the discretionary cap, redefined as outlined in the discretionary cap enforcement section above, and the most recent baseline estimate of non-exempt mandatory outlays. • The resulting reductions in defense and non-defense direct spending are implemented through a sequestration order released with the President’s Budget and taking effect the following October 1st. The reductions in discretionary spending are applied as reductions in the discretionary caps, and are enforced through the discretionary cap enforcement procedures discussed earlier in this section. Subsequent to the enactment of the BCA, the mandatory sequestration provisions were extended beyond 2021 by the BBA of 2013, which extended sequestration through 2023, P.L. 113-82, commonly referred to as the Military Retired Pay Restoration Act, which extended sequestration through 2024, and the BBA of 2015, which extended mandatory sequestration through 2025. Sequestration in these four years is to be applied using the same percentage reductions for defense and non-defense as calculated for 2021 under the procedures outlined above.2 The 2018 Budget proposes that the discretionary cap reductions for 2018 for the defense function, as ordered in the Joint Committee enforcement report issued simulta2 The BBA of 2015 specified that, notwithstanding the 2 percent limit on Medicare sequestration in the BCA, in extending sequestration into 2025 the reduction in the Medicare program should be 4.0 percent for the first half of the sequestration period and zero for the second half of the period. 75 8. Budget Concepts neously with the 2018 Budget, be reversed, and that the reductions that would otherwise apply to the defense cap instead be applied to the non-defense cap. The Budget further proposes that the outyear reductions to the caps for the defense category be reversed and replaced with further reductions to the non-defense category. In addition, the Budget proposes that the Joint Committee mandatory sequestration be extended to 2027. For more information on these proposals, see Chapter 10 of this volume, “Budget Process.” Budget Execution Government agencies may not spend or obligate more than the Congress has appropriated, and they may use funds only for purposes specified in law. The Antideficiency Act prohibits them from spending or obligating the Government to spend in advance of an appropriation, unless specific authority to do so has been provided in law. Additionally, the Act requires the President to apportion the budgetary resources available for most executive branch agencies. The President has delegated this authority to OMB. Some apportionments are by time periods (usually by quarter of the fiscal year), some are by projects or activities, and others are by a combination of both. Agencies may request OMB to reapportion funds during the year to accommodate changing circumstances. This system helps to ensure that funds do not run out before the end of the fiscal year. During the budget execution phase, the Government sometimes finds that it needs more funding than the Congress has appropriated for the fiscal year because of unanticipated circumstances. For example, more might be needed to respond to a severe natural disaster. Under such circumstances, the Congress may enact a supplemental appropriation. On the other hand, the President may propose to reduce a previously enacted appropriation. The President may propose to either “cancel” or “rescind” the amount. If the President initiates the withholding of funds while the Congress considers his request, the amounts are apportioned as “deferred” or “withheld pending rescission” on the OMB-approved apportionment form. Agencies are instructed not to withhold funds without the prior approval of OMB. When OMB approves a withholding, the Impoundment Control Act requires that the President transmit a “special message” to the Congress. The historical reason for the special message is to inform the Congress that the President has unilaterally withheld funds that were enacted in regular appropriations acts. The notification allows the Congress to consider the proposed rescission in a timely way. The last time the President initiated the withholding of funds was in fiscal year 2000. COVERAGE OF THE BUDGET Federal Government and Budget Totals The budget documents provide information on all Federal agencies and programs. However, because the laws governing Social Security (the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance trust funds) and the Postal Service Fund require that the receipts and outlays for those activities be excluded from the budget totals and from the calculation of the deficit or surplus, the budget presents on-budget and off-budget totals. The off-budget totals include the Federal transactions excluded by law from the budget totals. The on-budget and off-budget amounts are added together to derive the totals for the Federal Government. These are sometimes referred to as the unified or consolidated budget totals. It is not always obvious whether a transaction or activity should be included in the budget. Where there is a question, OMB normally follows the recommendation of the 1967 President’s Commission on Budget Concepts to be comprehensive of the full range of Federal agencies, programs, and activities. In recent years, for example, the budget has included the transactions of the Affordable Housing Program funds, the Universal Service Fund, the Public Company Accounting Oversight Board, the Securities Investor Protection Corporation, Guaranty Agencies Reserves, the National Railroad Retirement Investment Trust, the United Mine Workers Combined Benefits Fund, the Federal Financial Institutions Examination Council, Electric Reliability Organizations (EROs) established pursuant to the Energy Policy Act of 2005, the Corporation for Travel Promotion, and the National Association of Registered Agents and Brokers. In contrast, the budget excludes tribal trust funds that are owned by Indian tribes and held and managed by the Government in a fiduciary capacity on the tribes’ behalf. These funds are not owned by the Government, the Government is not the source of their capital, and the Government’s control is limited to the exercise of fiduciary duties. Similarly, the transactions of Government-sponsored enterprises, such as the Federal Home Loan Banks, are not included in the on-budget or off-budget totals. Federal laws established these enterprises for public policy purposes, but they are privately owned and operated corporations. Nevertheless, because of their public charters, the budget discusses them and reports summary financial data in the budget Appendix and in some detailed tables. The budget also excludes the revenues from copyright royalties and spending for subsequent payments to copyright holders where (1) the law allows copyright owners and users to voluntarily set the rate paid for the use of protected material, and (2) the amount paid by users of copyrighted material to copyright owners is related to the frequency or quantity of the material used. The budget excludes license royalties collected and paid out by the Copyright Office for the retransmission of network broadcasts via cable collected under 17 U.S.C. 111 because these revenues meet both of these conditions. The budget includes the royalties collected and paid out for license fees for digital audio re- 76 ANALYTICAL PERSPECTIVES cording technology under 17 U.S.C. 1004, since the amount of license fees paid is unrelated to usage of the material. The Appendix includes a presentation for the Board of Governors of the Federal Reserve System for information only. The amounts are not included in either the on-budget or off-budget totals because of the independent status of the System within the Government. However, the Federal Reserve System transfers its net earnings to the Treasury, and the budget records them as receipts. Chapter 9 of this volume, “Coverage of the Budget,” provides more information on this subject. Table 8–1. TOTALS FOR THE BUDGET AND THE FEDERAL GOVERNMENT Estimate 2017 •A function must be of continuing national importance, and the amounts attributable to it must be significant. • Each (In billions of dollars) 2016 Actual seeks to accomplish rather than the means of accomplishment, the objects purchased, the clientele or geographic area served (except in the cases of functions 450 for Community and Regional Development, 570 for Medicare, 650 for Social Security, and 700 for Veterans Benefits and Services), or the Federal agency conducting the activity (except in the case of subfunction 051 in the National Defense function, which is used only for defense activities under the Department of Defense—Military). 2018 Budget authority Unified ������������������������������������������������������������������������� On-budget ��������������������������������������������������������������� Off-budget ��������������������������������������������������������������� 3,973 3,193 780 4,111 3,297 814 4,279 3,407 872 Receipts: Unified ������������������������������������������������������������������������� On-budget ��������������������������������������������������������������� Off-budget ��������������������������������������������������������������� 3,268 2,458 810 3,460 2,602 857 3,654 2,762 892 Outlays: Unified ������������������������������������������������������������������������� On-budget ��������������������������������������������������������������� Off-budget ��������������������������������������������������������������� 3,853 3,078 775 4,062 3,247 815 4,094 3,228 867 Deficit (–) / Surplus (+): Unified ������������������������������������������������������������������������� On-budget ��������������������������������������������������������������� Off-budget ��������������������������������������������������������������� –585 –620 36 –603 –644 42 –440 –465 25 Functional Classification The functional classification is used to organize budget authority, outlays, and other budget data according to the major purpose served—such as agriculture, transportation, income security, and national defense. There are 20 major functions, 17 of which are concerned with broad areas of national need and are further divided into subfunctions. For example, the Agriculture function comprises the subfunctions Farm Income Stabilization and Agricultural Research and Services. The functional classification meets the Congressional Budget Act requirement for a presentation in the budget by national needs and agency missions and programs. The remaining three functions—Net Interest, Undistributed Offsetting Receipts, and Allowances—enable the functional classification system to cover the entire Federal budget. The following criteria are used in establishing functional categories and assigning activities to them: • A function encompasses activities with similar purposes, emphasizing what the Federal Government basic unit being classified (generally the appropriation or fund account) usually is classified according to its primary purpose and assigned to only one subfunction. However, some large accounts that serve more than one major purpose are subdivided into two or more functions or subfunctions. In consultation with the Congress, the functional classification is adjusted from time to time as warranted. Detailed functional tables, which provide information on Government activities by function and subfunction, are available online at www.budget.gov/budget/Analytical_ Perspectives and on the Budget CD-ROM. Agencies, Accounts, Programs, Projects, and Activities Various summary tables in the Analytical Perspectives volume of the Budget provide information on budget authority, outlays, and offsetting collections and receipts arrayed by Federal agency. A table that lists budget authority and outlays by budget account within each agency and the totals for each agency of budget authority, outlays, and receipts that offset the agency spending totals is available online at: www.budget.gov/budget/Analytical_ Perspectives and on the Budget CD-ROM. The Appendix provides budgetary, financial, and descriptive information about programs, projects, and activities by account within each agency. Types of Funds Agency activities are financed through Federal funds and trust funds. Federal funds comprise several types of funds. Receipt accounts of the general fund, which is the greater part of the budget, record receipts not earmarked by law for a specific purpose, such as income tax receipts. The general fund also includes the proceeds of general borrowing. General fund appropriations accounts record general fund expenditures. General fund appropriations draw from general fund receipts and borrowing collectively and, therefore, are not specifically linked to receipt accounts. Special funds consist of receipt accounts for Federal fund receipts that laws have designated for specific pur- 77 8. Budget Concepts poses and the associated appropriation accounts for the expenditure of those receipts. Public enterprise funds are revolving funds used for programs authorized by law to conduct a cycle of business-type operations, primarily with the public, in which outlays generate collections. Intragovernmental funds are revolving funds that conduct business-type operations primarily within and between Government agencies. The collections and the outlays of revolving funds are recorded in the same budget account. Trust funds account for the receipt and expenditure of monies by the Government for carrying out specific purposes and programs in accordance with the terms of a statute that designates the fund as a trust fund (such as the Highway Trust Fund) or for carrying out the stipulations of a trust where the Government itself is the beneficiary (such as any of several trust funds for gifts and donations for specific purposes). Trust revolving funds are trust funds credited with collections earmarked by law to carry out a cycle of business-type operations. The Federal budget meaning of the term “trust,” as applied to trust fund accounts, differs significantly from its private-sector usage. In the private sector, the beneficiary of a trust usually owns the trust’s assets, which are managed by a trustee who must follow the stipulations of the trust. In contrast, the Federal Government owns the assets of most Federal trust funds, and it can raise or lower future trust fund collections and payments, or change the purposes for which the collections are used, by changing existing laws. There is no substantive difference between a trust fund and a special fund or between a trust revolving fund and a public enterprise revolving fund. However, in some instances, the Government does act as a true trustee of assets that are owned or held for the benefit of others. For example, it maintains accounts on behalf of individual Federal employees in the Thrift Savings Fund, investing them as directed by the individual employee. The Government accounts for such funds in deposit funds, which are not included in the budget. (Chapter 23 of this volume, “Trust Funds and Federal Funds,” provides more information on this subject.) Budgeting for Full Costs A budget is a financial plan for allocating resources—deciding how much the Federal Government should spend in total, program by program, and for the parts of each program and deciding how to finance the spending. The budgetary system provides a process for proposing policies, making decisions, implementing them, and reporting the results. The budget needs to measure costs accurately so that decision makers can compare the cost of a program with its benefits, the cost of one program with another, and the cost of one method of reaching a specified goal with another. These costs need to be fully included in the budget up front, when the spending decision is made, so that executive and congressional decision makers have the information and the incentive to take the total costs into account when setting priorities. The budget includes all types of spending, including both current operating expenditures and capital investment, and to the extent possible, both are measured on the basis of full cost. Questions are often raised about the measure of capital investment. The present budget provides policymakers the necessary information regarding investment spending. It records investment on a cash basis, and it requires the Congress to provide budget authority before an agency can obligate the Government to make a cash outlay. However, the budget measures only costs, and the benefits with which these costs are compared, based on policy makers’ judgment, must be presented in supplementary materials. By these means, the budget allows the total cost of capital investment to be compared up front in a rough way with the total expected future net benefits. Such a comparison of total costs with benefits is consistent with the formal method of cost-benefit analysis of capital projects in government, in which the full cost of a capital asset as the cash is paid out is compared with the full stream of future benefits (all in terms of present values). (Chapter 17 of this volume, “Federal Investment,’’ provides more information on capital investment.) RECEIPTS, OFFSETTING COLLECTIONS, AND OFFSETTING RECEIPTS In General Governmental Receipts The budget records amounts collected by Government agencies two different ways. Depending on the nature of the activity generating the collection and the law that established the collection, they are recorded as either: • Governmental receipts, which are compared in total to outlays (net of offsetting collections and offsetting receipts) in calculating the surplus or deficit; or Governmental receipts are collections that result from the Government’s exercise of its sovereign power to tax or otherwise compel payment. Sometimes they are called receipts, budget receipts, Federal receipts, or Federal revenues. They consist mostly of individual and corporation income taxes and social insurance taxes, but also include excise taxes, compulsory user charges, regulatory fees, customs duties, court fines, certain license fees, and deposits of earnings by the Federal Reserve System. Total receipts for the Federal Government include both on-budget and off-budget receipts (see Table 8–1, “Totals for the Budget and the Federal Government,” which appears earlier in this chapter.) Chapter 11 of this volume, • Offsetting collections or offsetting receipts, which are deducted from gross outlays to calculate net outlay figures. 78 ANALYTICAL PERSPECTIVES “Governmental Receipts,’’ provides more information on governmental receipts. Offsetting Collections and Offsetting Receipts Offsetting collections and offsetting receipts are recorded as offsets to (deductions from) spending, not as additions on the receipt side of the budget. These amounts are recorded as offsets to outlays so that the budget totals represent governmental rather than market activity and reflect the Government’s net transactions with the public. They are recorded in one of two ways, based on interpretation of laws and longstanding budget concepts and practice. They are offsetting collections when the collections are authorized by law to be credited to expenditure accounts and are generally available for expenditure without further legislation. Otherwise, they are deposited in receipt accounts and called offsetting receipts; many of these receipts are available for expenditure without further legislation. Offsetting collections and offsetting receipts result from any of the following types of transactions: • Business-like transactions or market-oriented activities with the public—these include voluntary collections from the public in exchange for goods or services, such as the proceeds from the sale of postage stamps, the fees charged for admittance to recreation areas, and the proceeds from the sale of Government-owned land; and reimbursements for damages. The budget records these amounts as offsetting collections from non-Federal sources (for offsetting collections) or as proprietary receipts (for offsetting receipts). • Intragovernmental transactions—collections from other Federal Government accounts. The budget records collections by one Government account from another as offsetting collections from Federal sources (for offsetting collections) or as intragovernmental receipts (for offsetting receipts). For example, the General Services Administration rents office space to other Government agencies and records their rental payments as offsetting collections from Federal sources in the Federal Buildings Fund. These transactions are exactly offsetting and do not affect the surplus or deficit. However, they are an important accounting mechanism for allocating costs to the programs and activities that cause the Government to incur the costs. • Voluntary gifts and donations—gifts and donations of money to the Government, which are treated as offsets to budget authority and outlays. • Offsetting governmental transactions—collections from the public that are governmental in nature and should conceptually be treated like Federal revenues and compared in total to outlays (e.g., tax receipts, regulatory fees, compulsory user charges, custom duties, license fees) but required by law or longstanding practice to be misclassified as offset- ting. The budget records amounts from non-Federal sources that are governmental in nature as offsetting governmental collections (for offsetting collections) or as offsetting governmental receipts (for offsetting receipts). Offsetting Collections Some laws authorize agencies to credit collections directly to the account from which they will be spent and, usually, to spend the collections for the purpose of the account without further action by the Congress. Most revolving funds operate with such authority. For example, a permanent law authorizes the Postal Service to use collections from the sale of stamps to finance its operations without a requirement for annual appropriations. The budget records these collections in the Postal Service Fund (a revolving fund) and records budget authority in an amount equal to the collections. In addition to revolving funds, some agencies are authorized to charge fees to defray a portion of costs for a program that are otherwise financed by appropriations from the general fund and usually to spend the collections without further action by the Congress. In such cases, the budget records the offsetting collections and resulting budget authority in the program’s general fund expenditure account. Similarly, intragovernmental collections authorized by some laws may be recorded as offsetting collections and budget authority in revolving funds or in general fund expenditure accounts. Sometimes appropriations acts or provisions in other laws limit the obligations that can be financed by offsetting collections. In those cases, the budget records budget authority in the amount available to incur obligations, not in the amount of the collections. Offsetting collections credited to expenditure accounts automatically offset the outlays at the expenditure account level. Where accounts have offsetting collections, the budget shows the budget authority and outlays of the account both gross (before deducting offsetting collections) and net (after deducting offsetting collections). Totals for the agency, subfunction, and overall budget are net of offsetting collections. Offsetting Receipts Collections that are offset against gross outlays but are not authorized to be credited to expenditure accounts are credited to receipt accounts and are called offsetting receipts. Offsetting receipts are deducted from budget authority and outlays in arriving at total net budget authority and outlays. However, unlike offsetting collections credited to expenditure accounts, offsetting receipts do not offset budget authority and outlays at the account level. In most cases, they offset budget authority and outlays at the agency and subfunction levels. Proprietary receipts from a few sources, however, are not offset against any specific agency or function and are classified as undistributed offsetting receipts. They are deducted from the Government-wide totals for net bud- 79 8. Budget Concepts get authority and outlays. For example, the collections of rents and royalties from outer continental shelf lands are undistributed because the amounts are large and for the most part are not related to the spending of the agency that administers the transactions and the subfunction that records the administrative expenses. Similarly, two kinds of intragovernmental transactions—agencies’ payments as employers into Federal employee retirement trust funds and interest received by trust funds—are classified as undistributed offsetting receipts. They appear instead as special deductions in computing total net budget authority and outlays for the Government rather than as offsets at the agency level. This special treatment is necessary because the amounts are so large they would distort measures of the agency’s activities if they were attributed to the agency. User Charges User charges are fees assessed on individuals or organizations for the provision of Government services and for the sale or use of Government goods or resources. The payers of the user charge must be limited in the authorizing legislation to those receiving special benefits from, or subject to regulation by, the program or activity beyond the benefits received by the general public or broad segments of the public (such as those who pay income taxes or customs duties). Policy regarding user charges is established in OMB Circular A–25, “User Charges.” The term encompasses proceeds from the sale or use of Government goods and services, including the sale of natural resources (such as timber, oil, and minerals) and proceeds from asset sales (such as property, plant, and equipment). User charges are not necessarily dedicated to the activity they finance and may be credited to the general fund of the Treasury. The term “user charge” does not refer to a separate budget category for collections. User charges are classified in the budget as receipts, offsetting receipts, or offsetting collections according to the principles explained previously. See Chapter 12, “Offsetting Collections and Offsetting Receipts,” for more information on the classification of user charges. BUDGET AUTHORITY, OBLIGATIONS, AND OUTLAYS Budget authority, obligations, and outlays are the primary benchmarks and measures of the budget control system. The Congress enacts laws that provide agencies with spending authority in the form of budget authority. Before agencies can use these resources—obligate this budget authority—OMB must approve their spending plans. After the plans are approved, agencies can enter into binding agreements to purchase items or services or to make grants or other payments. These agreements are recorded as obligations of the United States and deducted from the amount of budgetary resources available to the agency. When payments are made, the obligations are liquidated and outlays recorded. These concepts are discussed more fully below. Budget Authority and Other Budgetary Resources Budget authority is the authority provided in law to enter into legal obligations that will result in immediate or future outlays of the Government. In other words, it is the amount of money that agencies are allowed to commit to be spent in current or future years. Government officials may obligate the Government to make outlays only to the extent they have been granted budget authority. The budget records new budget authority as a dollar amount in the year when it first becomes available for obligation. When permitted by law, unobligated balances of budget authority may be carried over and used in the next year. The budget does not record these balances as budget authority again. They do, however, constitute a budgetary resource that is available for obligation. In some cases, a provision of law (such as a limitation on obligations or a benefit formula) precludes the obligation of funds that would otherwise be available for obligation. In such cases, the budget records budget authority equal to the amount of obligations that can be incurred. A major exception to this rule is for the highway and mass transit programs financed by the Highway Trust Fund, where budget authority is measured as the amount of contract authority (described later in this chapter) provided in authorizing statutes, even though the obligation limitations enacted in annual appropriations acts restrict the amount of contract authority that can be obligated. In deciding the amount of budget authority to request for a program, project, or activity, agency officials estimate the total amount of obligations they will need to incur to achieve desired goals and subtract the unobligated balances available for these purposes. The amount of budget authority requested is influenced by the nature of the programs, projects, or activities being financed. For current operating expenditures, the amount requested usually covers the needs for the fiscal year. For major procurement programs and construction projects, agencies generally must request sufficient budget authority in the first year to fully fund an economically useful segment of a procurement or project, even though it may be obligated over several years. This full funding policy is intended to ensure that the decision-makers take into account all costs and benefits fully at the time decisions are made to provide resources. It also avoids sinking money into a procurement or project without being certain if or when future funding will be available to complete the procurement or project. Budget authority takes several forms: • Appropriations, provided in annual appropriations acts or authorizing laws, permit agencies to incur obligations and make payment; • Borrowing authority, usually provided in permanent laws, permits agencies to incur obligations but 80 ANALYTICAL PERSPECTIVES requires them to borrow funds, usually from the general fund of the Treasury, to make payment; • Contract authority, usually provided in permanent law, permits agencies to incur obligations in advance of a separate appropriation of the cash for payment or in anticipation of the collection of receipts that can be used for payment; and • Spending authority from offsetting collections, usually provided in permanent law, permits agencies to credit offsetting collections to an expenditure account, incur obligations, and make payment using the offsetting collections. Because offsetting collections and offsetting receipts are deducted from gross budget authority, they are referred to as negative budget authority for some purposes, such as Congressional Budget Act provisions that pertain to budget authority. Authorizing statutes usually determine the form of budget authority for a program. The authorizing statute may authorize a particular type of budget authority to be provided in annual appropriations acts, or it may provide one of the forms of budget authority directly, without the need for further appropriations. An appropriation may make funds available from the general fund, special funds, or trust funds, or authorize the spending of offsetting collections credited to expenditure accounts, including revolving funds. Borrowing authority is usually authorized for business-like activities where the activity being financed is expected to produce income over time with which to repay the borrowing with interest. The use of contract authority is traditionally limited to transportation programs. New budget authority for most Federal programs is normally provided in annual appropriations acts. However, new budget authority is also made available through permanent appropriations under existing laws and does not require current action by the Congress. Much of the permanent budget authority is for trust funds, interest on the public debt, and the authority to spend offsetting collections credited to appropriation or fund accounts. For most trust funds, the budget authority is appropriated automatically under existing law from the available balance of the fund and equals the estimated annual obligations of the funds. For interest on the public debt, budget authority is provided automatically under a permanent appropriation enacted in 1847 and equals interest outlays. Annual appropriations acts generally make budget authority available for obligation only during the fiscal year to which the act applies. However, they frequently allow budget authority for a particular purpose to remain available for obligation for a longer period or indefinitely (that is, until expended or until the program objectives have been attained). Typically, budget authority for current operations is made available for only one year, and budget authority for construction and some research projects is available for a specified number of years or indefinitely. Most budget authority provided in authorizing statutes, such as for most trust funds, is available indefinitely. If budget authority is initially provided for a limited period of availability, an extension of availability would require enactment of another law (see “Reappropriation” later in this chapter). Budget authority that is available for more than one year and not obligated in the year it becomes available is carried forward for obligation in a following year. In some cases, an account may carry forward unobligated budget authority from more than one prior year. The sum of such amounts constitutes the account’s unobligated balance. Most of these balances had been provided for specific uses such as the multi-year construction of a major project and so are not available for new programs. A small part may never be obligated or spent, primarily amounts provided for contingencies that do not occur or reserves that never have to be used. Amounts of budget authority that have been obligated but not yet paid constitute the account’s unpaid obligations. For example, in the case of salaries and wages, one to three weeks elapse between the time of obligation and the time of payment. In the case of major procurement and construction, payments may occur over a period of several years after the obligation is made. Unpaid obligations (which are made up of accounts payable and undelivered orders) net of the accounts receivable and unfilled customers’ orders are defined by law as the obligated balances. Obligated balances of budget authority at the end of the year are carried forward until the obligations are paid or the balances are canceled. (A general law provides that the obligated balances of budget authority that was made available for a definite period is automatically cancelled five years after the end of the period.) Due to such flows, a change in the amount of budget authority available in any one year may change the level of obligations and outlays for several years to come. Conversely, a change in the amount of obligations incurred from one year to the next does not necessarily result from an equal change in the amount of budget authority available for that year and will not necessarily result in an equal change in the level of outlays in that year. The Congress usually makes budget authority available on the first day of the fiscal year for which the appropriations act is passed. Occasionally, the appropriations language specifies a different timing. The language may provide an advance appropriation—budget authority that does not become available until one year or more beyond the fiscal year for which the appropriations act is passed. Forward funding is budget authority that is made available for obligation beginning in the last quarter of the fiscal year (beginning on July 1) for the financing of ongoing grant programs during the next fiscal year. This kind of funding is used mostly for education programs, so that obligations for education grants can be made prior to the beginning of the next school year. For certain benefit programs funded by annual appropriations, the appropriation provides for advance funding—budget authority that is to be charged to the appropriation in the succeeding year, but which authorizes obligations to be incurred in the last quarter of the current fiscal year if necessary to meet benefit payments in excess of the specific amount 81 8. Budget Concepts appropriated for the year. When such authority is used, an adjustment is made to increase the budget authority for the fiscal year in which it is used and to reduce the budget authority of the succeeding fiscal year. Provisions of law that extend into a new fiscal year the availability of unobligated amounts that have expired or would otherwise expire are called reappropriations. Reappropriations of expired balances that are newly available for obligation in the current or budget year count as new budget authority in the fiscal year in which the balances become newly available. For example, if a 2016 appropriations act extends the availability of unobligated budget authority that expired at the end of 2015, new budget authority would be recorded for 2016. This scorekeeping is used because a reappropriation has exactly the same effect as allowing the earlier appropriation to expire at the end of 2015 and enacting a new appropriation for 2016. For purposes of BBEDCA and the Statutory Pay-AsYou-Go Act of 2010 (discussed earlier under “Budget Enforcement’’), the budget classifies budget authority as discretionary or mandatory. This classification indicates whether an appropriations act or authorizing legislation controls the amount of budget authority that is available. Generally, budget authority is discretionary if provided in an annual appropriations act and mandatory if provided in authorizing legislation. However, the budget authority provided in annual appropriations acts for certain specifically identified programs is also classified as mandatory by OMB and the congressional scorekeepers. This is because the authorizing legislation for these programs entitles beneficiaries—persons, households, or other levels of government—to receive payment, or otherwise legally obligates the Government to make payment and thereby effectively determines the amount of budget authority required, even though the payments are funded by a subsequent appropriation. Sometimes, budget authority is characterized as current or permanent. Current authority requires the Congress to act on the request for new budget authority for the year involved. Permanent authority becomes available pursuant to standing provisions of law without appropriations action by the Congress for the year involved. Generally, budget authority is current if an annual appropriations act provides it and permanent if authorizing legislation provides it. By and large, the current/permanent distinction has been replaced by the discretionary/mandatory distinction, which is similar but not identical. Outlays are also classified as discretionary or mandatory according to the classification of the budget authority from which they flow (see “Outlays’’ later in this chapter). The amount of budget authority recorded in the budget depends on whether the law provides a specific amount or employs a variable factor that determines the amount. It is considered definite if the law specifies a dollar amount (which may be stated as an upper limit, for example, “shall not exceed …”). It is considered indefinite if, instead of specifying an amount, the law permits the amount to be determined by subsequent circumstances. For example, indefinite budget authority is provided for interest on the public debt, payment of claims and judgments awarded by the courts against the United States, and many entitlement programs. Many of the laws that authorize collections to be credited to revolving, special, and trust funds make all of the collections available for expenditure for the authorized purposes of the fund, and such authority is considered to be indefinite budget authority because the amount of collections is not known in advance of their collection. Obligations Following the enactment of budget authority and the completion of required apportionment action, Government agencies incur obligations to make payments (see earlier discussion under “Budget Execution”). Agencies must record obligations when they enter into binding agreements that will result in immediate or future outlays. Such obligations include the current liabilities for salaries, wages, and interest; and contracts for the purchase of supplies and equipment, construction, and the acquisition of office space, buildings, and land. For Federal credit programs, obligations are recorded in an amount equal to the estimated subsidy cost of direct loans and loan guarantees (see “Federal Credit” later in this chapter). Outlays Outlays are the measure of Government spending. They are payments that liquidate obligations (other than most exchanges of financial instruments, of which the repayment of debt is the prime example). The budget records outlays when obligations are paid, in the amount that is paid. Agency, function and subfunction, and Governmentwide outlay totals are stated net of offsetting collections and offsetting receipts for most budget presentations. (Offsetting receipts from a few sources do not offset any specific function, subfunction, or agency, as explained previously, but only offset Government-wide totals.) Outlay totals for accounts with offsetting collections are stated both gross and net of the offsetting collections credited to the account. However, the outlay totals for special and trust funds with offsetting receipts are not stated net of the offsetting receipts. In most cases, these receipts offset the agency, function, and subfunction totals but do not offset account-level outlays. However, when general fund payments are used to finance trust fund outlays to the public, the associated trust fund receipts are netted against the bureau totals to prevent double-counting budget authority and outlays at the bureau level. The Government usually makes outlays in the form of cash (currency, checks, or electronic fund transfers). However, in some cases agencies pay obligations without disbursing cash, and the budget nevertheless records outlays for the equivalent method. For example, the budget records outlays for the full amount of Federal employees’ salaries, even though the cash disbursed to employees is net of Federal and State income taxes withheld, retirement contributions, life and health insurance premiums, 82 ANALYTICAL PERSPECTIVES Chart 8-1. Relationship of Budget Authority to Outlays for 2018 (Billions of dollars) New Authority Recommended for 2018 4,279 Unspent Authority Enacted in Prior Years 2,353 To be spent in 2018 Outlays in 2018 3,231 To b e in fu spent ture year s nt pe e s 18 b 0 To in 2 -4 4,094 863 1,0 Authority written off, expired, and adjusted (net) To be spent in Future Years 1,486 and other deductions. (The budget also records receipts for the amounts withheld from Federal employee paychecks for Federal income taxes and other payments to the Government.) When debt instruments (bonds, debentures, notes, or monetary credits) are used in place of cash to pay obligations, the budget records outlays financed by an increase in agency debt. For example, the budget records the acquisition of physical assets through certain types of lease-purchase arrangements as though a cash disbursement were made for an outright purchase. The transaction creates a Government debt, and the cash lease payments are treated as repayments of principal and interest. The budget records outlays for the interest on the public issues of Treasury debt securities as the interest accrues, not when the cash is paid. A small portion of Treasury debt consists of inflation-indexed securities, which feature monthly adjustments to principal for inflation and semi annual payments of interest on the inflation-adjusted principal. As with fixed-rate securities, the budget records interest outlays as the interest accrues. The monthly adjustment to principal is recorded, simultaneously, as an increase in debt outstanding and an outlay of interest. Most Treasury debt securities held by trust funds and other Government accounts are in the Government account series. The budget normally states the interest on these securities on a cash basis. When a Government account is invested in Federal debt securities, the purchase price is usually close or identical to the par (face) value of the security. The budget generally records the investment at par value and adjusts the interest paid by Treasury and collected by the account by the difference between purchase price and par, if any. For Federal credit programs, outlays are equal to the subsidy cost of direct loans and loan guarantees and are recorded as the underlying loans are disbursed (see “Federal Credit” later in this chapter). 48 Unspent Authority for Outlays in Future Years 2,534 The budget records refunds of receipts that result from overpayments by the public (such as income taxes withheld in excess of tax liabilities) as reductions of receipts, rather than as outlays. However, the budget records payments to taxpayers for refundable tax credits (such as earned income tax credits) that exceed the taxpayer’s tax liability as outlays. Similarly, when the Government makes overpayments that are later returned to the Government, those refunds to the Government are recorded as offsetting collections or offsetting receipts, not as governmental receipts. Not all of the new budget authority for 2018 will be obligated or spent in 2018. Outlays during a fiscal year may liquidate obligations incurred in the same year or in prior years. Obligations, in turn, may be incurred against budget authority provided in the same year or against unobligated balances of budget authority provided in prior years. Outlays, therefore, flow in part from budget authority provided for the year in which the money is spent and in part from budget authority provided for prior years. The ratio of a given year’s outlays resulting from budget authority enacted in that or a prior year to the original amount of that budget authority is referred to as the outlay rate for that year. As shown in the accompanying chart, $3,231 billion of outlays in 2018 (79 percent of the outlay total) will be made from that year’s $4,279 billion total of proposed new budget authority (a first-year outlay rate of 76 percent). Thus, the remaining $863 billion of outlays in 2018 (21 percent of the outlay total) will be made from budget authority enacted in previous years. At the same time, $1,048 billion of the new budget authority proposed for 2018 (24 percent of the total amount proposed) will not lead to outlays until future years. As described earlier, the budget classifies budget authority and outlays as discretionary or mandatory. This classification of outlays measures the extent to which 83 8. Budget Concepts actual spending is controlled through the annual appropriations process. About 31 percent of total outlays in 2016 ($1,185 billion) were discretionary and the remaining 69 percent ($2,667 billion in 2016) were mandatory spending and net interest. Such a large portion of total spending is mandatory because authorizing rather than appropriations legislation determines net interest ($240 billion in 2016) and the spending for a few programs with large amounts of spending each year, such as Social Security ($910 billion in 2016) and Medicare ($588 billion in 2016). The bulk of mandatory outlays flow from budget authority recorded in the same fiscal year. This is not necessarily the case for discretionary budget authority and outlays. For most major construction and procurement projects and long-term contracts, for example, the budget authority covers the entire cost estimated when the projects are initiated even though the work will take place and outlays will be made over a period extending beyond the year for which the budget authority is enacted. Similarly, discretionary budget authority for most education and job training activities is appropriated for school or program years that begin in the fourth quarter of the fiscal year. Most of these funds result in outlays in the year after the appropriation. FEDERAL CREDIT Some Government programs provide assistance through direct loans or loan guarantees. A direct loan is a disbursement of funds by the Government to a non-Federal borrower under a contract that requires repayment of such funds with or without interest and includes economically equivalent transactions, such as the sale of Federal assets on credit terms. A loan guarantee is any guarantee, insurance, or other pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a nonFederal lender. The Federal Credit Reform Act of 1990, as amended (FCRA), prescribes the budgetary treatment for Federal credit programs. Under this treatment, the budget records obligations and outlays up front, for the net cost to the Government (subsidy cost), rather than recording the cash flows year by year over the term of the loan. FCRA treatment allows the comparison of direct loans and loan guarantees to each other, and to other methods of delivering assistance, such as grants. The cost of direct loans and loan guarantees, sometimes called the “subsidy cost,’’ is estimated as the present value of expected payments to and from the public over the term of the loan, discounted using appropriate Treasury interest rates.3 Similar to most other kinds of programs, agencies can make loans or guarantee loans only if the Congress has appropriated funds sufficient to cover the subsidy costs, or provided a limitation in an appropriations act on the amount of direct loans or loan guarantees that can be made. The budget records the subsidy cost to the Government arising from direct loans and loan guarantees—the budget authority and outlays—in credit program accounts. When a Federal agency disburses a direct loan or when a non-Federal lender disburses a loan guaranteed by a Federal agency, the program account disburses or outlays an amount equal to the estimated present value cost, or subsidy, to a non-budgetary credit financing account. The financing accounts record the actual transactions with the public. For a few programs, the estimated subsidy cost is negative because the present value of expected Government collections exceeds the present value of expected payments to the public over the term of the loan. 3 Present value is a standard financial concept that considers the time-value of money. That is, it accounts for the fact that a given sum of money is worth more today than the same sum would be worth in the future because interest can be earned. In such cases, the financing account pays the estimated subsidy cost to the program’s negative subsidy receipt account, where it is recorded as an offsetting receipt. In a few cases, the offsetting receipts of credit accounts are dedicated to a special fund established for the program and are available for appropriation for the program. The agencies responsible for credit programs must reestimate the subsidy cost of the outstanding portfolio of direct loans and loan guarantees each year. If the estimated cost increases, the program account makes an additional payment to the financing account equal to the change in cost. If the estimated cost decreases, the financing account pays the difference to the program’s downward reestimate receipt account, where it is recorded as an offsetting receipt. The FCRA provides permanent indefinite appropriations to pay for upward reestimates. If the Government modifies the terms of an outstanding direct loan or loan guarantee in a way that increases the cost as the result of a law or the exercise of administrative discretion under existing law, the program account records obligations for the increased cost and outlays the amount to the financing account. As with the original subsidy cost, agencies may incur modification costs only if the Congress has appropriated funds to cover them. A modification may also reduce costs, in which case the amounts are generally returned to the general fund, as the financing account makes a payment to the program’s negative subsidy receipt account. Credit financing accounts record all cash flows arising from direct loan obligations and loan guarantee commitments. Such cash flows include all cash flows to and from the public, including direct loan disbursements and repayments, loan guarantee default payments, fees, and recoveries on defaults. Financing accounts also record intragovernmental transactions, such as the receipt of subsidy cost payments from program accounts, borrowing and repayments of Treasury debt to finance program activities, and interest paid to or received from the Treasury. The cash flows of direct loans and of loan guarantees are recorded in separate financing accounts for programs that provide both types of credit. The budget totals exclude the transactions of the financing accounts because they are not a cost to the Government. However, since financing accounts record all credit cash flows to and from the public, they affect the means of financing a budget surplus or 84 ANALYTICAL PERSPECTIVES deficit (see “Credit Financing Accounts” in the next section). The budget documents display the transactions of the financing accounts, together with the related program accounts, for information and analytical purposes. The FCRA grandfathered the budgetary treatment of direct loan obligations and loan guarantee commitments made prior to 1992. The budget records these on a cash basis in credit liquidating accounts, the same as they were recorded before FCRA was enacted. However, this exception ceases to apply if the direct loans or loan guarantees are modified as described above. In that case, the budget records the subsidy cost or savings of the modification, as appropriate, and begins to account for the associated transactions under FCRA treatment for direct loan obligations and loan guarantee commitments made in 1992 or later. Under the authority provided in various acts, certain activities that do not meet the definition in FCRA of a direct loan or loan guarantee are reflected pursuant to FCRA. For example, the Emergency Economic Stabilization Act of 2008 (EESA) created the Troubled Asset Relief Program (TARP) under the Department of the Treasury, and authorized Treasury to purchase or guarantee troubled assets until October 3, 2010. Under the TARP, Treasury has purchased equity interests in financial institutions. Section 123 of the EESA provides the Administration the authority to treat these equity investments on a FCRA basis, recording outlays for the subsidy as is done for direct loans and loan guarantees. The budget reflects the cost to the Government of TARP direct loans, loan guarantees, and equity investments consistent with the FCRA and Section 123 of EESA, which requires an adjustment to the FCRA discount rate for market risks. Treasury equity purchases under the Small Business Lending Fund are treated pursuant to the FCRA, as provided by the Small Business Jobs Act of 2010.The 2009 increases to the International Monetary Fund (IMF) quota and New Arrangements to Borrow (NAB) enacted in the Supplemental Appropriations Act of 2009 were treated on a FCRA basis through 2015, with a risk adjustment to the discount rate, as directed in that Act. However, pursuant to Title IX of the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2016, these transactions have been restated on a present value basis with a risk adjustment to the discount rate, and the associated FCRA accounts have been closed. BUDGET DEFICIT OR SURPLUS AND MEANS OF FINANCING When outlays exceed receipts, the difference is a deficit, which the Government finances primarily by borrowing. When receipts exceed outlays, the difference is a surplus, and the Government automatically uses the surplus primarily to reduce debt. The Federal debt held by the public is approximately the cumulative amount of borrowing to finance deficits, less repayments from surpluses, over the Nation’s history. Borrowing is not exactly equal to the deficit, and debt repayment is not exactly equal to the surplus, because of the other transactions affecting borrowing from the public, or other means of financing, such as those discussed in this section. The factors included in the other means of financing can either increase or decrease the Government’s borrowing needs (or decrease or increase its ability to repay debt). For example, the change in the Treasury operating cash balance is a factor included in other means of financing. Holding receipts and outlays constant, increases in the cash balance increase the Government’s need to borrow or reduce the Government’s ability to repay debt, and decreases in the cash balance decrease the need to borrow or increase the ability to repay debt. In some years, the net effect of the other means of financing is minor relative to the borrowing or debt repayment; in other years, the net effect may be significant. Borrowing and Debt Repayment The budget treats borrowing and debt repayment as a means of financing, not as receipts and outlays. If borrowing were defined as receipts and debt repayment as outlays, the budget would always be virtually balanced by definition. This rule applies both to borrowing in the form of Treasury securities and to specialized borrowing in the form of agency securities. The rule reflects the commonsense understanding that lending or borrowing is just an exchange of financial assets of equal value—cash for Treasury securities—and so is fundamentally different from, say, paying taxes, which involve a net transfer of financial assets from taxpayers to the Government. In 2016, the Government borrowed $1,051 billion from the public, bringing debt held by the public to $14,168 billion. This borrowing financed the $585 billion deficit in that year, partly offset by the net impacts of the other means of financing, such as changes in cash balances and other accounts discussed below. In addition to selling debt to the public, the Treasury Department issues debt to Government accounts, primarily trust funds that are required by law to invest in Treasury securities. Issuing and redeeming this debt does not affect the means of financing, because these transactions occur between one Government account and another and thus do not raise or use any cash for the Government as a whole. (See Chapter 4 of this volume, “Federal Borrowing and Debt,” for a fuller discussion of this topic.) Exercise of Monetary Power Seigniorage is the profit from coining money. It is the difference between the value of coins as money and their cost of production. Seigniorage reduces the Government’s need to borrow. Unlike the payment of taxes or other receipts, it does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the Government’s power to create money and the public’s desire to hold financial assets in the form of coins. Therefore, the budget excludes seigniorage from receipts and treats 8. Budget Concepts it as a means of financing other than borrowing from the public. The budget also treats proceeds from the sale of gold as a means of financing, since the value of gold is determined by its value as a monetary asset rather than as a commodity. Credit Financing Accounts The budget records the net cash flows of credit programs in credit financing accounts. These accounts include the transactions for direct loan and loan guarantee programs, as well as the equity purchase programs under TARP that are recorded on a credit basis consistent with Section 123 of EESA. Financing accounts also record equity purchases under the Small Business Lending Fund consistent with the Small Business Jobs Act of 2010. Credit financing accounts are excluded from the budget because they are not allocations of resources by the Government (see “Federal Credit” earlier in this chapter). However, even though they do not affect the surplus or deficit, they can either increase or decrease the Government’s need to borrow. Therefore, they are recorded as a means of financing. Financing account disbursements to the public increase the requirement for Treasury borrowing in the same way as an increase in budget outlays. Financing account receipts from the public can be used to finance the payment of the Government’s obligations and therefore reduce the requirement for Treasury borrowing from the public in the same way as an increase in budget receipts. Deposit Fund Account Balances The Treasury uses non-budgetary accounts, called deposit funds, to record cash held temporarily until ownership is determined (for example, earnest money paid by bidders for mineral leases) or cash held by the Government as agent for others (for example, State and local income taxes withheld from Federal employees’ salaries and not yet paid to the State or local government or amounts held in the Thrift Savings Fund, a defined contribution pension fund held and managed in a fiduciary capacity by the Government). Deposit fund balances may be held in the form of either invested or uninvested balances. To the extent that they are not invested, changes in the balances are available to finance expenditures and are recorded as a means of financing other than borrowing from the public. To the extent that they are invested in Federal debt, changes in the balances are reflected as borrowing from the public (in lieu of borrowing from other parts of the public) and are not reflected as a separate means of financing. United States Quota Subscriptions to the International Monetary Fund (IMF) The United States participates in the IMF through a quota subscription.4 Financial transactions with the IMF 4 For a more detailed discussion of the history of the budgetary treatment of U.S. participation in the quota and NAB, see pages 139-141 in the Analytical Perspectives volume of the 2016 Budget As discussed in that volume, the budgetary treatment of the U.S. participation in the 85 are exchanges of monetary assets. When the IMF temporarily draws dollars from the U.S. quota, the United States simultaneously receives an equal, offsetting, interest-bearing, Special Drawing Right (SDR)-denominated claim in the form of an increase in the U.S. reserve position in the IMF. The U.S. reserve position in the IMF increases when the United States makes deposits in its account at the IMF when the IMF temporarily uses members’ quota resources to make loans and decreases when the IMF returns funds to the United States as borrowing countries repay the IMF (and the cash flows from the reserve position to the Treasury letter of credit). The budgetary treatment of appropriations for the IMF quota has changed over time. Prior to 1981, the transactions were not included in the budget because they are exchanges of cash for monetary assets (SDRs) of the same value. This was consistent with the scoring of other exchanges of monetary assets, such as deposits of cash in Treasury accounts at commercial banks.5 As a result of an agreement reached with the Congress in 1980 that marked the start of appropriators’ jurisdiction over changes to U.S. participation in the IMF quota (and later the NAB), the budget began to record budget authority for the quotas at the full value of the quota increase, but did not record outlays because of the continuing view that the transactions are exchanges of monetary assets of equal value. This scoring convention continued to be applied through 2008.6 This approach worked as a method for scoring new legislation, but because it did not align well with existing budget concepts, it led to budget presentations and budgetary reporting that showed the full value of the quota increase as if it were a budgetary cost despite the reality that these resources involve an exchange of assets. In 2009, Congress enacted increases in the U.S. participation in the quota and the NAB in the Supplemental Appropriations Act, 2009 (Public Law 111–32, Title XIV, International Monetary Programs) and directed that the increases in this Act be scored under the requirements of the Federal Credit Reform Act of 1990 (FCRA), with an adjustment to the discount rate for market risk. Accordingly, in the budget execution of the quota and the NAB increases provided by the Supplemental Appropriations Act, 2009, the Budget through 2015 reflected obligations and outlays for the estimated present value cost to the U.S. Government as if these transactions were direct loans under FCRA, plus an additional risk premium. While the FCRA model provided a framework for scoring new legislation, it did not reflect the actual circumstances of U.S. participation in the IMF quota and NAB, and budget execution and presentation were contrived to meet FRCA requirements with no real programmatic benefits. Pursuant to Title IX of the Department of State, Foreign Operations, and Related Programs Appropriations Act, NAB is similar to the quota. 5 The Report of the 1967 President’s Commission on Budget Concepts notes that the IMF “is more like a bank in which funds are deposited and from which funds in the form of needed foreign currencies can be withdrawn.” 6 This budgetary treatment was also proposed again in the 2014 Budget, after the Supplemental Appropriations Act of 2009 was enacted. 86 ANALYTICAL PERSPECTIVES 2016, the estimated cost of the 2009 increases as well as the 2016 IMF quota increase and partial rescission of the NAB authorized by the Act are recorded on a present value basis with a fair value premium added to the Treasury discount rate, and the FCRA accounts associated with the 2009 increases have been closed. This statutory direction to measure cost on a present value basis provides an opportunity to rationalize the budgetary presentation of IMF quota and NAB increases enacted before 2009. From both the perspective of Treasury and the IMF, it is not practical to seek to distinguish and execute each enacted quota increase in different ways. The funds are commingled and executed as a single source and use of funding. Therefore, the budget presents all increases consistent with the present value scores for the 2009 and 2016 legislation. Specifically, the Budget records budget authority and outlays equal to the estimated present value, including the fair value adjustment to the discount rate, in the year that the quota increase is enacted, i.e., 2016. All concurrent and subsequent transactions between the Treasury and the IMF are treated as a non-budgetary means of financing, which do not directly affect receipts, outlays, or deficits. The only exception is that interest earnings on U.S. deposits in its IMF account are recorded as offsetting receipts. For transparency and to support future decisions concerning the U.S. level of participation in the IMF quota and the NAB, the Budget Appendix shows supplementary “below-the-lines” information about dollar value of the IMF quota, divided between the portion that is held in a Treasury letter of credit and the amount deposited in the U.S. reserve tranche at the IMF, and the NAB. The actual amounts are updated in the Budget to reflect changes in the dollar value of Special Drawing Rights that serve as the unit of measure for countries’ level of participation. FEDERAL EMPLOYMENT The budget includes information on civilian and military employment. It also includes information on related personnel compensation and benefits and on staffing requirements at overseas missions. Chapter 7 of this volume, “Strengthening the Federal Workforce,’’ provides employ- ment levels measured in full-time equivalents (FTE). Agency FTEs are the measure of total hours worked by an agency’s Federal employees divided by the total number of one person’s compensable work hours in a fiscal year. BASIS FOR BUDGET FIGURES Data for the Past Year The past year column (2016) generally presents the actual transactions and balances as recorded in agency accounts and as summarized in the central financial reports prepared by the Treasury Department for the most recently completed fiscal year. Occasionally, the budget reports corrections to data reported erroneously to Treasury but not discovered in time to be reflected in Treasury’s published data. In addition, in certain cases the Budget has a broader scope and includes financial transactions that are not reported to Treasury (see Chapter 24 of this volume, “Comparison of Actual to Estimated Totals,” for a summary of these differences). Data for the Current Year authorizing legislation, and amounts estimated to result from changes in authorizing legislation and tax laws. The budget Appendix generally includes the appropriations language for the amounts proposed to be appropriated under current authorizing legislation. In a few cases, this language is transmitted later because the exact requirements are unknown when the budget is transmitted. The Appendix generally does not include appropriations language for the amounts that will be requested under proposed legislation; that language is usually transmitted later, after the legislation is enacted. Some tables in the budget identify the items for later transmittal and the related outlays separately. Estimates of the total requirements for the budget year include both the amounts requested with the transmittal of the budget and the amounts planned for later transmittal. The current year column (2017) includes estimates of transactions and balances based on the amounts of budgetary resources that were available when the budget was prepared. In cases where the budget proposes policy changes effective in the current year, the data will also reflect the budgetary effect of those proposed changes. The budget presents estimates for each of the nine years beyond the budget year (2019 through 2027) in order to reflect the effect of budget decisions on objectives and plans over a longer period. Data for the Budget Year Allowances The budget year column (2018) includes estimates of transactions and balances based on the amounts of budgetary resources that are estimated to be available, including new budget authority requested under current The budget may include lump-sum allowances to cover certain transactions that are expected to increase or decrease budget authority, outlays, or receipts but are not, for various reasons, reflected in the program details. For Data for the Outyears 87 8. Budget Concepts example, the budget might include an allowance to show the effect on the budget totals of a proposal that would affect many accounts by relatively small amounts, in order to avoid unnecessary detail in the presentations for the individual accounts. The baseline serves several useful purposes: • It may warn of future problems, either for Government fiscal policy as a whole or for individual tax and spending programs. • It may provide a starting point for formulating the President’s Budget. Baseline The budget baseline is an estimate of the receipts, outlays, and deficits or surpluses that would occur if no changes were made to current laws and policies during the period covered by the budget. The baseline assumes that receipts and mandatory spending, which generally are authorized on a permanent basis, will continue in the future consistent with current law and policy. The baseline assumes that the future funding for most discretionary programs, which generally are funded annually, will equal the most recently enacted appropriation, adjusted for inflation. Baseline outlays represent the amount of resources that would be used by the Government over the period covered by the budget on the basis of laws currently enacted. • It may provide a “policy-neutral’’ benchmark against which the President’s Budget and alternative proposals can be compared to assess the magnitude of proposed changes. The baseline rules in BBEDCA provide that funding for discretionary programs is inflated from the most recent enacted appropriations using specified inflation rates. Because the resulting funding would exceed the discretionary caps, the Administration’s baseline includes adjustments that reduce overall discretionary funding to levels consistent with the caps. (Chapter 22 of this volume, “Current Services Estimates,” provides more information on the baseline.) PRINCIPAL BUDGET LAWS The Budget and Accounting Act of 1921 created the core of the current Federal budget process. Before enactment of this law, there was no annual centralized budgeting in the Executive Branch. Federal Government agencies usually sent budget requests independently to congressional committees with no coordination of the various requests in formulating the Federal Government’s budget. The Budget and Accounting Act required the President to coordinate the budget requests for all Government agencies and to send a comprehensive budget to the Congress. The Congress has amended the requirements many times and portions of the Act are codified in Title 31, United States Code. The major laws that govern the budget process are as follows: Congressional Budget and Impoundment Control Act of 1974 (Public Law 93–344), as amended. This Act comprises the: • Congressional Budget Act of 1974, as amended, which prescribes the congressional budget process; and Article 1, section 8, clause 1 of the Constitution, which empowers the Congress to collect taxes. Article 1, section 9, clause 7 of the Constitution, which requires appropriations in law before money may be spent from the Treasury and the publication of a regular statement of the receipts and expenditures of all public money. Antideficiency Act (codified in Chapters 13 and 15 of Title 31, United States Code), which prescribes rules and procedures for budget execution. Balanced Budget and Emergency Deficit Control Act of 1985, as amended, which establishes limits on discretionary spending and provides mechanisms for enforcing discretionary spending limits. Chapter 11 of Title 31, United States Code, which prescribes procedures for submission of the President’s budget and information to be contained in it. Chapter 31 of Title 31, United States Code, which provides the authority for the Secretary of the Treasury to issue debt to finance the deficit and establishes a statutory limit on the level of the debt. Chapter 33 of Title 31, United States Code, which establishes the Department of the Treasury as the authority for making disbursements of public funds, with the authority to delegate that authority to executive agencies in the interests of economy and efficiency. Government Performance and Results Act of 1993 (Public Law 103–62, as amended) which emphasizes managing for results. It requires agencies to prepare strategic plans, annual performance plans, and annual performance reports. Statutory Pay-As-You-Go Act of 2010, which establishes a budget enforcement mechanism generally requiring that direct spending and revenue legislation enacted into law not increase the deficit. • Impoundment Control Act of 1974, which controls certain aspects of budget execution. • Federal Credit Reform Act of 1990, as amended (2 USC 661–661f), which the Budget Enforcement Act of 1990 included as an amendment to the Congressional Budget Act to prescribe the budget treatment for Federal credit programs. 88 ANALYTICAL PERSPECTIVES GLOSSARY OF BUDGET TERMS Account refers to a separate financial reporting unit used by the Federal Government to record budget authority, outlays and income for budgeting or management information purposes as well as for accounting purposes. All budget (and off-budget) accounts are classified as being either expenditure or receipt accounts and by fund group. Budget (and off-budget) transactions fall within either of two fund group: (1) Federal funds and (2) trust funds. (Cf. Federal funds group and trust funds group.) Accrual method of measuring cost means an accounting method that records cost when the liability is incurred. As applied to Federal employee retirement benefits, accrual costs are recorded when the benefits are earned rather than when they are paid at some time in the future. The accrual method is used in part to provide data that assists in agency policymaking, but not used in presenting the overall budget of the United States Government. Advance appropriation means appropriations of new budget authority that become available one or more fiscal years beyond the fiscal year for which the appropriation act was passed. Advance funding means appropriations of budget authority provided in an appropriations act to be used, if necessary, to cover obligations incurred late in the fiscal year for benefit payments in excess of the amount specifically appropriated in the act for that year, where the budget authority is charged to the appropriation for the program for the fiscal year following the fiscal year for which the appropriations act is passed. Agency means a department or other establishment of the Government. Allowance means a lump-sum included in the budget to represent certain transactions that are expected to increase or decrease budget authority, outlays, or receipts but that are not, for various reasons, reflected in the program details. Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) refers to legislation that altered the budget process, primarily by replacing the earlier fixed targets for annual deficits with a Pay-As-You-Go requirement for new tax or mandatory spending legislation and with caps on annual discretionary funding. The Statutory Pay-As-You-Go Act of 2010, which is a standalone piece of legislation that did not directly amend the BBEDCA, reinstated a statutory pay-as-you-go rule for revenues and mandatory spending legislation, and the Budget Control Act of 2011, which did amend BBEDCA, reinstated discretionary caps on budget authority. Balances of budget authority means the amounts of budget authority provided in previous years that have not been outlayed. Baseline means a projection of the estimated receipts, outlays, and deficit or surplus that would result from continuing current law or current policies through the period covered by the budget. Budget means the Budget of the United States Government, which sets forth the President’s comprehen- sive financial plan for allocating resources and indicates the President’s priorities for the Federal Government. Budget authority (BA) means the authority provided by law to incur financial obligations that will result in outlays. (For a description of the several forms of budget authority, see “Budget Authority and Other Budgetary Resources’’ earlier in this chapter.) Budget Control Act of 2011 refers to legislation that, among other things, amended BBEDCA to reinstate discretionary spending limits on budget authority through 2021 and restored the process for enforcing those spending limits. The legislation also increased the statutory debt ceiling; created a Joint Select Committee on Deficit Reduction that was instructed to develop a bill to reduce the Federal deficit by at least $1.5 trillion over a 10-year period; and provided a process to implement alternative spending reductions in the event that legislation achieving at least $1.2 trillion of deficit reduction was not enacted. Budget resolution—see concurrent resolution on the budget. Budget totals mean the totals included in the budget for budget authority, outlays, receipts, and the surplus or deficit. Some presentations in the budget distinguish on-budget totals from off-budget totals. On-budget totals reflect the transactions of all Federal Government entities except those excluded from the budget totals by law. Off-budget totals reflect the transactions of Government entities that are excluded from the on-budget totals by law. Under current law, the off-budget totals include the Social Security trust funds (Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds) and the Postal Service Fund. The budget combines the on- and off-budget totals to derive unified (i.e. consolidated) totals for Federal activity. Budget year refers to the fiscal year for which the budget is being considered, that is, with respect to a session of Congress, the fiscal year of the government that starts on October 1 of the calendar year in which that session of Congress begins. Budgetary resources mean amounts available to incur obligations in a given year. The term comprises new budget authority and unobligated balances of budget authority provided in previous years. Cap means the legal limits for each fiscal year under BBEDCA on the budget authority and outlays (only if applicable) provided by discretionary appropriations. Cap adjustment means either an increase or a decrease that is permitted to the statutory cap limits for each fiscal year under BBEDCA on the budget authority and outlays (only if applicable) provided by discretionary appropriations only if certain conditions are met. These conditions may include providing for a base level of funding, a designation of the increase or decrease by the Congress, (and in some circumstances, the President) pursuant to a section of the BBEDCA, or a change in concepts and definitions of funding under the cap. Changes 8. Budget Concepts in concepts and definitions require consultation with the Congressional Appropriations and Budget Committees. Cash equivalent transaction means a transaction in which the Government makes outlays or receives collections in a form other than cash or the cash does not accurately measure the cost of the transaction. (For examples, see the section on “Outlays’’ earlier in this chapter.) Collections mean money collected by the Government that the budget records as a governmental receipt, an offsetting collection, or an offsetting receipt. Concurrent resolution on the budget refers to the concurrent resolution adopted by the Congress to set budgetary targets for appropriations, mandatory spending legislation, and tax legislation. These concurrent resolutions are required by the Congressional Budget Act of 1974, and are generally adopted annually. Continuing resolution means an appropriations act that provides for the ongoing operation of the Government in the absence of enacted appropriations. Cost refers to legislation or administrative actions that increase outlays or decrease receipts. (Cf. savings.) Credit program account means a budget account that receives and obligates appropriations to cover the subsidy cost of a direct loan or loan guarantee and disburses the subsidy cost to a financing account. Current services estimate—see Baseline. Debt held by the public means the cumulative amount of money the Federal Government has borrowed from the public and not repaid. Debt held by the public net of financial assets means the cumulative amount of money the Federal Government has borrowed from the public and not repaid, minus the current value of financial assets such as loan assets, bank deposits, or private-sector securities or equities held by the Government and plus the current value of financial liabilities other than debt. Debt held by Government accounts means the debt the Treasury Department owes to accounts within the Federal Government. Most of it results from the surpluses of the Social Security and other trust funds, which are required by law to be invested in Federal securities. Debt limit means the maximum amount of Federal debt that may legally be outstanding at any time. It includes both the debt held by the public and the debt held by Government accounts, but without accounting for offsetting financial assets. When the debt limit is reached, the Government cannot borrow more money until the Congress has enacted a law to increase the limit. Deficit means the amount by which outlays exceed receipts in a fiscal year. It may refer to the on-budget, offbudget, or unified budget deficit. Direct loan means a disbursement of funds by the Government to a non-Federal borrower under a contract that requires the repayment of such funds with or without interest. The term includes the purchase of, or participation in, a loan made by another lender. The term also includes the sale of a Government asset on credit terms of more than 90 days duration as well as financing arrangements for other transactions that defer payment for more than 90 days. It also includes loans financed by 89 the Federal Financing Bank (FFB) pursuant to agency loan guarantee authority. The term does not include the acquisition of a federally guaranteed loan in satisfaction of default or other guarantee claims or the price support “loans” of the Commodity Credit Corporation. (Cf. loan guarantee.) Direct spending—see mandatory spending. Disaster funding means a discretionary appropriation that is enacted that the Congress designates as being for disaster relief. Such amounts are a cap adjustment to the limits on discretionary spending under BBEDCA. The total adjustment for this purpose cannot exceed a ceiling for a particular year that is defined as the total of the average funding provided for disaster relief over the previous 10 years (excluding the highest and lowest years) and the unused amount of the prior year’s ceiling (excluding the portion of the prior year’s ceiling that was itself due to any unused amount from the year before). Disaster relief is defined as activities carried out pursuant to a determination under section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Discretionary spending means budgetary resources (except those provided to fund mandatory spending programs) provided in appropriations acts. (Cf. mandatory spending.) Emergency requirement means an amount that the Congress has designated as an emergency requirement. Such amounts are not included in the estimated budgetary effects of PAYGO legislation under the requirements of the Statutory Pay-As-You-Go Act of 2010, if they are mandatory or receipts. Such a discretionary appropriation that is subsequently designated by the President as an emergency requirement results in a cap adjustment to the limits on discretionary spending under BBEDCA. Entitlement refers to a program in which the Federal Government is legally obligated to make payments or provide aid to any person who, or State or local government that, meets the legal criteria for eligibility. Examples include Social Security, Medicare, Medicaid, and Food Stamps. Federal funds group refers to the moneys collected and spent by the Government through accounts other than those designated as trust funds. Federal funds include general, special, public enterprise, and intragovernmental funds. (Cf. trust funds group.) Financing account means a non-budgetary account (an account whose transactions are excluded from the budget totals) that records all of the cash flows resulting from post-1991 direct loan obligations or loan guarantee commitments. At least one financing account is associated with each credit program account. For programs that make both direct loans and loan guarantees, separate financing accounts are required for direct loan cash flows and for loan guarantee cash flows. (Cf. liquidating account.) Fiscal year means the Government’s accounting period. It begins on October 1st and ends on September 30th, and is designated by the calendar year in which it ends. Forward funding means appropriations of budget authority that are made for obligation starting in the 90 last quarter of the fiscal year for the financing of ongoing grant programs during the next fiscal year. General fund means the accounts in which are recorded governmental receipts not earmarked by law for a specific purpose, the proceeds of general borrowing, and the expenditure of these moneys. Government sponsored enterprises mean private enterprises that were established and chartered by the Federal Government for public policy purposes. They are classified as non-budgetary and not included in the Federal budget because they are private companies, and their securities are not backed by the full faith and credit of the Federal Government. However, the budget presents statements of financial condition for certain Government sponsored enterprises such as the Federal National Mortgage Association. (Cf. off-budget.) Intragovernmental fund—see Revolving fund. Liquidating account means a budget account that records all cash flows to and from the Government resulting from pre-1992 direct loan obligations or loan guarantee commitments. (Cf. financing account.) Loan guarantee means any guarantee, insurance, or other pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a non-Federal lender. The term does not include the insurance of deposits, shares, or other withdrawable accounts in financial institutions. (Cf. direct loan.) Mandatory spending means spending controlled by laws other than appropriations acts (including spending for entitlement programs) and spending for the Supplemental Nutrition Assistance Program, formerly food stamps. Although the Statutory Pay-As-You-Go Act of 2010 uses the term direct spending to mean this, mandatory spending is commonly used instead. (Cf. discretionary spending.) Means of financing refers to borrowing, the change in cash balances, and certain other transactions involved in financing a deficit. The term is also used to refer to the debt repayment, the change in cash balances, and certain other transactions involved in using a surplus. By definition, the means of financing are not treated as receipts or outlays and so are non-budgetary. Obligated balance means the cumulative amount of budget authority that has been obligated but not yet outlayed. (Cf. unobligated balance.) Obligation means a binding agreement that will result in outlays, immediately or in the future. Budgetary resources must be available before obligations can be incurred legally. Off-budget refers to transactions of the Federal Government that would be treated as budgetary had the Congress not designated them by statute as “off-budget.” Currently, transactions of the Social Security trust funds and the Postal Service are the only sets of transactions that are so designated. The term is sometimes used more broadly to refer to the transactions of private enterprises that were established and sponsored by the Government, most especially “Government sponsored enterprises” such as the Federal Home Loan Banks. (Cf. budget totals.) ANALYTICAL PERSPECTIVES Offsetting collections mean collections that, by law, are credited directly to expenditure accounts and deducted from gross budget authority and outlays of the expenditure account, rather than added to receipts. Usually, they are authorized to be spent for the purposes of the account without further action by the Congress. They result from business-like transactions with the public, including payments from the public in exchange for goods and services, reimbursements for damages, and gifts or donations of money to the Government and from intragovernmental transactions with other Government accounts. The authority to spend offsetting collections is a form of budget authority. (Cf. receipts and offsetting receipts.) Offsetting receipts mean collections that are credited to offsetting receipt accounts and deducted from gross budget authority and outlays, rather than added to receipts. They are not authorized to be credited to expenditure accounts. The legislation that authorizes the offsetting receipts may earmark them for a specific purpose and either appropriate them for expenditure for that purpose or require them to be appropriated in annual appropriation acts before they can be spent. Like offsetting collections, they result from business-like transactions or market-oriented activities with the public, including payments from the public in exchange for goods and services, reimbursements for damages, and gifts or donations of money to the Government and from intragovernmental transactions with other Government accounts. (Cf. receipts, undistributed offsetting receipts, and offsetting collections.) On-budget refers to all budgetary transactions other than those designated by statute as off-budget (Cf. budget totals.) Outlay means a payment to liquidate an obligation (other than the repayment of debt principal or other disbursements that are “means of financing” transactions). Outlays generally are equal to cash disbursements, but also are recorded for cash-equivalent transactions, such as the issuance of debentures to pay insurance claims, and in a few cases are recorded on an accrual basis such as interest on public issues of the public debt. Outlays are the measure of Government spending. Outyear estimates mean estimates presented in the budget for the years beyond the budget year of budget authority, outlays, receipts, and other items (such as debt). Overseas Contingency Operations/Global War on Terrorism (OCO/GWOT) means a discretionary appropriation that is enacted that the Congress and, subsequently, the President have so designated on an account by account basis. Such a discretionary appropriation that is designated as OCO/GWOT results in a cap adjustment to the limits on discretionary spending under BBEDCA. Funding for these purposes has most recently been associated with the wars in Iraq and Afghanistan. Pay-as-you-go (PAYGO) refers to requirements of the Statutory Pay-As-You-Go Act of 2010 that result in a sequestration if the estimated combined result of new legislation affecting direct spending or revenue increases the on-budget deficit relative to the baseline, as of the end of a congressional session. 8. Budget Concepts Public enterprise fund—see Revolving fund. Reappropriation means a provision of law that extends into a new fiscal year the availability of unobligated amounts that have expired or would otherwise expire. Receipts mean collections that result from the Government’s exercise of its sovereign power to tax or otherwise compel payment. They are compared to outlays in calculating a surplus or deficit. (Cf. offsetting collections and offsetting receipts.) Revolving fund means a fund that conducts continuing cycles of business-like activity, in which the fund charges for the sale of products or services and uses the proceeds to finance its spending, usually without requirement for annual appropriations. There are two types of revolving funds: Public enterprise funds, which conduct business-like operations mainly with the public, and intragovernmental revolving funds, which conduct business-like operations mainly within and between Government agencies. (Cf. special fund and trust fund.) Savings refers to legislation or administrative actions that decrease outlays or increase receipts. (Cf. cost.) Scorekeeping means measuring the budget effects of legislation, generally in terms of budget authority, receipts, and outlays, for purposes of measuring adherence to the Budget or to budget targets established by the Congress, as through agreement to a Budget Resolution. Sequestration means the cancellation of budgetary resources. The Statutory Pay-As-You-Go Act of 2010 requires such cancellations if revenue or direct spending legislation is enacted that, in total, increases projected deficits or reduces projected surpluses relative to the baseline. The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, requires such cancellations if discretionary appropriations exceed the statutory limits on discretionary spending. Special fund means a Federal fund account for receipts or offsetting receipts earmarked for specific purposes and the expenditure of these receipts. (Cf. revolving fund and trust fund.) Statutory Pay-As-You-Go Act of 2010 refers to legislation that reinstated a statutory pay-as-you-go requirement for new tax or mandatory spending legislation. The law is a standalone piece of legislation that crossreferences BBEDCA but does not directly amend that legislation. This is a permanent law and does not expire. 91 Subsidy means the estimated long-term cost to the Government of a direct loan or loan guarantee, calculated on a net present value basis, excluding administrative costs and any incidental effects on governmental receipts or outlays. Surplus means the amount by which receipts exceed outlays in a fiscal year. It may refer to the on-budget, offbudget, or unified budget surplus. Supplemental appropriation means an appropriation enacted subsequent to a regular annual appropriations act, when the need for additional funds is too urgent to be postponed until the next regular annual appropriations act. Trust fund refers to a type of account, designated by law as a trust fund, for receipts or offsetting receipts dedicated to specific purposes and the expenditure of these receipts. Some revolving funds are designated as trust funds, and these are called trust revolving funds. (Cf. special fund and revolving fund.) Trust funds group refers to the moneys collected and spent by the Government through trust fund accounts. (Cf. Federal funds group.) Undistributed offsetting receipts mean offsetting receipts that are deducted from the Government-wide totals for budget authority and outlays instead of being offset against a specific agency and function. (Cf. offsetting receipts.) Unified budget includes receipts from all sources and outlays for all programs of the Federal Government, including both on- and off-budget programs. It is the most comprehensive measure of the Government’s annual finances. Unobligated balance means the cumulative amount of budget authority that remains available for obligation under law in unexpired accounts. The term “expired balances available for adjustment only” refers to unobligated amounts in expired accounts. User charges are charges assessed for the provision of Government services and for the sale or use of Government goods or resources. The payers of the user charge must be limited in the authorizing legislation to those receiving special benefits from, or subject to regulation by, the program or activity beyond the benefits received by the general public or broad segments of the public (such as those who pay income taxes or custom duties). 9. COVERAGE OF THE BUDGET The Federal budget is the central instrument of national policy making. It is the Government’s financial plan for proposing and deciding the allocation of resources to serve national objectives. The budget provides information on the cost and scope of Federal activities to inform decisions and to serve as a means to control the allocation of resources. When enacted, it establishes the level of public goods and services provided by the Government. Federal Government activities can be either “budgetary” or “non-budgetary.” Those activities that involve direct and measurable allocation of Federal resources are budgetary. The payments to and from the public resulting from budgetary activities are included in the budget’s accounting of outlays and receipts. Federal activities that do not involve direct and measurable allocation of Federal resources are non-budgetary and are not included in the budget’s accounting of outlays and receipts. More detailed information about outlays and receipts may be found in Chapter 8, “Budget Concepts,” of this volume. The budget documents include information on some non-budgetary activities because they can be important instruments of Federal policy and provide insight into the scope and nature of Federal activities. For example, as discussed in more detail later, the budget documents show the transactions of the Thrift Savings Program (TSP), a collection of investment funds managed by the Federal Retirement Thrift Investment Board (FRTIB). Despite the fact that the FRTIB is budgetary and one of the TSP funds is invested entirely in Federal securities, the transactions of these funds are non-budgetary because current and retired Federal employees own the funds. The Government manages these funds only in a fiduciary capacity. The budget also includes information on cash flows that are a means of financing Federal activity, such as for credit financing accounts. However, to avoid doublecounting, means of financing amounts are not included in the estimates of outlays or receipts double counting because the costs of the underlying Federal activities are already reflected in the deficit.1 Similarly, while budget totals of outlays and receipts do not include non-Federal costs resulting from Federal regulation, the Office of Management and Budget (OMB) annually reports on the costs and benefits of Federal regulation to non-Federal entities.2 This chapter provides details about the budgetary and non-budgetary activities of the Federal Government. 1 For more information on means of financing, see the “Budget Deficit or Surplus and Means of Financing” section of Chapter 8, “Budget Concepts,” in this volume. 2 For the 2016 draft of the “Report to Congress on the Benefits and Costs of Federal Regulation and Unfunded Mandates on State, Local and Tribal Entities,” see https://obamawhitehouse.archives.gov/sites/ default/files/omb/assets/legislative_reports/draft_2016_cost_benefit_ report_12_14_2016_2.pdf. Budgetary Activities The Federal Government has used the unified budget concept—which consolidates outlays and receipts from Federal funds and trust funds, including the Social Security trust funds—since 1968, starting with the 1969 Budget. The 1967 President’s Commission on Budget Concepts (the Commission) recommended the change to include the financial transactions of all of the Federal Government’s programs and agencies. Thus, the budget includes information on the financial transactions of all 15 Executive departments, all independent agencies (from all three branches of Government), and all Government corporations.3 The budget reflects the legal distinction, described in more detail below, between on-budget activities and offbudget activities by showing outlays and receipts for both types of activities separately. Although there is a legal distinction between on-budget and off-budget activities, conceptually there is no difference between the two. Off-budget Federal activities reflect the same kinds of governmental roles as on-budget activities and result in outlays and receipts. Like on-budget activities, the Government funds and controls off-budget activities. The “unified budget” reflects the conceptual similarity between on-budget and off-budget activities by showing combined totals of outlays and receipts for both. Many Government corporations are entities with business-type operations that charge the public for services at prices intended to allow the entity to be self-sustaining; although, some operate at a loss in order to provide subsidies to specific recipients. Often these entities are more independent than other agencies and have limited exemptions from certain Federal personnel requirements to allow for flexibility. All accounts in Table 26-1, “Federal Budget by Agency and Account,” in the supplemental materials to this volume are budgetary.4 The majority of budgetary accounts are associated with the departments or other entities that are clearly Federal agencies. Some budgetary accounts reflect Government payments to entities that the Government created or chartered as private or non-Federal entities. Some of these entities receive 3 Government corporations are Government entities that are defined as corporations pursuant to the Government Corporation Control Act, as amended (31 U.S.C. 9101), or elsewhere in law. Examples include the Commodity Credit Corporation, the Export-Import Bank of the United States, the Federal Crop Insurance Corporation, the Federal Deposit Insurance Corporation, the Millennium Challenge Corporation, the Overseas Private Investment Corporation, the Pension Benefit Guaranty Corporation, the Tennessee Valley Authority, the African Development Foundation (22 U.S.C. 290h-6), the Inter-American Foundation (22 U.S.C. 290f), the Presidio Trust (16 U.S.C. 460bb note), and the Valles Caldera Trust (16 U.S.C. 698v-4). 4 Table 26-1 can be found at: http://www.budget.gov/budget/analytical_perspectives. 93 94 ANALYTICAL PERSPECTIVES Table 9–1. COMPARISON OF TOTAL, ON-BUDGET, AND OFF-BUDGET TRANSACTIONS 1 (In billions of dollars) Year Receipts Total Outlays On-budget Off-budget Total Surplus or deficit (–) On-budget Off-budget Total On-budget Off-budget 1980 ����������������������������������������������������������������������������������������������������� 1981 ����������������������������������������������������������������������������������������������������� 1982 ����������������������������������������������������������������������������������������������������� 1983 ����������������������������������������������������������������������������������������������������� 1984 ����������������������������������������������������������������������������������������������������� 517.1 599.3 617.8 600.6 666.4 403.9 469.1 474.3 453.2 500.4 113.2 130.2 143.5 147.3 166.1 590.9 678.2 745.7 808.4 851.8 477.0 543.0 594.9 660.9 685.6 113.9 135.3 150.9 147.4 166.2 –73.8 –79.0 –128.0 –207.8 –185.4 –73.1 –73.9 –120.6 –207.7 –185.3 -0.7 -5.1 -7.4 -0.1 -0.1 1985 ����������������������������������������������������������������������������������������������������� 1986 ����������������������������������������������������������������������������������������������������� 1987 ����������������������������������������������������������������������������������������������������� 1988 ����������������������������������������������������������������������������������������������������� 1989 ����������������������������������������������������������������������������������������������������� 734.0 769.2 854.3 909.2 991.1 547.9 568.9 640.9 667.7 727.4 186.2 200.2 213.4 241.5 263.7 946.3 990.4 1,004.0 1,064.4 1,143.7 769.4 806.8 809.2 860.0 932.8 176.9 183.5 194.8 204.4 210.9 –212.3 –221.2 –149.7 –155.2 –152.6 –221.5 –237.9 –168.4 –192.3 –205.4 9.2 16.7 18.6 37.1 52.8 1990 ����������������������������������������������������������������������������������������������������� 1991 ����������������������������������������������������������������������������������������������������� 1992 ����������������������������������������������������������������������������������������������������� 1993 ����������������������������������������������������������������������������������������������������� 1994 ����������������������������������������������������������������������������������������������������� 1,032.0 1,055.0 1,091.2 1,154.3 1,258.6 750.3 761.1 788.8 842.4 923.5 281.7 293.9 302.4 311.9 335.0 1,253.0 1,324.2 1,381.5 1,409.4 1,461.8 1,027.9 1,082.5 1,129.2 1,142.8 1,182.4 225.1 241.7 252.3 266.6 279.4 –221.0 –269.2 –290.3 –255.1 –203.2 –277.6 –321.4 –340.4 –300.4 –258.8 56.6 52.2 50.1 45.3 55.7 1995 ����������������������������������������������������������������������������������������������������� 1996 ����������������������������������������������������������������������������������������������������� 1997 ����������������������������������������������������������������������������������������������������� 1998 ����������������������������������������������������������������������������������������������������� 1999 ����������������������������������������������������������������������������������������������������� 1,351.8 1,453.1 1,579.2 1,721.7 1,827.5 1,000.7 1,085.6 1,187.2 1,305.9 1,383.0 351.1 367.5 392.0 415.8 444.5 1,515.7 1,560.5 1,601.1 1,652.5 1,701.8 1,227.1 1,259.6 1,290.5 1,335.9 1,381.1 288.7 300.9 310.6 316.6 320.8 –164.0 –107.4 –21.9 69.3 125.6 –226.4 –174.0 –103.2 –29.9 1.9 62.4 66.6 81.4 99.2 123.7 2000 ����������������������������������������������������������������������������������������������������� 2001 ����������������������������������������������������������������������������������������������������� 2002 ����������������������������������������������������������������������������������������������������� 2003 ����������������������������������������������������������������������������������������������������� 2004 ����������������������������������������������������������������������������������������������������� 2,025.2 1,991.1 1,853.1 1,782.3 1,880.1 1,544.6 1,483.6 1,337.8 1,258.5 1,345.4 480.6 507.5 515.3 523.8 534.7 1,789.0 1,862.8 2,010.9 2,159.9 2,292.8 1,458.2 1,516.0 1,655.2 1,796.9 1,913.3 330.8 346.8 355.7 363.0 379.5 236.2 128.2 –157.8 –377.6 –412.7 86.4 –32.4 –317.4 –538.4 –568.0 149.8 160.7 159.7 160.8 155.2 2005 ����������������������������������������������������������������������������������������������������� 2006 ����������������������������������������������������������������������������������������������������� 2007 ����������������������������������������������������������������������������������������������������� 2008 ����������������������������������������������������������������������������������������������������� 2009 ����������������������������������������������������������������������������������������������������� 2,153.6 2,406.9 2,568.0 2,524.0 2,105.0 1,576.1 1,798.5 1,932.9 1,865.9 1,451.0 577.5 608.4 635.1 658.0 654.0 2,472.0 2,655.1 2,728.7 2,982.5 3,517.7 2,069.7 2,233.0 2,275.0 2,507.8 3,000.7 402.2 –318.3 422.1 –248.2 453.6 –160.7 474.8 –458.6 517.0 –1,412.7 –493.6 –434.5 –342.2 –641.8 –1,549.7 175.3 186.3 181.5 183.3 137.0 2010 ����������������������������������������������������������������������������������������������������� 2011 ����������������������������������������������������������������������������������������������������� 2012 ����������������������������������������������������������������������������������������������������� 2013 ����������������������������������������������������������������������������������������������������� 2014 ����������������������������������������������������������������������������������������������������� 2015 ����������������������������������������������������������������������������������������������������� 2016 ����������������������������������������������������������������������������������������������������� 2,162.7 2,303.5 2,450.0 2,775.1 3,021.5 3,249.9 3,268.0 1,531.0 1,737.7 1,880.5 2,101.8 2,285.9 2,479.5 2,457.8 631.7 565.8 569.5 673.3 735.6 770.4 810.2 3,457.1 3,603.1 3,536.9 3,454.6 3,506.1 3,688.4 3,852.6 2,902.4 3,104.5 3,029.4 2,820.8 2,800.0 2,945.3 3,077.9 554.7 –1,294.4 498.6 –1,299.6 507.6 –1,087.0 633.8 –679.5 706.1 –484.6 743.1 –438.5 774.7 –584.7 –1,371.4 –1,366.8 –1,148.9 –719.0 –514.1 –465.8 –620.2 77.0 67.2 61.9 39.5 29.5 27.3 35.5 857.4 892.2 931.3 971.8 1,026.8 1,081.3 4,062.2 4,094.5 4,339.6 4,470.1 4,616.7 4,831.7 3,246.7 3,227.8 3,416.0 3,482.3 3,564.7 3,708.1 –644.4 –465.7 –533.6 –472.0 –430.6 –399.3 41.9 25.5 7.7 -15.9 -25.2 -42.4 2017 estimate ��������������������������������������������������������������������������������������� 3,459.7 2,602.3 2018 estimate ��������������������������������������������������������������������������������������� 3,654.3 2,762.1 2019 estimate ��������������������������������������������������������������������������������������� 3,813.7 2,882.4 2020 estimate ��������������������������������������������������������������������������������������� 3,982.1 3,010.3 2021 estimate ��������������������������������������������������������������������������������������� 4,160.9 3,134.1 2022 estimate ��������������������������������������������������������������������������������������� 4,390.1 3,308.8 1 Off-budget transactions consist of the Social Security trust funds and the Postal Service fund. all or a majority of their funding from the Government. These include the Corporation for Public Broadcasting, Gallaudet University, Howard University, the Legal Services Corporation, the National Railroad Passenger Corporation (Amtrak), the Smithsonian Institution, the 815.5 866.7 923.6 987.8 1,052.0 1,123.6 –602.5 –440.2 –525.9 –488.0 –455.8 –441.7 State Justice Institute, and the United States Institute of Peace. A related example is the Standard Setting Board, which is not a Federally created entity but since 2003 has received a majority of funding through a federally mandated assessment on public companies under the 95 9. Coverage of the Budget Sarbanes-Oxley Act. Although the Federal payments to these entities are budgetary, the entities themselves are non-budgetary. Whether the Government created or chartered an entity does not alone determine its budgetary status. The Commission recommended that the budget be comprehensive but it also recognized that proper budgetary classification required weighing all relevant factors regarding establishment, ownership, and control of an entity while erring on the side of inclusiveness. Generally, entities that are primarily Government owned or controlled are classified as budgetary. OMB determines the budgetary classification of entities in consultation with the Congressional Budget Office (CBO) and the Budget Committees of the Congress. One recent example of a budgetary classification issue was for the Puerto Rico financial oversight board, created in June 2016 by the Puerto Rico Oversight, Management, and Economic Stability Act (PL 114-187). By statute, this oversight board is not a department, agency, establishment, or instrumentality of the Federal Government, but is an entity within the territorial government financed entirely by the territorial government. Because the flow of funds from the territory to the oversight board is mandated by Federal law, the budget reflects the allocation of resources by the territorial government to the new territorial entity as a receipt from the territorial government and an equal outlay to the oversight board, with net zero deficit impact. Because the oversight board itself is not a Federal entity, its operations are not included in the budget. Another example involved the National Association of Registered Agents and Brokers (NARAB). NARAB allows for the adoption and application of insurance licensing, continuing education, and other nonresident producer qualification requirements on a multi-state basis. In other words, NARAB streamlines the ability of a nonresident insurer to become a licensed agent in another State. In exchange for providing enhanced market access, NARAB collects fees from its members. The Terrorism Risk Insurance Reauthorization Act of 2015 established the association. In addition to being statutorily established, which in itself is an indication that the entity is governmental, NARAB has a board of directors appointed by the President and confirmed by the Senate. It must also submit bylaws and an annual report to the Department of the Treasury and its primary function involves exercising a regulatory function. Off-budget Federal activities.—Despite the Commission’s recommendation that the budget be comprehensive, every year since 1971 at least one Federal program or agency has been presented as off-budget because of a legal requirement.5 The Government funds such off-budget Federal activities and administers them according to Federal legal requirements. However, their net costs are excluded, by law, from the rest of the budget totals, also known as the “on-budget” totals. 5 While the term “off-budget” is sometimes used colloquially to mean non-budgetary, the term has a meaning distinct from non-budgetary. Off-budget activities would be considered budgetary, absent legal requirement to exclude these activities from the budget totals. Off-budget Federal activities currently consist of the U.S. Postal Service and the two Social Security trust funds: Old-Age and Survivors Insurance and Disability Insurance. Social Security has been classified as off-budget since 1986 and the Postal Service has been classified as off-budget since 1990.6 Other activities that had been designated in law as off-budget at various times before 1986 have been classified as on-budget by law since at least 1985 as a result of the Balanced Budget and Emergency Deficit Control Act of 1985 (Public Law 99–177). Activities that were off-budget at one time but that are now on-budget are classified as on-budget for all years in historical budget data. Social Security is the largest single program in the unified budget and it is classified by law as off-budget; as a result, the off-budget accounts constitute a significant part of total Federal spending and receipts. Table 9–1 divides total Federal Government outlays, receipts, and the surplus or deficit between on-budget and off-budget amounts. Within this table, the Social Security and Postal Service transactions are classified as off-budget for all years to provide a consistent comparison over time. Non-Budgetary Activities The Government characterizes some important Government activities as non-budgetary because they do not involve the direct allocation of resources.7 These activities can affect budget outlays or receipts even though they have non-budgetary components. Federal credit programs: budgetary and non-budgetary transactions.—Federal credit programs make direct loans or guarantee private loans to non-Federal borrowers. The Federal Credit Reform Act of 1990 (FCRA), as amended by the Balanced Budget Act of 1997, established the current budgetary treatment for credit programs. Under FCRA, the budgetary cost of a credit program, known as the “subsidy cost,” is the estimated lifetime cost to the Government of a loan or a loan guarantee on a net present value basis, excluding administrative costs. Outlays equal to the subsidy cost are recorded in the budget up front, as they are incurred—for example, when a loan is made or guaranteed. Credit program cash flows 6 See 42 U.S.C. 911, and 39 U.S.C. 2009a, respectively. The off-budget Postal Service accounts consist of the Postal Service Fund, which is classified as a mandatory account, and the Office of the Inspector General and the Postal Regulatory Commission, both of which are classified as discretionary accounts. The Postal Service Retiree Health Benefits Fund is an on-budget mandatory account with the Office of Personnel Management. The off-budget Social Security accounts consist of the Federal Old-Age and Survivors Insurance trust fund and the Federal Disability Insurance trust fund, both of which have mandatory and discretionary funding. 7 Tax expenditures, which are discussed in Chapter 13 of this volume, are an example of Government activities that could be characterized as either budgetary or non-budgetary. Tax expenditures refer to the reduction in tax receipts resulting from the special tax treatment accorded certain private activities. Because tax expenditures reduce tax receipts and receipts are budgetary, tax expenditures clearly have budgetary effects. However, the size and composition of tax expenditures are not explicitly recorded in the budget as outlays or as negative receipts and, for this reason, tax expenditures might be considered a special case of non-budgetary transactions. 96 to and from the public are recorded in non-budgetary financing accounts and the information is included in budget documents to provide insight into the program size and costs. For more information about the mechanisms of credit programs, see Chapter 8 of this volume, “Budget Concepts.” More detail on credit programs is in Chapter 19 of this volume, “Credit and Insurance.” Deposit funds.—Deposit funds are non-budgetary accounts that record amounts held by the Government temporarily until ownership is determined (such as earnest money paid by bidders for mineral leases) or held by the Government as an agent for others (such as State income taxes withheld from Federal employees’ salaries and not yet paid to the States). The largest deposit fund is the Government Securities Investment Fund, also known as the G-Fund, which is part of the TSP, the Government’s defined contribution retirement plan. The Federal Retirement Thrift Investment Board manages the fund’s investment for Federal employees who participate in the TSP (which is similar to private-sector 401(k) plans). The Department of the Treasury holds the G-Fund assets, which are the property of Federal employees, only in a fiduciary capacity; the transactions of the Fund are not resource allocations by the Government and are therefore non-budgetary.8 For similar reasons, Native American -owned funds that are held and managed in a fiduciary capacity are also excluded from the budget. Government-Sponsored Enterprises (GSEs).— Government-Sponsored Enterprises are privately owned and therefore distinct from government corporations. The Federal Government has chartered GSEs such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks, the Farm Credit System, and the Federal Agricultural Mortgage Corporation to provide financial intermediation for specified public purposes. Although federally chartered to serve public-policy purposes, because GSEs are intended to be privately owned and controlled, with any public benefits accruing indirectly from the GSEs’ business transactions, they are classified as non-budgetary. Estimates of the GSEs’ activities can be found in a separate chapter of the Budget Appendix, and their activities are discussed in Chapter 19 of this volume, “Credit and Insurance.” In September 2008, in response to the financial market crisis, the director of the Federal Housing Finance Agency (FHFA)9 placed Fannie Mae and Freddie Mac into conservatorship for the purpose of preserving the assets and restoring the solvency of these two GSEs. As conservator, FHFA has broad authority to direct the operations of these GSEs. However, these GSEs remain private companies with board of directors and management responsible for their day-to-day operations. This Budget continues to treat these two GSEs as non-budgetary private entities in conservatorship rather than as Government agencies. By contrast, CBO treats these 8 The administrative functions of the Federal Retirement Thrift Investment Board are carried out by Government employees and included in the budget totals. 9 FHFA is the regulator of Fannie Mae, Freddie Mac, and the Federal Home Loans Banks. ANALYTICAL PERSPECTIVES GSEs as budgetary Federal agencies. Both treatments include budgetary and non-budgetary amounts. While OMB reflects all of the GSEs’ transactions with the public as non-budgetary, the payments from the Treasury to the GSEs are recorded as budgetary outlays and dividends received by the Treasury are recorded as budgetary receipts. Under CBO’s approach, the subsidy costs of Fannie Mae’s and Freddie Mac’s past credit activities have already been recorded in the budget estimates; the subsidy costs of future credit activities will be recorded when the activities occur. Lending and borrowing activities between the GSEs and the public apart from the subsidy costs are treated as non-budgetary by CBO, and Treasury payments to the GSEs are intragovernmental transfers (from Treasury to the GSEs) that net to zero in CBO’s budget estimates. Overall, both the Budget’s accounting and CBO’s accounting present Fannie Mae’s and Freddie Mac’s gains and losses as Government receipts and outlays—which reduce or increase Government deficits. The two approaches, however, reflect the effect of the gains and losses in the budget at different times. Other federally-created non-budgetary entities.— In addition to the GSEs, the Federal Government has created a number of other entities that are classified as non-budgetary. These include federally funded research and development centers (FFRDCs), non-appropriated fund instrumentalities (NAFIs), and other entities; some of these are non-profit entities and some are for-profit entities.10 FFRDCs are entities that conduct agency-specific research under contract or cooperative agreement. Some FFRDCs were created to conduct research for the Department of Defense but are administered by colleges, universities, or other non-profit entities. Despite this non-budgetary classification, many FFRDCs receive direct resource allocation from the Government and are 10 Although most entities created by the Federal Government are budgetary, as discussed in this section, the GSEs and the Federal Reserve System were created by the Federal Government, but are classified as non-budgetary. In addition, Congress and the President have chartered, but not necessarily created, approximately 100 non-profit entities that are non-budgetary. These include patriotic, charitable, and educational organizations under Title 36 of the U.S. Code and foundations and trusts chartered under other titles of the Code. Title 36 corporations include the American Legion, the American National Red Cross, Big Brothers—Big Sisters of America, Boy Scouts of America, Future Farmers of America, Girl Scouts of the United States of America, the National Academy of Public Administration, the National Academy of Sciences, and Veterans of Foreign Wars of the United States. Virtually all of the non-profit entities chartered by the Government existed under State law prior to the granting of a Government charter, making the Government charter an honorary rather than governing charter. A major exception to this is the American National Red Cross. Its Government charter requires it to provide disaster relief and to ensure compliance with treaty obligations under the Geneva Convention. Although any Government payments (whether made as direct appropriations or through agency appropriations) to these chartered non-profits, including the Red Cross, would be budgetary, the non-profits themselves are classified as nonbudgetary. On April 29, 2015, the Subcommittee on Immigration and Border Security of the Committee on the Judiciary in the U.S. House of Representatives adopted a policy prohibiting Congress from granting new Federal charters to private, non-profit organizations. This policy has been adopted by every subcommittee with jurisdiction over charters since the 101st Congress. 97 9. Coverage of the Budget included as budget lines in various agencies. Examples of FFRDCs include the Center for Naval Analysis and the Jet Propulsion Laboratory.11 Even though FFRDCs are non-budgetary, Federal payments to the FFRDC are budget outlays. In addition to Federal funding, FFRDCs may receive funding from non-Federal sources. Non-appropriated fund instrumentalities (NAFIs) are entities that support an agency’s current and retired personnel. Nearly all NAFIs are associated with the Departments of Defense, Homeland Security (Coast Guard), and Veterans Affairs. Most NAFIs are located on military bases and include the armed forces exchanges (which sell goods to military personnel and their families), recreational facilities, and childcare centers. NAFIs are financed by proceeds from the sale of goods or services and do not receive direct appropriations; thus, they are characterized as non-budgetary but any agency payments to the NAFIs are recorded as budget outlays. A number of entities created by the Government receive a significant amount of non-Federal funding. Non-Federal individuals or organizations significantly control some of these entities. These entities include Gallaudet University, Howard University, and the Universal Services Administrative Company, among others.12 Most of these entities receive direct appropriations or other recurring payments from the Government. The appropriations or other payments are budgetary and included in Table 26-1. However, many of these entities are themselves non-budgetary. Generally, entities that receive a significant portion of funding from non-Federal sources but are not controlled by the Government are non-budgetary. Regulation.—Federal Government regulations often require the private sector or other levels of government to make expenditures for specified purposes that are intended to have public benefits, such as workplace safety and pollution control. Although the budget reflects the Government’s cost of conducting regulatory activities, the costs imposed on the private sector as a result of regulation are treated as non-budgetary and not included in the budget. The annual Regulatory Plan and the semi-annual Unified Agenda of Federal Regulatory and Deregulatory Actions describe the Government’s regulatory priorities and plans.13 OMB has published the estimated costs and benefits of Federal regulation annually since 1997.14 11 The National Science Foundation maintains a list of FFRDCs at www.nsf.gov/statistics/ffrdc. 12 Under section 415(b) of the Amtrak Reform and Accountability Act of 1997, (49 U.S.C. 24304 and note), Amtrak was required to redeem all of its outstanding common stock. Once all outstanding common stock is redeemed, Amtrak will be wholly-owned by the Government and, at that point, its non-budgetary status may need to be reassessed. 13 The most recent Regulatory Plan and introduction to the Unified Agenda issued by the General Services Administration’s Regulatory Information Service Center are available at www.reginfo.gov and at www. gpoaccess.gov. 14 In the most recent draft report, OMB indicates that the estimated annual benefits of Federal regulations it reviewed from October 1, 2005, to September 30, 2015, range from $208 billion to $672 billion, while the estimated annual costs range from $57 billion to $85 billion. Monetary policy.— As a fiscal policy tool, the budget is used by elected Government officials to promote economic growth and achieve other public policy objectives. Monetary policy is another tool that governments use to promote economic policy objectives. In the United States, the Federal Reserve System, which is composed of a Board of Governors and 12 regional Federal Reserve Banks, conducts monetary policy,. The Federal Reserve Act provides that the goal of monetary policy is to “maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”15 The Full Employment and Balanced Growth Act of 1978, also known as the Humphrey-Hawkins Act, reaffirmed the dual goals of full employment and price stability.16 By law, the Federal Reserve System is a self-financing entity that is independent of the Executive Branch and subject only to broad oversight by the Congress. Consistent with the recommendations of the Commission, the effects of monetary policy and the actions of the Federal Reserve System are non-budgetary, with exceptions for the transfer to the Treasury of excess income generated through its operations. The Federal Reserve System earns income from a variety of sources including interest on Government securities, foreign currency investments and loans to depository institutions, and fees for services (e.g., check clearing services) provided to depository institutions. The Federal Reserve System remits to Treasury any excess income over expenses annually. For the fiscal year ending September 2016, Treasury recorded $115.7 billion in receipts from the Federal Reserve System. In addition to remitting excess income to Treasury, law requires the Federal Reserve to transfer a portion of its excess earnings to the Consumer Financial Protection Bureau (CFPB).17 The Board of Governors of the Federal Reserve is a Federal Government agency, but because of its independent status, its budget is not subject to Executive Branch review and is included in the Budget Appendix for informational purposes only. The Federal Reserve Banks are subject to Board oversight and managed by boards of directors chosen by the Board of Governors and member banks, which include all national banks and State banks that choose to become members. The budgets of the regional Banks are subject to approval by the Board of Governors and are not included in the Budget Appendix. 15 See 12 U.S.C. 225a. 15 U.S.C. 3101 et seq. 17 See section 1011 of Public Law 111-203 (12 U.S.C. 5491), (2010). The CFPB is an executive agency, led by a director appointed by the President and reliant on Federal funding, that serves the governmental function of regulating Federal consumer financial laws. Accordingly, it is included in the Budget. 16 See 10. BUDGET PROCESS This chapter addresses two broad categories of budget reform. First, the chapter discusses proposals to improve budgeting and fiscal sustainability with respect to individual programs as well as across Government. These proposals include: an extension of the spending reductions required by the Joint Select Committee on Deficit Reduction; various initiatives to reduce improper payments; funding requested for disaster relief; limits on changes in mandatory programs in appropriations Acts; limits on advance appropriations; reforms in transportation and infrastructure spending; and proposals for the Pell Grant program. Second, the chapter describes the 2018 Budget proposals for budget enforcement and budget presentation. The budget enforcement proposals include a discussion of the system under the Statutory Pay-As-You-Go Act of 2010 (PAYGO) of scoring legislation affecting receipts and mandatory spending; reforms to account for debt service in cost estimates; administrative PAYGO actions affecting mandatory spending; discretionary spending caps; improvements to how Joint Committee sequestration is shown in the Budget; the budgetary treatment of the housing Government-sponsored enterprises and the United States Postal Service; and using fair value as a method of scoring credit programs. These reforms combine fiscal responsibility with measures to provide citizens a more transparent, comprehensive, and accurate measure of the reach of the Federal budget. Together, the reforms and presentations discussed create a budget more focused on core Government functions and more accountable to the taxpayer. I. BUDGET REFORM PROPOSALS Joint Committee Enforcement In August 2011, as part of the Budget Control Act of 2011 (BCA; Public Law 112-25), bipartisan majorities in both the House and Senate voted to establish the Joint Select Committee on Deficit Reduction to recommend legislation to achieve at least $1.5 trillion of deficit reduction over the period of fiscal years 2012 through 2021. The failure of the Congress to enact such comprehensive deficit reduction legislation to achieve the $1.5 trillion goal triggered a sequestration of discretionary and mandatory spending in 2013, led to reductions in the discretionary caps for 2014 through 2018, and forced additional sequestrations of mandatory spending in each of fiscal years 2014 through 2017. A further sequestration of mandatory spending is scheduled to take effect beginning on October 1 based on the order released with the 2018 Budget. To date, various enacted legislation has changed the annual reductions required to the discretionary spending limits set in the BCA through 2017. The sequestration preview report issued with this budget reduced the 2018 discretionary caps according to current law. Going forward, the reductions to discretionary spending for fiscal years 2019 through 2021 are to be implemented in the sequestration preview report for each year by reducing the discretionary caps. Future reductions to mandatory programs are to be implemented by a sequestration of nonexempt mandatory budgetary resources in each of fiscal years 2019 through 2025, which is triggered by the transmittal of the President’s Budget for each year and takes effect on the first day of the fiscal year. The 2018 Budget proposes to continue mandatory sequestration into 2026 and 2027 to generate an additional $39 billion in deficit reduction. For discretionary programs, under current law, 2018 Joint Committee pro- cedures reduce the defense cap from $603 billion to $549.1 billion and the non-defense cap from $553 billion to $515.7 billion. The 2018 Budget restores the Joint Committee reductions made to the defense category and pays for this increase by reducing the cap for non-defense by roughly the same amount. This results in a proposed defense cap of $603 billion for defense programs and a non-defense cap of $462 billion for non-defense programs. After 2018, the Budget sets aside the existing Joint Committee procedures for discretionary programs by proposing new caps for defense and non-defense programs through 2027. These funding levels will enhance our national security while maintaining fiscal responsibility by rebalancing the non-defense mission to focus on core Government responsibilities. See Table S–7 in the main Budget volume for the proposed annual discretionary caps. Program Integrity Funding Critical programs such as Social Security, Unemployment Insurance, Medicare, and Medicaid should be run efficiently and effectively. Therefore, the Administration proposes to make significant investments in activities to ensure that taxpayer dollars are spent correctly, by expanding oversight activities in the largest benefit programs and increasing investments in tax compliance and enforcement activities. In addition, the Administration supports a number of legislative and administrative reforms in order to reduce improper payments. Many of these proposals will provide savings for the Government and taxpayers, and will support Government-wide efforts to improve the management and oversight of Federal resources. The Administration supports efforts to provide Federal agencies with the necessary resources and incentives to 99 100 improve payment integrity, and to prevent, reduce, or recover improper payments. The Administration will continue to identify areas, in addition to those outlined in the Budget, where it can work with the Congress to further improve agency efforts. Administrative Funding for Program Integrity.— There is compelling evidence that investments in administrative resources can significantly decrease the rate of improper payments and recoup many times their initial investment. The Social Security Administration (SSA) estimates that continuing disability reviews conducted in 2018 will yield net Federal program savings over the next 10 years of roughly $8 on average per $1 budgeted for dedicated program integrity funding, including the Old Age, Survivors, and Disability Insurance Program (OASDI), Supplemental Security Income (SSI), Medicare and Medicaid program effects. Similarly, for Health Care Fraud and Abuse Control (HCFAC) program integrity efforts, CMS actuaries conservatively estimate approximately $2 is saved or averted for every additional $1 spent. Enacted Adjustments Pursuant to BBEDCA.—The Balanced Budget and Emergency Deficit Control Act of 1985, as amended (BBEDCA), recognized that a multiyear strategy to reduce the rate of improper payments, commensurate with the large and growing costs of the programs administered by the Social Security Administration and the Department of Health and Human Services, is a laudable goal. To support the overall goal, BBEDCA provided for adjustments to the discretionary spending limits through 2021 to allow for additional funding for specific program integrity activities to reduce improper payments in the Social Security programs and in the Medicare and Medicaid programs. Because the additional funding is classified as discretionary and the savings as mandatory, the savings cannot be offset against the funding for budget enforcement purposes. These adjustments to the discretionary caps are made only if appropriations bills increase funding for the specified program integrity purposes above specified minimum, or base levels. This method ensures that the additional funding provided in BBEDCA does not supplant other Federal spending on these activities and that such spending is not diverted to other purposes. The Bipartisan Budget Act of 2015 (BBA) increased the level of such adjustments for Social Security programs by a net $484 million over the 2017-2021 period, and it expanded the uses of cap adjustment funds to include cooperative disability investigation units, and special attorneys for fraud prosecutions. The 2018 Budget supports full funding of the authorized cap adjustments for these programs through 2021 and proposes to extend the cap adjustments through 2027 at the rate of current services inflation assumed in the Budget. The 2018 Budget shows the baseline and policy levels at equivalent amounts. Accordingly, savings generated from such funding levels in the baseline for program integrity activities are reflected in the baselines for Social Security programs, Medicare, and Medicaid. Social Security Administration Medical Continuing Disability Reviews and Non-Medical Redeterminations of ANALYTICAL PERSPECTIVES SSI Eligibility.—For the Social Security Administration, the Budget’s proposed $1,735 million in discretionary funding in 2018 ($273 million in base funding and $1,462 million in cap adjustment funding) will allow SSA to conduct 890,000 full medical CDRs and approximately 2.8 million SSI non-medical redeterminations of eligibility. Medical CDRs are periodic reevaluations to determine whether disabled OASDI or SSI beneficiaries continue to meet SSA’s standards for disability. As a result of the discretionary funding requested in 2018, as well as the fully funded base and cap adjustment amounts in 2019 through 2027, the OASDI, SSI, Medicare and Medicaid programs would recoup almost $43 billion in gross Federal savings with additional savings after the 10-year period, according to estimates from SSA’s Office of the Chief Actuary. Access to increased cap adjustment amounts and SSA’s commitment to fund the fully loaded costs of performing the requested CDR and redetermination volumes would produce net deficit savings of $28 billion in the 10-year window, and additional savings in the outyears. These costs and savings are reflected in Table 10-1. SSA is required by law to conduct medical CDRs for all beneficiaries who are receiving disability benefits under the OASDI program, as well as all children under age 18 who are receiving SSI. SSI redeterminations are also required by law. However, the frequency of CDRs and redeterminations is constrained by the availability of funds to support these activities. The mandatory savings from the base funding in every year and the enacted discretionary cap adjustment funding assumed for 2017 are included in the BBEDCA baseline, consistent with the levels amended by the BBA of 2015, because the baseline assumes the continued funding of program integrity activities. The Budget shows the savings that would result from the increase in CDRs and redeterminations made possible by the discretionary cap adjustment funding requested in 2018 through 2027. With access to program integrity cap adjustments, SSA is on track to eliminate the backlog of CDRs by the end of 2018 and remain current with program integrity workloads throughout the budget window. As stated above, current estimates indicate that CDRs conducted in 2018 will yield a return on investment (ROI) of about $8 on average in net Federal program savings over 10 years per $1 budgeted for dedicated program integrity funding, including OASDI, SSI, Medicare and Medicaid program effects. Similarly, SSA estimates indicate that non-medical redeterminations conducted in 2018 will yield a ROI of about $3 on average of net Federal program savings over 10 years per $1 budgeted for dedicated program integrity funding, including SSI and Medicaid program effects. The Budget assumes the full cost of performing CDRs in 2017 and beyond to ensure that sufficient resources are available. The savings from one year of program integrity activities are realized over multiple years because some results find that beneficiaries are no longer eligible to receive OASDI or SSI benefits. Redeterminations are periodic reviews of non-medical eligibility factors, such as income and resources, for the 101 10. Budget Process means-tested SSI program and can result in a revision of the individual’s benefit level. However, the schedule of savings resulting from redeterminations will be different for the base funding and the cap adjustment funding in 2018 through 2027. This is because redeterminations of eligibility can uncover underpayment errors as well as overpayment errors. SSI recipients are more likely to initiate a redetermination of eligibility if they believe there are underpayments, and these recipient-initiated redeterminations are included in the base. The estimated savings per dollar spent on CDRs and non-medical redeterminations reflects an interaction with the state option to expand Medicaid coverage for individuals under age 65 with income less than 133 percent of poverty. As a result of this option, some SSI beneficiaries, who would otherwise lose Medicaid coverage due to a medical CDR or non-medical redetermination, would continue to be covered. In addition, some of the coverage costs for these individuals will be eligible for the enhanced Federal matching rate, resulting in higher Federal Medicaid costs in those states. Health Care Fraud and Abuse Program.—The 2018 Budget proposes base and cap adjustment funding levels over the next 10 years and continues the program integrity cap adjustment through 2027. In order to maintain level of effort, the base amount increases annually over the 10-year period. The cap adjustment is set at the levels specified under BBEDCA through 2021 and then increases annually based on inflation from 2022 through 2027. The mandatory savings from both the base and cap adjustment are included in the Medicare and Medicaid baselines. The discretionary base funding of $311 million plus an additional $6 million adjustment for inflation and cap adjustment of $434 million for HCFAC activities in 2018 are designed to reduce the Medicare improper payment rate, support the Health Care Fraud Prevention & Enforcement Action Team (HEAT) initiative and reduce Medicaid improper payment rates. The investment will also allow CMS to deploy innovative efforts that focus on improving the analysis and application of data, including state-of-the-art predictive modeling capabilities, in order to prevent potentially wasteful, abusive, or fraudulent payments before they occur. The funding is to be allocated among CMS, the Health and Human Services Office of Inspector General, and the Department of Justice (DOJ). Over 2018 through 2027, as reflected in Table 10-1, this $5.25 billion investment in HCFAC cap adjustment funding will generate approximately $11.7 billion in savings to Medicare and Medicaid, for new net deficit reduction of $6.4 billion over the 10-year period, reflecting prevention and recoupment of improper payments made to providers, as well as recoveries related to civil and criminal penalties. Mandatory Program Integrity Initiatives.—The mandatory and receipt savings from other program integrity initiatives that are included in the 2018 Budget, beyond the expansion in resources resulting from the increases in administrative funding discussed above are shown in table 10-2. These savings total almost $149 billion over 10 years. These mandatory proposals to reduce improper payments reflect the importance of these issues to the Administration. Through these and other initiatives outlined in the Budget, the Administration can improve management efforts across the Federal Government. Unemployment Insurance Program Integrity Package.— The Budget includes proposals aimed at improving integrity in the Unemployment Insurance (UI) program. The proposals would result in $67 million in PAYGO savings over 10 years, and would result in more than $2.2 billion in non-PAYGO savings. These proposals include savings that would allow States to reduce their unemployment taxes by $670 million. Included in this package are proposals to: allow for data disclosure to contractors for the Treasury Offset Program; expand State use of the Separation Information Data Exchange System (SIDES), which already improves program integrity by allowing States and employers to exchange information on reasons for a claimant’s separation from employment and thereby helping States to determine UI eligibility; mandate the use of the National Directory of New Hires to conduct cross-matches for program integrity purposes; allow the Secretary to set corrective action measures for poor State performance; require States to cross-match claimants against the Prisoner Update Processing System (PUPS), Table 10–1. PROGRAM INTEGRITY DISCRETIONARY CAP ADJUSTMENTS, INCLUDING MANDATORY SAVINGS (Outlays in millions of dollars) 2018 Social Security Program Integrity: Discretionary Costs1 ���������������������������������������������������������������������������������� Mandatory Savings 2 ���������������������������������������������������������������������������������� Net Savings ������������������������������������������������������������������ 1,462 –93 1,369 2019 1,410 –2,084 –674 2020 1,309 –3,117 –1,808 2021 1,302 –3,792 –2,490 2022 1,350 –4,647 –3,297 2023 1,400 –4,942 –3,542 2024 1,452 –5,152 –3,700 2025 1,506 –5,869 –4,363 2026 1,561 –6,330 –4,769 2027 1,619 –6,772 –5,153 2018 2027 Total 14,371 –42,798 –28,427 Health Care Fraud and Abuse Control Program: Discretionary Costs1 ���������������������������������������������������������������������������������� 434 454 475 496 514 533 553 574 595 617 5,245 Mandatory Savings 3 ���������������������������������������������������������������������������������� –923 –980 –1,040 –1,102 –1,158 –1,202 –1,246 –1,294 –1,341 –1,391 –11,677 Net Savings ������������������������������������������������������������������ –489 –526 –565 –606 –644 –669 –693 –720 –746 –774 –6,432 1 The discretionary costs are equal to the outlays associated with the budget authority levels authorized in BBEDCA through 2021; the costs for each of 2022 through 2027 are equal to the outlays associated with the budget authority levels inflated from the 2021 level, using the 2018 Budget assumptions. The levels in baseline are equal to the 2018 Budget policy. The mandatory savings from the cap adjustment funding are included in the baselines for Social Security, Medicare, and Medicaid programs. 2 This is based on SSA’s Office of the Chief Actuary’s estimates of savings. 3 These savings are based on estimates from the HHS Office of the Actuary for return on investment (ROI) from program integrity activities. 102 which is currently used by some States; and allow States to retain five percent of overpayment and tax investigation recoveries to fund program integrity activities. Reemployment Services and Eligibility Assessments (RESEA).— The Budget also includes a mandatory proposal to fund RESEA for one-half of all UI claimants profiled as most likely to exhaust benefits. The related Reemployment and Eligibility Assessment initiative was begun in 2005 to finance in-person interviews at American Job Centers (also known as “One-Stop Career Centers”), to assess UI beneficiaries’ need for job finding services and their continued eligibility for benefits. Research, including a random-assignment evaluation, shows that a combination of eligibility reviews and reemployment services reduces the time on UI, increases earnings, and reduces improper payments to claimants who are not eligible for benefits. Based on this research, the Budget proposes to expand funding for the RESEA initiative to allow States to conduct robust reemployment services along with REAs. These reemployment services may include the development of reemployment and work search plans, provision of skills assessments, career counseling, job matching and referrals, and referrals to training as appropriate. The Budget proposal includes $2.7 billion in PAYGO outlays for States to provide RESEA services to focus on UI claimants identified as most likely to exhaust their UI benefits and on newly separated veterans claiming unemployment compensation for ex-servicemembers (UCX), resulting in net non-PAYGO deficit reduction of $6.7 billion. These savings consist of reductions in UI benefit payments of an estimated $8.1 billion, as well as a net reduction in business taxes of $1.4 billion. In total, this proposal is estimated to reduce the deficit by $4 billion over 10 years. Because most unemployment claims are now filed by telephone or online, in-person assessments conducted in the Centers can help determine the continued eligibility for benefits and the adequacy of work search, verify the identity of beneficiaries where there is suspicion of possible identity theft, and provide a referral to reemployment assistance for those who need additional help. The benefit savings from this initiative are short-term because the maximum UI benefit period is limited, typically 26 weeks for regular State UI programs. Preventing Improper Payments in Social Security.— Overall, the Budget proposes legislation that would avert close to $1.6 billion in improper payments in Social Security over 10 years. While much of this savings is considered off-budget and would be non-PAYGO, about $718 million from various proposals would be PAYGO savings. • Hold Fraud Facilitators Liable for Overpayments.—The Budget proposes to hold fraud facilitators liable for overpayments by allowing SSA to recover the overpayment from a third party if the third party was responsible for making fraudulent statements or providing false evidence that allowed the beneficiary to receive payments that should not have been paid. This proposal would result in an estimated $8 million in savings over 10 years. ANALYTICAL PERSPECTIVES • Government-wide Use of Custom and Border Protection (CBP) Entry/Exit Data to Prevent Improper Payments.—The Budget proposes the use of CBP Entry/Exit data to prevent improper OASDI and Supplemental Security Insurance (SSI) payments. Generally, U.S. citizens can receive benefits regardless of residence. Non-citizens may be subject to additional residence requirements depending on the country of residence and benefit type. However, an SSI beneficiary who is outside the United States for 30 consecutive days is not eligible for benefits for that month. These data have the potential to be useful across the Government to prevent improper payments. This proposal would result in an estimated $177 million in savings over 10 years. • Allow SSA to Use Commercial Databases to Ver- ify Real Property Data in the SSI Program.— The Budget proposes to reduce improper payments and lessen recipients’ reporting burden by authorizing SSA to use private commercial databases to check for ownership of real property (i.e. land and buildings), which could affect SSI eligibility. Consent to allow SSA to access these databases would be a condition of benefit receipt for new beneficiaries and current beneficiaries who complete a determination. All other current due process and appeal rights would be preserved. This proposal would result in savings of $559 million over 10 years. • Increase the Overpayment Collection Threshold for OASDI.—The Budget would change the minimum monthly withholding amount for recovery of Social Security benefit overpayments to reflect the increase in the average monthly benefit since the Agency established the current minimum of $10 in 1960. By changing this amount from $10 to 10% of the monthly benefit payable, SSA would recover overpayments more quickly and better fulfill its stewardship obligations to the combined Social Security Trust Funds. The SSI program already utilizes the 10% rule. Debtors could still pay less if the negotiated amount would allow for repayment of the debt in 36 months. If the beneficiary cannot afford to have his or her full benefit payment withheld because he or she cannot meet ordinary and necessary living expenses, the beneficiary may request partial withholding. To determine a proper partial withholding amount, SSA negotiates (as well as renegotiates at the overpaid beneficiary’s request) a partial withholding rate. This proposal would result in savings of $848 million over 10 years. • Authorize SSA to Use All Collection Tools to Re- cover Funds in Certain Scenarios.—The Budget also proposes to allow SSA a broader range of collection tools when someone improperly receives a benefit after the beneficiary has died. Currently, if a spouse cashes a benefit payment (or does not return a directly deposited benefit) for an individual who has died and the spouse is also not receiving benefits on that individual’s record, SSA has more lim- 103 10. Budget Process Table 10–2. MANDATORY AND RECEIPT SAVINGS FROM OTHER PROGRAM INTEGRITY INITIATIVES (Deficit increases (+) or decreases (–) in millions of dollars) 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 10-year total Mandatory Program Integrity Initiatives: Department of Labor: Unemployment Insurance Program Integrity Package 1 ������������������������������ PAYGO effects ���������������������������������������������������������������������������������������� Non-PAYGO effects �������������������������������������������������������������������������������� Reemployment Services and Eligibility Assessments 1 ������������������������������� PAYGO effects ���������������������������������������������������������������������������������������� Non-PAYGO effects �������������������������������������������������������������������������������� –94 –12 –82 ......... ......... ......... –215 –17 –198 –88 260 –348 –251 –10 –241 –541 272 –813 –249 –8 –241 –562 281 –843 –243 –7 –236 –522 291 –813 –211 –4 –207 –411 301 –712 –253 –2 –251 –413 309 –722 –249 –4 –245 –493 317 –810 –241 –1 –240 –499 325 –824 –228 –2 –226 –519 333 –852 –2,234 –67 –2,167 –4,048 2,689 –6,737 ......... ......... –1 –1 –1 –1 –1 –1 –1 –1 –8 ......... ......... –1 –4 –9 –18 –24 –28 –36 –39 –159 ......... ......... ......... –1 –2 –2 –2 –3 –4 –4 –18 –12 –8 –28 –26 –44 –43 –53 –59 –60 –77 –69 –93 –70 –107 –68 –135 –76 –144 –79 –156 –559 –848 ......... –20 –2 –56 –2 –91 –3 –121 –4 –153 –4 –187 –5 –209 –5 –240 –5 –266 –11 –290 –41 –1,622 ......... –719 –1,482 –2,383 –4,288 –4,549 Exclude SSA debts from discharge in bankruptcy (non-PAYGO) ���������������� –9 –18 –23 –29 –34 –36 –38 –40 –43 –45 –315 Department of the Treasury: Increase oversight of paid tax return preparers 1 ����������������������������������������� Provide more flexible authority for the IRS to address correctable errors 1 � –14 –30 –31 –61 –35 –64 –38 –65 –42 –67 –47 –70 –50 –71 –55 –74 –61 –76 –66 –77 –439 –655 Social Security Administration: Hold Fraud Facilitators Liable for Overpayments (non-PAYGO) ������������������ Government Wide Use of CBP Entry/Exit Data to Prevent Improper Payment �������������������������������������������������������������������������������������������������� Government Wide Use of CBP Entry/Exit Data to Prevent Improper Payment (non-PAYGO). �������������������������������������������������������������������������� Allow SSA to Use Commercial Databases to Verify Real Property Data in the SSI Program. ������������������������������������������������������������������������������������ Increase the Overpayment Collection Threshold for OASDI (non-PAYGO) ���� Authorize SSA to Use All Collection Tools to Recover Funds in Certain Scenarios (non-PAYGO) ������������������������������������������������������������������������� Total, Preventing Improper Payments in Social Security������������������������� Government-wide: Reduce Improper Payments Government-wide (non-PAYGO) �������������������� –9,652 –20,480 –38,024 –57,633 –139,210 Other Program Integrity Initiatives: Total, Mandatory and Receipt Savings ���������������������������������������������������� –167 –1,188 –2,487 –3,447 –5,349 –5,511 –10,686 –21,631 –39,210 –58,858 –148,534 PAYGO Savings �������������������������������������������������������������������������������������� –68 123 118 113 106 93 92 88 75 70 810 Non-PAYGO Savings ������������������������������������������������������������������������������ –99 –1,311 –2,605 –3,560 –5,455 –5,604 –10,778 –21,719 –39,285 –58,928 –149,344 1 The estimate for this proposal includes effects on receipts in addition to changes in outlays. Receipt effects by proposal can be seen in table S–6, Mandatory and Receipt Proposals, in the main Budget volume. ited collection tools available than would be the case if the spouse also receives benefits on the deceased individual’s earning record. The Budget proposal would end this disparate treatment of similar types of improper payments and results in an estimated $41 million in savings over 10 years. Reducing Improper Payments Government-Wide.— Even though the majority of government payments are made properly, any waste of taxpayer money is unacceptable. The Budget prioritizes shrinking the amount of improper cash out the door. Specifically, by 2027 the Budget proposes to curtail government-wide improper payments by half through actions to improve payment accuracy and tighten administrative controls. This proposal includes improvements in paperwork errors that contribute to the improper payment rate. Overall, the proposal will save approximately $139 billion over 10 years that would reduce the deficit, but is not included as a PAYGO savings. Other Program Integrity Initiatives.— Data Analytics to Improve Payment Accuracy.—At the core of Government-wide data analytics to improve payment accuracy is the Treasury Do Not Pay Business Center which includes a system that enables agencies to identify, prevent, capture, and recover payments at different phases of the payment life cycle using available databases. Do Not Pay analytics specialists are also available to work one-on-one with agencies to review payment data to identify and address internal control weaknesses that could result in improper payments. Furthermore, Treasury’s team provides business process review services to support this work. The Do Not Pay initiative also incorporates other agency best practices and activities that further promote program integrity and benefits to the taxpayer. For example, the Bipartisan Budget Act of 2013 (BBA of 2013; Public Law 113-67) expanded the Do Not Pay initiative to include additional data collected by the Social Security Administration to prevent the improper payment of Federal funds to incarcerated individuals, 104 and in 2015, the Do Not Pay Business Center began facilitating the Internal Revenue Service use of these data to prevent fraud committed by prisoners. Additional examples of agencies using data to improve payment accuracy include the Centers for Medicare & Medicaid Services’ (CMS) Fraud Prevention System (FPS), a state-of-theart predictive analytics technology used to identify and prevent fraud in the program; the Department of Defense Business Activity Monitoring tool; and the Department of Labor’s Unemployment Insurance (UI) Integrity Center for Excellence, a Federal-State partnership which facilitates the development and implementation of integrity tools that help detect and reduce improper payments in state run programs. The effective use of data analytics has provided insight into methods of reducing costs and improving performance and decision-making capabilities. As a result of the Initiative, agencies cumulatively identified and stopped over $5.9 billion of improper payments through the Do Not Pay Initiative as of the end of FY 2016. Agencies need available data to be timely, accurate, and relevant to their programs to improve their payment accuracy, and additional authorities will enhance data sharing on death, prisoners, and employment for payment accuracy, while maintaining privacy. Use of the Death Master File to Prevent Federal Improper Payments.—The Administration is continuing to pursue opportunities to improve information sharing by developing or enhancing policy guidance, ensuring privacy protection, and developing legislative proposals to leverage available information and technology in determining benefit eligibility and other opportunities to prevent improper payments. The Budget proposes to improve payment accuracy further by sharing available death data across Government agencies to prevent improper payments. This proposal would amend the Social Security Act to provide the Do Not Pay system at Treasury and agencies that use the system access to the full death data at SSA to prevent, identify, or recover improper payments. This proposal would include information received from a State, or any other source, about the deceased. Exclude SSA Debts from Discharge in Bankruptcy.— Debts due to an overpayment of Social Security benefits are generally dischargeable in bankruptcy. The Budget includes a proposal to exclude such debts from discharge in bankruptcy, except when it would result in an undue hardship. This proposal would help ensure program integrity by increasing the amount of overpayments SSA recovers and would save $315 million over the 2018 through 2027 window. Increase Oversight of Paid Tax Preparers.—This proposal would give the IRS the statutory authority to increase its oversight of paid tax return preparers. As more taxpayers use paid preparers, the quality of the preparers has a dramatic impact on whether taxpayers follow tax laws. Increasing the quality of paid preparers lessens the need for after-the-fact enforcement of tax laws and increases the amount of revenue that the IRS can collect. ANALYTICAL PERSPECTIVES This proposal saves $439 million over the 2018 through 2027 period. Provide the IRS with Greater Flexibility to Address Correctable Errors.—The Budget proposes to give the IRS expanded authority to correct errors on taxpayer returns. Current law only allows the IRS to correct errors on returns in certain limited instances, such as basic math errors or the failure to include the appropriate Social Security Number or Taxpayer Identification Number. This proposal would expand the instances in which the IRS could correct a taxpayer’s return. For example, with this new authority, the IRS could deny a tax credit that a taxpayer had claimed on a tax return if the taxpayer did not include the required paperwork, or where government databases showed that the taxpayer-provided information was incorrect. This proposal would save $655 million over the 2018 through 2027 window. Develop Accurate Cost Estimates.—OMB works with Federal agencies and CBO to develop PAYGO estimates for mandatory programs. OMB has issued guidance to agencies for scoring legislation under the statutory PAYGO Act of 2010. This guidance states that agencies must score the effects of program legislation on other programs if the programs are linked by statute. (For example, effects on Medicaid spending that are due to statutory linkages in eligibility for Supplemental Security Income benefits must be scored.) In addition, even when programs are not linked by statute, agencies may score effects on other programs if those effects are significant and well documented. Specifically, the guidance states: “Under certain circumstances, estimates may also include effects in programs not linked by statute where such effects are significant and well documented. For example, such effects may be estimated where rigorous experimental research or past program experience has established a high probability that changes in eligibility or terms of one program will have significant effects on participation in another program.” Disaster Relief Funding Section 251(b)(2)(D) of BBEDCA includes a provision to adjust the discretionary caps for appropriations that the Congress designates in statute as provided for disaster relief. The law allows for a fiscal year’s discretionary cap to be increased by no more than the average funding provided for disaster relief over the previous 10 years, excluding the highest and lowest years. The ceiling for each year’s adjustment (as determined by the 10-year average) is then increased by the unused amount of the prior year’s ceiling (excluding the portion of the prior year’s ceiling that was itself due to any unused amount from the year before). Disaster relief is defined as activities carried out pursuant to a determination under section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122(2)) for major disasters declared by the President. As required by law, OMB included in its Sequestration Update Report for FY 2017 a preview estimate of the 2017 adjustment for disaster relief. The ceiling for the disaster relief adjustment in 2017 was calculated to be $8,566 million. However, the 105 10. Budget Process Continuing Appropriations and Military Construction, Veterans Affairs, and Related Agencies Appropriations Act, 2017, and Zika Response and Preparedness Act (Public Law 114-223) provided supplemental funding of $500 million for the Department of Housing and Urban Development’s Community Development Fund (CDF) in 2016. OMB’s seven-day-after report for Public Law 114223 stated that this supplemental funding decreased the disaster ceiling for 2017 to $8,129 million. At the time the Budget was prepared, the Government was operating under a continuing resolution set in the Continuing Appropriations Act, 2017 (division C of Public Law 114223, as amended by division A of Public Law 114-254) (the “CR”). The CR had provided for 2017 a continuing appropriation of $6,713 million for the Federal Emergency Management Agency’s Disaster Relief Fund (DRF) and a full-year appropriation for HUD’s CDF of $1,416 million. If final 2017 appropriations affirm this allocation with a final appropriation of $6,713 million for the DRF, such amounts would use the entire ceiling available in 2017. OMB must include in its Sequestration Update Report for 2018 a preview estimate of the ceiling on the adjustment for disaster relief funding for 2018. This estimate will contain an average funding calculation that incorporates four years (2008 through 2011) using the definition of disaster relief from OMB’s September 1, 2011 report and six years using the funding the Congress designated in 2012 through 2017 for disaster relief pursuant to BBEDCA excluding the highest and lowest years. As noted above, the entire ceiling may be used for 2017; therefore, no amount would be carried forward from 2017 into the 2018 preview estimate that will be included in OMB’s August 2017 Sequestration Update Report for Fiscal Year 2018. Currently, based on enacted and continuing appropriations, OMB estimates the total adjustment available for disaster funding for 2018 at $7,366 million. Any revisions necessary to account for final 2017 appropriations will be includedin the 2018 Sequestration Update Report. At this time, the Administration is requesting $6,793 million in funding for FEMA’s DRF in 2018 to cover the costs of Presidentially declared major disasters, including identified costs for previously declared catastrophic events (defined by FEMA as events with expected costs that total more than $500 million) and the predictable annual cost of non-catastrophic events expected to obligate in 2018. For this program, the Budget requests funding for both known needs based on expected costs of prior declared disasters and the typical average expenditures in these programs. This is consistent with past practice of requesting and funding these as part of regular appropriations bills. Also consistent with past practice, the 2018 request level does not seek to pre-fund anticipated needs in other programs arising out of disasters that have yet to occur, nor does the Budget seek funding for potential catastrophic needs. As additional information about the need to fund prior or future disasters becomes available, additional requests, in the form of either 2017 supplemental appropriations (designated as either disaster relief or emergency requirements pursuant to BBEDCA) or budget amendments to the Budget, may be transmitted. Under the principles outlined above, since the Administration does not have the adequate information about known or estimated needs that is necessary to state the total amount that will be requested in future years to be designated by the Congress for disaster relief, the Budget does not explicitly request to use the BBEDCA disaster designation in any year after the budget year. Instead, a placeholder for disaster relief is included in each of the out years that is equal to the current 2018 request. This funding level does not reflect a specific request but a placeholder amount that, along with other out year appropriations levels, will be decided on an annual basis as part of the normal budget development process. Declining Disaster Relief Cap Adjustment The allowable adjustment for disaster relief funding is declining to levels that approximate average annual Federal disaster assistance budget requests (which supports previously declared catastrophic disasters, future non-catastrophic disasters, and a limited amount of above-average future disaster activity). This amount will soon likely be insufficient to support the costs of future Presidentially declared disasters. Inflation, urbanization, and other factors may contribute to increasing future response and recovery costs. The decline of the cap adjustment results from the recent trend of relatively modest annual disaster appropriations over the past five fiscal years coupled with high-cost response and recovery efforts for Hurricanes Katrina and Sandy aging out of the rolling 10-year window used in the cap adjustment formula. The Administration will continue to review potential options for addressing the declining cap adjustment and looks forward to working with the Congress on disaster funding needs. Limits on Changes in Mandatory Spending in Appropriations Acts (CHIMPs) The discretionary spending caps in place since the enactment of the BCA in 2011 have been circumvented annually by the enactment of higher discretionary spending offset by reductions in mandatory budget authority with no net outlay savings. These spending offsets come from changes in mandatory programs, or CHIMPs, in the form of Congressionally-enacted rescissions or oneyear delays of spending with net zero outlay reductions over time. Congress has started to reduce the reliance on CHIMPs with no net outlay reductions by setting decreasing limits in the budget resolution of $19.1 billion in 2016, $17.0 billion in 2018, and $15.0 billion in 2019. The Administration supports these efforts and limits the use of CHIMPs with no outlay savings to $13.9 billion in the 2018 Budget. Limit on Discretionary Advance Appropriations An advance appropriation first becomes available for obligation one or more fiscal years beyond the year for which the appropriations act is passed. Budget authority is recorded in the year the funds become available for obligation, not in the year the appropriation is enacted. 106 There are legitimate policy reasons to use advance appropriations to fund programs. However, advance appropriations can also be used in situations that lack a programmatic justification, as a gimmick to make room for expanded funding within the discretionary spending limits on budget authority for a given year under BBEDCA. For example, some education grants are forward funded (available beginning July 1 of the fiscal year) to provide certainty of funding for an entire school year, since school years straddle Federal fiscal years. This funding is recorded in the budget year because the funding is first legally available in that fiscal year. However, $22.6 billion of this funding is advance appropriated (available beginning three months later, on October 1) rather than forward funded. Prior Congresses increased advance appropriations and decreased the amounts of forward funding as a gimmick to free up room in the budget year without affecting the total amount available for a coming school year. This gimmick works because the advance appropriation is not recorded in the budget year but rather the following fiscal year. However, it works only in the year in which funds switch from forward funding to advance appropriations; that is, it works only in years in which the amounts of advance appropriations for such “straddle” programs are increased. To curtail this gimmick, which allows over-budget funding in the budget year and exerts pressure for increased funding in future years by committing upfront a portion of the total budget authority limits under the discretionary caps in BBEDCA in those years, congressional budget resolutions since 2001 have set limits on the amount of advance appropriations. When the congressional limit equals the amount that had been advance appropriated in the most recent appropriations bill, there is no additional room to switch forward funding to advance appropriations, and so no room for this particular gimmick to operate in that year’s budget. The Budget includes $27,870 million in advance appropriations for 2019 and freezes them at this level in subsequent years. In this way, the Budget does not employ this potential gimmick. Moreover, the Administration supports limiting advance appropriations to the proposed level for 2019, below the limits included in sections 3202 and 3304 for the Senate and the House, respectively, of the Concurrent Resolution on the Budget for Fiscal Year 2016 (S. Con. Res. 11). Those limits apply only to the accounts explicitly specified in the joint explanatory statement of managers accompanying S. Con. Res. 11. In addition, the Administration would allow discretionary advance appropriations for veterans medical care, as is required by the Veterans Health Care Budget Reform and Transparency Act (P.L. 111-81). The veterans medical care accounts in the Department of Veterans Affairs (VA) currently comprise Medical Services, Medical Support and Compliance, Medical Facilities, and Medical Community Care. The level of advance appropriations funding for veterans medical care is largely determined by the VA’s Enrollee Health Care Projection Model. This actuarial model projects the funding requirement for over 90 types of health care services, including primary care, specialty care, and mental ANALYTICAL PERSPECTIVES health. The remaining funding requirement is estimated based on other models and assumptions for services such as readjustment counseling and special activities. VA has included detailed information in its Congressional Budget Justifications about the overall 2019 veterans medical care funding request. For a detailed table of accounts that have received discretionary and mandatory advance appropriations since 2016 or for which the Budget requests advance appropriations for 2019 and beyond, please refer to the Advance Appropriations chapter in the Appendix. Wildland Fire Suppression Funding The Administration continues to review potential administrative actions and legislative options to address longstanding concerns regarding how budgeting occurs for wildland fire suppression. The Administration will work with the Congress during the 2018 budget cycle to develop a responsible approach that addresses risk management, performance accountability, cost containment, and the role of State and local government partners in ensuring adequate funds are available for wildfire suppression without undue disruption to land management operations. Budgetary Treatment of Surface Transportation Infrastructure Funding Currently, surface transportation programs financed from the Highway Trust Fund (HTF) are treated as hybrids: contract authority is classified as mandatory, while outlays are classified as discretionary. Broadly speaking, this framework evolved as a mechanism to ensure that collections into the HTF (e.g., motor fuel taxes) were used to pay only for programs that benefit surface transportation users, and that funding for those programs would generally be commensurate with collections. Contract authority is a unique form of mandatory budget authority (BA) that permits authorized programs to obligate Federal funds for expenditure in advance of appropriations. Obligations of contract authority authorized for surface transportation programs are then satisfied by outlays from the HTF. Unlike discretionary budget authority provided through annual appropriations bills (which is controlled through 302(b) allocations), most Federal funding for surface transportation programs is provided by the authorizing committees within the authorization bills in the form of contract authority. The appropriations committees limit the annual obligations that HTF programs can incur in a given year. It is the annual obligation limitation that represents the actual spending level. Although authorization language prescribes obligation limitation levels for each year, the appropriators may adjust these amounts. Hence, both authorizers and appropriators have a hand in setting transportation spending. For scoring purposes, Congress and the Administration score budget authority from contract authority to the authorizers but score outlays from obligation limitations to the appropriators. Highway Trust Fund Solvency.—The Highway Revenue Act of 1956 introduced the HTF to accelerate the devel- 107 10. Budget Process opment of the Interstate Highway System. In the 1970s the HTF’s scope was expanded to include expenditures on mass transit. In 1982, a permanent Mass Transit Account with the HTF was created. Deposits to the HTF through the 1990s were historically more than sufficient to meet the surface transportation funding needs. However, by the 2000s, deposits into the HTF began to level off as vehicle fuel efficiency continued to improve. At the same time, the investment needs continued to rise as the infrastructure, much of which was built in the 1960s and 1970s, deteriorated and required recapitalization. The cost of construction also generally increased. The Federal motor fuel tax rates had stayed constant since 1993. By 2008, balances that had been building in the HTF were spent down. The 2008-2009 recession and rising gasoline prices had led to a reduction in the consumption of fuel resulting in the HTF reaching the point of insolvency for the first time. Congress responded by providing the first in a series of General Fund transfers to the HTF to maintain solvency. Recent passage of the Fixing America’s Surface Transportation Act, or the FAST Act (Public Law 11494), shored up the Highway Trust Fund and maintained the hybrid budgetary treatment through 2020. The FAST Act did not significantly amend transportation-related taxes or HTF authorization provisions beyond extending the authority to collect and spend revenue. Congress retained the Federal fuel tax rate at 18.4 cents per gallon for gasoline and 24.4 cents for diesel. To maintain HTF solvency, the FAST Act transferred $70 billion from the General Fund into the HTF. Since 2008, HTF tax revenues have been supplemented by $140 billion in General Fund transfers. Highway Trust Fund in the 2018 Budget.—For 2018, the Administration is requesting obligation limitation levels for HTF programs equal to the Contract Authority levels provided in the FAST Act, and those levels are frozen at the 2018 level through 2027. The Budget also reflects the FAST Act contract authority levels for the remainder of the Act, through 2020. After 2020 contract authority is frozen at the 2020 level. Beginning in 2021, the Budget assumes HTF outlays at levels supported with existing HTF tax receipts. DOT is unable to make reimbursements to States and grantees in excess of the receipts into the HTF. Relative to baseline levels, this presentation shows a reduction in total HTF outlays by $95 billion over the 2021-2027 window. The fact that the HTF has required $140 billion in General Fund transfers to stay solvent points to the need for a comprehensive reevaluation of the surface transportation funding regime. While Congress and past Administrations have been unable to find a long-term funding solution to the HTF, many States and localities have raised new revenue sources to finance transportation expenditures. The Administration believes that the Federal government should incentivize more States and localities to finance their own transportation needs, as they are best equipped to know the right level and mix of infrastructure investments. Infrastructure Initiative The overriding goal of the Administration’s infrastructure initiative is to bring about up to $1 trillion in new investment in the Nation’s physical infrastructure through long-term reforms to how infrastructure projects are regulated, funded, delivered, and maintained. This proposal will include a combination of policy, regulatory, and legislative proposals, ranging from changes to existing programs, to the creation of new programs and initiatives to reshape how the Federal government invests, permits, and collaborates on infrastructure. The 2018 Budget includes $200 billion in mandatory outlays to support this effort, which the Administration will use to make targeted investments to incentivize State, local, private, and other partners to significantly expand their infrastructure investments. Pell Grants The Pell Grant program includes features that make it unlike other discretionary programs including that Pell Grants are awarded to all applicants who meet income and other eligibility criteria. This section provides some background on the unique nature of the Pell Grant program and explains how the Budget accommodates changes in discretionary costs. Under current law, the Pell program has several notable features: • The Pell Grant program acts like an entitlement program, such as the Supplemental Nutrition Assistance Program or Supplemental Security Income, in which everyone who meets specific eligibility requirements and applies for the program receives a benefit. Specifically, Pell Grant costs in a given year are determined by the maximum award set in statute, the number of eligible applicants, and the award for which those applicants are eligible based on their needs and costs of attendance. The maximum Pell award for the academic year 2017-2018 is $5,920, of which $4,860 was established in discretionary appropriations and the remaining $1060 is provided automatically by the College Cost Reduction and Access Act (CCRAA), as amended. • The cost of each Pell Grant is funded by discretion- ary budget authority provided in annual appropriations acts, along with mandatory budget authority provided not only by the CCRAA, as amended, and the BCA, but also by amendments to the Higher Education Act of 1965 contained in the 2011 and 2012 appropriations acts. There is no programmatic difference between the mandatory and discretionary funding. • If valid applicants are more numerous than expected, or if these applicants are eligible for higher awards than anticipated, the Pell Grant program will cost more than the appropriations provided. If the costs during one academic year are higher than provided for in that year’s appropriation, the Department of 108 ANALYTICAL PERSPECTIVES Education funds the extra costs with the subsequent year’s appropriation.1 are countercyclical to the economy; more people go to school during periods of higher unemployment, but return to the workforce as the economy improves. In fact, the program experienced a spike in enrollment and costs during the recent recession, reaching a peak of 9.4 million students in 2011. This spike required temporary mandatory or emergency appropriations to fund the program well above the level that could have been provided as a practical matter by the regular discretionary appropriation. Since 2011, enrollment and costs have continued to decline, and the funding provided has lasted longer than anticipated. The 2018 Budget baseline expects program costs to stay within available resources, which include the discretionary appropriation, budget authority carried forward from the previous year, and extra mandatory funds, throughout the 10-year budget window (see Table 103). These estimates have changed significantly from year to year, which illustrates continuing uncertainty about Pell program costs, and the year in which a shortfall will reemerge. The 2018 Budget reflects the Administration’s commitment to ensuring students receive the maximum Pell Grant for which they are eligible, and enhances the program by supporting year-round Pell eligibility. First, the Budget provides sufficient resources to fully fund Pell Grants in the award years covered by the budget year, and subsequent years. The Budget provides $22.4 billion in discretionary budget authority in 2018, the same level of discretionary budget authority provided in the Furthering Continuing Appropriations Act, 2017 (P.L. 114-254). Level-funding Pell in 2018, combined with available budget authority from the previous year and mandatory funding provided in previous legislation, provides $13.6 billion more than is needed to fully fund the program in the 2018-19 award year. In light of these additional resources, the Budget proposes a cancellation of $3.9 billion from the unobligated carryover from 2017. Then, with significant budget authority still available in the program, the Budget also proposes to provide more flexibility to students by sup- • To prevent deliberate underfunding of Pell costs, in 2006 the congressional and Executive Branch scorekeepers agreed to a special scorekeeping rule for Pell. Under this rule, the annual appropriations bill is charged with the full Congressional Budget Office estimated cost of the Pell Grant program for the budget year, plus or minus any cumulative shortfalls or surpluses from prior years. This scorekeeping rule was adopted by the Congress as §406(b) of the Concurrent Resolution on the Budget for Fiscal Year 2006 (H. Con. Res. 95, 109th Congress). Given the nature of the program, it is reasonable to consider Pell Grants an individual entitlement for purposes of budget analysis and enforcement. The discretionary portion of the award funded in annual appropriations Acts counts against the discretionary spending caps pursuant to section 251 of BBEDCA and appropriations allocations established annually under §302 of the Congressional Budget Act. The total cost of Pell Grants can fluctuate from year to year, even with no change in the maximum Pell Grant award, because of changes in enrollment, college costs, and family resources. In general, the demand for and costs of the program 1 This ability to “borrow” from a subsequent appropriation is unique to the Pell program. It comes about for two reasons. First, like many education programs, Pell is “forward-funded”—the budget authority enacted in the fall of one year is intended for the subsequent academic year, which begins in the following July. Second, even though the amount of funding is predicated on the expected cost of Pell during one academic year, the money is made legally available for the full 24-month period covering the current fiscal year and the subsequent fiscal year. This means that, if the funding for an academic year proves inadequate, the following year’s appropriation will legally be available to cover the funding shortage for the first academic year. The 2018 appropriation, for instance, will support the 2018-2019 academic year beginning in July 2018 but will become available in October 2017 and can therefore help cover any shortages that may arise in funding for the 2017-2018 academic year. Table 10–3. DISCRETIONARY PELL FUNDING NEEDS (Dollars in Billions) 2018 2019 2020 2021 Discretionary Pell Funding Needs (Baseline) Estimated Program Cost for $4,860 Maximum Award �������������������������������� 21.7 22.2 22.5 22.9 Cumulative Incoming Surplus ��������������������������������������������������������������������� 11.4 ......... ......... ......... Mandatory Budget Authority Available �������������������������������������������������������� 1.4 1.4 1.4 1.1 Total Additional Budget Authority Needed �������������������������������������������������� 8.9 20.8 21.1 21.7 Fund Pell at 2017 Level ������������������������������������������������������������������������������ Surplus/Funding Gap from Prior Year ��������������������������������������������������������� Cumulative Surplus/(Discretionary Funding Gap) �������������������������������������� 22.4 13.6 22.4 13.6 15.2 22.4 15.2 16.6 22.4 16.6 17.3 2022 2023 2024 2025 2026 2027 23.2 ......... 1.1 22.0 23.6 ......... 1.1 22.5 24.1 ......... 1.1 22.9 24.5 ......... 1.1 23.3 24.8 ......... 1.1 23.6 25.1 ......... 1.1 24.0 22.4 17.3 17.7 22.4 17.7 17.6 22.4 17.6 17.2 22.4 17.2 16.3 22.4 16.3 15.1 22.4 15.1 13.5 Effect of 2018 Budget Policies Year-Round Pell ������������������������������������������������������������������������������������������ –1.2 –1.2 –1.2 –1.3 –1.3 –1.3 –1.3 –1.3 –1.4 –1.4 Cancellation of Unobligated Balances �������������������������������������������������������� –3.9 ......... ......... ......... ......... ......... ......... ......... ......... ......... Mandatory Funding Shift* ��������������������������������������������������������������������������� –0.3 –0.3 –0.3 –0.3 –0.3 –0.3 –0.3 –0.4 –0.4 –0.4 Surplus/Funding Gap from Prior Year ��������������������������������������������������������� 8.2 8.2 8.1 7.2 6.0 4.3 2.2 –0.5 –3.4 Cumulative Surplus/(Discretionary Funding Gap) �������������������������������������� 8.2 8.2 8.1 7.2 6.0 4.3 2.2 –0.5 –3.4 –6.7 * Some budget authority, provided in previous legislation and classified as mandatory, but used to meet discretionary Pell grant program funding needs, will be shifted to instead fund new costs associated with the mandatory add-on. 109 10. Budget Process porting year-round Pell. This policy allows students the opportunity to earn a third semester of Pell Grant support during an award year, boosting Pell Grant aid disbursed by $1.5 billion in award year 2018 to approximately 900,000 students. Year-round Pell would also help incentivize students to complete their degrees faster, which can help them reduce their loan debt and enter the workforce sooner. Year-round Pell increases future discretionary Pell program costs by $13 billion over 10 years (see Table 10–3). With the proposed cancellation and the increase for year-round Pell, the Pell program still is expected to have sufficient discretionary funds until 2025. II. BUDGET ENFORCEMENT AND BUDGET PRESENTATION Statutory PAYGO The Statutory Pay-As-You-Go Act of 2010 (PAYGO, or “the Act”; Public Law 111-139) was enacted on February 12, 2010. Drawing upon the PAYGO provisions enacted as part of the Budget Enforcement Act, the Act requires that, subject to specific exceptions, all legislation enacted during each session of the Congress changing taxes or mandatory expenditures and collections not increase projected deficits. Mandatory spending encompasses any spending except that controlled by the annual appropriations process.2 The Act established 5- and 10-year scorecards to record the budgetary effects of legislation; these scorecards are maintained by OMB and are published on the OMB web site. The Act also established special scorekeeping rules that affect whether all estimated budgetary effects of PAYGO bills are entered on the scorecards. Off-budget programs (primarily Social Security and the Postal Service) do not have budgetary effects for the purposes of PAYGO and are not counted. Provisions designated by the Congress in law as emergencies appear on the scorecards, but the effects are subtracted before computing the scorecard totals. In addition to the exemptions in the PAYGO Act itself, the Congress has enacted laws affecting revenues or direct spending with a provision directing that the budgetary effects of all or part of the law be held off of the PAYGO scorecards. In the most recently completed Congressional session, one piece of legislation was enacted with such a provision. The requirement of budget neutrality is enforced by an accompanying requirement of automatic across-the-board cuts in selected mandatory programs if enacted legislation, taken as a whole, does not meet that standard. If the Congress adjourns at the end of a session with net costs—that is, more costs than savings—in the budgetyear column of either the 5- or 10-year scorecard, OMB is required to prepare, and the President is required to issue, a sequestration order implementing across-the-board cuts to non-exempt mandatory programs in an amount sufficient to offset the net costs on the PAYGO scorecards. The list of exempt programs and special sequestration rules for certain programs are contained in sections 255 and 256 of BBEDCA. 2 Mandatory spending is termed direct spending in the PAYGO Act. The term mandatory encompasses entitlement programs, e.g., Medicare and Medicaid, and any funding not controlled by annual appropriations bills, such as the automatic availability of immigration examination fees to the Department of Homeland Security. As was the case during the 1990s, the PAYGO sequestration has not been required during the seven Congressional sessions since the PAYGO Act reinstated the statutory PAYGO requirement. For each of those sessions, OMB’s annual PAYGO reports showed net savings in the budget year column of both the 5- and 10-year scorecards. For the second session of the 114th Congress, the most recent session, enacted legislation placed costs of $478 million in each year of the 5-year scorecard and $980 million in each year of the 10-year scorecard. The new costs in 2017 lowered the balances of savings from prior sessions of the Congress in 2017, the budget year column, and resulted in total net savings of $4,418 million on the 5-year scorecard, and $14,468 million on the 10year scorecard, so no sequestration was required.3 There are limitations to Statutory PAYGO’s usefulness as a budget enforcement tool. Although the scorecard consistently shows net savings from legislation subject to the PAYGO rules, a number of laws that significantly increased deficits were enacted with provisions directing that these deficit effects be ignored for PAYGO purposes. PAYGO also suffers from the technical flaws of excluding off-budget programs, ignoring effects outside of the 11-year window, and excluding the debt service costs associated with direct changes in the deficit. Estimating the Impacts of Debt Service New legislation that affects direct spending and revenue will also indirectly affect interest payments on the national debt. These effects on interest payments can cause a significant budgetary impact; however, they are not captured in cost estimates that are required under the Statutory PAYGO Act of 2010, nor are they typically included in estimates of new legislation that are produced by the Congressional Budget Office. The Administration believes that cost estimates of new legislation could be improved by incorporating information on the effects of interest payments and looks forward to working with the Congress in making reforms in this area. Administrative PAYGO The Administration continues to review potential administrative actions by Executive Branch agencies affecting entitlement programs, as stated in a memorandum issued on May 23, 2005, by the Director of the Office of Management and Budget. This memo effectively established a PAYGO requirement for administrative actions involving mandatory spending programs, so that agen3 OMB’s annual PAYGO reports and other explanatory material about the PAYGO Act are available on OMB’s website. 110 cies administering these programs have a requirement to keep costs low. Exceptions to this requirement are only provided in extraordinary or compelling circumstances.4 Discretionary spending limits The BBEDCA baseline extends enacted or continuing appropriations at the account level assuming current services inflation but allowances are included to bring total base discretionary funding in line with the BBEDCA caps through 2021. Current law requires reductions to those discretionary caps in accordance with Joint Committee enforcement procedures put in place by the BCA. For 2018, the Budget supports maintaining the topline for base discretionary programs at the Joint Committee-enforced level but proposes rebalancing Federal responsibilities by restoring the reductions made to the defense cap by reducing the non-defense cap by about the same amount. After 2018, the Budget proposes new caps that shift resources from non-defense programs by further reducing the non-defense cap over the 2019–2027 window by 2 percent per year (the “2-penny” plan) while increasing the defense category spending by 2.1 percent per year. The Defense base cap estimates for 2019–2027 reflect inflated 2018 levels, not a policy judgment. The Administration will determine 2019–2027 defense funding levels in the 2019 Budget, in accordance with the National Security Strategy, National Defense Strategy, and Nuclear Posture Review that are currently under development. The discretionary cap policy levels are reflected in Table S–7 of the main Budget volume. Further adjustments to the proposed discretionary caps The discretionary non-defense caps proposed in the 2018 Budget are reduced further to account for policy decisions to remove the air traffic control programs from discretionary spending because of privatization and to reduce the contributions of Federal agencies to the retirement plans of civilian employees. These cap reductions would prevent the savings achieved by these reforms from being redirected to augment existing non-defense programs. Reforms to the retirement plans of Federal civilian employees would also yield savings in the defense category, but no reduction is included to allow for those savings to be redirected to critical national security investments within the category. Air Traffic Control Privatization.—The Administration proposes to shift the Federal Aviation Administration’s (FAA) air traffic control function into a non-governmental entity beginning in 2021. This proposal reduces the need for discretionary spending in the following FAA accounts: Facilities and Equipment; Research, Engineering, and Development; and Trust Fund Share accounts. The Budget reflects an annual reduction of $10.4 billion in budget authority from 2021 to 2027; this level was determined by measuring the amount allocated as a placeholder 4 For a review of the application of Administrative PAYGO, see USDA’s Application of Administrative PAYGO to Its Mandatory Spending Programs, GAO, October 31, 2011, GAO-11-921R. ANALYTICAL PERSPECTIVES in the policy outyears to air traffic control activities under the proposed non-defense category. Employer-Employee Share of Federal Employee Retirement.—The Budget proposes to reallocate the costs of Federal employee retirement by charging equal shares of employees’ accruing retirement costs to employees and employers. The Budget takes the estimated reductions in the share of employee retirement paid by Federal agencies out of the cap levels starting in 2019. This proposal starts at a reduction of discretionary budget authority of $6.6 billion in 2019 and totals $70 billion in reduced discretionary spending over the 2019 to 2027 period. Gross versus net reductions in Joint Committee sequestration The net realized savings from Joint Committee mandatory sequestration are less than the amounts required by the sequestration calculation as a result of requirements in BBEDCA. The 2018 Budget shows the net effect of Joint Committee sequestration reductions by accounting for reductions in 2018 that remain in the sequestered account and become newly available for obligation in the year after sequestration, in accordance with section 256(k)(6) of BBEDCA. The BA and outlays from these “pop-up” resources are included in the baseline and policy estimates and amount to a cost of $2.5 billion in 2018. Additionally, the 2018 Budget accounts for $669 million in lost savings that results from the sequestration of certain interfund payments. Such payments produce no net deficit reduction. Fannie Mae and Freddie Mac The Budget continues to present Fannie Mae and Freddie Mac, the housing Government-sponsored enterprises (GSEs) currently in Federal conservatorship, as non-Federal entities. However, any Treasury equity investments in the GSEs would be recorded as budgetary outlays, and the dividends on those investments are recorded as offsetting receipts. In addition, the budget estimates reflect collections from the 10 basis point increase in GSE guarantee fees that was enacted under the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). The baseline also reflects collections from a 4.2 basis point set-aside on each dollar of unpaid principal balance of new business purchases authorized under the Housing and Economic Recovery Act of 2008 (P.L. 111289) to be remitted to several Federal affordable housing programs; the 2018 Budget proposes to eliminate the 4.2 basis point set-aside and discontinue funding for these programs. The GSEs are discussed in more detail in Chapter 20, “Credit and Insurance.” Postal Service Reforms The Administration proposes reform of the Postal Service, necessitated by the serious financial condition of the Postal Service Fund. The proposals are discussed in the Postal Service and Office of Personnel Management sections of the Appendix. The Postal Service is designated in statute as an offbudget independent establishment of the Executive 111 10. Budget Process Branch. This designation and budgetary treatment was most recently mandated in 1989, in part to reflect the policy agreement that the Postal Service should pay for its own costs through its own revenues and should operate more like an independent business entity. Statutory requirements on Postal Service expenses and restrictions that impede the Postal Service’s ability to adapt to the ongoing evolution to paperless written communications have made this goal increasingly difficult to achieve. To address its current financial and structural challenges, the Administration proposes reform measures to ensure that the Postal Service funds existing commitments to current and former employees from business revenues, not taxpayer funds. To reflect the Postal Services’ practice since 2012 of using defaults to on-budget accounts to continue operations, despite losses, the Administration’s baseline now reflects probable defaults to on-budget accounts at the Office of Personnel Management (OPM). This treatment allows for a clearer presentation of the Postal Service’s likely actions in the absence of reform and more realistic scoring of reform proposals, with improvements in the Postal Service’s finances reflected through lower defaults, and added costs for the Postal Service reflected as higher defaults. Under current scoring rules, savings from reform for the Postal Service affect the unified deficit but do not affect the PAYGO scorecard. Savings to OPM through lower projected defaults affect both the PAYGO scorecard and the unified deficit. Fair Value for Credit Programs Fair value is an approach to measuring the cost of Federal direct loan and loan guarantee programs that would align budget estimates with the market value of Federal assistance, typically by including risk premiums observed in the market. Under current budget rules, the cost of Federal credit programs is measured as the net present value of the estimated future cash flows resulting from a loan or loan guarantee discounted at the Treasury rate. These rules are defined in law by the Federal Credit Reform Act of 1990 (FCRA). In recent years, some analysts have argued that fair value estimates would better capture the true costs imposed on taxpayers from Federal credit programs and would align with private sector standard practices for measuring the value of loans and loan guarantees. The Congressional Budget Office (CBO), for instance, has stated that fair value would be a more comprehensive measure of the cost of Federal credit programs. The Concurrent Resolution on the Budget for Fiscal Year 2016 (S. Con. Res. 11) also included language supporting the use of fair value. The Administration supports proposals to improve the accuracy of cost estimates and is open to working with Congress to address any conceptual and implementation challenges necessary to implement fair value estimates for Federal credit programs. Budget Presentation of Immigration Policy and Reforms The Administration is exploring a future change to budget presentation that would make transparent the net budgetary effects of immigration programs and policy. The goal of such changes would be to better capture the impact of immigration policy decisions on the federal Government’s fiscal path. Once the net effect of immigration on the Federal budget is more clearly illustrated, the American public can be better informed about options for improving policy outcomes and savings taxpayer resource. To that end, the Budget supports reforming the U.S. immigration system to encourage a merit-based system of entry for legal immigrants, ending the entry of illegal immigrants, and a substantial reduction in refugees slotted for domestic resettlement. FEDERAL RECEIPTS 113 11. GOVERNMENTAL RECEIPTS A simpler, fairer, and more efficient tax system is critical to growing the economy and creating jobs. Our outdated, overly complex, and burdensome tax system must be reformed to unleash America’s economy, and create millions of new, better-paying jobs that enable American workers to meet their families’ needs. The Budget assumes deficit neutral tax reform, which the Administration will work closely with the Congress to enact. The Administration has articulated several core principles that will guide its discussions with taxpayers, businesses, Members of Congress, and other stakeholders. Overall, the Administration believes that tax reform, both for individuals and businesses, should grow the economy and make America a more attractive business environment. Tax relief for American families, especially middle-income families, should: • Lower individual income tax rates; • Expand the standard deduction, and help families struggling with child and dependent care expenses; • Protect homeownership, charitable giving, and retirement saving; • End the burdensome alternative minimum tax, which requires many taxpayers to calculate their taxes twice; • Repeal the 3.8 percent Obamacare surcharge on capital gains and dividends, which further hinders capital formation; and • Abolish the death tax, which penalizes farmers and small business owners who want to pass their family enterprises on to their children. The Administration believes that business tax reform should: • Reduce the tax rate on American businesses in order to fuel job creation and economic growth; • Eliminate most special interest tax breaks to make the tax code more equitable, more efficient, and to help pay for lower business tax rates; and • End the penalty on American businesses by transi- tioning to a territorial system of taxation, enabling these businesses to repatriate their newly earned overseas profits without incurring additional taxes. This transition would include a one-time repatriation tax on already accumulated overseas income. Going forward, the President is committed to continue working with the Congress and other stakeholders to carefully and deliberatively build on these principles to create a tax system that is fair, simple, and efficient—one that puts Americans back to work and puts America first. ESTIMATES OF GOVERNMENTAL RECEIPTS Governmental receipts are taxes and other collections from the public that result from the exercise of the Federal Government’s sovereign or governmental powers. The difference between governmental receipts and outlays is the surplus or deficit. The Federal Government also collects income from the public from market-oriented activities. Collections from these activities, which are subtracted from gross outlays, rather than added to taxes and other governmental receipts, are discussed in Chapter 12, “Offsetting Collections and Offsetting Receipts,” in this volume. Total governmental receipts (hereafter referred to as “receipts”) are estimated to be $3,459.7 billion in 2017, an increase of $191.7 billion or 5.9 percent from 2016. The estimated increase in 2017 is largely due to increases in payroll taxes, individual income taxes, and taxes on corporate income. Receipts in 2017 are esti- mated to be 18.1 percent of Gross Domestic Product (GDP), which is higher than in 2016, when receipts were 17.8 percent of GDP. Receipts are estimated to rise to $3,654.3 billion in 2018, an increase of $194.6 billion or 5.6 percent relative to 2017. Receipts are projected to grow at an average annual rate of 4.7 percent between 2018 and 2022, rising to $4,390.1 billion. Receipts are projected to rise to $5,724.2 billion in 2027, growing at an average annual rate of 5.5 percent between 2022 and 2027. This growth is largely due to assumed increases in incomes resulting from both real economic growth and inflation. As a share of GDP, receipts are projected to increase from 18.1 percent in 2017 to 18.3 percent in 2018, and to remain between 18.0 percent and 18.4 percent of GDP through 2027. 115 116 ANALYTICAL PERSPECTIVES Table 11–1. RECEIPTS BY SOURCE—SUMMARY (In billions of dollars) Individual income taxes ������������������������������������������������������������������ Corporation income taxes ��������������������������������������������������������������� Social insurance and retirement receipts ��������������������������������������� (On-budget) �������������������������������������������������������������������������������� (Off-budget) �������������������������������������������������������������������������������� Excise taxes ����������������������������������������������������������������������������������� Estate and gift taxes ����������������������������������������������������������������������� Customs duties ������������������������������������������������������������������������������� Miscellaneous receipts ������������������������������������������������������������������� Allowance to repeal and replace Obamacare ��������������������������������� Total, receipts ���������������������������������������������������������������������������� (On-budget) �������������������������������������������������������������������������� (Off-budget) �������������������������������������������������������������������������� Total receipts as a percentage of GDP ��������������������������������������� Estimate 2016 Actual 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 1,546.1 299.6 1,115.1 304.9 810.2 95.0 21.4 34.8 156.0 ......... 3,268.0 2,457.8 810.2 17.8 1,659.9 323.6 1,174.7 317.3 857.4 87.0 23.1 33.9 157.4 ......... 3,459.7 2,602.3 857.4 18.1 1,836.1 354.9 1,224.3 332.1 892.2 106.2 24.3 39.7 123.8 –55.0 3,654.3 2,762.1 892.2 18.3 1,935.3 374.8 1,277.0 345.7 931.3 107.3 26.1 41.6 111.6 –60.0 3,813.7 2,882.4 931.3 18.2 2,044.2 401.2 1,334.6 362.8 971.8 109.8 27.8 43.0 106.6 –85.0 3,982.1 3,010.3 971.8 18.1 2,166.7 400.5 1,412.6 385.8 1,026.8 99.3 29.3 43.5 109.0 –100.0 4,160.9 3,134.1 1,026.8 18.0 2,292.9 414.4 1,488.3 407.1 1,081.3 101.3 31.2 46.0 120.9 –105.0 4,390.1 3,308.8 1,081.3 18.1 2,428.5 425.0 1,557.2 424.4 1,132.9 103.6 33.0 50.4 131.8 –115.0 4,614.6 3,481.7 1,132.9 18.1 2,571.7 438.9 1,637.4 445.9 1,191.4 106.1 35.6 52.8 141.5 –120.0 4,864.1 3,672.7 1,191.4 18.2 2,723.3 454.8 1,716.9 466.3 1,250.6 109.2 38.0 56.4 151.5 –120.0 5,130.1 3,879.5 1,250.6 18.2 2,884.0 475.1 1,805.9 490.1 1,315.8 112.7 40.4 60.3 158.5 –120.0 5,416.9 4,101.1 1,315.8 18.3 3,062.0 496.6 1,892.9 514.4 1,378.5 116.9 42.7 65.5 167.6 –120.0 5,724.2 4,345.7 1,378.5 18.4 LEGISLATION ENACTED IN 2016 THAT AFFECTS GOVERNMENTAL RECEIPTS Several laws were enacted during 2016 that affect receipts. The major provisions of those laws that have a significant impact on receipts are described below.1 COAST GUARD AUTHORIZATION ACT OF 2015 (PUBLIC LAW 114-120) Airport and Airway Trust Fund through July 15, 2016. The prior law exemption from domestic and international air passenger ticket taxes provided for aircraft in fractional ownership aircraft programs was also extended through that date. These taxes had been scheduled to expire after March 31, 2016, under prior law. This Act, which was signed into law on February 8, 2016, reauthorized the Coast Guard through September 30, 2017, and enacted various reforms. One of these reforms altered the criteria when the Secretary of Homeland Security may remit or cancel any part of a person’s indebtedness to the United States or any U.S instrumentality. Cancellation of debt is typically a taxable event affecting governmental receipts. This Act, which was signed into law on May 11, 2016, increased the maximum penalty for trade secret theft from $5,000,000 to the greater of $5,000,000 or three times the value of the stolen trade secret. These penalties are classified as governmental receipts. TRADE FACILITATION AND TRADE ENFORCEMENT ACT OF 2015 (PUBLIC LAW 114-125) PUERTO RICO OVERSIGHT, MANAGEMENT, AND ECONOMIC STABILITY ACT (PUBLIC LAW 114-187) This Act, which was signed into law on February 24, 2016, modified various requirements under the Tariff Act of 1930 and the Harmonized Tariff Schedule of the United States, provided certain trade preferences for Nepal, and increased the maximum penalty for failure to file a tax return within 60 days of the deadline, except for reasonable cause. This Act, also known as PROMESA, which was signed into law on June 30, 2016, addressed Puerto Rico’s debt by establishing an oversight board, and a process for restructuring debt including an automatic stay upon enactment. PROMESA creates an oversight board that is not a department, agency, establishment, or instrumentality of the Federal Government but is an entity within the territorial government, which is not subject to the supervision or control of any Federal agency. Although the Board’s financing is derived entirely from the territorial government, the flow of funds from the territory to the Board is mandated by Federal law. Because Federal law prescribes the flow of funds to the Board, the budget reflects the allocation of resources by the territorial government to the new territorial entity as governmental receipts and a simultaneous payment to the oversight board in the same AIRPORT AND AIRWAY EXTENSION ACT OF 2016 (PUBLIC LAW 114-141) This Act, which was signed into law on March 30, 2016, extended the authority to collect taxes that fund the 1 In the discussions of enacted legislation, years referred to are calendar years, unless otherwise noted. DEFEND TRADE SECRETS ACT OF 2016 (PUBLIC LAW 114-153) 117 11. Governmental Receipts amount, with a net zero Federal deficit impact, consistent with long-standing budgetary concepts. unless the taxpayer’s adjusted gross income exceeded $1,000,000 or $500,000 if married but filing separately. FAA EXTENSION, SAFETY, AND SECURITY ACT OF 2016 (PUBLIC LAW 114-190) 21ST CENTURY CURES ACT (PUBLIC LAW 114-255) This Act, which was signed into law on July 15, 2016, enacted aviation safety and security reforms, and extended the authority to collect taxes that fund the Airport and Airway Trust Fund through September 30, 2017. The prior law exemption from domestic and international air passenger ticket taxes provided for aircraft in fractional ownership aircraft programs was also extended through that date. These taxes had been scheduled to expire after July 15, 2016, under prior law. This Act, which was signed into law on December 13, 2016, created an exception to the group health plan requirements for qualified small employer health reimbursement arrangements. The amount of such arrangements was limited to $4,950 ($10,000 for arrangements which also covered employee’s family members) and indexed to inflation. UNITED STATES APPRECIATION FOR OLYMPIANS AND PARALYMPIANS ACT OF 2016 (PUBLIC LAW 114-239) This Act, which was signed into law on October 7, 2016, excluded the value of any medal awarded or prize money received from the U.S. Olympic Committee on account of competition in the Olympic Games or Paralympic Games NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2017 (PUBLIC LAW 114-328) This Act, which was signed into law on December 23, 2016, reauthorized the Department of Defense, and enacted various reforms. One of these reforms expanded when the Secretaries of the Army, the Navy, the Air Force, and Homeland Security may remit or cancel any part of a person’s indebtedness to the United States or any U.S instrumentality. Cancellation of debt is typically a taxable event affecting governmental receipts. BUDGET PROPOSALS While the details of the Administration’s reforms to individual and business taxes will be released at a later date, the budget does include several proposals which affect governmental receipts: Extend CHIP funding through 2019.—The Authorization for the Children’s Health Insurance Program (CHIP) currently expires at the end of 2017. The Administration proposes to extend CHIP funding for two years, through fiscal year 2019. As a result, on net, more children will be enrolled in CHIP and fewer children will be enrolled in Marketplace qualified health plans and employment-based health insurance. This will increase tax revenues and reduce outlays associated with the premium tax credit. Establish Electronic Visa Update System (EVUS) user fee.—The Administration proposes to establish a user fee for EVUS, a new U.S. Customs and Border Protection (CBP) program to collect biographic and travel-related information from certain non-immigrant visa holders prior to traveling to the United States. This process will complement existing visa application processes and enhance CBP’s ability to make pre-travel admissibility and risk determinations. CBP proposes to establish a user fee to fund the costs of establishing, providing, and administering the system. Eliminate Corporation for Travel Promotion.— The Administration proposes to eliminate funding for the Corporation for Travel Promotion (also known as Brand USA) as part of the Administration’s plans to move the nation towards fiscal responsibility and to redefine the proper role of the Federal Government. The Budget re- directs the Electronic System for Travel Authorization (ESTA) surcharge currently deposited in the Travel Promotion Fund to the ESTA account at Customs and Border Protection with a portion to be transferred to the International Trade Administration. Provide paid parental leave benefits.—The Administration proposes establishing a new benefit within the Unemployment Insurance (UI) program to provide up to six weeks paid leave to mothers, fathers, and adoptive parents. States are expected to adjust their UI tax structures to maintain sufficient balances in their Unemployment Trust Fund accounts. Establish Unemployment Insurance (UI) solvency standard.—The Administration proposes to set a minimum solvency standard to encourage States to maintain sufficient balances in their UI trust funds. States that are currently below this minimum standard are expected to increase their State UI taxes to build up their trust fund balances. States that do not build up sufficient reserves will be subject to Federal Unemployment Tax Act credit reductions, increasing Federal UI receipts. Improve Unemployment Insurance program integrity.—The Administration proposes a package of reforms to the UI program aimed at improving program integrity. These reforms are expected to reduce outlays in the UI program by reducing improper payments. In general, reduced outlays allow States to keep UI taxes lower, reducing overall receipts to the UI trust funds. Provide mandatory Reemployment Services and Eligibility Assessments.—The Administration proposes mandatory funding to provide Reemployment Services and Eligibility Assessments (RESEAs) to the one-half of 118 UI claimants identified as most likely to exhaust benefits. RESEAs have been shown to reduce improper payments and to get claimants back to work more quickly, thereby reducing UI benefit outlays. In general, reduced outlays allow States to keep UI taxes lower, reducing overall receipts to the UI trust funds. Offset overlapping unemployment and disability payments.—The Administration proposes to close a loophole that allows individuals to receive both UI and Disability Insurance (DI) benefits for the same period of joblessness. The proposal would offset the DI benefit to account for concurrent receipt of UI benefits. Under current law, concurrent receipt of DI benefits and unemployment compensation is allowable. Offsetting the overlapping benefits would discourage some individuals from applying for UI, reducing benefit outlays. The reduction in benefit outlays is accompanied by a reduction in States' UI tax receipts, which are held in the Unemployment Trust Fund. Enact Federal Aviation Administration (FAA) air traffic control reform.—The Administration proposes to shift the FAA’s air traffic control function into a nongovernmental entity beginning in 2021. This proposal would reduce the collection of aviation excise taxes. The estimates in the Budget are illustrative of the aviation taxes that would be in place to fund the FAA’s Airport Improvement Program. The reform proposal in the Budget assumes the ticket tax will end, but has not yet developed the precise tax rates for the remaining aviation excise taxes. Reform the Essential Air Service.—The Administration proposes to reform the Essential Air Service (EAS) by eliminating discretionary funding and focusing on the remote airports that are most in need of subsidized commercial air service. The proposal will include a mix of reforms, including limits on per-passenger subsidies and higher average daily enplanements. These reforms would affect governmental receipts by reducing aviation overflight fees. Require a social security number that is valid for work in order to claim child tax credit and earned income tax credit.—The Administration proposes requiring a social security number that is valid for work to claim the earned income tax credit or the child tax credit for the taxable year. For both credits, this requirement would apply to taxpayers (including the primary and secondary filer on a joint return) and all qualifying children. Increase oversight of paid tax return preparers.— Paid tax return preparers have an important role in tax administration because they assist taxpayers in complying with their obligations under the tax laws. Incompetent and dishonest tax return preparers increase collection costs, reduce revenues, disadvantage taxpayers by potentially subjecting them to penalties and interest as a result of incorrect returns, and undermine confidence in the tax system. To promote high quality services from paid tax return preparers, the proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers. This proposal would be effective as of the date of enactment. ANALYTICAL PERSPECTIVES Provide the Internal Revenue Service (IRS) with greater flexibility to address correctable errors.— The Administration proposes to expand IRS authority to correct errors on taxpayer returns. Current statute only allows the IRS to correct errors on returns in certain limited instances, such as basic math errors or the failure to include the appropriate social security number or taxpayer identification number. This proposal would expand the instances in which the IRS could correct a taxpayer’s return including cases where: (1) the information provided by the taxpayer does not match the information contained in government databases; (2) the taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or (3) the taxpayer has failed to include with his or her return, certain documentation that is required by statute. The proposal would be effective on the date of enactment. Provide authority to purchase and construct a new Bureau of Engraving and Printing (BEP) facility.—The Administration proposes to provide authority to the Bureau of Engraving and Printing to construct a more efficient production facility. This will reduce the cost incurred by the Federal Reserve for printing currency and therefore increase governmental receipts via increased deposits from the Federal Reserve to Treasury. Reform inland waterways financing.—The Administration proposes to reform the laws governing the Inland Waterways Trust Fund, including establishing a fee to increase the amount paid by commercial navigation users of the inland waterways. In 1986, the Congress provided that commercial traffic on the inland waterways would be responsible for 50 percent of the capital costs of the locks, dams, and other features that make barge transportation possible on the inland waterways. The additional revenue would help finance future capital investments in these waterways to support economic growth. The current excise tax on diesel fuel used in inland waterways commerce will not produce sufficient revenue to cover these costs. Increase employee contributions to Federal Employee Retirement System (FERS).—The Administration proposes to increase Federal employee contributions to FERS, equalizing employee and employer contributions to FERS so that half of the normal cost would be paid by each. For some specific occupations, such as law enforcement officers and firefighters, the cost of their retirement package necessitates a higher normal cost percentage. For those specific occupations, this proposal would increase, but not equalize employee contributions. This proposal is consistent with the goal of reining in Federal Government spending in many areas, and bringing Federal retirement benefits more in line with the private sector. This adjustment will reduce the long term cost to the Federal Government, by reducing the Government’s contribution rate. To lessen the impact on employees, this proposal will be phased in over an estimated 6-year period. This reform would affect governmental receipts because Federal employee retirement contributions are classified as governmental receipts. Repeal and replace Obamacare.—The Administration is committed to rescuing Americans from the 119 11. Governmental Receipts failures of Obamacare and to expand choice, increase access, and lower premiums. Repealing and replacing Obamacare would affect governmental receipts. Reform medical liability system.—The Administration proposes to reform medical liability beginning in 2018. This proposal has the potential to lower health insurance premiums, increasing taxable income and payroll tax receipts and reducing outlays associated with the premium tax credit. Eliminate allocations to the Housing Trust Fund and Capital Magnet Fund.—The Administration proposes to eliminate an assessment on Fannie Mae and Freddie Mac that is used to fund the Housing Trust Fund and Capital Magnet Fund, two Federal programs that support affordable low-income housing. The resulting increase in taxable income at Fannie Mae and Freddie Mac would impact governmental receipts. Table 11–2. EFFECT OF BUDGET PROPOSALS (In millions of dollars) 2017 Extend CHIP funding through 2019 ������������ Establish Electronic Visa Update System user fee �������������������������������������������������� Eliminate Brand USA; make revenue available to CBP ����������������������������������� Transfer Electronic System for Travel Authorization receipts to International Trade Administration ������������������������������ Provide paid parental leave benefits ���������� Establish an Unemployment Insurance (UI) solvency standard ���������������������������������� Improve UI program integrity ��������������������� Provide for Reemployment Services and Eligibility Assessments �������������������������� Offset overlapping unemployment and disability payments ������������������������������� Reform Air Traffic Control �������������������������� Reform Essential Air Service ��������������������� Require social security number for Child Tax Credit & Earned Income Tax Credit ������� Increase oversight of paid tax return preparers ���������������������������������������������� Provide more flexible authority for the IRS to address correctable errors ���������������� Provide authority for Bureau of Engraving and printing to construct new facility ������ Reform inland waterways financing ������������ Increase employee contributions to 50% of cost with 6-year phase-in (1% per year) Repeal and replace Obamacare ���������������� Reform the medical liability system ����������� Eliminate allocations to the Housing Trust Fund and Capital Magnet Fund ������������ Total receipt effects of mandatory proposals ������������������������������������������ 2018 2019 2020 2021 2022 2023 2024 2025 2026 20182022 2027 2017-2027 ......... –49 219 367 67 ......... ......... ......... ......... ......... ......... 604 604 ......... 27 27 31 28 29 28 31 28 29 28 142 286 ......... –162 –170 –178 ......... ......... ......... ......... ......... ......... ......... –510 –510 ......... ......... 162 ......... 171 ......... 178 ......... 185 916 193 962 200 971 208 1,158 215 1,264 223 1,365 230 1,459 889 1,878 1,965 8,095 ......... ......... ......... ......... ......... –4 758 –8 1,894 –23 2,568 –42 1,045 –86 1,833 –57 1,072 –81 1,488 –102 2,254 –132 5,220 –77 12,912 –535 ......... ......... 1 ......... –18 –89 –238 –269 –229 –264 –284 –106 –1,390 ......... ......... ......... ......... ......... ......... ......... ......... ......... –1 –3 –7 –13 –18 –23 –46 –36 –11 –147 ......... –14,391 –14,976 –15,627 –16,382 –17,302 –18,073 –18,881 –29,367 –115,632 ......... –129 –130 –132 –133 –134 –136 –137 –259 –931 ......... 298 1,176 1,194 1,228 1,261 1,313 1,381 1,455 1,526 1,618 5,157 12,450 ......... 12 18 20 22 24 27 29 32 36 39 96 259 ......... 5 10 11 11 12 13 13 14 15 15 49 119 ......... ......... 15 108 74 107 3 106 –5 105 314 104 –5 103 –14 103 –3 101 –165 100 494 100 401 530 708 1,037 ......... 1,719 3,227 4,810 6,372 7,959 9,537 9,568 9,599 9,624 9,640 24,087 72,055 ......... –55,000 –60,000 –85,000 –100,000 –105,000 –115,000 –120,000 –120,000 –120,000 –120,000 –405,000 –1,000,000 ......... 24 222 545 982 1,468 2,054 2,666 3,053 3,261 3,444 3,241 17,719 ......... 75 79 96 110 117 122 126 129 131 134 477 1,120 ......... –52,766 –54,843 –77,068 –102,649 –105,233 –115,688 –119,757 –120,810 –120,987 –120,015 –392,559 –989,815 12. OFFSETTING COLLECTIONS AND OFFSETTING RECEIPTS I. INTRODUCTION AND BACKGROUND The Government records money collected in one of two ways. It is either recorded as a governmental receipt and included in the amount reported on the receipts side of the budget or it is recorded as an offsetting collection or offsetting receipt, which reduces (or “offsets”) the amount reported on the outlay side of the budget. Governmental receipts are discussed in the previous chapter, “Governmental Receipts.” The first section of this chapter broadly discusses offsetting collections and offsetting receipts. The second section discusses user charges, which consist of a subset of offsetting collections and offsetting receipts and a small share of governmental receipts. As discussed below, offsetting collections and offsetting receipts are cash inflows to a budget account that are usually used to finance Government activities. The spending associated with these activities is included in total or “gross outlays.” For 2016, gross outlays to the public were $4,352 billion,1 or 23.6 percent of gross domestic product (GDP). Offsetting collections and offsetting receipts from the public are subtracted from gross outlays to the public to yield “net outlays,” which is the most common measure of outlays cited and generally referred to as simply “outlays.” For 2016, net outlays were $3,853 billion or 20.9 percent of GDP. Government-wide net outlays reflect the Government’s net disbursements to the public and are subtracted from governmental receipts to derive the Government’s deficit or surplus. For 2016, governmental receipts were $3,268 billion, or 17.8 percent of GDP, and the deficit was $585 billion, or 3.2 percent of GDP. There are two sources of offsetting receipts and offsetting collections: from the public and from other budget accounts. In 2016, offsetting receipts and offsetting collections from the public were $499 billion, while intragovernmental offsetting receipts and offsetting collections were $1,141 billion. Regardless of how it is recorded (as governmental receipts, offsetting receipts, or offsetting collections), money collected from the public reduces the deficit or increases the surplus. In contrast, intragovernmental collections from other budget accounts exactly offset the payments made by these accounts, with no net impact on the deficit or surplus.2 When measured by the magnitude of the dollars collected, most offsetting collections and offsetting receipts 1 Gross outlays to the public are derived by subtracting intragovernmental outlays from gross outlays. For 2016, gross outlays were $5,493 billion. Intragovernmental outlays are payments from one Government account to another Government account. For 2016, intragovernmental outlays totaled $1,141 billion. 2 For the purposes of this discussion, “collections from the public” include collections from non-budgetary Government accounts, such as credit financing accounts and deposit funds. For more information on these non-budgetary accounts, see Chapter 9, “Coverage of the Budget.” from the public arise from business-like transactions with the public. Unlike governmental receipts, which are derived from the Government’s exercise of its sovereign power, these offsetting collections and offsetting receipts arise primarily from voluntary payments from the public for goods or services provided by the Government. They are classified as offsets to outlays for the cost of producing the goods or services for sale, rather than as governmental receipts on the receipts side of the budget. Treating offsetting collections and offsetting receipts as offsets to outlays produces budget totals for receipts and (net) outlays that reflect the amount of resources allocated by the Government through collective political choice, rather than through the marketplace.3 These activities include the sale of postage stamps, land, timber, and electricity; charging fees for services provided to the public (e.g., admission to national parks); and collecting premiums for health care benefits (e.g., Medicare Parts B and D). A relatively small portion ($25.1 billion in 2016) of offsetting collections and offsetting receipts from the public is derived from the Government’s exercise of its sovereign power. From a conceptual standpoint, these should be classified as governmental receipts. However, they are classified as offsetting rather than governmental receipts either because this classification has been specified in law or because these collections have traditionally been classified as offsets to outlays. Most of the offsetting collections and offsetting receipts in this category derive from fees from Government regulatory services or Government licenses, and include, for example, charges for regulating the nuclear energy industry, bankruptcy filing fees, immigration fees, food inspection fees, passport fees, and patent and trademark fees.4 A third source of offsetting collections and offsetting receipts is intragovernmental transfers. Examples of intragovernmental transfers include interest payments to funds that hold Government securities (such as the Social Security trust funds), general fund transfers to civilian and military retirement pension and health benefits 3 Showing collections from business-type transactions as offsets on the spending side of the budget follows the concept recommended by the Report of the President’s Commission on Budget Concepts in 1967 and is discussed in Chapter 8 of this volume, “Budget Concepts.’’ 4 This category of receipts is known as “offsetting governmental receipts.” Some argue that regulatory or licensing fees should be viewed as payments for a particular service or for the right to engage in a particular type of business. However, these fees are conceptually much more similar to taxes because they are compulsory, and they fund activities that are intended to provide broadly dispersed benefits, such as protecting the health of the public. Reclassifying these fees as governmental receipts could require a change in law, and because of conventions for scoring appropriations bills, would make it impossible for fees that are controlled through annual appropriations acts to be scored as offsets to discretionary spending. 121 122 ANALYTICAL PERSPECTIVES funds, and agency payments to funds for employee health insurance and retirement benefits. Although these intragovernmental collections exactly offset the payments themselves, with no effect on the deficit or surplus, it is important to record these transactions in the budget to show how much the Government is allocating to fund various programs. For example, in the case of civilian retirement pensions, Government agencies make accrual payments to the Civil Service Retirement and Disability Fund on behalf of current employees to fund their future retirement benefits; the receipt of these payments to the Fund is shown in a single receipt account. Recording the receipt of these payments is important because it demonstrates the total cost to the Government today of providing this future benefit. The final source of offsetting collections and offsetting receipts is gifts. Gifts are voluntary contributions to the Government to support particular purposes or reduce the amount of Government debt held by the public. Although both offsetting collections and offsetting receipts are subtracted from gross outlays to derive net outlays, they are treated differently when it comes to accounting for specific programs and agencies. Offsetting collections are usually authorized to be spent for the purposes of an expenditure account and are generally available for use when collected, without further action by the Congress. Therefore, offsetting collections are recorded as offsets to spending within expenditure accounts, so that the account total highlights the net flow of funds. Like governmental receipts, offsetting receipts are credited to receipt accounts, and any spending of the re- Table 12–1. OFFSETTING COLLECTIONS AND OFFSETTING RECEIPTS FROM THE PUBLIC (In billions of dollars) Actual 2016 Estimate 2017 2018 Offsetting collections (credited to expenditure accounts): User charges: Postal Service stamps and other USPS fees (off-budget) �������������������������������������������������������������������������������������������������������������������������������� Defense Commissary Agency �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Employee contributions for employees and retired employees health benefits funds �������������������������������������������������������������������������������������� Sale of energy: Tennessee Valley Authority ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Bonneville Power Administration ������������������������������������������������������������������������������������������������������������������������������������������������������������������ All other user charges ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal, user charges ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 69.8 5.3 14.8 69.7 5.5 15.9 73.2 5.0 17.0 44.2 3.4 70.8 208.3 43.2 4.0 67.0 205.3 43.7 4.0 73.4 216.3 Other collections credited to expenditure accounts: Commodity Credit Corporation fund ����������������������������������������������������������������������������������������������������������������������������������������������������������������� Supplemental Security Income (collections from the States) ��������������������������������������������������������������������������������������������������������������������������� Other collections ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal, other collections ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal, offsetting collections �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6.8 2.6 20.9 30.2 238.5 7.7 2.7 19.9 30.2 224.3 7.4 2.7 20.1 30.2 234.8 User charges: Medicare premiums ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Spectrum auction, relocation, and licenses ������������������������������������������������������������������������������������������������������������������������������������������������������ Outer Continental Shelf rents, bonuses, and royalties ������������������������������������������������������������������������������������������������������������������������������������� All other user charges ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Subtotal, user charges deposited in receipt accounts ���������������������������������������������������������������������������������������������������������������������������������� 72.5 8.4 2.8 37.5 121.2 79.2 0.0 4.0 37.5 120.8 91.4 8.8 4.5 38.7 143.4 Other collections deposited in receipt accounts: Military assistance program sales �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Interest received from credit financing accounts ���������������������������������������������������������������������������������������������������������������������������������������������� Proceeds, GSE equity related transactions ������������������������������������������������������������������������������������������������������������������������������������������������������ All other collections deposited in receipt accounts ������������������������������������������������������������������������������������������������������������������������������������������� Subtotal, other collections deposited in receipt accounts ����������������������������������������������������������������������������������������������������������������������������� Subtotal, offsetting receipts ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 32.1 41.5 11.5 54.2 139.3 260.5 37.4 45.0 23.4 62.0 167.8 288.6 36.0 46.7 17.3 50.0 149.9 293.3 Total, offsetting collections and offsetting receipts from the public ������������������������������������������������������������������������������������������������������������������� Total, offsetting collections and offsetting receipts excluding off-budget �������������������������������������������������������������������������������������������������������������������� 499.0 429.0 512.9 443.2 528.1 454.9 ADDENDUM: User charges that are offsetting collections and offsetting receipts 1 ��������������������������������������������������������������������������������������������������������������������� Other offsetting collections and offsetting receipts from the public ������������������������������������������������������������������������������������������������������������������������ 1 Excludes user charges that are classified on the receipts side of the budget. For total user charges, see Table 12-3. 329.5 169.5 326.1 186.8 359.6 168.5 Offsetting receipts (deposited in receipt accounts): 123 12. Offsetting Collections and Offsetting Receipts Table 12–2. SUMMARY OF OFFSETTING RECEIPTS BY TYPE (In millions of dollars) Receipt Type Estimate Actual 2016 2017 2018 2019 2020 2021 2022 Intragovernmental �������������������������������������������������������������������������������� 798,075 767,842 784,834 811,307 852,320 897,448 944,185 Receipts from non-Federal sources: Proprietary �������������������������������������������������������������������������������������� Offsetting governmental . ����������������������������������������������������������������� Total, receipts from non-Federal sources ���������������������������������� Total, offsetting receipts ������������������������������������������������������������������ 240,616 19,868 260,484 1,058,559 275,225 13,391 288,616 1,056,458 271,135 22,140 293,275 1,078,109 276,618 15,530 292,148 1,103,455 287,823 16,054 303,877 1,156,197 297,906 14,948 312,854 1,210,302 310,955 15,389 326,344 1,270,529 ceipts is recorded in separate expenditure accounts. As a result, the budget separately displays the flow of funds into and out of the Government. Offsetting receipts may or may not be designated for a specific purpose, depending on the legislation that authorizes their collection. If designated for a particular purpose, the offsetting receipts may, in some cases, be spent without further action by the Congress. When not designated for a particular purpose, offsetting receipts are credited to the general fund, which contains all funds not otherwise allocated and which is used to finance Government spending that is not financed out of dedicated funds. In some cases where the receipts are designated for a particular purpose, offsetting receipts are reported in a particular agency and reduce or offset the outlays reported for that agency. In other cases, the offsetting receipts are “undistributed,” which means they reduce total Government outlays, but not the outlays of any particular agency. Table 12–1 summarizes offsetting collections and offsetting receipts from the public. Note that this table does not include intragovernmental transactions. The amounts shown in the table are not evident in the commonly cited budget measure of outlays, which is already net of these collections and receipts. For 2018, the table shows that total offsetting collections and offsetting receipts from the public are estimated to be $528.1 billion or 2.6 percent of GDP. Of these, an estimated $234.8 billion are offsetting collections and an estimated $293.3 billion are offsetting receipts. Table 12–1 also identifies those offsetting collections and offsetting receipts that are considered user charges, as defined and discussed below. As shown in the table, major offsetting collections from the public include proceeds from Postal Service sales, electrical power sales, loan repayments to the Commodity Credit Corporation for loans made prior to enactment of the Federal Credit Reform Act, and Federal employee payments for health insurance. As also shown in the table, major offsetting receipts from the public include premiums for Medicare Parts B and D, proceeds from military assistance program sales, rents and royalties from Outer Continental Shelf oil extraction, proceeds from auctions of the electromagnetic spectrum, dividends on holdings of preferred stock of the Government-sponsored enterprises, and interest income. Tables 12–2 and 12–4 provide further detail about offsetting receipts, including both offsetting receipts from the public (as summarized in Table 12–1) and intragovernmental transactions. Table 12–4, formerly printed in this chapter, is available on the Internet at www.budget. gov/budget/Analytical_Perspectives and on the Budget CD-ROM. In total, offsetting receipts are estimated to be $1,078.1 billion in 2018; $784.8 billion are from intragovernmental transactions and $293.3 billion are from the public. The offsetting receipts from the public consist of proprietary receipts ($271.1 billion) and those classified as offsetting receipts by law or long-standing practice ($22.1 billion) and shown as offsetting governmental receipts in the table. Proprietary receipts from the public result from business-like transactions such as the sale of goods or services, or the rental or use of Government land. Offsetting governmental receipts are composed of fees from Government regulatory services or Government licenses that, absent a specification in law or a longstanding practice, would be classified on the receipts side of the budget. II. USER CHARGES User charges or user fees5 refer generally to those monies that the Government receives from the public for market-oriented activities and regulatory activities. In combination with budget concepts, laws that authorize 5 In this chapter, the term “user charge” is generally used and has the same meaning as the term “user fee.” The term “user charge” is the one used in OMB Circular No. A–11, “Preparation, Submission, and Execution of the Budget”; OMB Circular No. A–25, “User Charges”; and Chapter 8 of this volume, “Budget Concepts.” In common usage, the terms “user charge” and “user fee” are often used interchangeably, and in A Glossary of Terms Used in the Federal Budget Process, GAO provides the same definition for both terms. user charges determine whether a user charge is classified as an offsetting collection, an offsetting receipt, or a governmental receipt. Almost all user charges, as defined below, are classified as offsetting collections or offsetting receipts; for 2018, only an estimated 1.5 percent of user charges are classified as governmental receipts. As summarized in Table 12–3, total user charges for 2018 are estimated to be $365.0 billion with $359.6 billion being offsetting collections or offsetting receipts, and accounting for more than half of all offsetting collections and offsetting receipts from the public. 124 ANALYTICAL PERSPECTIVES Table 12–3. GROSS OUTLAYS, USER CHARGES, OTHER OFFSETTING COLLECTIONS AND OFFSETTING RECEIPTS FROM THE PUBLIC, AND NET OUTLAYS (In billions of dollars) Actual 2016 Gross outlays to the public ������������������������������������������� 4,351.6 Estimate 2017 4,578.0 2018 4,620.8 Offsetting collections and offsetting receipts from the public: User charges 1 ����������������������������������������������������� 329.5 326.1 359.6 Other ��������������������������������������������������������������������� 169.5 186.8 168.5 Subtotal, offsetting collections and offsetting receipts from the public ��������������������������������������������������������� 499.0 512.9 528.1 Net outlays �������������������������������������������������������������������� 3,852.6 4,064.0 4,105.6 1 $4.4 billion of the total user charges for 2016 were classified as governmental receipts, and the remainder were classified as offsetting collections and offsetting receipts. $4.9 billion and $5.4 billion of the total user charges for 2017 and 2018 are classified as governmental receipts, respectively. Definition. In this chapter, user charges refer to fees, charges, and assessments levied on individuals or organizations directly benefiting from or subject to regulation by a Government program or activity, where the payers do not represent a broad segment of the public such as those who pay income taxes. Examples of business-type or market-oriented user charges and regulatory and licensing user charges include those charges listed in Table 12–1 for offsetting collections and offsetting receipts. User charges exclude certain offsetting collections and offsetting receipts from the public, such as payments received from credit programs, interest, and dividends, and also exclude payments from one part of the Federal Government to another. In addition, user charges do not include dedicated taxes (such as taxes paid to social insurance programs or excise taxes on gasoline) or customs duties, fines, penalties, or forfeitures. Alternative definitions. The definition for user charges used in this chapter follows the definition used in OMB Circular No. A–25, “User Charges,’’ which provides policy guidance to Executive Branch agencies on setting the amount for user charges. Alternative definitions may be used for other purposes. Much of the discussion of user charges below—their purpose, when they should be levied, and how the amount should be set—applies to these alternative definitions as well. A narrower definition of user charges could be limited to proceeds from the sale of goods and services, excluding the proceeds from the sale of assets, and to proceeds that are dedicated to financing the goods and services being provided. This definition is similar to one the House of Representatives uses as a guide for purposes of committee jurisdiction. (See the Congressional Record, January 3, 1991, p. H31, item 8.) The definition of user charges could be even narrower by excluding regulatory fees and focusing solely on business-type transactions. Alternatively, the user charge definition could be broader than the one used in this chapter by including beneficiary- or liabilitybased excise taxes.6 Classification of user charges in the budget. As shown in the note to Table 12–3, most user charges are classified as offsets to outlays on the spending side of the budget, but a few are classified on the receipts side of the budget. An estimated $5.4 billion in 2018 of user charges are classified on the receipts side and are included in the governmental receipts totals described in the previous chapter, “Governmental Receipts.’’ They are classified as receipts because they are regulatory charges collected by the Federal Government by the exercise of its sovereign powers. Examples include filing fees in the United States courts and agricultural quarantine inspection fees. The remaining user charges, an estimated $359.6 billion in 2018, are classified as offsetting collections and offsetting receipts on the spending side of the budget. As discussed above in the context of all offsetting collections and offsetting receipts, some of these user charges are collected by the Federal Government by the exercise of its sovereign powers and conceptually should appear on the receipts side of the budget, but they are required by law or a long-standing practice to be classified on the spending side. 6 Beneficiary- and liability-based taxes are terms taken from the Congressional Budget Office, The Growth of Federal User Charges, August 1993, and updated in October 1995. Gasoline taxes are an example of beneficiary-based taxes. An example of a liability-based tax is the excise tax that formerly helped fund the hazardous substance superfund in the Environmental Protection Agency. This tax was paid by industry groups to finance environmental cleanup activities related to the industry activity but not necessarily caused by the payer of the fee. FEDERAL RECEIPTS 125 13. TAX EXPENDITURES The Congressional Budget Act of 1974 (Public Law 93– 344) requires that a list of “tax expenditures’’ be included in the budget. Tax expenditures are defined in the law as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’’ These exceptions may be viewed as alternatives to other policy instruments, such as spending or regulatory programs. Identification and measurement of tax expenditures depends crucially on the baseline tax system against which the actual tax system is compared. The tax expenditure estimates presented in this document are patterned on a comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period of time. An important assumption underlying each tax expenditure estimate reported below is that other parts of the Tax Code remain unchanged. The estimates would be different if tax expenditures were changed simultaneously because of potential interactions among provisions. For that reason, this document does not present a grand total for the estimated tax expenditures. Tax expenditures relating to the individual and corporate income taxes are estimated for fiscal years 2016–2026 using two methods of accounting: current revenue effects and present value effects. The present value approach provides estimates of the revenue effects for tax expenditures that generally involve deferrals of tax payments into the future. A discussion of performance measures and economic effects related to the assessment of the effect of tax expenditures on the achievement of program performance goals is presented in Appendix A. This section is a complement to the Government-wide performance plan required by the Government Performance and Results Act of 1992. TAX EXPENDITURES IN THE INCOME TAX Tax Expenditure Estimates All tax expenditure estimates and descriptions presented here are based upon current tax law enacted as of July 1, 2016 and reflect the economic assumptions from the Mid-Session Review of the 2017 Budget. In some cases, expired or repealed provisions are listed if their revenue effects occur in fiscal year 2016 or later. The total revenue effects for tax expenditures for fiscal years 2016–2026 are displayed according to the Budget’s functional categories in Table 1. Descriptions of the specific tax expenditure provisions follow the discussion of general features of the tax expenditure concept. Two baseline concepts—the normal tax baseline and the reference tax law baseline—are used to identify and estimate tax expenditures.1 For the most part, the two concepts coincide. However, items treated as tax expenditures under the normal tax baseline, but not the reference tax law baseline, are indicated by the designation “normal tax method’’ in the tables. The revenue effects for these items are zero using the reference tax rules. The alternative baseline concepts are discussed in detail below. Tables 2A and 2B report separately the respective portions of the total revenue effects that arise under the individual and corporate income taxes. The location of the estimates under the individual and corporate headings does not imply that these categories of filers benefit 1 These baseline concepts are thoroughly discussed in Special Analysis G of the 1985 Budget, where the former is referred to as the pre-1983 method and the latter the post-1982 method. from the special tax provisions in proportion to the respective tax expenditure amounts shown. Rather, these breakdowns show the form of tax liability that the various provisions affect. The ultimate beneficiaries of corporate tax expenditures could be shareholders, employees, customers, or other providers of capital, depending on economic forces. Table 3 ranks the major tax expenditures by the size of their 2017–2026 revenue effect. The first column provides the number of the provision in order to cross reference this table to Tables 1, 2A, and 2B, as well as to the descriptions below. Interpreting Tax Expenditure Estimates The estimates shown for individual tax expenditures in Tables 1 through 3 do not necessarily equal the increase in Federal revenues (or the change in the budget balance) that would result from repealing these special provisions, for the following reasons. First, eliminating a tax expenditure may have incentive effects that alter economic behavior. These incentives can affect the resulting magnitudes of the activity or of other tax provisions or Government programs. For example, if capital gains were taxed at ordinary rates, capital gain realizations would be expected to decline, resulting in lower tax receipts. Such behavioral effects are not reflected in the estimates. Second, tax expenditures are interdependent even without incentive effects. Repeal of a tax expenditure 127 128 ANALYTICAL PERSPECTIVES provision can increase or decrease the tax revenues associated with other provisions. For example, even if behavior does not change, repeal of an itemized deduction could increase the revenue costs from other deductions because some taxpayers would be moved into higher tax brackets. Alternatively, repeal of an itemized deduction could lower the revenue cost from other deductions if taxpayers are led to claim the standard deduction instead of itemizing. Similarly, if two provisions were repealed simultaneously, the increase in tax liability could be greater or less than the sum of the two separate tax expenditures, because each is estimated assuming that the other remains in force. In addition, the estimates reported in Table 1 are the totals of individual and corporate income tax revenue effects reported in Tables 2A and 2B, and do not reflect any possible interactions between individual and corporate income tax receipts. For this reason, the estimates in Table 1 should be regarded as approximations. Present-Value Estimates The annual value of tax expenditures for tax deferrals is reported on a cash basis in all tables except Table 4. Cash-based estimates reflect the difference between taxes deferred in the current year and incoming revenues that are received due to deferrals of taxes from prior years. Although such estimates are useful as a measure of cash flows into the Government, they do not accurately reflect the true economic cost of these provisions. For example, for a provision where activity levels have changed over time, so that incoming tax receipts from past deferrals are greater than deferred receipts from new activity, the cashbasis tax expenditure estimate can be negative, despite the fact that in present-value terms current deferrals have a real cost to the Government. Alternatively, in the case of a newly enacted deferral provision, a cash-based estimate can overstate the real effect on receipts to the Government because the newly deferred taxes will ultimately be received. Discounted present-value estimates of revenue effects are presented in Table 4 for certain provisions that involve tax deferrals or other long-term revenue effects. These estimates complement the cash-based tax expenditure estimates presented in the other tables. The present-value estimates represent the revenue effects, net of future tax payments that follow from activities undertaken during calendar year 2015 which cause the deferrals or other long-term revenue effects. For instance, a pension contribution in 2016 would cause a deferral of tax payments on wages in 2016 and on pension fund earnings on this contribution (e.g., interest) in later years. In some future year, however, the 2016 pension contribution and accrued earnings will be paid out and taxes will be due; these receipts are included in the present-value estimate. In general, this conceptual approach is similar to the one used for reporting the budgetary effects of credit programs, where direct loans and guarantees in a given year affect future cash flows. Tax Expenditure Baselines A tax expenditure is an exception to baseline provisions of the tax structure that usually results in a reduction in the amount of tax owed. The 1974 Congressional Budget Act, which mandated the tax expenditure budget, did not specify the baseline provisions of the tax law. As noted previously, deciding whether provisions are exceptions, therefore, is a matter of judgment. As in prior years, most of this year’s tax expenditure estimates are presented using two baselines: the normal tax baseline and the reference tax law baseline. Tax expenditures may take the form of credits, deductions, special exceptions and allowances. The normal tax baseline is patterned on a practical variant of a comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period of time. The normal tax baseline allows personal exemptions, a standard deduction, and deduction of expenses incurred in earning income. It is not limited to a particular structure of tax rates, or by a specific definition of the taxpaying unit. The reference tax law baseline is also patterned on a comprehensive income tax, but it is closer to existing law. Reference law tax expenditures are limited to special exceptions from a generally provided tax rule that serve programmatic functions in a way that is analogous to spending programs. Provisions under the reference law baseline are generally tax expenditures under the normal tax baseline, but the reverse is not always true. Both the normal and reference tax baselines allow several major departures from a pure comprehensive income tax. For example, under the normal and reference tax baselines: • Income is taxable only when it is realized in exchange. Thus, the deferral of tax on unrealized capital gains is not regarded as a tax expenditure. Accrued income would be taxed under a comprehensive income tax. • There is a separate corporate income tax. • Tax rates on noncorporate business income vary by level of income. • Individual tax rates, including brackets, standard deduction, and personal exemptions, are allowed to vary with marital status. • Values of assets and debt are not generally adjust- ed for inflation. A comprehensive income tax would adjust the cost basis of capital assets and debt for changes in the general price level. Thus, under a comprehensive income tax baseline, the failure to take account of inflation in measuring depreciation, capital gains, and interest income would be regarded as a negative tax expenditure (i.e., a tax penalty), and failure to take account of inflation in measuring interest costs would be regarded as a positive tax expenditure (i.e., a tax subsidy). Although the reference law and normal tax baselines are generally similar, areas of difference include: 129 13. Tax Expenditures Tax rates. The separate schedules applying to the various taxpaying units are included in the reference law baseline. Thus, corporate tax rates below the maximum statutory rate do not give rise to a tax expenditure. The normal tax baseline is similar, except that, by convention, it specifies the current maximum rate as the baseline for the corporate income tax. The lower tax rates applied to the first $10 million of corporate income are thus regarded as a tax expenditure under the normal tax. By convention, the Alternative Minimum Tax is treated as part of the baseline rate structure under both the reference and normal tax methods. Income subject to the tax. Income subject to tax is defined as gross income less the costs of earning that income. Under the reference tax rules, gross income does not include gifts defined as receipts of money or property that are not consideration in an exchange nor does gross income include most transfer payments from the Government.2 The normal tax baseline also excludes gifts between individuals from gross income. Under the normal tax baseline, however, all cash transfer payments from the Government to private individuals are counted in gross income, and exemptions of such transfers from tax are identified as tax expenditures. The costs of earning income are generally deductible in determining taxable income under both the reference and normal tax baselines.3 Capital recovery. Under the reference tax law baseline no tax expenditures arise from accelerated depreciation. Under the normal tax baseline, the depreciation allowance for property is computed using estimates of economic depreciation. Treatment of foreign income. Both the normal and reference tax baselines allow a tax credit for foreign income taxes paid (up to the amount of U.S. income taxes that would otherwise be due), which prevents double taxation of income earned abroad. Under the normal tax method, however, controlled foreign corporations (CFCs) are not regarded as entities separate from their controlling U.S. shareholders. Thus, the deferral of tax on income received by CFCs is regarded as a tax expenditure under this method. In contrast, except for tax haven activities, the reference law baseline follows current law in treating CFCs as separate taxable entities whose income is not subject to U.S. tax until distributed to U.S. taxpayers. Under this baseline, deferral of tax on CFC income is not a tax expenditure because U.S. taxpayers generally are not taxed on accrued, but unrealized, income. 2 Gross income does, however, include transfer payments associated with past employment, such as Social Security benefits. 3 In the case of individuals who hold “passive’’ equity interests in businesses, the pro-rata shares of sales and expense deductions reportable in a year are limited. A passive business activity is defined generally to be one in which the holder of the interest, usually a partnership interest, does not actively perform managerial or other participatory functions. The taxpayer may generally report no larger deductions for a year than will reduce taxable income from such activities to zero. Deductions in excess of the limitation may be taken in subsequent years, or when the interest is liquidated. In addition, costs of earning income may be limited under the Alternative Minimum Tax. Descriptions of Income Tax Provisions Descriptions of the individual and corporate income tax expenditures reported on in this document follow. These descriptions relate to current law as of July 1, 2016. National Defense 1. Exclusion of benefits and allowances to armed forces personnel.—Under the baseline tax system, all compensation, including dedicated payments and in-kind benefits, should be included in taxable income because they represent accretions to wealth that do not materially differ from cash wages. As an example, a rental voucher of $100 is (approximately) equal in value to $100 of cash income. In contrast to this treatment, certain housing and meals, in addition to other benefits provided military personnel, either in cash or in kind, as well as certain amounts of pay related to combat service, are excluded from income subject to tax. International Affairs 2. Exclusion of income earned abroad by U.S. citizens.—Under the baseline tax system, all compensation received by U.S. citizens and residents is properly included in their taxable income. It makes no difference whether the compensation is a result of working abroad or whether it is labeled as a housing allowance. In contrast to this treatment, U.S. tax law allows U.S. citizens and residents who live abroad, work in the private sector, and satisfy a foreign residency requirement to exclude up to $80,000, plus adjustments for inflation since 2004, in foreign earned income from U.S. taxes. In addition, if these taxpayers are provided housing by their employers, then they may also exclude the cost of such housing from their income to the extent that it exceeds 16 percent of the earned income exclusion limit. This housing exclusion is capped at 30 percent of the earned income exclusion limit, with geographical adjustments. If taxpayers do not receive a specific allowance for housing expenses, they may deduct housing expenses up to the amount by which foreign earned income exceeds their foreign earned income exclusion. 3. Exclusion of certain allowances for Federal employees abroad.—In general, all compensation received by U.S. citizens and residents is properly included in their taxable income. It makes no difference whether the compensation is a result of working abroad or whether it is labeled as an allowance for the high cost of living abroad. In contrast to this treatment, U.S. Federal civilian employees and Peace Corps members who work outside the continental United States are allowed to exclude from U.S. taxable income certain special allowances they receive to compensate them for the relatively high costs associated with living overseas. The allowances supplement wage income and cover expenses such as rent, education, and the cost of travel to and from the United States. 130 ANALYTICAL PERSPECTIVES Table 13–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026 (In millions of dollars) Total from corporations and individuals National Defense 1 Exclusion of benefits and allowances to armed forces personnel �������������������������������������������������������������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20172026 12,280 12,650 11,460 11,500 11,860 12,320 12,820 13,370 13,940 14,560 15,210 129,690 International affairs: 2 Exclusion of income earned abroad by U.S. citizens ������������� 6,280 6,600 6,930 7,280 7,640 8,020 8,420 8,840 9,290 9,750 10,240 83,010 3 Exclusion of certain allowances for Federal employees abroad ������������������������������������������������������������������������������� 1,300 1,370 1,430 1,500 1,580 1,660 1,740 1,830 1,920 2,020 2,120 17,170 4 Inventory property sales source rules exception �������������������� 4,270 4,630 5,020 5,440 5,900 6,400 6,940 7,530 8,170 8,860 9,610 68,500 5 Deferral of income from controlled foreign corporations (normal tax method) ��������������������������������������������������������� 102,100 107,200 112,560 118,190 124,100 130,310 136,820 143,660 150,850 158,390 166,310 1,348,390 6 Deferred taxes for financial firms on certain income earned overseas ���������������������������������������������������������������������������� 15,320 16,080 16,880 17,730 18,620 19,550 20,520 21,550 22,630 23,760 24,950 202,270 General science, space, and technology: 7 Expensing of research and experimentation expenditures (normal tax method) ��������������������������������������������������������� 8 Credit for increasing research activities ��������������������������������� 7,190 10,350 7,110 11,150 7,660 11,850 8,680 12,580 9,640 13,350 10,430 14,170 11,130 15,040 11,770 15,990 12,470 16,980 13,220 18,040 14,020 19,160 106,130 148,310 –650 400 –290 510 –30 560 120 610 200 690 260 810 290 960 290 1,100 300 1,200 350 1,350 840 8,190 40 150 20 1,770 70 2,440 10 20 40 150 20 2,320 70 3,450 0 0 40 140 10 2,970 30 3,830 0 0 40 140 20 3,570 0 3,920 0 0 30 150 30 4,110 0 3,720 0 0 30 150 30 4,470 0 2,950 0 0 30 150 30 4,650 0 2,000 0 0 30 160 30 4,710 0 1,150 0 0 30 170 30 4,610 0 550 0 0 20 170 30 4,400 0 290 0 0 330 1,530 250 37,580 170 24,300 10 20 550 450 70 660 470 70 650 490 70 480 520 70 410 540 70 360 570 70 270 590 70 200 620 70 190 650 70 210 680 70 3,980 5,580 700 –190 400 –270 440 –210 230 –190 30 –150 –20 –120 –20 –70 –20 –20 –10 0 –10 0 0 –1,220 1,020 –1,380 140 –1,140 150 –930 150 –740 150 –560 120 –370 60 –180 –20 –40 –100 0 –190 0 –270 –5,340 190 60 60 60 70 80 90 70 60 40 40 630 10 170 290 1,460 30 –30 0 190 –30 70 0 1,500 30 –30 0 220 –30 30 0 1,550 30 –30 170 240 –30 10 0 1,470 30 –10 440 250 –30 0 0 1,270 30 0 550 270 –30 0 0 640 30 0 550 280 –30 0 0 150 30 0 550 290 –30 0 0 20 30 0 550 300 –30 0 0 0 30 0 550 320 –30 0 0 0 30 0 550 330 –260 280 290 8,060 300 –100 3,910 2,690 20 430 40 420 40 430 50 440 50 440 50 440 50 430 50 430 50 420 50 410 50 390 480 4,250 420 150 330 460 450 150 340 470 470 150 360 470 500 140 380 480 540 140 390 490 610 150 420 510 670 150 420 520 700 150 430 530 740 160 430 540 780 170 440 540 800 170 440 550 6,260 1,530 4,050 5,100 Energy: 9 Expensing of exploration and development costs, fuels �������� –450 10 Excess of percentage over cost depletion, fuels ������������������� 410 11 Exception from passive loss limitation for working interests in oil and gas properties ������������������������������������������������������� 60 12 Capital gains treatment of royalties on coal ��������������������������� 150 13 Exclusion of interest on energy facility bonds ������������������������ 10 14 Energy production credit 1 ����������������������������������������������������� 1,400 15 Marginal wells credit ��������������������������������������������������������������� 0 16 Energy investment credit 1 ����������������������������������������������������� 1,190 17 Alcohol fuel credits 2 ������������������������������������������������������������ 10 18 Bio-Diesel and small agri-biodiesel producer tax credits 3 ��� 30 19 Tax credits for clean-fuel burning vehicles and refueling property ����������������������������������������������������������������������������� 480 20 Exclusion of utility conservation subsidies ������������������������������ 430 21 Credit for holding clean renewable energy bonds 4 ��������������� 70 22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy �������������������������������� 60 23 Credit for investment in clean coal facilities ���������������������������� 160 24 Temporary 50% expensing for equipment used in the refining of liquid fuels ���������������������������������������������������������������������� –1,760 25 Natural gas distribution pipelines treated as 15-year property 140 26 Amortize all geological and geophysical expenditures over 2 years ���������������������������������������������������������������������������������� 70 27 Allowance of deduction for certain energy efficient commercial building property ��������������������������������������������� 80 28 Credit for construction of new energy efficient homes ������������ 210 29 Credit for energy efficiency improvements to existing homes 530 30 Credit for residential energy efficient property ����������������������� 1,450 31 Qualified energy conservation bonds 5 ���������������������������������� 30 32 Advanced Energy Property Credit ������������������������������������������ 10 33 Advanced nuclear power production credit ����������������������������� 0 34 Reduced tax rate for nuclear decommissioning funds ������������ 160 Natural resources and environment: 35 Expensing of exploration and development costs, nonfuel minerals ���������������������������������������������������������������������������� 36 Excess of percentage over cost depletion, nonfuel minerals 37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities �������������������������������������������������� 38 Capital gains treatment of certain timber income ������������������ 39 Expensing of multiperiod timber growing costs ��������������������� 40 Tax incentives for preservation of historic structures ������������� 131 13. Tax Expenditures Table 13–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations and individuals 2016 41 42 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20172026 Industrial CO2 capture and sequestration tax credit �������������� Deduction for endangered species recovery expenditures ����� 110 30 150 30 180 30 80 30 0 40 0 50 0 50 0 50 0 50 0 70 0 70 410 470 Agriculture: 43 Expensing of certain capital outlays �������������������������������������� 44 Expensing of certain multiperiod production costs ���������������� 45 Treatment of loans forgiven for solvent farmers ���������������������� 46 Capital gains treatment of certain income ����������������������������� 47 Income averaging for farmers ������������������������������������������������� 48 Deferral of gain on sale of farm refiners ��������������������������������� 49 Expensing of reforestation expenditures �������������������������������� 210 370 40 1,470 140 20 60 230 390 50 1,480 150 20 60 240 410 50 1,450 160 20 60 250 440 50 1,440 170 20 60 270 460 50 1,440 180 20 70 280 490 50 1,460 180 20 80 290 520 60 1,500 190 30 80 310 550 60 1,540 200 30 80 330 590 60 1,600 210 30 80 350 630 60 1,670 220 30 90 360 660 70 1,740 230 30 90 2,910 5,140 560 15,320 1,890 250 750 2,310 2,710 3,080 3,260 3,350 3,600 3,770 3,530 3,850 4,100 4,060 35,310 13,980 17,920 24,360 29,110 32,410 34,770 36,520 37,920 39,130 40,290 41,280 333,710 50 50 50 60 60 60 60 70 70 70 80 630 690 40 470 720 40 500 740 40 510 780 40 530 830 40 550 870 40 570 890 50 580 910 50 590 930 50 600 950 50 610 970 50 620 8,590 450 5,660 Commerce and housing: 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 Financial institutions and insurance: Exemption of credit union income ������������������������������������� Exclusion and deferral of policyholder income earned on life insurance and annuity contracts ����������������������������� Exclusion or special alternative tax for small property and casualty insurance companies ������������������������������������� Tax exemption of insurance income earned by tax-exempt organizations ����������������������������������������������������������������� Small life insurance company deduction ��������������������������� Exclusion of interest spread of financial institutions ����������� Housing: Exclusion of interest on owner-occupied mortgage subsidy bonds ���������������������������������������������������������������������������� 1,200 1,270 1,330 1,390 1,530 1,730 1,860 1,990 2,090 2,170 2,250 17,610 Exclusion of interest on rental housing bonds �������������������� 1,030 1,100 1,150 1,200 1,320 1,490 1,600 1,710 1,800 1,870 1,940 15,180 Deductibility of mortgage interest on owner-occupied homes ��������������������������������������������������������������������������� 61,190 64,110 68,090 73,590 79,990 86,570 93,030 99,300 105,110 110,480 115,650 895,920 Deductibility of State and local property tax on owneroccupied homes ����������������������������������������������������������� 34,470 36,540 38,940 41,590 44,410 47,170 49,930 52,770 55,670 58,560 61,280 486,860 Deferral of income from installment sales ������������������������� 1,620 1,630 1,620 1,620 1,630 1,660 1,700 1,750 1,820 1,890 1,970 17,290 Capital gains exclusion on home sales ������������������������������ 43,310 46,130 48,470 50,920 53,500 56,200 59,050 62,040 65,180 68,470 71,940 581,900 Exclusion of net imputed rental income ������������������������������ 105,610 109,620 112,670 114,740 116,270 119,520 122,870 126,310 129,850 133,480 137,220 1,222,550 Exception from passive loss rules for $25,000 of rental loss ������������������������������������������������������������������������������� 7,120 7,480 7,800 8,080 8,290 8,490 8,670 8,820 8,980 9,250 9,370 85,230 Credit for low-income housing investments ������������������������ 8,630 8,740 8,850 8,950 9,090 9,280 9,490 9,730 10,010 10,290 10,200 94,630 Accelerated depreciation on rental housing (normal tax method) ������������������������������������������������������������������������ 1,610 2,200 2,920 3,660 4,440 5,290 6,170 6,930 7,660 8,360 9,060 56,690 Discharge of mortgage indebtedness ��������������������������������� 3,340 1,090 0 0 0 0 0 0 0 0 0 1,090 Commerce: Discharge of business indebtedness ���������������������������������� –150 –50 10 10 10 20 30 40 50 50 50 220 Exceptions from imputed interest rules ����������������������������� 50 50 60 60 60 70 70 80 80 80 90 700 Treatment of qualified dividends ����������������������������������������� 27,980 28,810 29,850 30,940 32,100 33,370 34,720 36,160 37,690 39,290 40,990 343,920 Capital gains (except agriculture, timber, iron ore, and coal) ������������������������������������������������������������������������������� 109,530 110,270 108,560 107,620 107,780 109,210 111,760 115,240 119,500 124,450 129,800 1,144,190 Capital gains exclusion of small corporation stock ������������� 540 700 850 1,050 1,210 1,320 1,420 1,520 1,600 1,660 1,710 13,040 Step-up basis of capital gains at death ������������������������������ 49,990 51,990 54,070 56,230 58,480 60,820 63,250 65,780 68,420 71,150 74,000 624,190 Carryover basis of capital gains on gifts ���������������������������� 7,790 7,520 7,180 6,960 6,890 6,960 7,020 7,060 7,140 7,260 7,410 71,400 Ordinary income treatment of loss from small business corporation stock sale ��������������������������������������������������� 50 50 50 50 50 50 50 50 50 50 50 500 Deferral of gains from like-kind exchanges ������������������������� 7,330 7,690 8,080 8,500 8,920 9,360 9,830 10,320 10,840 11,380 11,940 96,860 Depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������� –8,830 –9,000 –9,390 –10,010 –10,750 –11,420 –12,090 –12,750 –13,490 –13,950 –14,360 –117,210 Accelerated depreciation of machinery and equipment (normal tax method) ����������������������������������������������������� 44,630 47,080 50,320 52,420 –11,620 –20,710 –830 11,810 23,160 32,860 40,480 224,970 Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������ 3,920 3,580 3,660 3,840 7,730 8,350 7,470 7,210 7,140 7,250 7,570 63,800 Graduated corporation income tax rate (normal tax method) ������������������������������������������������������������������������ 3,300 3,000 2,650 2,460 2,370 2,360 2,380 2,380 2,380 2,410 2,250 24,640 Exclusion of interest on small issue bonds ������������������������ 150 160 170 170 190 220 240 260 270 280 280 2,240 132 ANALYTICAL PERSPECTIVES Table 13–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations and individuals 81 82 Deduction for US production activities �������������������������������� Special rules for certain film and TV production ����������������� Transportation: 83 Tonnage tax ���������������������������������������������������������������������������� 84 Deferral of tax on shipping companies ����������������������������������� 85 Exclusion of reimbursed employee parking expenses ����������� 86 Exclusion for employer-provided transit passes �������������������� 87 Tax credit for certain expenditures for maintaining railroad tracks ��������������������������������������������������������������������������������� 88 Exclusion of interest on bonds for Highway Projects and railtruck transfer facilities �������������������������������������������������������� Community and regional development: 89 Investment credit for rehabilitation of structures (other than historic) ����������������������������������������������������������������������������� 90 Exclusion of interest for airport, dock, and similar bonds ������� 91 Exemption of certain mutuals’ and cooperatives’ income ������ 92 Empowerment zones �������������������������������������������������������������� 93 New markets tax credit ����������������������������������������������������������� 94 Credit to holders of Gulf Tax Credit Bonds. ����������������������������� 95 Recovery Zone Bonds 6 ��������������������������������������������������������� 96 Tribal Economic Development Bonds ������������������������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20172026 15,860 280 16,420 200 17,160 110 17,900 60 18,650 30 19,440 0 20,250 0 21,110 0 21,990 0 22,910 0 23,880 0 199,710 400 70 20 2,940 1,010 80 20 3,060 1,080 80 20 3,170 1,140 90 20 3,280 1,210 90 20 3,410 1,290 90 20 3,520 1,370 100 20 3,610 1,440 100 20 3,750 1,520 110 20 3,850 1,600 110 20 4,020 1,630 120 20 4,160 1,690 970 200 35,830 13,970 140 60 0 0 0 0 0 0 0 0 0 60 210 200 190 170 170 160 160 140 140 130 130 1,590 20 680 140 140 1,290 230 130 40 20 720 150 110 1,300 240 130 40 20 750 150 50 1,200 250 140 40 20 790 150 30 1,050 260 140 40 20 870 150 30 980 300 160 50 20 980 160 10 890 320 180 50 20 1,060 160 10 760 350 190 60 20 1,120 160 10 610 380 210 60 20 1,190 170 0 440 400 220 70 20 1,230 170 0 280 420 230 70 20 1,280 180 0 90 430 240 70 200 9,990 1,600 250 7,600 3,350 1,840 550 3,290 3,410 3,500 3,560 3,690 3,820 3,960 4,100 4,240 4,400 4,550 39,230 15,530 30 1,950 1,740 440 15,620 40 1,970 1,920 460 15,450 40 2,010 2,110 480 15,590 40 2,050 2,300 500 15,720 40 2,130 2,490 560 15,730 40 2,150 2,700 620 15,720 40 2,200 2,910 680 15,720 50 2,270 3,140 730 15,690 50 2,290 3,390 760 15,630 50 2,330 3,650 790 15,520 50 2,410 3,930 820 156,390 440 21,810 28,540 6,400 2,260 160 2,380 170 2,490 180 2,600 170 2,870 150 3,230 130 3,490 110 3,730 90 3,920 80 4,080 60 4,220 50 33,010 1,190 30 4,220 5,110 850 210 90 650 30 4,210 5,480 900 210 100 650 30 4,310 5,890 950 210 100 650 30 4,470 6,330 990 210 100 650 30 4,600 6,730 1,040 220 110 650 40 4,720 7,100 1,090 220 110 650 40 4,830 7,490 1,140 260 110 650 40 4,940 7,860 1,200 270 110 650 40 5,030 8,250 1,260 270 120 650 50 5,100 8,630 1,320 270 120 650 50 5,180 9,000 1,380 270 120 650 380 47,390 72,760 11,270 2,410 1,100 6,500 1,160 950 10 560 300 1,310 1,000 10 580 310 1,350 1,060 10 610 320 1,390 1,140 10 650 340 1,010 1,200 10 680 360 480 1,280 10 720 350 300 1,350 10 760 370 230 1,440 10 800 360 170 1,530 10 840 370 130 1,620 10 890 370 100 1,710 10 930 380 6,470 13,330 100 7,460 3,530 4,540 4,570 10 4,650 4,600 10 4,770 4,710 10 4,910 4,860 10 5,040 4,990 10 5,170 5,090 10 5,300 5,200 10 5,430 5,300 10 5,560 5,420 10 5,700 5,530 10 5,830 5,650 10 52,360 51,350 100 44,070 450 940 50 47,450 480 990 40 51,180 500 1,040 20 55,030 520 1,090 20 58,590 540 1,150 20 61,930 560 1,210 20 65,250 580 1,280 10 68,510 600 1,340 10 71,820 610 1,410 10 75,090 630 1,490 10 78,270 650 1,570 10 633,120 5,670 12,570 170 Education, training, employment, and social services: 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 Education: Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������� Tax credits and deductions for postsecondary education expenses 7 �������������������������������������������������������������������� Education Individual Retirement Accounts ������������������������� Deductibility of student-loan interest ����������������������������������� Qualified tuition programs ��������������������������������������������������� Exclusion of interest on student-loan bonds ���������������������� Exclusion of interest on bonds for private nonprofit educational facilities ����������������������������������������������������� Credit for holders of zone academy bonds 8 ���������������������� Exclusion of interest on savings bonds redeemed to finance educational expenses ��������������������������������������� Parental personal exemption for students age 19 or over � Deductibility of charitable contributions (education) ����������� Exclusion of employer-provided educational assistance ��� Special deduction for teacher expenses ����������������������������� Discharge of student loan indebtedness ���������������������������� Qualified school construction bonds 9 �������������������������������� Training, employment, and social services: Work opportunity tax credit ������������������������������������������������� Employer provided child care exclusion ����������������������������� Employer-provided child care credit ����������������������������������� Assistance for adopted foster children �������������������������������� Adoption credit and exclusion ��������������������������������������������� Exclusion of employee meals and lodging (other than military) ������������������������������������������������������������������������� Credit for child and dependent care expenses ������������������ Credit for disabled access expenditures ���������������������������� Deductibility of charitable contributions, other than education and health ����������������������������������������������������� Exclusion of certain foster care payments ������������������������� Exclusion of parsonage allowances ���������������������������������� Indian employment credit ��������������������������������������������������� 133 13. Tax Expenditures Table 13–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations and individuals 2016 124 Credit for employer differential wage payments ������������������ 2017 0 2018 0 2019 0 10 2020 10 2021 10 2022 20 2023 20 2024 20 2025 20 2026 20 20172026 130 Health: 125 Exclusion of employer contributions for medical insurance premiums and medical care 10 ����������������������������������������� 210,190 222,030 235,830 250,760 265,170 280,990 297,880 315,770 334,890 355,060 376,330 2,934,710 126 Self-employed medical insurance premiums �������������������������� 7,170 7,590 7,960 8,320 8,870 9,410 9,880 10,350 10,830 11,350 11,920 96,480 127 Medical Savings Accounts / Health Savings Accounts ����������� 5,730 6,850 8,160 9,720 11,570 13,770 16,410 19,530 23,230 27,650 32,920 169,810 128 Deductibility of medical expenses ����������������������������������������� 7,970 8,680 9,920 11,550 13,450 15,610 17,970 20,850 24,250 27,790 32,090 182,160 129 Exclusion of interest on hospital construction bonds �������������� 3,480 3,670 3,840 4,010 4,430 4,990 5,370 5,740 6,040 6,290 6,510 50,890 130 Refundable Premium Assistance Tax Credit 11 ���������������������� 2,070 2,410 3,170 3,810 4,620 5,700 6,010 6,170 6,500 6,710 6,900 52,000 131 Credit for employee health insurance expenses of small business 12 ������������������������������������������������������������������������ 160 160 170 150 140 100 120 90 60 30 20 1,040 132 Deductibility of charitable contributions (health) ��������������������� 4,980 5,360 5,780 6,220 6,620 7,000 7,380 7,740 8,110 8,490 8,850 71,550 133 Tax credit for orphan drug research �������������������������������������� 1,720 2,060 2,480 2,970 3,570 4,280 5,130 6,160 7,390 8,880 10,650 53,570 134 Special Blue Cross/Blue Shield tax benefits �������������������������� 630 610 610 610 600 590 570 540 510 460 400 5,500 135 Tax credit for health insurance purchased by certain displaced and retired individuals 13 ���������������������������������� 30 30 20 10 0 0 0 0 0 0 0 60 136 Distributions from retirement plans for premiums for health and long-term care insurance �������������������������������������������� 440 460 480 500 520 540 560 580 600 620 650 5,510 Income security: 137 Child credit 14 ������������������������������������������������������������������������� 138 Exclusion of railroad retirement (Social Security equivalent) benefits ����������������������������������������������������������������������������� 139 Exclusion of workers’ compensation benefits ������������������������� 140 Exclusion of public assistance benefits (normal tax method) 141 Exclusion of special benefits for disabled coal miners ����������� 142 Exclusion of military disability pensions �������������������������������� 24,180 24,460 24,710 24,710 24,520 24,140 23,750 23,300 22,820 22,330 21,840 236,580 300 10,030 570 30 230 310 10,100 590 20 240 310 10,170 600 20 250 300 10,240 620 20 260 290 10,320 640 20 270 270 10,390 670 10 290 260 10,460 680 10 300 240 10,530 700 10 310 220 10,610 730 10 330 200 10,680 740 10 340 180 10,760 690 10 360 2,580 104,260 6,660 140 2,950 70,400 61,770 16,410 1,270 28,050 70,690 64,610 17,900 1,240 30,820 70,980 69,420 19,170 1,260 33,780 70,970 76,450 20,680 1,270 37,050 69,880 81,250 22,310 1,290 40,500 68,360 89,270 23,970 1,320 44,040 66,180 63,730 61,360 58,340 54,710 95,350 112,370 117,620 122,660 129,460 25,200 26,560 26,550 26,720 26,800 1,330 1,350 1,350 1,360 1,380 47,890 52,080 56,640 61,590 66,980 655,200 958,460 235,860 13,150 471,370 2,460 320 2,580 320 2,680 330 2,780 330 2,880 330 2,980 340 3,080 340 3,190 340 3,310 350 3,430 350 3,550 350 30,460 3,380 20 20 30 40 40 40 50 50 50 50 50 420 1,110 2,030 40 2,940 10 370 1,550 1,170 2,090 40 3,110 10 390 1,760 1,220 2,150 40 3,350 10 400 1,820 1,280 2,210 40 3,560 10 410 3,780 1,340 2,290 50 3,800 10 420 3,890 1,400 2,350 50 4,000 10 440 2,080 1,470 2,430 50 4,260 10 450 2,200 1,540 2,510 60 4,600 0 460 2,330 1,610 2,580 60 4,900 0 470 2,430 1,690 2,670 70 5,250 0 480 2,560 1,770 2,750 80 5,620 0 490 2,660 14,490 24,030 540 42,450 60 4,410 25,510 Exclusion of social security benefits: Social Security benefits for retired and disabled workers and spouses, dependents and survivors ����������������������� 159 Credit for certain employer contributions to social security 36,140 1,000 38,440 1,030 40,580 1,080 42,920 1,120 44,850 1,170 46,530 1,220 48,140 1,270 49,700 1,330 51,380 1,380 53,260 1,440 55,330 1,500 471,130 12,540 Veterans benefits and services: 160 Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������� 161 Exclusion of veterans pensions ��������������������������������������������� 162 Exclusion of GI bill benefits ��������������������������������������������������� 163 Exclusion of interest on veterans housing bonds ������������������� 6,770 440 1,550 10 7,290 470 1,690 10 7,720 500 1,790 10 7,980 520 1,880 10 8,250 540 1,960 10 8,520 560 2,050 10 8,780 590 2,140 10 9,060 610 2,240 10 9,340 630 2,340 20 9,630 650 2,440 20 9,930 680 2,550 20 86,500 5,750 21,080 130 143 144 145 146 147 Net exclusion of pension contributions and earnings: Defined benefit employer plans ������������������������������������������ Defined contribution employer plans ���������������������������������� Individual Retirement Accounts ����������������������������������������� Low and moderate income savers credit ���������������������������� Self-Employed plans ���������������������������������������������������������� Exclusion of other employee benefits: 148 Premiums on group term life insurance ����������������������������� 149 Premiums on accident and disability insurance ����������������� 150 Income of trusts to finance supplementary unemployment benefits ����������������������������������������������������������������������������� 151 Income of trusts to finance voluntary employee benefits associations ���������������������������������������������������������������������� 152 Special ESOP rules ���������������������������������������������������������������� 153 Additional deduction for the blind ������������������������������������������ 154 Additional deduction for the elderly ��������������������������������������� 155 Tax credit for the elderly and disabled ����������������������������������� 156 Deductibility of casualty losses ���������������������������������������������� 157 Earned income tax credit 15 �������������������������������������������������� Social Security: 158 134 ANALYTICAL PERSPECTIVES Table 13–1. ESTIMATES OF TOTAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations and individuals General purpose fiscal assistance: 164 Exclusion of interest on public purpose State and local bonds �������������������������������������������������������������������������������������������� 165 Build America Bonds 16 ��������������������������������������������������������� 166 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����������������������������������������������� Interest: 167 Deferral of interest on U.S. savings bonds ����������������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 20172026 28,890 0 30,500 0 31,910 0 33,350 0 36,780 0 41,420 0 44,640 0 47,700 0 50,180 0 52,250 0 54,050 0 422,780 0 56,230 59,750 63,340 67,230 71,710 75,950 80,170 84,600 89,100 93,590 97,830 783,270 980 970 960 950 940 940 930 920 910 900 890 9,310 34,470 36,540 38,940 41,590 44,410 47,170 49,930 52,770 55,670 58,560 61,280 486,860 56,230 59,750 63,340 67,230 71,710 75,950 80,170 84,600 89,100 93,590 97,830 783,270 Addendum: Aid to State and local governments: Deductibility of: Property taxes on owner-occupied homes ������������������������ Nonbusiness State and local taxes other than on owneroccupied homes ����������������������������������������������������������� Exclusion of interest on State and local bonds for: Public purposes ������������������������������������������������������������������ 28,890 30,500 31,910 33,350 36,780 41,420 44,640 47,700 50,180 52,250 54,050 422,780 Energy facilities ������������������������������������������������������������������ 10 20 20 10 20 30 30 30 30 30 30 250 Water, sewage, and hazardous waste disposal facilities ��� 420 450 470 500 540 610 670 700 740 780 800 6,260 Small-issues ����������������������������������������������������������������������� 150 160 170 170 190 220 240 260 270 280 280 2,240 Owner-occupied mortgage subsidies ��������������������������������� 1,200 1,270 1,330 1,390 1,530 1,730 1,860 1,990 2,090 2,170 2,250 17,610 Rental housing ������������������������������������������������������������������� 1,030 1,100 1,150 1,200 1,320 1,490 1,600 1,710 1,800 1,870 1,940 15,180 Airports, docks, and similar facilities ���������������������������������� 680 720 750 790 870 980 1,060 1,120 1,190 1,230 1,280 9,990 Student loans ��������������������������������������������������������������������� 440 460 480 500 560 620 680 730 760 790 820 6,400 Private nonprofit educational facilities ������������������������������� 2,260 2,380 2,490 2,600 2,870 3,230 3,490 3,730 3,920 4,080 4,220 33,010 Hospital construction ���������������������������������������������������������� 3,480 3,670 3,840 4,010 4,430 4,990 5,370 5,740 6,040 6,290 6,510 50,890 Veterans’ housing �������������������������������������������������������������� 10 10 10 10 10 10 10 10 20 20 20 130 1 Firms can take an energy grant in lieu of the energy production credit or the energy investment credit for facilities whose construction began in 2009, 2010, or 2011. The effect of the grant on outlays (in millions of dollars) is as follows: 2016 $750; 2017 $500; and $0 thereafter. 2 The alternative fuel mixture credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2016 $590; 2017 $290 and $0 thereafter. 3 In addition, the biodiesel producer tax credit results in a reduction in excise tax receipts (in millions of dollars) as follows: 2016 $2,650; 2017 $2,810 and $0 thereafter. 4 In addition, the credit for holding clean renewable energy bonds has outlay effects of (in millions of dollars): 2016 $30; 2017 $30; 2018 $30; 2019 $30; 2020 $30; 2021 $30; 2022 $30; 2023 $30; 2024 $30; 2025, $30; and 2026 $30. 5 In addition, the qualified energy conservation bonds have outlay effects of (in millions of dollars): 2016 $40; 2017 $40; 2018 $40; 2019 $40; 2020 $40; 2021 $40; 2022 $40; 2023 $40; 2024 $40; 2025, $40; and 2026 $40. 6 In addition, recovery zone bonds have outlay effects (in millions of dollars) as follows: 2016 $220; 2017 $220; 2018 $220; 2019 $220; 2020 $220; 2021 $220; 2022 $220; 2023 $220; 2024 $220; 2025, $220; and 2026 $220. 7 In addition, the tax credits and deductions for postsecondary education expenses have outlay effects of (in millions of dollars): 016 $4,630; 2017 $4,530; 2018 $4,570; 2019 $4,630; 2020 $4,660; 2021 $4,710; 2022 $4,760; 2023 $4,800; 2024 $4,840; 2025 $4,860; and 2026 $4,870 8 In addition, the credit for holders of zone academy bonds has outlay effects of (in millions of dollars): 2016 $60; 2017 $60; 2018 $60; 2019 $60; 2020 $60; 2021 $60; 2022 $60; 2023 $60; 2024 $60; 2025 $60; and 2026 $60. 9 In addition, the provision for school construction bonds has outlay effects of (in millions of dollars): 2016 $680; 2017 $730; 2018 $730; 2019 $730; 2020 $730; 2021 $730; 2022 $730; 2023 $730; 2024 $730; 2025 $730; and 2026 $730. 10 In addition, the employer contributions for health have effects on payroll tax receipts (in millions of dollars) as follows: 2016 $130,380; 2017 $136,600; 2018 $144,110; 2019 $151,860; 2020 $158,700; 2021 $166,540; 2022 $175,190; 2023 $184,390; 2024 $194,210; 2025 $204,590; and 2026 $215,340. 11 In addition, the premium assistance credit provision has outlay effects (in millions of dollars) as follows: 2016 $24,230; 2017 $32,240; 2018 $40,620; 2019 $51,220; 2020 $64,670; 2021 $70,140; 2022 $74,150; 2023 $77,420; 2024 $81,060; 2025 $84,670; and 2026 $88,980. 12 In addition, the small business credit provision has outlay effects (in millions of dollars) as follows: 2016 $30; 2017 $30; 2018 $30; 2019 $30; 2020 $30; 2021 $20; 2022 $20; 2023 $20; 2024 $10; 2025 $10; and 2026 $0. 13 In addition, the effect of the health coverage tax credit on receipts has outlay effects of (in millions of dollars) 2016 $10; 2017 $20; 2018 $30; 2019 $30; 2020 $10; and $0 thereafter. 14 In addition, the effect of the child tax credit on receipts has outlay effects of (in millions of dollars): 2016 $29,990; 2017 $29,980; 2018 $29,620; 2019 $ 29,300; 2020 $29,100; 2021 $29,270; 2022 $29,360; 2023 $29,560 2024 $29,630; 2025 $29,720; and 2026 $29,800. 15 In addition, the earned income tax credit on receipts has outlay effects of (in millions of dollars): 2016 $62,150; 2017 $62,070; 2018 $61,770; 2019 $ 60,130; 2020 $60,540; 2021 $63,880; 2022 $65,310; 2023 $67,020; 2024 $68,560; 2025 $70,080; and 2026 $71,560. 16 In addition, the Build America Bonds have outlay effects of (in millions of dollars): 2016 $3,350; 2017 $3,610; 2018 $3,610, 2019 $3,610; 2020 $3,610; 2021 $3,610; 2022 $3,610; 2023 $3,610; 2024 $3,610; 2025, $3,610; and 2026 $3,610. Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method. All estimates have been rounded to the nearest $10 million. Provisions with estimates that rounded to zero in each year are not included in the table. 135 13. Tax Expenditures Table 13–2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026 (In millions of dollars) Total from corporations 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-26 National Defense 1 Exclusion of benefits and allowances to armed forces personnel 0 0 0 0 0 0 0 0 0 0 0 0 International affairs: 2 Exclusion of income earned abroad by U.S. citizens 0 0 0 0 0 0 0 0 0 0 0 0 3 4 5 6 Exclusion of certain allowances for Federal employees abroad 0 0 0 0 0 0 0 0 0 0 0 0 Inventory property sales source rules exception �������������������� 4,270 4,630 5,020 5,440 5,900 6,400 6,940 7,530 8,170 8,860 9,610 68,500 Deferral of income from controlled foreign corporations (normal tax method) ��������������������������������������������������������� 102,100 107,200 112,560 118,190 124,100 130,310 136,820 143,660 150,850 158,390 166,310 1,348,390 Deferred taxes for financial firms on certain income earned overseas ���������������������������������������������������������������������������� 15,320 16,080 16,880 17,730 18,620 19,550 20,520 21,550 22,630 23,760 24,950 202,270 General science, space, and technology: 7 Expensing of research and experimentation expenditures (normal tax method) ��������������������������������������������������������� 8 Credit for increasing research activities ��������������������������������� Energy: 9 Expensing of exploration and development costs, fuels �������� 10 Excess of percentage over cost depletion, fuels ������������������� 11 Exception from passive loss limitation for working interests in oil and gas properties ������������������������������������������������������� 12 Capital gains treatment of royalties on coal ��������������������������� 13 Exclusion of interest on energy facility bonds ������������������������ 14 Energy production credit 1/ ����������������������������������������������������� 15 Marginal wells credit ��������������������������������������������������������������� 16 Energy investment credit 1/ ���������������������������������������������������� 17 Alcohol fuel credits 2/ ����������������������������������������������������������� 18 Bio-Diesel and small agri-biodiesel producer tax credits 3/ �� 19 Tax credits for clean-fuel burning vehicles and refueling property ����������������������������������������������������������������������������� 20 Exclusion of utility conservation subsidies ������������������������������ 21 Credit for holding clean renewable energy bonds 4/ �������������� 22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy �������������������������������� 23 Credit for investment in clean coal facilities ���������������������������� 24 Temporary 50% expensing for equipment used in the refining of liquid fuels ���������������������������������������������������������������������� 25 Natural gas distribution pipelines treated as 15-year property 26 Amortize all geological and geophysical expenditures over 2 years ���������������������������������������������������������������������������������� 27 Allowance of deduction for certain energy efficient commercial building property ��������������������������������������������� 28 Credit for construction of new energy efficient homes ������������ 29 Credit for energy efficiency improvements to existing homes 30 Credit for residential energy efficient property ����������������������� 31 Qualified energy conservation bonds 5/ ��������������������������������� 32 Advanced Energy Property Credit ������������������������������������������ 33 Advanced nuclear power production credit ����������������������������� 34 Reduced tax rate for nuclear decommissioning funds ������������ Natural resources and environment: 35 Expensing of exploration and development costs, nonfuel minerals ���������������������������������������������������������������������������� 36 Excess of percentage over cost depletion, nonfuel minerals 37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities �������������������������������������������������� 38 Capital gains treatment of certain timber income ������������������ 39 Expensing of multiperiod timber growing costs ��������������������� 6,350 9,580 6,300 10,230 6,910 10,840 7,930 11,500 8,800 12,190 9,520 12,920 10,150 13,700 10,740 14,540 11,370 15,420 12,060 16,360 12,790 17,350 96,570 135,050 -320 330 -470 320 -210 410 -20 450 90 490 150 550 190 650 210 770 210 880 220 960 260 1,080 630 6,560 0 0 0 1,050 0 890 0 20 0 0 10 1,330 20 1,830 0 10 0 0 10 1,740 20 2,590 0 0 0 0 0 2,230 10 2,870 0 0 0 0 0 2,680 0 2,940 0 0 0 0 10 3,080 0 2,790 0 0 0 0 10 3,350 0 2,210 0 0 0 0 10 3,490 0 1,500 0 0 0 0 10 3,530 0 860 0 0 0 0 0 3,460 0 410 0 0 0 0 0 3,300 0 220 0 0 0 0 60 28,190 130 30 20 150 30 20 170 30 20 130 30 20 90 30 20 80 30 20 60 30 20 40 30 20 30 30 20 40 30 20 50 30 20 840 300 200 60 140 -190 360 -270 400 -210 210 -190 30 -150 -20 -120 -20 -70 -20 -20 -10 0 -10 0 0 -1,220 920 -1,760 140 -1,380 140 -1,140 150 -930 150 -740 150 -560 120 -370 60 -180 -20 -40 -100 0 -190 0 -270 -5,340 190 50 40 40 40 50 60 60 50 40 30 30 440 20 50 0 0 10 10 0 160 0 50 0 0 10 -20 0 190 -10 20 0 0 10 -20 0 220 -10 10 0 0 10 -20 170 240 -10 0 0 0 10 -10 440 250 -10 0 0 0 10 0 550 270 -10 0 0 0 10 0 550 280 -10 0 0 0 10 0 550 290 -10 0 0 0 10 0 550 300 -10 0 0 0 10 0 550 320 -10 0 0 0 10 0 550 330 -90 80 0 0 100 -70 3,910 2,690 20 410 40 400 40 410 50 420 50 420 50 420 50 410 50 410 50 400 50 390 50 370 480 4,050 120 0 200 130 0 210 130 0 230 120 0 240 120 0 250 140 0 260 140 0 260 130 0 270 130 0 270 130 0 280 120 0 280 1,290 0 2,550 18,220 0 10 136 ANALYTICAL PERSPECTIVES Table 13–2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations 2016 40 41 42 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-26 Tax incentives for preservation of historic structures ������������� Industrial CO2 capture and sequestration tax credit �������������� Deduction for endangered species recovery expenditures ����� 390 110 10 400 150 10 400 180 10 410 80 10 420 0 20 430 0 20 440 0 20 450 0 20 460 0 20 460 0 30 470 0 30 4,340 410 190 Agriculture: 43 Expensing of certain capital outlays �������������������������������������� 44 Expensing of certain multiperiod production costs ���������������� 45 Treatment of loans forgiven for solvent farmers ���������������������� 46 Capital gains treatment of certain income ����������������������������� 47 Income averaging for farmers ������������������������������������������������� 48 Deferral of gain on sale of farm refiners ��������������������������������� 49 Expensing of reforestation expenditures �������������������������������� 10 20 0 0 0 20 20 20 30 0 0 0 20 20 20 30 0 0 0 20 20 20 30 0 0 0 20 20 20 30 0 0 0 20 30 20 40 0 0 0 20 30 20 40 0 0 0 30 30 20 40 0 0 0 30 30 30 50 0 0 0 30 30 30 50 0 0 0 30 30 30 50 0 0 0 30 30 230 390 0 0 0 250 270 2,310 2,710 3,080 3,260 3,350 3,600 3,770 3,530 3,850 4,100 4,060 35,310 1,470 1,740 2,140 2,470 2,730 2,960 3,160 3,360 3,550 3,740 3,930 29,780 50 50 50 60 60 60 60 70 70 70 80 630 690 40 0 720 40 0 740 40 0 780 40 0 830 40 0 870 40 0 890 50 0 910 50 0 930 50 0 950 50 0 970 50 0 8,590 450 0 350 300 380 330 370 320 330 290 350 300 390 340 380 330 380 320 360 310 350 300 350 300 3,640 3,140 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8,200 0 8,300 0 8,410 0 8,500 0 8,640 0 8,820 0 9,020 0 9,240 0 9,510 0 9,780 0 9,690 0 89,910 260 370 500 630 770 920 1,070 1,200 1,320 1,430 1,540 9,750 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,720 0 6,000 0 6,310 0 6,630 0 6,960 0 7,300 0 7,670 0 8,050 0 8,460 0 8,880 0 9,320 0 75,580 -3,760 -3,920 -4,170 -4,490 -4,860 -5,170 -5,460 -5,750 -6,080 -6,280 -6,450 -52,630 28,570 30,490 33,010 34,750 -5,150 -10,650 1,960 10,000 17,260 23,490 28,430 163,590 340 290 300 310 990 880 810 780 790 7,550 Commerce and housing: 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 Financial institutions and insurance: Exemption of credit union income ������������������������������������� Exclusion and deferral of policyholder income earned on life insurance and annuity contracts ����������������������������� Exclusion or special alternative tax for small property and casualty insurance companies ������������������������������������� Tax exemption of insurance income earned by tax-exempt organizations ����������������������������������������������������������������� Small life insurance company deduction ��������������������������� Exclusion of interest spread of financial institutions ����������� Housing: Exclusion of interest on owner-occupied mortgage subsidy bonds ���������������������������������������������������������������������������� Exclusion of interest on rental housing bonds �������������������� Deductibility of mortgage interest on owner-occupied homes ��������������������������������������������������������������������������� Deductibility of State and local property tax on owneroccupied homes ����������������������������������������������������������� Deferral of income from installment sales ������������������������� Capital gains exclusion on home sales ������������������������������ Exclusion of net imputed rental income ������������������������������ Exception from passive loss rules for $25,000 of rental loss ������������������������������������������������������������������������������� Credit for low-income housing investments ������������������������ Accelerated depreciation on rental housing (normal tax method) ������������������������������������������������������������������������ Discharge of mortgage indebtedness ��������������������������������� Commerce: Discharge of business indebtedness ���������������������������������� Exceptions from imputed interest rules ����������������������������� Treatment of qualified dividends ����������������������������������������� Capital gains (except agriculture, timber, iron ore, and coal) ������������������������������������������������������������������������������� Capital gains exclusion of small corporation stock ������������� Step-up basis of capital gains at death ������������������������������ Carryover basis of capital gains on gifts ���������������������������� Ordinary income treatment of loss from small business corporation stock sale ��������������������������������������������������� Deferral of gains from like-kind exchanges ������������������������� Depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������� Accelerated depreciation of machinery and equipment (normal tax method) ����������������������������������������������������� Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������ 1,150 1,250 137 13. Tax Expenditures Table 13–2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations 79 80 81 82 Graduated corporation income tax rate (normal tax method) ������������������������������������������������������������������������ Exclusion of interest on small issue bonds ������������������������ Deduction for US production activities �������������������������������� Special rules for certain film and TV production ����������������� Transportation: 83 Tonnage tax ���������������������������������������������������������������������������� 84 Deferral of tax on shipping companies ����������������������������������� 85 Exclusion of reimbursed employee parking expenses ����������� 86 Exclusion for employer-provided transit passes �������������������� 87 Tax credit for certain expenditures for maintaining railroad tracks ��������������������������������������������������������������������������������� 88 Exclusion of interest on bonds for Highway Projects and railtruck transfer facilities �������������������������������������������������������� Community and regional development: 89 Investment credit for rehabilitation of structures (other than historic) ����������������������������������������������������������������������������� 90 Exclusion of interest for airport, dock, and similar bonds ������� 91 Exemption of certain mutuals’ and cooperatives’ income ������ 92 Empowerment zones �������������������������������������������������������������� 93 New markets tax credit ����������������������������������������������������������� 94 Credit to holders of Gulf Tax Credit Bonds. ����������������������������� 95 Recovery Zone Bonds 6/ �������������������������������������������������������� 96 Tribal Economic Development Bonds ������������������������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-26 3,300 40 12,080 220 3,000 50 12,510 160 2,650 50 13,080 90 2,460 40 13,640 50 2,370 40 14,210 20 2,360 50 14,810 0 2,380 50 15,430 0 2,380 50 16,080 0 2,380 50 16,750 0 2,410 50 17,450 0 2,250 40 18,190 0 24,640 470 152,150 320 70 20 0 0 80 20 0 0 80 20 0 0 90 20 0 0 90 20 0 0 90 20 0 0 100 20 0 0 100 20 0 0 110 20 0 0 110 20 0 0 120 20 0 0 970 200 0 0 110 50 0 0 0 0 0 0 0 0 0 50 50 50 50 40 40 40 40 30 30 30 30 380 10 200 140 70 1,260 70 40 10 10 210 150 50 1,270 70 40 10 10 210 150 20 1,170 70 40 10 10 190 150 10 1,030 60 30 10 10 200 150 10 960 70 40 10 10 220 160 0 870 70 40 10 10 220 160 0 740 70 40 10 10 210 160 0 590 70 40 10 10 210 170 0 430 70 40 10 10 200 170 0 270 70 40 10 10 200 180 0 80 70 40 10 100 2,070 1,600 90 7,410 690 390 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 130 0 0 0 0 140 0 0 0 0 130 0 0 0 0 120 0 0 0 0 130 0 0 0 0 140 0 0 0 0 140 0 0 0 0 140 0 0 0 0 130 0 0 0 0 130 0 0 0 0 130 0 0 0 0 1,330 660 160 710 170 690 180 620 170 650 150 730 130 720 110 710 90 680 80 660 60 660 50 6,830 1,190 0 0 820 0 0 0 160 0 0 860 0 0 0 160 0 0 900 0 0 0 160 0 0 950 0 0 0 160 0 0 1,000 0 0 0 160 0 0 1,040 0 0 0 160 0 0 1,100 0 0 0 160 0 0 1,150 0 0 0 160 0 0 1,210 0 0 0 160 0 0 1,270 0 0 0 160 0 0 1,330 0 0 0 160 0 0 10,810 0 0 0 1,600 830 0 10 0 0 920 0 10 0 0 950 0 10 0 0 980 0 10 0 0 680 0 10 0 0 350 0 10 0 0 230 0 10 0 0 180 0 10 0 0 130 0 10 0 0 100 0 10 0 0 80 0 10 0 0 4,600 0 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,720 1,790 1,860 1,930 2,010 2,090 2,170 2,250 2,340 2,430 2,530 21,400 Education, training, employment, and social services: 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 Education: Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������� Tax credits and deductions for postsecondary education expenses 7/ ������������������������������������������������������������������� Education Individual Retirement Accounts ������������������������� Deductibility of student-loan interest ����������������������������������� Qualified tuition programs ��������������������������������������������������� Exclusion of interest on student-loan bonds ���������������������� Exclusion of interest on bonds for private nonprofit educational facilities ����������������������������������������������������� Credit for holders of zone academy bonds 8/ ��������������������� Exclusion of interest on savings bonds redeemed to finance educational expenses ��������������������������������������� Parental personal exemption for students age 19 or over � Deductibility of charitable contributions (education) ����������� Exclusion of employer-provided educational assistance ��� Special deduction for teacher expenses ����������������������������� Discharge of student loan indebtedness ���������������������������� Qualified school construction bonds 9/ ������������������������������� Training, employment, and social services: Work opportunity tax credit ������������������������������������������������� Employer provided child care exclusion ����������������������������� Employer-provided child care credit ����������������������������������� Assistance for adopted foster children �������������������������������� Adoption credit and exclusion ��������������������������������������������� Exclusion of employee meals and lodging (other than military) ������������������������������������������������������������������������� 118 Credit for child and dependent care expenses ������������������ 119 Credit for disabled access expenditures ���������������������������� 120 Deductibility of charitable contributions, other than education and health ����������������������������������������������������� 112 113 114 115 116 117 138 ANALYTICAL PERSPECTIVES Table 13–2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations 2016 121 122 123 124 Exclusion of certain foster care payments ������������������������� Exclusion of parsonage allowances ���������������������������������� Indian employment credit ��������������������������������������������������� Credit for employer differential wage payments ������������������ 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-26 0 0 30 0 0 0 20 0 0 0 10 0 0 0 10 10 0 0 10 10 0 0 10 10 0 0 0 10 0 0 0 10 0 0 0 10 0 0 0 10 0 0 0 10 0 0 60 80 0 0 0 0 1,010 0 0 0 0 0 1,090 0 0 0 0 0 1,070 0 0 0 0 0 960 0 0 0 0 0 1,010 0 0 0 0 0 1,130 0 0 0 0 0 1,100 0 0 0 0 0 1,090 0 0 0 0 0 1,050 0 0 0 0 0 1,020 0 0 0 0 0 1,020 0 0 0 0 0 10,540 0 60 230 1,700 630 60 240 2,040 610 70 250 2,450 610 60 260 2,940 610 60 270 3,530 600 50 290 4,230 590 50 300 5,080 570 40 310 6,100 540 20 320 7,320 510 10 340 8,790 460 10 350 10,550 400 430 2,930 53,030 5,500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,910 0 0 0 0 0 0 1,970 0 0 0 0 0 0 2,030 0 0 0 0 0 0 2,090 0 0 0 0 0 0 2,160 0 0 0 0 0 0 2,220 0 0 0 0 0 0 2,290 0 0 0 0 0 0 2,370 0 0 0 0 0 0 2,440 0 0 0 0 0 0 2,520 0 0 0 0 0 0 2,600 0 0 0 0 0 0 22,690 0 0 0 0 0 Exclusion of social security benefits: Social Security benefits for retired and disabled workers and spouses, dependents and survivors ����������������������� 159 Credit for certain employer contributions to social security 0 470 0 490 0 510 0 530 0 550 0 580 0 600 0 630 0 650 0 680 0 710 0 5,930 Veterans benefits and services: 160 Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������� 0 0 0 0 0 0 0 0 0 0 0 0 Health: 125 Exclusion of employer contributions for medical insurance premiums and medical care 10/ ��������������������������������������� 126 Self-employed medical insurance premiums �������������������������� 127 Medical Savings Accounts / Health Savings Accounts ����������� 128 Deductibility of medical expenses ����������������������������������������� 129 Exclusion of interest on hospital construction bonds �������������� 130 Refundable Premium Assistance Tax Credit 11/ �������������������� 131 Credit for employee health insurance expenses of small business 12/ ���������������������������������������������������������������������� 132 Deductibility of charitable contributions (health) ��������������������� 133 Tax credit for orphan drug research �������������������������������������� 134 Special Blue Cross/Blue Shield tax benefits �������������������������� 135 Tax credit for health insurance purchased by certain displaced and retired individuals 13/ �������������������������������� 136 Distributions from retirement plans for premiums for health and long-term care insurance �������������������������������������������� Income security: 137 Child credit 14/ ������������������������������������������������������������������������ 138 Exclusion of railroad retirement (Social Security equivalent) benefits ����������������������������������������������������������������������������� 139 Exclusion of workers’ compensation benefits ������������������������� 140 Exclusion of public assistance benefits (normal tax method) 141 Exclusion of special benefits for disabled coal miners ����������� 142 Exclusion of military disability pensions �������������������������������� 143 144 145 146 147 Net exclusion of pension contributions and earnings: Defined benefit employer plans ������������������������������������������ Defined contribution employer plans ���������������������������������� Individual Retirement Accounts ����������������������������������������� Low and moderate income savers credit ���������������������������� Self-Employed plans ���������������������������������������������������������� Exclusion of other employee benefits: 148 Premiums on group term life insurance ����������������������������� 149 Premiums on accident and disability insurance ����������������� 150 Income of trusts to finance supplementary unemployment benefits ����������������������������������������������������������������������������� 151 Income of trusts to finance voluntary employee benefits associations ���������������������������������������������������������������������� 152 Special ESOP rules ���������������������������������������������������������������� 153 Additional deduction for the blind ������������������������������������������ 154 Additional deduction for the elderly ��������������������������������������� 155 Tax credit for the elderly and disabled ����������������������������������� 156 Deductibility of casualty losses ���������������������������������������������� 157 Earned income tax credit 15/ ������������������������������������������������� Social Security: 158 139 13. Tax Expenditures Table 13–2A. ESTIMATES OF TOTAL CORPORATE INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016-2026—Continued (In millions of dollars) Total from corporations 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-26 161 Exclusion of veterans pensions ��������������������������������������������� 162 Exclusion of GI bill benefits ��������������������������������������������������� 163 Exclusion of interest on veterans housing bonds ������������������� 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 General purpose fiscal assistance: 164 Exclusion of interest on public purpose State and local bonds �������������������������������������������������������������������������������������������� 165 Build America Bonds 16/ �������������������������������������������������������� 166 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����������������������������������������������� 8,400 0 9,080 0 8,860 0 8,000 0 8,360 0 9,390 0 9,170 0 9,040 0 8,740 0 8,490 0 8,440 0 87,570 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Deductibility of: Property taxes on owner-occupied homes ������������������������ Nonbusiness State and local taxes other than on owneroccupied homes ����������������������������������������������������������� 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Exclusion of interest on State and local bonds for: Public purposes ������������������������������������������������������������������ Energy facilities ������������������������������������������������������������������ Water, sewage, and hazardous waste disposal facilities ��� Small-issues ����������������������������������������������������������������������� Owner-occupied mortgage subsidies ��������������������������������� Rental housing ������������������������������������������������������������������� Airports, docks, and similar facilities ���������������������������������� Student loans ��������������������������������������������������������������������� Private nonprofit educational facilities ������������������������������� Hospital construction ���������������������������������������������������������� Veterans’ housing �������������������������������������������������������������� See Table 1 footnotes for specific table information 8,400 0 120 40 350 300 200 130 660 1,010 0 9,080 10 130 50 380 330 210 140 710 1,090 0 8,860 10 130 50 370 320 210 130 690 1,070 0 8,000 0 120 40 330 290 190 120 620 960 0 8,360 0 120 40 350 300 200 130 650 1,010 0 9,390 10 140 50 390 340 220 140 730 1,130 0 9,170 10 140 50 380 330 220 140 720 1,100 0 9,040 10 130 50 380 320 210 140 710 1,090 0 8,740 10 130 50 360 310 210 130 680 1,050 0 8,490 0 130 50 350 300 200 130 660 1,020 0 8,440 0 120 40 350 300 200 130 660 1,020 0 87,570 60 1,290 470 3,640 3,140 2,070 1,330 6,830 10,540 0 Interest: 167 Deferral of interest on U.S. savings bonds ����������������������������� Addendum: Aid to State and local governments: 140 ANALYTICAL PERSPECTIVES Table 13–2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016–2026 (In millions of dollars) Total from individuals National Defense 1 Exclusion of benefits and allowances to armed forces personnel �������������������������������������������������������������������������� International affairs: 2 Exclusion of income earned abroad by U.S. citizens ������������� 3 Exclusion of certain allowances for Federal employees abroad ������������������������������������������������������������������������������� 4 Inventory property sales source rules exception �������������������� 5 Deferral of income from controlled foreign corporations (normal tax method) ��������������������������������������������������������� 6 Deferred taxes for financial firms on certain income earned overseas ���������������������������������������������������������������������������� General science, space, and technology: 7 Expensing of research and experimentation expenditures (normal tax method) ��������������������������������������������������������� 8 Credit for increasing research activities ��������������������������������� Energy: 9 Expensing of exploration and development costs, fuels �������� 10 Excess of percentage over cost depletion, fuels ������������������� 11 Exception from passive loss limitation for working interests in oil and gas properties ������������������������������������������������������� 12 Capital gains treatment of royalties on coal ��������������������������� 13 Exclusion of interest on energy facility bonds ������������������������ 14 Energy production credit 1 ����������������������������������������������������� 15 Marginal wells credit ��������������������������������������������������������������� 16 Energy investment credit 1 ����������������������������������������������������� 17 Alcohol fuel credits 2 ������������������������������������������������������������ 18 Bio-Diesel and small agri-biodiesel producer tax credits 3 ��� 19 Tax credits for clean-fuel burning vehicles and refueling property ����������������������������������������������������������������������������� 20 Exclusion of utility conservation subsidies ������������������������������ 21 Credit for holding clean renewable energy bonds 4 ��������������� 22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy �������������������������������� 23 Credit for investment in clean coal facilities ���������������������������� 24 Temporary 50% expensing for equipment used in the refining of liquid fuels ���������������������������������������������������������������������� 25 Natural gas distribution pipelines treated as 15-year property 26 Amortize all geological and geophysical expenditures over 2 years ���������������������������������������������������������������������������������� 27 Allowance of deduction for certain energy efficient commercial building property ��������������������������������������������� 28 Credit for construction of new energy efficient homes ������������ 29 Credit for energy efficiency improvements to existing homes 30 Credit for residential energy efficient property ����������������������� 31 Qualified energy conservation bonds 5 ���������������������������������� 32 Advanced Energy Property Credit ������������������������������������������ 33 Advanced nuclear power production credit ����������������������������� 34 Reduced tax rate for nuclear decommissioning funds ������������ Natural resources and environment: 35 Expensing of exploration and development costs, nonfuel minerals ���������������������������������������������������������������������������� 36 Excess of percentage over cost depletion, nonfuel minerals 37 Exclusion of interest on bonds for water, sewage, and hazardous waste facilities �������������������������������������������������� 38 Capital gains treatment of certain timber income ������������������ 39 Expensing of multiperiod timber growing costs ��������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017– 2026 12,280 12,650 11,460 11,500 11,860 12,320 12,820 13,370 13,940 14,560 15,210 129,690 6,280 6,600 6,930 7,280 7,640 8,020 8,420 8,840 9,290 9,750 10,240 83,010 1,300 0 1,370 0 1,430 0 1,500 0 1,580 0 1,660 0 1,740 0 1,830 0 1,920 0 2,020 0 2,120 0 17,170 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 840 770 810 920 750 1,010 750 1,080 840 1,160 910 1,250 980 1,340 1,030 1,450 1,100 1,560 1,160 1,680 1,230 1,810 9,560 13,260 –130 80 –180 80 –80 100 –10 110 30 120 50 140 70 160 80 190 80 220 80 240 90 270 210 1,630 60 150 10 350 0 300 10 10 40 150 10 440 50 610 10 10 40 150 10 580 50 860 0 0 40 140 10 740 20 960 0 0 40 140 20 890 0 980 0 0 30 150 20 1,030 0 930 0 0 30 150 20 1,120 0 740 0 0 30 150 20 1,160 0 500 0 0 30 160 20 1,180 0 290 0 0 30 170 30 1,150 0 140 0 0 20 170 30 1,100 0 70 0 0 330 1,530 190 9,390 350 400 50 400 420 50 490 440 50 520 460 50 390 490 50 330 510 50 300 540 50 230 560 50 170 590 50 150 620 50 160 650 50 3,140 5,280 500 0 20 0 40 0 40 0 20 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 100 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 20 20 20 20 20 20 30 20 20 10 10 190 60 160 530 1,450 20 0 0 0 10 120 290 1,460 20 –10 0 0 –20 50 0 1,500 20 –10 0 0 –20 20 0 1,550 20 –10 0 0 –20 10 0 1,470 20 0 0 0 –20 0 0 1,270 20 0 0 0 –20 0 0 640 20 0 0 0 –20 0 0 150 20 0 0 0 –20 0 0 20 20 0 0 0 –20 0 0 0 20 0 0 0 –20 0 0 0 20 0 0 0 –170 200 290 8,060 200 –30 0 0 0 20 0 20 0 20 0 20 0 20 0 20 0 20 0 20 0 20 0 20 0 20 0 200 300 150 130 320 150 130 340 150 130 380 140 140 420 140 140 470 150 160 530 150 160 570 150 160 610 160 160 650 170 160 680 170 160 4,970 1,530 1,500 6,080 10 10 141 13. Tax Expenditures Table 13–2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016–2026—Continued (In millions of dollars) Total from individuals 2016 40 41 42 2017 2018 2019 2020 2021 2022 2023 2024 2025 2017– 2026 2026 Tax incentives for preservation of historic structures ������������� Industrial CO2 capture and sequestration tax credit �������������� Deduction for endangered species recovery expenditures ����� 70 0 20 70 0 20 70 0 20 70 0 20 70 0 20 80 0 30 80 0 30 80 0 30 80 0 30 80 0 40 80 0 40 760 0 280 Agriculture: 43 Expensing of certain capital outlays �������������������������������������� 44 Expensing of certain multiperiod production costs ���������������� 45 Treatment of loans forgiven for solvent farmers ���������������������� 46 Capital gains treatment of certain income ����������������������������� 47 Income averaging for farmers ������������������������������������������������� 48 Deferral of gain on sale of farm refiners ��������������������������������� 49 Expensing of reforestation expenditures �������������������������������� 200 350 40 1,470 140 0 40 210 360 50 1,480 150 0 40 220 380 50 1,450 160 0 40 230 410 50 1,440 170 0 40 250 430 50 1,440 180 0 40 260 450 50 1,460 180 0 50 270 480 60 1,500 190 0 50 290 510 60 1,540 200 0 50 300 540 60 1,600 210 0 50 320 580 60 1,670 220 0 60 330 610 70 1,740 230 0 60 2,680 4,750 560 15,320 1,890 0 480 0 0 0 0 0 0 0 0 0 0 0 0 12,510 16,180 22,220 26,640 29,680 31,810 33,360 34,560 35,580 36,550 37,350 303,930 0 0 0 0 0 0 0 0 0 0 0 0 0 0 470 0 0 500 0 0 510 0 0 530 0 0 550 0 0 570 0 0 580 0 0 590 0 0 600 0 0 610 0 0 620 0 0 5,660 Commerce and housing: 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 Financial institutions and insurance: Exemption of credit union income ������������������������������������� Exclusion and deferral of policyholder income earned on life insurance and annuity contracts ����������������������������� Exclusion or special alternative tax for small property and casualty insurance companies ������������������������������������� Tax exemption of insurance income earned by tax-exempt organizations ����������������������������������������������������������������� Small life insurance company deduction ��������������������������� Exclusion of interest spread of financial institutions ����������� Housing: Exclusion of interest on owner-occupied mortgage subsidy bonds ���������������������������������������������������������������������������� 850 890 960 1,060 1,180 1,340 1,480 1,610 1,730 1,820 1,900 13,970 Exclusion of interest on rental housing bonds �������������������� 730 770 830 910 1,020 1,150 1,270 1,390 1,490 1,570 1,640 12,040 Deductibility of mortgage interest on owner-occupied homes ��������������������������������������������������������������������������� 61,190 64,110 68,090 73,590 79,990 86,570 93,030 99,300 105,110 110,480 115,650 895,920 Deductibility of State and local property tax on owneroccupied homes ����������������������������������������������������������� 34,470 36,540 38,940 41,590 44,410 47,170 49,930 52,770 55,670 58,560 61,280 486,860 Deferral of income from installment sales ������������������������� 1,620 1,630 1,620 1,620 1,630 1,660 1,700 1,750 1,820 1,890 1,970 17,290 Capital gains exclusion on home sales ������������������������������ 43,310 46,130 48,470 50,920 53,500 56,200 59,050 62,040 65,180 68,470 71,940 581,900 Exclusion of net imputed rental income ������������������������������ 105,610 109,620 112,670 114,740 116,270 119,520 122,870 126,310 129,850 133,480 137,220 1,222,550 Exception from passive loss rules for $25,000 of rental loss ������������������������������������������������������������������������������� 7,120 7,480 7,800 8,080 8,290 8,490 8,670 8,820 8,980 9,250 9,370 85,230 Credit for low-income housing investments ������������������������ 430 440 440 450 450 460 470 490 500 510 510 4,720 Accelerated depreciation on rental housing (normal tax method) ������������������������������������������������������������������������ 1,350 1,830 2,420 3,030 3,670 4,370 5,100 5,730 6,340 6,930 7,520 46,940 Discharge of mortgage indebtedness ��������������������������������� 3,340 1,090 0 0 0 0 0 0 0 0 0 1,090 Commerce: Discharge of business indebtedness ���������������������������������� –150 –50 10 10 10 20 30 40 50 50 50 220 Exceptions from imputed interest rules ����������������������������� 50 50 60 60 60 70 70 80 80 80 90 700 Treatment of qualified dividends ����������������������������������������� 27,980 28,810 29,850 30,940 32,100 33,370 34,720 36,160 37,690 39,290 40,990 343,920 Capital gains (except agriculture, timber, iron ore, and coal) ������������������������������������������������������������������������������� 109,530 110,270 108,560 107,620 107,780 109,210 111,760 115,240 119,500 124,450 129,800 1,144,190 Capital gains exclusion of small corporation stock ������������� 540 700 850 1,050 1,210 1,320 1,420 1,520 1,600 1,660 1,710 13,040 Step-up basis of capital gains at death ������������������������������ 49,990 51,990 54,070 56,230 58,480 60,820 63,250 65,780 68,420 71,150 74,000 624,190 Carryover basis of capital gains on gifts ���������������������������� 7,790 7,520 7,180 6,960 6,890 6,960 7,020 7,060 7,140 7,260 7,410 71,400 Ordinary income treatment of loss from small business corporation stock sale ��������������������������������������������������� 50 50 50 50 50 50 50 50 50 50 50 500 Deferral of gains from like-kind exchanges ������������������������� 1,610 1,690 1,770 1,870 1,960 2,060 2,160 2,270 2,380 2,500 2,620 21,280 Depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������� –5,070 –5,080 –5,220 –5,520 –5,890 –6,250 –6,630 –7,000 –7,410 –7,670 –7,910 –64,580 Accelerated depreciation of machinery and equipment (normal tax method) ����������������������������������������������������� 16,060 16,590 17,310 17,670 –6,470 –10,060 –2,790 1,810 5,900 9,370 12,050 61,380 Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������ 3,580 3,290 3,360 3,530 6,580 7,100 6,480 6,330 6,330 6,470 6,780 56,250 142 ANALYTICAL PERSPECTIVES Table 13–2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016–2026—Continued (In millions of dollars) Total from individuals 2016 79 80 81 82 Graduated corporation income tax rate (normal tax method) ������������������������������������������������������������������������ Exclusion of interest on small issue bonds ������������������������ Deduction for US production activities �������������������������������� Special rules for certain film and TV production ����������������� Transportation: 83 Tonnage tax ���������������������������������������������������������������������������� 84 Deferral of tax on shipping companies ����������������������������������� 85 Exclusion of reimbursed employee parking expenses ����������� 86 Exclusion for employer-provided transit passes �������������������� 87 Tax credit for certain expenditures for maintaining railroad tracks ��������������������������������������������������������������������������������� 88 Exclusion of interest on bonds for Highway Projects and railtruck transfer facilities �������������������������������������������������������� Community and regional development: 89 Investment credit for rehabilitation of structures (other than historic) ����������������������������������������������������������������������������� 90 Exclusion of interest for airport, dock, and similar bonds ������� 91 Exemption of certain mutuals’ and cooperatives’ income ������ 92 Empowerment zones �������������������������������������������������������������� 93 New markets tax credit ����������������������������������������������������������� 94 Credit to holders of Gulf Tax Credit Bonds. ����������������������������� 95 Recovery Zone Bonds 6 ��������������������������������������������������������� 96 Tribal Economic Development Bonds ������������������������������������� 2017 2018 2019 2020 2021 2022 2023 2024 2025 2017– 2026 2026 0 110 3,780 60 0 110 3,910 40 0 120 4,080 20 0 130 4,260 10 0 150 4,440 10 0 170 4,630 0 0 190 4,820 0 0 210 5,030 0 0 220 5,240 0 0 230 5,460 0 0 240 5,690 0 0 1,770 47,560 80 0 0 2,940 1,010 0 0 3,060 1,080 0 0 3,170 1,140 0 0 3,280 1,210 0 0 3,410 1,290 0 0 3,520 1,370 0 0 3,610 1,440 0 0 3,750 1,520 0 0 3,850 1,600 0 0 4,020 1,630 0 0 4,160 1,690 0 0 35,830 13,970 30 10 0 0 0 0 0 0 0 0 0 10 160 150 140 130 130 120 120 110 110 100 100 1,210 10 480 0 70 30 160 90 30 10 510 0 60 30 170 90 30 10 540 0 30 30 180 100 30 10 600 0 20 20 200 110 30 10 670 0 20 20 230 120 40 10 760 0 10 20 250 140 40 10 840 0 10 20 280 150 50 10 910 0 10 20 310 170 50 10 980 0 0 10 330 180 60 10 1,030 0 0 10 350 190 60 10 1,080 0 0 10 360 200 60 100 7,920 0 160 190 2,660 1,450 450 3,290 3,410 3,500 3,560 3,690 3,820 3,960 4,100 4,240 4,400 4,550 39,230 15,530 30 1,950 1,740 310 15,620 40 1,970 1,920 320 15,450 40 2,010 2,110 350 15,590 40 2,050 2,300 380 15,720 40 2,130 2,490 430 15,730 40 2,150 2,700 480 15,720 40 2,200 2,910 540 15,720 50 2,270 3,140 590 15,690 50 2,290 3,390 630 15,630 50 2,330 3,650 660 15,520 50 2,410 3,930 690 156,390 440 21,810 28,540 5,070 1,600 0 1,670 0 1,800 0 1,980 0 2,220 0 2,500 0 2,770 0 3,020 0 3,240 0 3,420 0 3,560 0 26,180 0 30 4,220 4,290 850 210 90 490 30 4,210 4,620 900 210 100 490 30 4,310 4,990 950 210 100 490 30 4,470 5,380 990 210 100 490 30 4,600 5,730 1,040 220 110 490 40 4,720 6,060 1,090 220 110 490 40 4,830 6,390 1,140 260 110 490 40 4,940 6,710 1,200 270 110 490 40 5,030 7,040 1,260 270 120 490 50 5,100 7,360 1,320 270 120 490 50 5,180 7,670 1,380 270 120 490 380 47,390 61,950 11,270 2,410 1,100 4,900 330 950 0 560 300 390 1,000 0 580 310 400 1,060 0 610 320 410 1,140 0 650 340 330 1,200 0 680 360 130 1,280 0 720 350 70 1,350 0 760 370 50 1,440 0 800 360 40 1,530 0 840 370 30 1,620 0 890 370 20 1,710 0 930 380 1,870 13,330 0 7,460 3,530 4,540 4,570 10 4,650 4,600 10 4,770 4,710 10 4,910 4,860 10 5,040 4,990 10 5,170 5,090 10 5,300 5,200 10 5,430 5,300 10 5,560 5,420 10 5,700 5,530 10 5,830 5,650 10 52,360 51,350 100 Education, training, employment, and social services: 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 Education: Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������� Tax credits and deductions for postsecondary education expenses 7 �������������������������������������������������������������������� Education Individual Retirement Accounts ������������������������� Deductibility of student-loan interest ����������������������������������� Qualified tuition programs ��������������������������������������������������� Exclusion of interest on student-loan bonds ���������������������� Exclusion of interest on bonds for private nonprofit educational facilities ����������������������������������������������������� Credit for holders of zone academy bonds 8 ���������������������� Exclusion of interest on savings bonds redeemed to finance educational expenses ��������������������������������������� Parental personal exemption for students age 19 or over � Deductibility of charitable contributions (education) ����������� Exclusion of employer-provided educational assistance ��� Special deduction for teacher expenses ����������������������������� Discharge of student loan indebtedness ���������������������������� Qualified school construction bonds 9 �������������������������������� Training, employment, and social services: Work opportunity tax credit ������������������������������������������������� Employer provided child care exclusion ����������������������������� Employer-provided child care credit ����������������������������������� Assistance for adopted foster children �������������������������������� Adoption credit and exclusion ��������������������������������������������� Exclusion of employee meals and lodging (other than military) ������������������������������������������������������������������������� 118 Credit for child and dependent care expenses ������������������ 119 Credit for disabled access expenditures ���������������������������� 112 113 114 115 116 117 143 13. Tax Expenditures Table 13–2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016–2026—Continued (In millions of dollars) Total from individuals 120 121 122 123 124 Deductibility of charitable contributions, other than education and health ����������������������������������������������������� Exclusion of certain foster care payments ������������������������� Exclusion of parsonage allowances ���������������������������������� Indian employment credit ��������������������������������������������������� Credit for employer differential wage payments ������������������ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017– 2026 42,350 450 940 20 0 45,660 480 990 20 0 49,320 500 1,040 10 0 53,100 520 1,090 10 0 56,580 540 1,150 10 0 59,840 560 1,210 10 0 63,080 580 1,280 10 10 66,260 600 1,340 10 10 69,480 610 1,410 10 10 72,660 630 1,490 10 10 75,740 650 1,570 10 10 611,720 5,670 12,570 110 50 Health: 125 Exclusion of employer contributions for medical insurance premiums and medical care 10 ����������������������������������������� 210,190 222,030 235,830 250,760 265,170 280,990 297,880 315,770 334,890 355,060 376,330 2,934,710 126 Self-employed medical insurance premiums �������������������������� 7,170 7,590 7,960 8,320 8,870 9,410 9,880 10,350 10,830 11,350 11,920 96,480 127 Medical Savings Accounts / Health Savings Accounts ����������� 5,730 6,850 8,160 9,720 11,570 13,770 16,410 19,530 23,230 27,650 32,920 169,810 128 Deductibility of medical expenses ����������������������������������������� 7,970 8,680 9,920 11,550 13,450 15,610 17,970 20,850 24,250 27,790 32,090 182,160 129 Exclusion of interest on hospital construction bonds �������������� 2,470 2,580 2,770 3,050 3,420 3,860 4,270 4,650 4,990 5,270 5,490 40,350 130 Refundable Premium Assistance Tax Credit 11 ���������������������� 2,070 2,410 3,170 3,810 4,620 5,700 6,010 6,170 6,500 6,710 6,900 52,000 131 Credit for employee health insurance expenses of small business 12 ������������������������������������������������������������������������ 100 100 100 90 80 50 70 50 40 20 10 610 132 Deductibility of charitable contributions (health) ��������������������� 4,750 5,120 5,530 5,960 6,350 6,710 7,080 7,430 7,790 8,150 8,500 68,620 133 Tax credit for orphan drug research �������������������������������������� 20 20 30 30 40 50 50 60 70 90 100 540 134 Special Blue Cross/Blue Shield tax benefits �������������������������� 0 0 0 0 0 0 0 0 0 0 0 0 135 Tax credit for health insurance purchased by certain displaced and retired individuals 13 ���������������������������������� 30 30 20 10 0 0 0 0 0 0 0 60 136 Distributions from retirement plans for premiums for health and long-term care insurance �������������������������������������������� 440 460 480 500 520 540 560 580 600 620 650 5,510 Income security: 137 Child credit 14 ������������������������������������������������������������������������� 138 Exclusion of railroad retirement (Social Security equivalent) benefits ����������������������������������������������������������������������������� 139 Exclusion of workers’ compensation benefits ������������������������� 140 Exclusion of public assistance benefits (normal tax method) 141 Exclusion of special benefits for disabled coal miners ����������� 142 Exclusion of military disability pensions �������������������������������� Net exclusion of pension contributions and earnings: ����������� 143 Defined benefit employer plans ������������������������������������������ 144 Defined contribution employer plans ���������������������������������� 145 Individual Retirement Accounts ����������������������������������������� 146 Low and moderate income savers credit ���������������������������� 147 Self-Employed plans ���������������������������������������������������������� Exclusion of other employee benefits: ����������������������������������� 148 Premiums on group term life insurance ����������������������������� 149 Premiums on accident and disability insurance ����������������� 150 Income of trusts to finance supplementary unemployment benefits ����������������������������������������������������������������������������� 151 Income of trusts to finance voluntary employee benefits associations ���������������������������������������������������������������������� 152 Special ESOP rules ���������������������������������������������������������������� 153 Additional deduction for the blind ������������������������������������������ 154 Additional deduction for the elderly ��������������������������������������� 155 Tax credit for the elderly and disabled ����������������������������������� 156 Deductibility of casualty losses ���������������������������������������������� 157 Earned income tax credit 15 �������������������������������������������������� 24,180 24,460 24,710 24,710 24,520 24,140 23,750 23,300 22,820 22,330 21,840 236,580 300 10,030 570 30 230 0 70,400 61,770 16,410 1,270 28,050 0 2,460 320 310 10,100 590 20 240 0 70,690 64,610 17,900 1,240 30,820 0 2,580 320 310 10,170 600 20 250 0 70,980 69,420 19,170 1,260 33,780 0 2,680 330 300 10,240 620 20 260 0 70,970 76,450 20,680 1,270 37,050 0 2,780 330 290 10,320 640 20 270 0 69,880 81,250 22,310 1,290 40,500 0 2,880 330 270 10,390 670 10 290 0 68,360 89,270 23,970 1,320 44,040 0 2,980 340 260 240 220 200 180 10,460 10,530 10,610 10,680 10,760 680 700 730 740 690 10 10 10 10 10 300 310 330 340 360 0 0 0 0 0 66,180 63,730 61,360 58,340 54,710 95,350 112,370 117,620 122,660 129,460 25,200 26,560 26,550 26,720 26,800 1,330 1,350 1,350 1,360 1,380 47,890 52,080 56,640 61,590 66,980 0 0 0 0 0 3,080 3,190 3,310 3,430 3,550 340 340 350 350 350 2,580 104,260 6,660 140 2,950 0 655,200 958,460 235,860 13,150 471,370 0 30,460 3,380 20 20 30 40 40 40 50 50 50 50 50 420 1,110 120 40 2,940 10 370 1,550 1,170 120 40 3,110 10 390 1,760 1,220 120 40 3,350 10 400 1,820 1,280 120 40 3,560 10 410 3,780 1,340 130 50 3,800 10 420 3,890 1,400 130 50 4,000 10 440 2,080 1,470 140 50 4,260 10 450 2,200 1,540 140 60 4,600 0 460 2,330 1,610 140 60 4,900 0 470 2,430 1,690 150 70 5,250 0 480 2,560 1,770 150 80 5,620 0 490 2,660 14,490 1,340 540 42,450 60 4,410 25,510 36,140 530 38,440 540 40,580 570 42,920 590 44,850 620 46,530 640 48,140 670 49,700 700 51,380 730 53,260 760 55,330 790 471,130 6,610 Social Security: Exclusion of social security benefits: Social Security benefits for retired and disabled workers and spouses, dependents and survivors ����������������������� 159 Credit for certain employer contributions to social security 158 Veterans benefits and services: 144 ANALYTICAL PERSPECTIVES Table 13–2B. ESTIMATES OF TOTAL INDIVIDUAL INCOME TAX EXPENDITURES FOR FISCAL YEARS 2016–2026—Continued (In millions of dollars) Total from individuals 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017– 2026 160 Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������� 161 Exclusion of veterans pensions ��������������������������������������������� 162 Exclusion of GI bill benefits ��������������������������������������������������� 163 Exclusion of interest on veterans housing bonds ������������������� 6,770 440 1,550 10 7,290 470 1,690 10 7,720 500 1,790 10 7,980 520 1,880 10 8,250 540 1,960 10 8,520 560 2,050 10 8,780 590 2,140 10 9,060 610 2,240 10 9,340 630 2,340 20 9,630 650 2,440 20 9,930 680 2,550 20 86,500 5,750 21,080 130 General purpose fiscal assistance: 164 Exclusion of interest on public purpose State and local bonds �������������������������������������������������������������������������������������������� 165 Build America Bonds 16 ��������������������������������������������������������� 166 Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����������������������������������������������� 20,490 0 21,420 0 23,050 0 25,350 0 28,420 0 32,030 0 35,470 0 38,660 0 41,440 0 43,760 0 45,610 0 335,210 0 56,230 59,750 63,340 67,230 71,710 75,950 80,170 84,600 89,100 93,590 97,830 783,270 980 970 960 950 940 940 930 920 910 900 890 9,310 Deductibility of: Property taxes on owner-occupied homes ������������������������ Nonbusiness State and local taxes other than on owneroccupied homes ����������������������������������������������������������� 34,470 36,540 38,940 41,590 44,410 47,170 49,930 52,770 55,670 58,560 61,280 486,860 56,230 59,750 63,340 67,230 71,710 75,950 80,170 84,600 89,100 93,590 97,830 783,270 Exclusion of interest on State and local bonds for: Public purposes ������������������������������������������������������������������ Energy facilities ������������������������������������������������������������������ Water, sewage, and hazardous waste disposal facilities ��� Small-issues ����������������������������������������������������������������������� Owner-occupied mortgage subsidies ��������������������������������� Rental housing ������������������������������������������������������������������� Airports, docks, and similar facilities ���������������������������������� Student loans ��������������������������������������������������������������������� Private nonprofit educational facilities ������������������������������� Hospital construction ���������������������������������������������������������� Veterans’ housing �������������������������������������������������������������� See Table 1 footnotes for specific table information 20,490 10 300 110 850 730 480 310 1,600 2,470 10 21,420 10 320 110 890 770 510 320 1,670 2,580 10 23,050 10 340 120 960 830 540 350 1,800 2,770 10 25,350 10 380 130 1,060 910 600 380 1,980 3,050 10 28,420 20 420 150 1,180 1,020 670 430 2,220 3,420 10 32,030 20 470 170 1,340 1,150 760 480 2,500 3,860 10 35,470 20 530 190 1,480 1,270 840 540 2,770 4,270 10 38,660 20 570 210 1,610 1,390 910 590 3,020 4,650 10 41,440 20 610 220 1,730 1,490 980 630 3,240 4,990 20 43,760 30 650 230 1,820 1,570 1,030 660 3,420 5,270 20 45,610 30 680 240 1,900 1,640 1,080 690 3,560 5,490 20 335,210 190 4,970 1,770 13,970 12,040 7,920 5,070 26,180 40,350 130 Interest: 167 Deferral of interest on U.S. savings bonds ����������������������������� Addendum: Aid to State and local governments: 145 13. Tax Expenditures Table 13-3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2017-2026 PROJECTED REVENUE EFFECT (In millions of dollars) Provision 125 5 62 70 144 58 166 143 120 72 61 59 147 158 164 69 51 137 145 77 6 81 128 127 98 8 1 7 139 75 126 64 160 63 2 107 132 73 4 78 65 133 117 130 118 129 106 154 97 14 85 50 103 148 101 157 79 16 152 Exclusion of employer contributions for medical insurance premiums and medical care 10 ��������������������������������������������������������������������������������������� Deferral of income from controlled foreign corporations (normal tax method) ������������������������������������������������������������������������������������������������������������ Exclusion of net imputed rental income ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Capital gains (except agriculture, timber, iron ore, and coal) ��������������������������������������������������������������������������������������������������������������������������������������� Defined contribution employer plans ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Deductibility of mortgage interest on owner-occupied homes ������������������������������������������������������������������������������������������������������������������������������������� Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ����������������������������������������������������������������������������������������� Defined benefit employer plans ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Deductibility of charitable contributions, other than education and health �������������������������������������������������������������������������������������������������������������������� Step-up basis of capital gains at death ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Capital gains exclusion on home sales ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Deductibility of State and local property tax on owner-occupied homes ��������������������������������������������������������������������������������������������������������������������� Self-Employed plans ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Social Security benefits for retired and disabled workers and spouses, dependents and survivors ���������������������������������������������������������������������������� Exclusion of interest on public purpose State and local bonds ������������������������������������������������������������������������������������������������������������������������������������ Treatment of qualified dividends ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion and deferral of policyholder income earned on life insurance and annuity contracts ���������������������������������������������������������������������������������� Child credit 14 ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Individual Retirement Accounts ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Accelerated depreciation of machinery and equipment (normal tax method) ������������������������������������������������������������������������������������������������������������� Deferred taxes for financial firms on certain income earned overseas ������������������������������������������������������������������������������������������������������������������������� Deduction for US production activities �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Deductibility of medical expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Medical Savings Accounts / Health Savings Accounts ������������������������������������������������������������������������������������������������������������������������������������������������� Tax credits and deductions for postsecondary education expenses 7 ������������������������������������������������������������������������������������������������������������������������� Credit for increasing research activities ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of benefits and allowances to armed forces personnel ������������������������������������������������������������������������������������������������������������������������������� Expensing of research and experimentation expenditures (normal tax method) �������������������������������������������������������������������������������������������������������� Exclusion of workers’ compensation benefits ��������������������������������������������������������������������������������������������������������������������������������������������������������������� Deferral of gains from like-kind exchanges ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Self-employed medical insurance premiums ���������������������������������������������������������������������������������������������������������������������������������������������������������������� Credit for low-income housing investments ������������������������������������������������������������������������������������������������������������������������������������������������������������������ Exclusion of veterans death benefits and disability compensation ������������������������������������������������������������������������������������������������������������������������������ Exception from passive loss rules for $25,000 of rental loss ��������������������������������������������������������������������������������������������������������������������������������������� Exclusion of income earned abroad by U.S. citizens ��������������������������������������������������������������������������������������������������������������������������������������������������� Deductibility of charitable contributions (education) ����������������������������������������������������������������������������������������������������������������������������������������������������� Deductibility of charitable contributions (health) ����������������������������������������������������������������������������������������������������������������������������������������������������������� Carryover basis of capital gains on gifts ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� Inventory property sales source rules exception ���������������������������������������������������������������������������������������������������������������������������������������������������������� Expensing of certain small investments (normal tax method) ������������������������������������������������������������������������������������������������������������������������������������� Accelerated depreciation on rental housing (normal tax method) ������������������������������������������������������������������������������������������������������������������������������� Tax credit for orphan drug research ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of employee meals and lodging (other than military) ���������������������������������������������������������������������������������������������������������������������������������� Refundable Premium Assistance Tax Credit 11 ������������������������������������������������������������������������������������������������������������������������������������������������������������ Credit for child and dependent care expenses ������������������������������������������������������������������������������������������������������������������������������������������������������������ Exclusion of interest on hospital construction bonds ���������������������������������������������������������������������������������������������������������������������������������������������������� Parental personal exemption for students age 19 or over ������������������������������������������������������������������������������������������������������������������������������������������� Additional deduction for the elderly ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of scholarship and fellowship income (normal tax method) ������������������������������������������������������������������������������������������������������������������������ Energy production credit 1 ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of reimbursed employee parking expenses ������������������������������������������������������������������������������������������������������������������������������������������������� Exemption of credit union income ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on bonds for private nonprofit educational facilities �������������������������������������������������������������������������������������������������������������������� Premiums on group term life insurance ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� Qualified tuition programs ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Earned income tax credit 15 ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Graduated corporation income tax rate (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������� Energy investment credit 1 ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Special ESOP rules ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 2017 2018 222,030 107,200 109,620 110,270 64,610 64,110 59,750 70,690 47,450 51,990 46,130 36,540 30,820 38,440 30,500 28,810 17,920 24,460 17,900 47,080 16,080 16,420 8,680 6,850 15,620 11,150 12,650 7,110 10,100 7,690 7,590 8,740 7,290 7,480 6,600 5,480 5,360 7,520 4,630 3,580 2,200 2,060 4,650 2,410 4,600 3,670 4,210 3,110 3,410 1,770 3,060 2,710 2,380 2,580 1,920 1,760 3,000 2,440 2,090 235,830 112,560 112,670 108,560 69,420 68,090 63,340 70,980 51,180 54,070 48,470 38,940 33,780 40,580 31,910 29,850 24,360 24,710 19,170 50,320 16,880 17,160 9,920 8,160 15,450 11,850 11,460 7,660 10,170 8,080 7,960 8,850 7,720 7,800 6,930 5,890 5,780 7,180 5,020 3,660 2,920 2,480 4,770 3,170 4,710 3,840 4,310 3,350 3,500 2,320 3,170 3,080 2,490 2,680 2,110 1,820 2,650 3,450 2,150 20172026 2,934,710 1,348,390 1,222,550 1,144,190 958,460 895,920 783,270 655,200 633,120 624,190 581,900 486,860 471,370 471,130 422,780 343,920 333,710 236,580 235,860 224,970 202,270 199,710 182,160 169,810 156,390 148,310 129,690 106,130 104,260 96,860 96,480 94,630 86,500 85,230 83,010 72,760 71,550 71,400 68,500 63,800 56,690 53,570 52,360 52,000 51,350 50,890 47,390 42,450 39,230 37,580 35,830 35,310 33,010 30,460 28,540 25,510 24,640 24,300 24,030 146 ANALYTICAL PERSPECTIVES Table 13-3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2017-2026 PROJECTED REVENUE EFFECT—Continued (In millions of dollars) Provision 100 162 56 60 3 46 57 151 86 113 146 71 122 159 108 90 167 53 10 30 93 115 140 111 112 102 37 161 121 55 20 136 134 44 40 156 36 39 19 33 116 149 94 142 43 34 138 109 80 47 95 91 88 12 38 104 110 66 131 Deductibility of student-loan interest ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of GI bill benefits ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on owner-occupied mortgage subsidy bonds ����������������������������������������������������������������������������������������������������������������������������� Deferral of income from installment sales ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of certain allowances for Federal employees abroad ����������������������������������������������������������������������������������������������������������������������������������� Capital gains treatment of certain income ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on rental housing bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������� Income of trusts to finance voluntary employee benefits associations ������������������������������������������������������������������������������������������������������������������������ Exclusion for employer-provided transit passes ���������������������������������������������������������������������������������������������������������������������������������������������������������� Employer provided child care exclusion ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� Low and moderate income savers credit ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� Capital gains exclusion of small corporation stock ������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of parsonage allowances ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Credit for certain employer contributions to social security ������������������������������������������������������������������������������������������������������������������������������������������ Exclusion of employer-provided educational assistance ��������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest for airport, dock, and similar bonds ��������������������������������������������������������������������������������������������������������������������������������������������� Deferral of interest on U.S. savings bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Tax exemption of insurance income earned by tax-exempt organizations ������������������������������������������������������������������������������������������������������������������� Excess of percentage over cost depletion, fuels ��������������������������������������������������������������������������������������������������������������������������������������������������������� Credit for residential energy efficient property ������������������������������������������������������������������������������������������������������������������������������������������������������������� New markets tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Assistance for adopted foster children �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of public assistance benefits (normal tax method) �������������������������������������������������������������������������������������������������������������������������������������� Qualified school construction bonds 9 �������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Work opportunity tax credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on student-loan bonds ���������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on bonds for water, sewage, and hazardous waste facilities ������������������������������������������������������������������������������������������������������� Exclusion of veterans pensions ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of certain foster care payments ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest spread of financial institutions ����������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of utility conservation subsidies �������������������������������������������������������������������������������������������������������������������������������������������������������������������� Distributions from retirement plans for premiums for health and long-term care insurance ����������������������������������������������������������������������������������������� Special Blue Cross/Blue Shield tax benefits ���������������������������������������������������������������������������������������������������������������������������������������������������������������� Expensing of certain multiperiod production costs ������������������������������������������������������������������������������������������������������������������������������������������������������ Tax incentives for preservation of historic structures ��������������������������������������������������������������������������������������������������������������������������������������������������� Deductibility of casualty losses ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ Excess of percentage over cost depletion, nonfuel minerals �������������������������������������������������������������������������������������������������������������������������������������� Expensing of multiperiod timber growing costs ����������������������������������������������������������������������������������������������������������������������������������������������������������� Tax credits for clean-fuel burning vehicles and refueling property �������������������������������������������������������������������������������������������������������������������������������� Advanced nuclear power production credit ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Adoption credit and exclusion ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Premiums on accident and disability insurance ����������������������������������������������������������������������������������������������������������������������������������������������������������� Credit to holders of Gulf Tax Credit Bonds. ������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of military disability pensions ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� Expensing of certain capital outlays ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Reduced tax rate for nuclear decommissioning funds �������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of railroad retirement (Social Security equivalent) benefits ������������������������������������������������������������������������������������������������������������������������� Special deduction for teacher expenses ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on small issue bonds ������������������������������������������������������������������������������������������������������������������������������������������������������������������ Income averaging for farmers ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Recovery Zone Bonds 6 ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Exemption of certain mutuals’ and cooperatives’ income �������������������������������������������������������������������������������������������������������������������������������������������� Exclusion of interest on bonds for Highway Projects and rail-truck transfer facilities ��������������������������������������������������������������������������������������������������� Capital gains treatment of royalties on coal ����������������������������������������������������������������������������������������������������������������������������������������������������������������� Capital gains treatment of certain timber income �������������������������������������������������������������������������������������������������������������������������������������������������������� Credit for holders of zone academy bonds 8 ���������������������������������������������������������������������������������������������������������������������������������������������������������������� Discharge of student loan indebtedness ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� Discharge of mortgage indebtedness ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Credit for employee health insurance expenses of small business 12 �������������������������������������������������������������������������������������������������������������������������� 2017 1,970 1,690 1,270 1,630 1,370 1,480 1,100 1,170 1,080 1,000 1,240 700 990 1,030 900 720 970 720 400 1,460 1,300 580 590 650 1,310 460 450 470 480 500 450 460 610 390 470 390 420 340 550 0 310 320 240 240 230 190 310 210 160 150 130 150 200 150 150 170 100 1,090 160 2018 2,010 1,790 1,330 1,620 1,430 1,450 1,150 1,220 1,140 1,060 1,260 850 1,040 1,080 950 750 960 740 510 1,500 1,200 610 600 650 1,350 480 470 500 500 510 470 480 610 410 470 400 430 360 660 0 320 330 250 250 240 220 310 210 170 160 140 150 190 150 150 180 100 0 170 20172026 21,810 21,080 17,610 17,290 17,170 15,320 15,180 14,490 13,970 13,330 13,150 13,040 12,570 12,540 11,270 9,990 9,310 8,590 8,190 8,060 7,600 7,460 6,660 6,500 6,470 6,400 6,260 5,750 5,670 5,660 5,580 5,510 5,500 5,140 5,100 4,410 4,250 4,050 3,980 3,910 3,530 3,380 3,350 2,950 2,910 2,690 2,580 2,410 2,240 1,890 1,840 1,600 1,590 1,530 1,530 1,190 1,100 1,090 1,040 147 13. Tax Expenditures Table 13-3. INCOME TAX EXPENDITURES RANKED BY TOTAL FISCAL YEAR 2017-2026 PROJECTED REVENUE EFFECT—Continued (In millions of dollars) Provision 23 Credit for investment in clean coal facilities ������������������������������������������������������������������������������������������������������������������������������������������������������������������ 83 Tonnage tax ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 9 Expensing of exploration and development costs, fuels ���������������������������������������������������������������������������������������������������������������������������������������������� 49 Expensing of reforestation expenditures ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 21 Credit for holding clean renewable energy bonds 4 ����������������������������������������������������������������������������������������������������������������������������������������������������� 68 Exceptions from imputed interest rules ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 26 Amortize all geological and geophysical expenditures over 2 years ���������������������������������������������������������������������������������������������������������������������������� 52 Exclusion or special alternative tax for small property and casualty insurance companies ���������������������������������������������������������������������������������������� 45 Treatment of loans forgiven for solvent farmers ������������������������������������������������������������������������������������������������������������������������������������������������������������ 96 Tribal Economic Development Bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 153 Additional deduction for the blind �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 74 Ordinary income treatment of loss from small business corporation stock sale ���������������������������������������������������������������������������������������������������������� 35 Expensing of exploration and development costs, nonfuel minerals ��������������������������������������������������������������������������������������������������������������������������� 42 Deduction for endangered species recovery expenditures ������������������������������������������������������������������������������������������������������������������������������������������� 54 Small life insurance company deduction ��������������������������������������������������������������������������������������������������������������������������������������������������������������������� 99 Education Individual Retirement Accounts ������������������������������������������������������������������������������������������������������������������������������������������������������������������� 150 Income of trusts to finance supplementary unemployment benefits ��������������������������������������������������������������������������������������������������������������������������� 41 Industrial CO2 capture and sequestration tax credit ���������������������������������������������������������������������������������������������������������������������������������������������������� 82 Special rules for certain film and TV production ����������������������������������������������������������������������������������������������������������������������������������������������������������� 105 Exclusion of interest on savings bonds redeemed to finance educational expenses ��������������������������������������������������������������������������������������������������� 11 Exception from passive loss limitation for working interests in oil and gas properties ������������������������������������������������������������������������������������������������ 31 Qualified energy conservation bonds 5 ������������������������������������������������������������������������������������������������������������������������������������������������������������������������ 29 Credit for energy efficiency improvements to existing homes �������������������������������������������������������������������������������������������������������������������������������������� 28 Credit for construction of new energy efficient homes �������������������������������������������������������������������������������������������������������������������������������������������������� 13 Exclusion of interest on energy facility bonds �������������������������������������������������������������������������������������������������������������������������������������������������������������� 48 Deferral of gain on sale of farm refiners ����������������������������������������������������������������������������������������������������������������������������������������������������������������������� 92 Empowerment zones ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 67 Discharge of business indebtedness ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 84 Deferral of tax on shipping companies ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 89 Investment credit for rehabilitation of structures (other than historic) �������������������������������������������������������������������������������������������������������������������������� 25 Natural gas distribution pipelines treated as 15-year property ������������������������������������������������������������������������������������������������������������������������������������� 15 Marginal wells credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 123 Indian employment credit ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 141 Exclusion of special benefits for disabled coal miners ������������������������������������������������������������������������������������������������������������������������������������������������� 124 Credit for employer differential wage payments ������������������������������������������������������������������������������������������������������������������������������������������������������������ 163 Exclusion of interest on veterans housing bonds ��������������������������������������������������������������������������������������������������������������������������������������������������������� 114 Employer-provided child care credit ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 119 Credit for disabled access expenditures ���������������������������������������������������������������������������������������������������������������������������������������������������������������������� 87 Tax credit for certain expenditures for maintaining railroad tracks �������������������������������������������������������������������������������������������������������������������������������� 135 Tax credit for health insurance purchased by certain displaced and retired individuals 13 ����������������������������������������������������������������������������������������� 155 Tax credit for the elderly and disabled ������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 18 Bio-Diesel and small agri-biodiesel producer tax credits 3 ����������������������������������������������������������������������������������������������������������������������������������������� 17 Alcohol fuel credits 2 �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 165 Build America Bonds 16 ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 32 Advanced Energy Property Credit �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 27 Allowance of deduction for certain energy efficient commercial building property ������������������������������������������������������������������������������������������������������� 22 Deferral of gain from dispositions of transmission property to implement FERC restructuring policy �������������������������������������������������������������������������� 24 Temporary 50% expensing for equipment used in the refining of liquid fuels ��������������������������������������������������������������������������������������������������������������� 76 Depreciation of buildings other than rental housing (normal tax method) ������������������������������������������������������������������������������������������������������������������� See Table 1 footnotes for specific table information 2017 400 80 –650 60 70 50 60 50 50 40 40 50 40 30 40 40 20 150 200 30 40 30 290 170 20 20 110 –50 20 20 140 70 40 20 0 10 10 10 60 30 10 20 10 0 –30 10 –190 –1,380 –9,000 2018 20172026 440 1,020 80 970 –290 840 60 750 70 700 60 700 60 630 50 630 50 560 40 550 40 540 50 500 40 480 30 470 40 450 40 440 30 420 180 410 110 400 30 380 40 330 30 300 0 290 70 280 20 250 20 250 50 250 10 220 20 200 20 200 150 190 70 170 20 170 20 140 0 130 10 130 10 100 10 100 0 60 20 60 10 60 0 20 0 10 0 0 –30 –100 –30 –260 –270 –1,220 –1,140 –5,340 –9,390 –117,210 148 ANALYTICAL PERSPECTIVES 4. Inventory property sales source rules exception.—The United States generally taxes the worldwide income of U.S. persons and business entities. Under the baseline tax system, taxpayers receive a credit for foreign taxes paid which is limited to the pre-credit U.S. tax on the foreign source income. In contrast, the sales source rules for inventory property under current law allow U.S. exporters to use more foreign tax credits by allowing the exporters to attribute a larger portion of their earnings to foreign sources than would be the case if the allocation of earnings was based on actual economic activity. 5. Deferral of income from controlled foreign corporations (normal tax method).—Under the baseline tax system, the United States generally taxes the worldwide income of U.S. persons and business entities. In contrast, certain active income of foreign corporations controlled by U.S. shareholders is not subject to U.S. taxation when it is earned. The income becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from their foreign stockholding. The reference law tax baseline reflects this tax treatment where only realized income is taxed. Under the normal tax method, however, the currently attributable foreign source pre-tax income from such a controlling interest is considered to be subject to U.S. taxation, whether or not distributed. Thus, the normal tax method considers the amount of controlled foreign corporation income not yet distributed to a U.S. shareholder as tax-deferred income. 6. Deferred taxes for financial firms on certain income earned overseas.—The United States generally taxes the worldwide income of U.S. persons and business entities. The baseline tax system would not allow the deferral of tax or other relief targeted at particular industries or activities. In contrast, the Tax Code allows financial firms to defer taxes on income earned overseas in an active business. General Science, Space, and Technology 7. Expensing of research and experimentation expenditures (normal tax method).—The baseline tax system allows a deduction for the cost of producing income. It requires taxpayers to capitalize the costs associated with investments over time to better match the streams of income and associated costs. Research and experimentation (R&E) projects can be viewed as investments because, if successful, their benefits accrue for several years. It is often difficult, however, to identify whether a specific R&E project is successful and, if successful, what its expected life will be. Because of this ambiguity, the reference law baseline tax system would allow expensing of R&E expenditures. In contrast, under the normal tax method, the expensing of R&E expenditures is viewed as a tax expenditure. The baseline assumed for the normal tax method is that all R&E expenditures are successful and have an expected life of five years. 8. Credit for increasing research activities.— The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code allows an R&E credit of up to 20 percent of qualified research expenditures in excess of a base amount. The base amount of the credit is generally determined by multiplying a “fixed-base percentage” by the average amount of the company’s gross receipts for the prior four years. The taxpayer’s fixed base percentage generally is the ratio of its research expenses to gross receipts for 1984 through 1988. Taxpayers can elect the alternative simplified credit regime, which equals 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding taxable years. Energy 9. Expensing of exploration and development costs.—Under the baseline tax system, the costs of exploring and developing oil and gas wells would be capitalized and then amortized (or depreciated) over an estimate of the economic life of the well. This insures that the net income from the well is measured appropriately each year. In contrast to this treatment, current law allows intangible drilling costs for successful investments in domestic oil and gas wells (such as wages, the cost of using machinery for grading and drilling, and the cost of unsalvageable materials used in constructing wells) to be deducted immediately, i.e., expensed. Because it allows recovery of costs sooner, expensing is more generous for the taxpayer than amortization. Integrated oil companies may deduct only 70 percent of such costs and must amortize the remaining 30 percent over five years. Non-integrated oil companies may expense all such costs. The same rule applies to the exploration and development costs of surface stripping and the construction of shafts and tunnels for other fuel minerals. 10. Excess of percentage over cost depletion.— The baseline tax system would allow recovery of the costs of developing certain oil and mineral properties using cost depletion. Cost depletion is similar in concept to depreciation, in that the costs of developing or acquiring the asset are capitalized and then gradually reduced over an estimate of the asset’s economic life, as is appropriate for measuring net income. In contrast, the Tax Code generally allows independent fuel and mineral producers and royalty owners to take percentage depletion deductions rather than cost depletion on limited quantities of output. Under percentage depletion, taxpayers deduct a percentage of gross income from fossil fuel production. In certain cases the deduction is limited to a fraction of the asset’s net income. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. Consequently, percentage depletion offers more generous tax treatment than would cost depletion, which would limit deductions to an investment’s cost. 11. Exception from passive loss limitation for working interests in oil and gas properties.—The baseline tax system accepts current law’s general rule limiting taxpayers’ ability to deduct losses from passive activities against nonpassive income (e.g., wages, interest, and dividends). Passive activities generally are defined as 149 13. Tax Expenditures Table 13–4. PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR ACTIVITY IN CALENDAR YEAR 2016 (In millions of dollars) 2016 Present Value of Revenue Loss Provision 5 7 21 9 35 39 44 43 49 51 65 76 77 78 104 64 101 143 144 145 145 145 147 164 Deferral of income from controlled foreign corporations (normal tax method) �������������������������������������������� Expensing of research and experimentation expenditures (normal tax method) ���������������������������������������� Credit for holding clean renewable energy bonds ��������������������������������������������������������������������������������������� Expensing of exploration and development costs - fuels ����������������������������������������������������������������������������� Expensing of exploration and development costs - nonfuels ����������������������������������������������������������������������� Expensing of multiperiod timber growing costs ������������������������������������������������������������������������������������������� Expensing of certain multiperiod production costs - agriculture ������������������������������������������������������������������ Expensing of certain capital outlays - agriculture ���������������������������������������������������������������������������������������� Expensing of reforestation expenditures ����������������������������������������������������������������������������������������������������� Exclusion and deferral of policyholder income earned on life insurance and annuity contracts 1 ��������������� Accelerated depreciation on rental housing ������������������������������������������������������������������������������������������������ Depreciation of buildings other than rental ������������������������������������������������������������������������������������������������ Accelerated depreciation of machinery and equipment ������������������������������������������������������������������������������ Expensing of certain small investments (normal tax method) ��������������������������������������������������������������������� Credit for holders of zone academy bonds �������������������������������������������������������������������������������������������������� Credit for low-income housing investments ������������������������������������������������������������������������������������������������� Qualified tuition programs ���������������������������������������������������������������������������������������������������������������������������� Defined benefit employer plans ������������������������������������������������������������������������������������������������������������������� Defined contribution employer plans ����������������������������������������������������������������������������������������������������������� Exclusion of IRA contributions and earnings ����������������������������������������������������������������������������������������������� Exclusion of Roth earnings and distributions ���������������������������������������������������������������������������������������������� Exclusion of non-deductible IRA earnings ��������������������������������������������������������������������������������������������������� Exclusion of contributions and earnings for Self-Employed plans ��������������������������������������������������������������� Exclusion of interest on public-purpose bonds �������������������������������������������������������������������������������������������� Exclusion of interest on non-public purpose bonds ������������������������������������������������������������������������������������� 170 Deferral of interest on U.S. savings bonds ��������������������������������������������������������������������������������������������������� 1 Estimate is for annuities only. Life insurance earnings are mostly excluded from taxable income. those in which the taxpayer does not materially participate, and there are numerous additional considerations brought to bear on the determination of which activities are passive for a given taxpayer. Losses are limited in an attempt to limit tax sheltering activities. Passive losses that are unused may be carried forward and applied against future passive income. An exception from the passive loss limitation is provided for a working interest in an oil or gas property that the taxpayer holds directly or through an entity that does not limit the liability of the taxpayer with respect to the interest. Thus, taxpayers can deduct losses from such working interests against nonpassive income without regard to whether they materially participate in the activity. 12. Capital gains treatment of royalties on coal.—The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. For individuals, tax rates on regular income vary from 10 percent to 39.6 percent (plus a 3.8-percent surtax on high income taxpayers), depending on the taxpayer’s income. In contrast, current law allows capital gains realized by individuals to be taxed at a preferentially low rate that is no higher than 20 percent (plus 60,600 3,090 0 150 10 120 –140 –100 30 12,720 17,470 –3,430 20,250 940 160 6,190 3,790 30,510 72,100 1,390 4,540 450 5,120 14,900 3,880 260 the 3.8-percent surtax). Certain sales of coal under royalty contracts qualify for taxation as capital gains rather than ordinary income, and so benefit from the preferentially low 20 percent maximum tax rate on capital gains. 13. Exclusion of interest on energy facility bonds.—The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds used to finance construction of certain energy facilities to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual volume cap. 14. Energy production credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provides a credit for certain electricity produced from wind energy, biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, or qualified hydropower and sold to an unrelated party. Wind facilities must have begun construction before January 1, 2020. Facilities that begin construction in 2017 receive 80 percent of the credit, 150 facilities that begin construction in 2018 receive 60 percent of the credit, and facilities that begin construction in 2019 receive 40 percent of the credit. Qualified facilities producing electricity from sources other than wind must begin construction before January 1, 2017. In addition to the electricity production credit, an income tax credit is allowed for the production of refined coal for facilities placed in service before January 1, 2012. The Tax Code also provided an income tax credit for Indian coal facilities. . The Indian coal facilities credit expires on December 31, 2016. 15. Marginal wells credit.—A credit is provided for crude oil and natural gas produced from a qualified marginal well. A marginal well is one that does not produce more than 1,095 barrel-of-oil equivalents per year, with this limit adjusted proportionately for the number of days the well is in production. The credit is no more than $3.00 per barrel of qualified crude oil production and $0.50 per thousand cubic feet of qualified natural gas production. The credit for natural gas is reduced in proportion to the amount by which the reference price of natural gas at the wellhead exceeds $1.67 per thousand cubic feet and is zero for a reference price that exceeds $2.00. The credit for crude oil is reduced in proportion to the amount by which the reference price of oil exceeds $15.00 per barrel and is zero for a reference price that exceeds $18.00. All dollar amounts are adjusted for inflation from 2004. 16. Energy investment credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code provides credits for investments in solar and geothermal energy property, qualified fuel cell power plants, stationary microturbine power plants, geothermal heat pumps, small wind property and combined heat and power property. A temporary credit of up to 30 percent is available for certain qualified property placed in service before January 1, 2017. For solar energy, a temporary credit is available for property for which construction begins before January 1, 2022, and which is placed in service before January 1, 2024. The credit is 30 percent for property that begins construction before 2020, 26 percent for property that begins construction in 2020, and 22 percent for property that begins construction in 2021. A permanent 10 percent credit is available for geothermal property placed in service after December 31, 2017 and for qualified solar property for which construction begins after December 31, 2021 or that is placed in service after December 31, 2023. . Owners of renewable power facilities that qualify for the energy production credit may instead elect to take an energy investment credit at a rate specified by law. 17. Alcohol fuel credits.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code provided an income tax credit for qualified cellulosic biofuel production which was renamed the Second generation biofuel producer credit. This provision expires on December 31, 2016. ANALYTICAL PERSPECTIVES 18. Bio-diesel and small agri-biodiesel producer tax credits.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code allowed an income tax credit for Bio-diesel and for Bio-diesel derived from virgin sources. In lieu of the Biodiesel credit, the taxpayer could claim a refundable excise tax credit. In addition, small agri-biodiesel producers were eligible for a separate income tax credit for biodiesel production and a separate credit was available for qualified renewable diesel fuel mixtures. This provision expires on December 31, 2016. 19. Tax credits for clean-fuel burning vehicles and refueling property.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allows credits for plug-in electric-drive motor vehicles, alternative fuel vehicle refueling property, two-wheeled plug-in electric vehicles, and fuel cell motor vehicles. These provisions, except for the plug-in electric-drive motor vehicle credit, expire after December 31, 2016. 20. Exclusion of utility conservation subsidies.— The baseline tax system generally takes a comprehensive view of taxable income that includes a wide variety of (measurable) accretions to wealth. In certain circumstances, public utilities offer rate subsidies to non-business customers who invest in energy conservation measures. These rate subsidies are equivalent to payments from the utility to its customer, and so represent accretions to wealth, income that would be taxable to the customer under the baseline tax system. In contrast, the Tax Code exempts these subsidies from the non-business customer’s gross income. 21. Credit for holding clean renewable energy bonds.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the Tax Code provides for the issuance of Clean Renewable Energy Bonds which entitles the bond holder to a Federal income tax credit in lieu of interest. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment with the yield becoming fully taxable. 22. Deferral of gain from dispositions of transmission property to implement FERC restructuring policy.—The baseline tax system generally would tax gains from sale of property when realized. It would not allow an exception for particular activities or individuals. However, the Tax Code allowed electric utilities to defer gains from the sale of their transmission assets to a FERC-approved independent transmission company. The sale of property must have been made prior to January 1, 2017. 23. Credit for investment in clean coal facilities.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In contrast, the 151 13. Tax Expenditures Tax Code provides investment tax credits for clean coal facilities producing electricity and for industrial gasification combined cycle projects. 24. Temporary 50 percent expensing for equipment used in the refining of liquid fuels.—The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code provided for an accelerated recovery of the cost of certain investments in refineries by allowing partial expensing of the cost, thereby giving such investments a tax advantage. Qualified refinery property must have been placed in service before January 1, 2014. 25. Natural gas distribution pipelines treated as 15-year property.—The baseline tax system allows taxpayers to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code allows depreciation of natural gas distribution pipelines (placed in service between 2005 and 2011) over a 15 year period. These deductions are accelerated relative to deductions based on economic depreciation. 26. Amortize all geological and geophysical expenditures over two years.—The baseline tax system allows taxpayers to deduct the decline in the economic value of an investment over its economic life. However, the Tax Code allows geological and geophysical expenditures incurred in connection with oil and gas exploration in the United States to be amortized over two years for non-integrated oil companies, a span of time that is generally shorter than the economic life of the assets. 27. Allowance of deduction for certain energy efficient commercial building property.—The baseline tax system would not allow deductions in lieu of normal depreciation allowances for particular investments in particular industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allows a deduction for certain energy efficient commercial building property. The basis of such property is reduced by the amount of the deduction. This provision expires on December 31, 2016. 28. Credit for construction of new energy efficient homes.—The baseline tax system would not allow credits for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. However, the Tax Code allowed contractors a tax credit of $2,000 for the construction of a qualified new energy-efficient home that had an annual level of heating and cooling energy consumption at least 50 percent below the annual consumption under the 2006 International Energy Conservation Code. The credit equaled $1,000 in the case of a new manufactured home that met a 30 percent standard or requirements for EPA’s Energy Star homes. This provision expires on December 31, 2016. 29. Credit for energy efficiency improvements to existing homes.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code provided an investment tax credit for expenditures made on insulation, exterior windows, and doors that improved the energy efficiency of homes and met certain standards. The Tax Code also provided a credit for purchases of advanced main air circulating fans, natural gas, propane, or oil furnaces or hot water boilers, and other qualified energy efficient property. This provision expires on December 31, 2016. 30. Credit for residential energy efficient property.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code provides a credit for the purchase of a qualified photovoltaic property and solar water heating property, as well as for fuel cell power plants, geothermal heat pumps and small wind property used in or placed on a residence. The credit for qualified solar electric and solar water heating property is 30 percent for property placed in service before January 1, 2020, 26 percent for property placed in service in 2020, and 22 percent for property placed in service in 2021. The credit for fuel cell, small wind, and geothermal heat pump property is 30 percent for property placed in service before January 1, 2017. 31. Credit for qualified energy conservation bonds.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. However, the Tax Code provides for the issuance of energy conservation bonds which entitle the bond holder to a Federal income tax credit in lieu of interest. As of March 2010, issuers of the unused authorization of such bonds could opt to receive direct payment with the yield becoming fully taxable. 32. Advanced energy property credit.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, the Tax Code provides a 30 percent investment credit for property used in a qualified advanced energy manufacturing project. The Treasury Department may award up to $2.3 billion in tax credits for qualified investments. 33. Advanced nuclear power facilities production credit.—The baseline tax system would not allow credits or deductions for particular activities, investments, or industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, the Tax Code allows a tax credit equal to 1.8 cents times the number of kilowatt hours of electricity produced at a qualifying advanced nuclear power facility. A taxpayer may claim no more than $125 million per 1,000 megawatts of capacity. The Treasury Department may allocate up to 6,000 megawatts of credit-eligible capacity. 34. Reduced tax rate for nuclear decommissioning funds.—The baseline tax system would uniformly tax all returns to investments and not allow special rates for particular activities, investments, or industries. In contrast, the Tax Code provides a special 20% tax rate for investments made by Nuclear Decommissioning Reserve Funds. Natural Resources and Environment 35. Expensing of exploration and development costs.—The baseline tax system allows the taxpayer to 152 deduct the depreciation of an asset according to the decline in its economic value over time. However, certain capital outlays associated with exploration and development of nonfuel minerals may be expensed rather than depreciated over the life of the asset. 36. Excess of percentage over cost depletion.— The baseline tax system allows the taxpayer to deduct the decline in the economic value of an investment over time. Under current law, however, most nonfuel mineral extractors may use percentage depletion (whereby the deduction is fixed as a percentage of revenue) rather than cost depletion, with percentage depletion rates ranging from 22 percent for sulfur to 5 percent for sand and gravel. Over the life of an investment, percentage depletion deductions can exceed the cost of the investment. Consequently, percentage depletion offers more generous tax treatment than would cost depletion, which would limit deductions to an investment’s cost. 37. Exclusion of interest on bonds for water, sewage, and hazardous waste facilities.—The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low (or zero) tax rates to apply to certain types or sources of income. In contrast, the Tax Code allows interest earned on State and local bonds used to finance construction of sewage, water, or hazardous waste facilities to be exempt from tax. These bonds are generally subject to the State private-activity-bond annual volume cap. 38. Capital gains treatment of certain timber.— The baseline tax system generally would tax all income under the regular tax rate schedule. It would not allow preferentially low tax rates to apply to certain types or sources of income. However, under current law certain timber sales can be treated as a capital gain rather than ordinary income and therefore subject to the lower capital-gains tax rate. For individuals, tax rates on regular income vary from 10 percent to 39.6 percent (plus a 3.8-percent surtax on high income taxpayers), depending on the taxpayer’s income. In contrast, current law allows capital gains to be taxed at a preferentially low rate that is no higher than 20 percent (plus the 3.8-percent surtax). 39. Expensing of multi-period timber growing costs.—The baseline tax system requires the taxpayer to capitalize costs associated with investment property. However, most of the production costs of growing timber may be expensed under current law rather than capitalized and deducted when the timber is sold, thereby accelerating cost recovery. 40. Tax incentives for preservation of historic structures.—The baseline tax system would not allow credits for particular activities, investments, or industries. However, expenditures to preserve and restore certified historic structures qualify for an investment tax credit of 20 percent under current law for certified rehabilitation activities. The taxpayer’s recoverable basis must be reduced by the amount of the credit. 41. Industrial CO2 capture and sequestration tax credit.—The baseline tax system would uniformly tax all returns to investments and not allow credits for particular activities, investments, or industries. In con- ANALYTICAL PERSPECTIVES trast, the Tax Code allows a credit for qualified carbon dioxide captured at a qualified facility and disposed of in secure geological storage. In addition, the provision allows a credit for qualified carbon dioxide that is captured at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project. The credit is not allowed after the end of the calendar year in which 75 million metric tons of qualified carbon dioxide are certified as having been taken into account. 42. Deduction for endangered species recovery expenditures.—The baseline tax system would not allow deductions in addition to normal depreciation allowances for particular investments in particular industries. Instead, it generally would seek to tax uniformly all returns from investment-like activities. In contrast, under current law farmers can deduct up to 25 percent of their gross income for expenses incurred as a result of site and habitat improvement activities that will benefit endangered species on their farm land, in accordance with site specific management actions included in species recovery plans approved pursuant to the Endangered Species Act of 1973. Agriculture 43. Expensing of certain capital outlays.—The baseline tax system requires the taxpayer to capitalize costs associated with investment property. However, farmers may expense certain expenditures for feed and fertilizer, for soil and water conservation measures and certain other capital improvements under current law. 44. Expensing of certain multiperiod production costs.—The baseline tax system requires the taxpayer to capitalize costs associated with an investment over time. However, the production of livestock and crops with a production period greater than two years is exempt from the uniform cost capitalization rules (e.g., for costs for establishing orchards or structure im