Read Ch. 5 of the report. Select one of the health options listed Assume you are the chief operating officer responsible for managing all operations of your selected health care organization. You recently received an email detailing the impact of the proposed options for reducing the federal deficit from the Congressional Budget Office. You are directed to the document from the following website: Options for Reducing the Deficit: 2017 to 2026.
After reviewing the Health Care Options in Chapter 5, you determine that one of the options will have a major impact on your organization. You have decided to write a letter to the editor of your professional association to reach its membership. Your purpose in sharing your opinion is to influence others in the industry and provide useful information for those in similar situations facing challenges from regulatory changes that will impact their operations.
CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
CBO
Options for
Reducing the
Deficit:
2017 to 2026
DECEMBER 2016
Notes
Unless otherwise indicated, all years referred to in this report regarding budgetary outlays
and revenues are federal fiscal years, which run from October 1 to September 30 and are
designated by the calendar year in which they end.
The numbers in the text and tables are in nominal (current year) dollars. Those numbers
may not add up to totals because of rounding. In the tables, for changes in outlays, revenues,
and the deficit, negative numbers indicate decreases, and positive numbers, increases. Thus,
negative numbers for spending and positive numbers for revenues reduce the deficit, and
positive numbers for spending and negative numbers for revenues increase it.
The baseline budget projections discussed in this report are those published in Congressional
Budget Office, Updated Budget Projections: 2016 to 2026 (March 2016), www.cbo.gov/
publication/51384. Such projections over the longer term are those in Congressional Budget
Office, The 2016 Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580.
Budgetary results for 2016 reflect data published in Department of the Treasury, Bureau of
the Fiscal Service, Final Monthly Treasury Statement of Receipts and Outlays of the United States
Government for Fiscal Year 2016 Through September 30, 2016, and Other Periods (October
2016), http://go.usa.gov/x8X5v (PDF, 598 KB).
The estimates for the various options shown in this volume may differ from any previous or
subsequent cost estimates for legislative proposals that resemble the options presented here.
As referred to in this report, the Affordable Care Act comprises the Patient Protection
and Affordable Care Act, the health care provisions of the Health Care and Education
Reconciliation Act of 2010, and the effects of subsequent judicial decisions, statutory
changes, and administrative actions.
CBO’s website includes a “Budget Options search” that allows users to search for options by
major budget category, budget function, topic, and date (www.cbo.gov/budget-options).
The photographs of tax forms, rockets at Cape Canaveral, a home, and a health care
professional are, respectively, © Gary L./Shutterstock.com, hbpictures/Shutterstock.com,
Lindasj22/Shutterstock.com, and Have a nice day Photo/Shutterstock.com. The photograph
of school buses comes from Flickr Creative Commons and is attributed to JohnPickenPhoto.
The photograph of Carrier Strike Group 5 in formation with allied ships, provided courtesy
of the Department of Defense, was taken by Navy Seaman Jamaal Liddell.
CBO
www.cbo.gov/publication/52142
Contents
1
Introduction
1
The Current Context for Decisions About the Budget
Choices for the Future
Caveats About This Volume
2
4
5
2
Mandatory Spending Options
11
Trends in Mandatory Spending
Analytic Method Underlying the Estimates of Mandatory Spending
Options in This Chapter
11
12
13
3
Discretionary Spending Options
65
Trends in Discretionary Spending
Analytic Method Underlying the Estimates of Discretionary Spending
Options in This Chapter
65
66
67
4
Revenue Options
119
Trends in Revenues
Tax Expenditures
BOX 4-1. TEMPORARY TAX PROVISIONS
119
120
122
Analytic Method Underlying the Estimates of Revenues
Options in This Chapter
123
125
Health Options
215
Trends in Health-Related Federal Spending and Revenues
Analytic Method Underlying the Estimates Related to Health
Options in This Chapter
215
217
217
5
CBO
II
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
6
The Budgetary Implications of Eliminating a Cabinet Department
277
An Overview of the Budgets of the Cabinet Departments
BOX 6-1. THE TREATMENT OF FEDERAL CREDIT PROGRAMS IN
278
THIS ANALYSIS
CBO
DECEMBER 2016
280
Commerce, Education, and Energy: Departmental Budgets by Program
Policy and Implementation Issues
285
295
List of Tables and Figures
299
About This Document
300
CONTENTS
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
III
Mandatory Spending
Energy and Natural Resources
Option 1
Change the Terms and Conditions for Oil and Gas Leasing on Federal Lands
14
Option 2
Limit Enrollment in the Department of Agriculture’s Conservation Programs
16
Agriculture
Option 3
Eliminate Title I Agriculture Programs
18
Option 4
Reduce Subsidies in the Crop Insurance Program
20
Option 5
Eliminate ARC and PLC Payments on Generic Base Acres
22
Option 6
Limit ARC and PLC Payment Acres to 50 Percent of Base Acres
24
Housing
Option 7
Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and
Decrease Their Eligible Loan Limits
26
Education
Option 8
Eliminate the Add-On to Pell Grants, Which Is Funded With
Mandatory Spending
28
Option 9
Limit Forgiveness of Graduate Student Loans
30
Option 10
Reduce or Eliminate Subsidized Loans for Undergraduate Students
32
Retirement
Option 11
Option 12
Eliminate Concurrent Receipt of Retirement Pay and
Disability Compensation for Disabled Veterans
34
Reduce Pensions in the Federal Employees Retirement System
36
Income Security
Option 13
Convert Multiple Assistance Programs for Lower-Income People Into
Smaller Block Grants to States
38
Eliminate Subsidies for Certain Meals in the National School Lunch,
School Breakfast, and Child and Adult Care Food Programs
41
Option 15
Tighten Eligibility for the Supplemental Nutrition Assistance Program
43
Option 16
Reduce TANF’s State Family Assistance Grant by 10 Percent
45
Option 17
Eliminate Supplemental Security Income Benefits for Disabled Children
46
Option 14
Social Security
Option 18
Link Initial Social Security Benefits to Average Prices Instead of
Average Earnings
48
Option 19
Make Social Security’s Benefit Structure More Progressive
50
Option 20
Raise the Full Retirement Age for Social Security
52
CBO
IV
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending (Continued)
Social Security (Continued)
Option 21
Reduce Social Security Benefits for New Beneficiaries
54
Option 22
Require Social Security Disability Insurance Applicants to Have Worked
More in Recent Years
56
Eliminate Eligibility for Starting Social Security Disability Benefits at
Age 62 or Later
57
Option 23
Veterans
Option 24
Option 25
Narrow Eligibility for Veterans’ Disability Compensation by
Excluding Certain Disabilities Unrelated to Military Duties
59
Restrict VA’s Individual Unemployability Benefits to Disabled Veterans
Who Are Younger Than the Full Retirement Age for Social Security
60
Multiple Programs or Activities
Option 26
Use an Alternative Measure of Inflation to Index Social Security and
Other Mandatory Programs
61
Discretionary Spending
Defense
Option 1
Reduce the Size of the Military to Satisfy Caps Under the
Budget Control Act
69
Reduce DoD’s Operation and Maintenance Appropriation,
Excluding Funding for the Defense Health Program
71
Option 3
Cap Increases in Basic Pay for Military Service Members
73
Option 4
Replace Some Military Personnel With Civilian Employees
75
Option 5
Cancel Plans to Purchase Additional F-35 Joint Strike Fighters and
Instead Purchase F-16s and F/A-18s
77
Option 6
Stop Building Ford Class Aircraft Carriers
79
Option 7
Reduce Funding for Naval Ship Construction to Historical Levels
81
Option 8
Reduce the Size of the Nuclear Triad
83
Option 9
Build Only One Type of Nuclear Weapon for Bombers
86
Option 10
Defer Development of the B-21 Bomber
89
Option 2
CBO
CONTENTS
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
V
Discretionary Spending (Continued)
International Affairs
Option 11
Reduce Funding for International Affairs Programs
91
Energy, Science, and Space
Option 12
Eliminate Human Space Exploration Programs
92
Option 13
Reduce Department of Energy Funding for Energy Technology Development
93
Natural Resources and Environment
Option 14
Eliminate Certain Forest Service Programs
95
Commerce
Option 15
Option 16
Convert the Home Equity Conversion Mortgage Program From a
Guarantee Program to a Direct Loan Program
96
Eliminate the International Trade Administration’s Trade Promotion Activities
98
Transportation
Option 17
Eliminate Funding for Amtrak and the Essential Air Service Program
99
Option 18
Limit Highway Funding to Expected Highway Revenues
101
Education and Social Services
Option 19
Eliminate Federal Funding for National Community Service
103
Option 20
Eliminate Head Start
104
Option 21
Restrict Pell Grants to the Neediest Students
105
Income Security
Option 22
Increase Payments by Tenants in Federally Assisted Housing
107
Option 23
Reduce the Number of Housing Choice Vouchers or Eliminate the Program
108
Federal Civilian Employment
Option 24
Option 25
Reduce the Annual Across-the-Board Adjustment for Federal Civilian
Employees’ Pay
110
Reduce the Size of the Federal Workforce Through Attrition
111
Multiple Programs or Activities
Option 26
Impose Fees to Cover the Cost of Government Regulations and
Charge for Services Provided to the Private Sector
113
Option 27
Repeal the Davis-Bacon Act
115
Option 28
Eliminate or Reduce Funding for Certain Grants to State and
Local Governments
116
CBO
VI
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Revenues
Individual Income Tax Rates
Option 1
Increase Individual Income Tax Rates
127
Option 2
Implement a New Minimum Tax on Adjusted Gross Income
130
Option 3
Raise the Tax Rates on Long-Term Capital Gains and
Qualified Dividends by 2 Percentage Points
132
Individual Income Tax Base
Option 4
Use an Alternative Measure of Inflation to Index Some Parameters of the
Tax Code
134
Option 5
Convert the Mortgage Interest Deduction to a 15 Percent Tax Credit
136
Option 6
Curtail the Deduction for Charitable Giving
139
Option 7
Limit the Deduction for State and Local Taxes
140
Option 8
Limit the Value of Itemized Deductions
141
Option 9
Change the Tax Treatment of Capital Gains From Sales of Inherited Assets
144
Option 10
Eliminate the Tax Exemption for New Qualified Private Activity Bonds
146
Option 11
Expand the Base of the Net Investment Income Tax to Include the
Income of Active Participants in S Corporations and Limited Partnerships
148
Option 12
Tax Carried Interest as Ordinary Income
150
Option 13
Include Disability Payments From the Department of Veterans Affairs in
Taxable Income
152
Include Employer-Paid Premiums for Income Replacement Insurance in
Employees’ Taxable Income
154
Option 15
Further Limit Annual Contributions to Retirement Plans
156
Option 16
Tax Social Security and Railroad Retirement Benefits in the Same Way
That Distributions From Defined Benefit Pensions Are Taxed
159
Option 14
Individual Income Tax Credits
Option 17
Eliminate Certain Tax Preferences for Education Expenses
161
Option 18
Lower the Investment Income Limit for the Earned Income Tax Credit and
Extend That Limit to the Refundable Portion of the Child Tax Credit
163
Require Earned Income Tax Credit and Child Tax Credit Claimants to
Have a Social Security Number That Is Valid for Employment
165
Option 19
CBO
CONTENTS
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
VII
Revenues (Continued)
Payroll Taxes
Option 20
Increase the Maximum Taxable Earnings for the Social Security Payroll Tax
167
Option 21
Expand Social Security Coverage to Include Newly Hired State and
Local Government Employees
169
Increase the Payroll Tax Rate for Medicare Hospital Insurance by
1 Percentage Point
171
Tax All Pass-Through Business Owners Under SECA and Impose a
Material Participation Standard
173
Increase Taxes That Finance the Federal Share of the
Unemployment Insurance System
175
Option 22
Option 23
Option 24
Taxation of Income From Businesses and Other Entities
Option 25
Increase Corporate Income Tax Rates by 1 Percentage Point
178
Option 26
Capitalize Research and Experimentation Costs and Amortize Them
Over Five Years
180
Option 27
Extend the Period for Depreciating the Cost of Certain Investments
182
Option 28
Repeal Certain Tax Preferences for Energy and Natural Resource–Based
Industries
184
Option 29
Repeal the Deduction for Domestic Production Activities
186
Option 30
Repeal the “LIFO” and “Lower of Cost or Market” Inventory
Accounting Methods
187
Option 31
Subject All Publicly Traded Partnerships to the Corporate Income Tax
189
Option 32
Repeal the Low-Income Housing Tax Credit
190
Taxation of Income From Worldwide Business Activity
Option 33
Determine Foreign Tax Credits on a Pooling Basis
192
Option 34
Require a Minimum Level of Taxation of Foreign Income as It Is Earned
194
Option 35
Further Limit the Deduction of Interest Expense for
Multinational Corporations
196
Excise Taxes
Option 36
Increase Excise Taxes on Motor Fuels by 35 Cents and Index for Inflation
198
Option 37
Impose an Excise Tax on Overland Freight Transport
200
Option 38
Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon
202
CBO
VIII
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Revenues (Continued)
Other Taxes and Fees
Option 39
Impose a 5 Percent Value-Added Tax
204
Option 40
Impose a Fee on Large Financial Institutions
207
Option 41
Impose a Tax on Financial Transactions
209
Option 42
Impose a Tax on Emissions of Greenhouse Gases
211
Option 43
Increase Federal Civilian Employees’ Contributions to the
Federal Employees Retirement System
213
Health
Mandatory Spending
Option 1
Adopt a Voucher Plan and Slow the Growth of Federal Contributions for the
Federal Employees Health Benefits Program
219
Option 2
Impose Caps on Federal Spending for Medicaid
221
Option 3
Limit States’ Taxes on Health Care Providers
231
Option 4
Repeal All Insurance Coverage Provisions of the Affordable Care Act
233
Option 5
Repeal the Individual Health Insurance Mandate
236
Option 6
Introduce Minimum Out-of-Pocket Requirements Under TRICARE for Life
238
Option 7
Change the Cost-Sharing Rules for Medicare and Restrict Medigap Insurance
239
Option 8
Increase Premiums for Parts B and D of Medicare
248
Option 9
Raise the Age of Eligibility for Medicare to 67
250
Option 10
Reduce Medicare’s Coverage of Bad Debt
253
Option 11
Require Manufacturers to Pay a Minimum Rebate on Drugs Covered
Under Part D of Medicare for Low-Income Beneficiaries
255
Consolidate and Reduce Federal Payments for Graduate Medical
Education at Teaching Hospitals
257
Limit Medical Malpractice Claims
259
Option 12
Option 13
Discretionary Spending
Option 14
Option 15
Option 16
CBO
End Congressional Direction of Medical Research in the
Department of Defense
262
Modify TRICARE Enrollment Fees and Cost Sharing for
Working-Age Military Retirees
263
End Enrollment in VA Medical Care for Veterans in Priority Groups 7 and 8
265
CONTENTS
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
IX
Health (Continued)
Revenues
Option 17
Increase the Excise Tax on Cigarettes by 50 Cents per Pack
267
Option 18
Reduce Tax Preferences for Employment-Based Health Insurance
269
CBO
CHAPTER
1
Introduction
T
he Congress faces an array of policy choices as it
confronts the challenges posed by the amount of federal
debt held by the public—which has more than doubled
relative to the size of the economy since 2007—and the
prospect of continued growth in that debt over the coming decades if the large annual budget deficits projected
under current law come to pass (see Figure 1-1). To help
inform lawmakers, the Congressional Budget Office
periodically issues a compendium of policy options that
would help to reduce the deficit.1 This edition reports the
estimated budgetary effects of various options and highlights some of the advantages and disadvantages of those
options.
This volume presents 115 options that would decrease
federal spending or increase federal revenues over the next
decade (see Table 1-1 on page 6). The options included
in this volume come from various sources. Some are
based on proposed legislation or on the budget proposals
of various Administrations; others come from Congressional offices or from entities in the federal government
or in the private sector. The options cover many areas—
ranging from defense to energy, Social Security, and provisions of the tax code. The budgetary effects identified
for most of the options span the 10 years from 2017 to
2026 (the period covered by CBO’s March 2016 baseline
budget projections), although many of the options would
have longer-term effects as well.2
1. For the most recent previous compilation of budget options, see
Congressional Budget Office, Options for Reducing the Deficit:
2015 to 2024 (November 2014), www.cbo.gov/publication/
49638. That document included a brief description of the policy
involved for each option. For additional information, including a
description of each option’s advantages and disadvantages, see
Congressional Budget Office, Options for Reducing the Deficit:
2014 to 2023 (November 2013), www.cbo.gov/publication/
44715.
Chapters 2 through 5 present options in the following
categories:
B Chapter 2: Mandatory spending other than that for
health-related programs,
B Chapter 3: Discretionary spending other than that for
health-related programs,
B Chapter 4: Revenues other than those related to
health, and
B Chapter 5: Health-related programs and revenue
provisions.
Chapter 6 differs from the rest of the volume; it discusses
the challenges and the potential budgetary effects of eliminating a Cabinet department.
Chapters 2 through 5 begin with a description of budgetary trends for the topic area. Then, entries for the options
provide background information, describe the possible
policy change, and summarize arguments for and against
that change. As appropriate, related options in this volume are referenced, as are related CBO publications. As a
collection, the options are intended to reflect a range of
possibilities, not a ranking of priorities or an exhaustive
list. Inclusion or exclusion of any particular option does
not imply an endorsement or rejection by CBO, and the
report makes no recommendations. This volume does
not contain comprehensive budget plans; it would be
possible to devise such plans by combining certain
options in various ways (although some would overlap
and would interact with others).
2. Congressional Budget Office, Updated Budget Projections: 2016 to
2026 (March 2016), www.cbo.gov/publication/51384.
CBO
2
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Figure 1-1.
Federal Debt Held by the Public
Percentage of Gross Domestic Product
150
Actual
125
Extended
Baseline
Projection
World War II
100
75
Great
Depression
50
Civil War
World War I
25
0
1790
1810
1830
1850
1870
1890
1910
1930
1950
1970
1990
2010
High and rising federal debt
would reduce national saving
and income in the long term;
increase the government’s
interest payments, thereby
putting more pressure on the
rest of the budget; limit
lawmakers’ ability to respond
to unforeseen events; and
increase the likelihood of a
fiscal crisis.
2030
Source: Congressional Budget Office.
CBO’s most recent long-term projection of federal debt was completed in July 2016. See Congressional Budget Office, The 2016 Long-Term Budget
Outlook (July 2016), www.cbo.gov/publication/51580. For details about the sources of data used for past debt held by the public, see Congressional
Budget Office, Historical Data on Federal Debt Held by the Public (July 2010), www.cbo.gov/publication/21728.
The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2026 and then extending most of the
concepts underlying those baseline projections for the rest of the long-term projection period.
CBO’s website includes a “Budget Options search” that
allows users to search for options by major budget category, budget function, topic, and date.3 The online search
is updated regularly to include only the most recent version of budget options from various CBO reports. All of
the options in this volume currently appear in that online
search. In addition, other options that appear in that
search were analyzed in the past but not updated for this
volume. Among those other options are ones that would
yield comparatively small savings and ones discussed in
recently published CBO reports analyzing specific federal
programs or aspects of the tax code in detail. Although
those other options were not updated in this volume,
they represent approaches that policymakers might take
to reduce deficits.
3. See Congressional Budget Office, “Budget Options,”
www.cbo.gov/budget-options.
CBO
The Current Context for
Decisions About the Budget
The federal budget deficit in fiscal year 2016 totaled
$587 billion, or 3.2 percent of gross domestic product
(GDP), up from 2.5 percent in 2015.4 Last year’s deficit
marked the first increase in the budget shortfall, measured as a share of the nation’s output, since 2009. As a
result, debt held by the public increased to 77 percent of
GDP at the end of 2016—about 3 percentage points
higher than the amount in 2015 and the highest ratio
since 1950.
4. About $41 billion of the deficit increase resulted from a shift in
the timing of some payments that the government would
ordinarily have made in fiscal year 2017; those payments were
instead made in fiscal year 2016 because October 1, 2016 (the
first day of fiscal year 2017), fell on a weekend. If not for that
shift, CBO estimates, the deficit in 2016 would have been about
$546 billion, or 3.0 percent of GDP—still considerably higher
than the deficit recorded for 2015.
CHAPTER ONE: INTRODUCTION
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
3
Figure 1-2.
Total Revenues and Outlays
Percentage of Gross Domestic Product
28
Outlays
24
Actual
Average Outlays,
1966 to 2015
(20.2%)
Baseline
Projection
20
Over the next 10 years,
revenues and outlays
16
Revenues
are projected to be
Average Revenues,
1966 to 2015
(17.4%)
12
above their 50-year
averages as measured
8
relative to gross
domestic product.
4
0
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
2021
2026
Source: Congressional Budget Office.
CBO’s most recent budget projections (through 2026) were completed in August 2016. See Congressional Budget Office, An Update to the Budget and
Economic Outlook: 2016 to 2026 (August 2016), www.cbo.gov/publication/51908.
As specified in law, CBO constructs its baseline
projections of federal revenues and spending under the
assumption that current laws will generally remain
unchanged. Under that assumption, annual budget
shortfalls in CBO’s projection rise substantially over the
2017–2026 period, from a low of $520 billion in 2018 to
$1.2 trillion in 2026 (see Table 1-2 on page 10).5 That
increase is projected to occur mainly because growth in
revenues would be outpaced by a combination of significant growth in spending on retirement and health care
programs—caused by the aging of the population and
rising health care costs per person—and growing interest
payments on federal debt. Deficits are projected to dip
from 3.1 percent of GDP in 2017 to 2.6 percent in 2018
and then to begin rising again, reaching 4.6 percent at the
end of the 10-year period—significantly above the average deficit as a percentage of GDP between 1966 and
2015. Over the next 10 years, revenues and outlays alike
are projected to be above their 50-year averages as measured relative to GDP (see Figure 1-2).
5. For CBO’s most recent budget and economic projections, see
Congressional Budget Office, An Update to the Budget and
Economic Outlook: 2016 to 2026 (August 2016), www.cbo.gov/
publication/51908.
As deficits accumulate in CBO’s baseline, debt held by
the public rises to 86 percent of GDP (or $23 trillion) by
2026. At that level, debt held by the public, measured as
a percentage of GDP, would be more than twice the average over the past five decades. Beyond the 10-year period,
if current laws remained in place, the pressures that contributed to rising deficits during the baseline period
would accelerate and push up debt even more sharply.
Three decades from now, for instance, debt held by the
public is projected to be about twice as high, relative to
GDP, as it is this year—which would be a higher ratio
than the United States has ever recorded.6
Such high and rising debt would have serious consequences, both for the economy and for the federal
budget. Federal spending on interest payments would
rise substantially as a result of increases in interest rates,
such as those projected to occur over the next few years.
Moreover, because federal borrowing reduces national
saving over time, the nation’s capital stock ultimately
6. See Congressional Budget Office, The 2016 Long-Term Budget
Outlook (July 2016), www.cbo.gov/publication/51580. CBO’s
long-term projections, which focus on the 30-year period ending
in 2046, generally adhere closely to current law, following the
agency’s March 2016 baseline budget projections through the
usual 10-year projection period and then extending the baseline
concept into later years.
CBO
4
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
would be smaller and productivity and income would be
lower than would be the case if the debt was smaller. In
addition, lawmakers would have less flexibility than otherwise to respond to unexpected challenges, such as significant economic downturns or financial crises. Finally,
the likelihood of a fiscal crisis in the United States would
increase. Specifically, the risk would rise of investors’
becoming unwilling to finance the government’s borrowing unless they were compensated with very high interest
rates. If that occurred, interest rates on federal debt would
rise suddenly and sharply relative to rates of return on
other assets.
Not only are deficits and debt projected to be greater in
coming years, but the United States also is on track to
have a federal budget that will look very different from
budgets of the past. Under current law, in 2026 spending
for all federal activities other than the major health care
programs and Social Security is projected to account for
its smallest share of GDP since 1962.7 At the same time,
revenues would represent a larger percentage of GDP in
the future—averaging 18.3 percent of GDP over the
2017–2026 period—than they generally have in the past
few decades. Despite those trends, revenues would not
keep pace with outlays under current law because the
government’s major health care programs (particularly
Medicare) and Social Security would absorb a much
larger share of the economy’s output in the future than
they have in the past.
Choices for the Future
To put the federal budget on a sustainable long-term
path, lawmakers would need to make significant policy
changes—allowing revenues to rise more than they would
under current law, reducing spending for large benefit
programs to amounts below those currently projected, or
adopting some combination of those approaches.
Lawmakers and the public may weigh several factors in
considering new policies that would reduce budget deficits: What is an acceptable amount of federal debt, and
hence, how much deficit reduction is necessary? How
rapidly should such reductions occur? What is the proper
7. The major health care programs consist of Medicare, Medicaid,
and the Children’s Health Insurance Program, along with federal
subsidies for health insurance purchased through the marketplaces
established under the Affordable Care Act and related spending.
CBO
DECEMBER 2016
size of the federal government, and what would be the
best way to allocate federal resources? What types of policy changes would most enhance prospects for near-term
and long-term economic growth? What would be the
distributional implications of proposed changes—that is,
who would bear the burden of particular cuts in spending
or increases in taxes, and who would realize long-term
economic benefits?
The scale of changes in noninterest spending or revenues
would depend on the target level of federal debt. If lawmakers set out to ensure that debt in 2046 would equal
75 percent of GDP (close to the current share), cutting
noninterest spending or raising revenues in each year (or
both) beginning in 2017 by amounts totaling 1.7 percent
of GDP (about $330 billion in 2017, or $1,000 per person) would achieve that result.8 Increases in revenues or
reductions in noninterest spending would need to be
larger to reduce debt to the percentages of GDP that are
more typical of those in recent decades. If lawmakers
wanted to return the debt to 39 percent of GDP (its
average over the past 50 years) by 2046, one way to do so
would be to increase revenues or cut noninterest spending
(in relation to current law), or do some combination of
the two, beginning in 2017 by amounts totaling 2.9 percent of GDP each year. (In 2017, 2.9 percent of GDP
would be about $560 billion, or $1,700 per person.)
In deciding how quickly to implement policies to put
federal debt on a sustainable path—regardless of the
chosen goal for federal debt—lawmakers face trade-offs.
Reducing the deficit sooner would have several benefits:
less accumulated debt, smaller policy changes required to
achieve long-term outcomes, and less uncertainty about
which policies lawmakers would adopt. However, if
lawmakers implemented spending cuts or tax increases
quickly, people would have little time to plan and adjust
to the policy changes, and the ongoing economic expansion would be weakened. By contrast, waiting several
years to implement reductions in federal spending or
increases in taxes would mean more accumulated debt
over the long run, which would slow long-term growth
8. The amounts of those reductions are calculated before
macroeconomic feedback is taken into account. The projected
effects on debt include both those direct effects of the specified
policy changes and the resulting macroeconomic feedback to the
budget.
CHAPTER ONE: INTRODUCTION
in output and income. Also, delaying would mean that
reaching any chosen target for debt would require larger
policy changes.9
Caveats About This Volume
The ways in which specific federal programs, the budget
as a whole, and the U.S. economy will evolve under current law are uncertain, as are the possible effects of proposed changes to federal spending and revenue policies.
Because a broad range of results for any change in policy
is plausible, CBO’s estimates are designed to fall in the
middle of the distribution of possible outcomes.
The estimates presented in this volume could differ from
cost estimates for similar proposals that CBO might produce later or from revenue estimates developed later by
the staff of the Joint Committee on Taxation (JCT). One
reason is that the proposals on which those estimates were
based might not precisely match the options presented
here. Another is that the baseline budget projections
against which such proposals would ultimately
be measured might have changed and thus would differ
from the projections used for this report.
In addition, some proposals similar to options presented
in this volume would be defined as “major” legislation
and thus would require CBO and JCT, to the greatest
extent practicable, to incorporate the budgetary impact of
macroeconomic effects into 10-year cost estimates.
(Major legislation is defined as either having a gross budgetary effect, before incorporating macroeconomic
effects, of 0.25 percent of GDP in any year over the next
10 years, or having been designated as such by the Chair
of either Budget Committee. CBO projects that 0.25
percent of GDP in 2026 would be about $70 billion.)
Those macroeconomic effects might include, for example, changes in the labor supply or private investment.
Incorporating such macroeconomic feedback into cost
estimates is often called dynamic scoring. The estimates
presented in this volume do not incorporate such effects.
Many of the options in this volume could be combined
to provide building blocks for broader changes. In some
cases, however, combining various spending or revenue
options would produce budgetary effects that would
differ from the sums of those estimates as presented here
9. For additional discussion, see Congressional Budget Office,
Choices for Deficit Reduction: An Update (December 2013),
www.cbo.gov/publication/44967.
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
5
because some options would overlap or interact in ways
that would change their budgetary impact. And some
options would be mutually exclusive. In addition,
some options are flexible enough to be scaled up or
down, leading to larger or smaller effects on households,
businesses, and government budgets. Other options, such
as those that eliminate programs, could not be scaled up.
To reduce projected deficits (relative to the baseline)
through changes in discretionary spending, lawmakers
would need to decrease the statutory funding caps below
the levels already established under current law or enact
appropriations below those caps. The discretionary
options in this report could be used to accomplish either
of those objectives. Alternatively, some of the options
could be implemented to help comply with the existing
caps on discretionary funding that are in place through
2021.
In some cases, CBO has not yet developed specific estimates of secondary effects for some options that would
primarily affect mandatory or discretionary spending or
revenues but that also could have other, less direct, effects
on the budget.
The estimated budgetary effects of options do not reflect
the extent to which those policy changes would reduce
interest payments on federal debt. Those savings may be
included as part of a comprehensive budget plan (such as
the Congressional budget resolution), but CBO does not
make such calculations for individual pieces of legislation
or for individual options of the type discussed here.
Some of the estimates in this volume depend on projections of states’ responses to federal policy changes, which
can be difficult to predict and can vary over time because
of states’ changing fiscal conditions and other factors.
CBO’s analyses do not attempt to quantify the impact
of options on states’ spending or revenues.
Some options might impose federal mandates on other
levels of government or on private entities. The
Unfunded Mandates Reform Act of 1995 requires CBO
to estimate the costs of any mandates that would be
imposed by new legislation that the Congress considers.
(The law defines mandates as enforceable duties imposed
on state, local, or tribal governments or the private sector
as well as certain types of provisions affecting large mandatory programs that provide funds to states.) In this volume, CBO does not address the costs of any mandates
that might be associated with the various options.
CBO
6
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Table 1-1.
Options for Reducing the Deficit
Savings,
2017–2026a
(Billions of dollars)
Option
Number
Title
Mandatory Spending (Other than that for health-related programs)
Option 1
Change the Terms and Conditions for Oil and Gas Leasing on Federal Lands
3
Option 2
Limit Enrollment in the Department of Agriculture’s Conservation Programs
10
Option 3
Eliminate Title I Agriculture Programs
25
Option 4
Reduce Subsidies in the Crop Insurance Program
27
Option 5
Eliminate ARC and PLC Payments on Generic Base Acres
4
Option 6
Limit ARC and PLC Payment Acres to 50 Percent of Base Acres
11
Option 7
Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and Decrease Their Eligible Loan Limits
6
Option 8
Eliminate the Add-On to Pell Grants, Which Is Funded With Mandatory Spending
60
Option 9
Limit Forgiveness of Graduate Student Loans
Option 10
Reduce or Eliminate Subsidized Loans for Undergraduate Students
8 to 27
Option 11
Eliminate Concurrent Receipt of Retirement Pay and Disability Compensation for Disabled Veterans
139
Option 12
Reduce Pensions in the Federal Employees Retirement System
7
Option 13
Convert Multiple Assistance Programs for Lower-Income People Into Smaller Block Grants to States
367b
Option 14
Eliminate Subsidies for Certain Meals in the National School Lunch, School Breakfast, and
Child and Adult Care Food Programs
10
Option 15
Tighten Eligibility for the Supplemental Nutrition Assistance Program
88
Option 16
Reduce TANF’s State Family Assistance Grant by 10 Percent
14
Option 17
Eliminate Supplemental Security Income Benefits for Disabled Children
104 b
Option 18
Link Initial Social Security Benefits to Average Prices Instead of Average Earnings
72 to 114
Option 19
Make Social Security’s Benefit Structure More Progressive
8 to 36
19
Option 20
Raise the Full Retirement Age for Social Security
Option 21
Reduce Social Security Benefits for New Beneficiaries
8
Option 22
Require Social Security Disability Insurance Applicants to Have Worked More in Recent Years
45
Option 23
Eliminate Eligibility for Starting Social Security Disability Benefits at Age 62 or Later
17
Option 24
Narrow Eligibility for Veterans’ Disability Compensation by Excluding Certain Disabilities
Unrelated to Military Duties
26
105 to 190
Option 25
Restrict VA’s Individual Unemployability Benefits to Disabled Veterans Who Are
Younger Than the Full Retirement Age for Social Security
40
Option 26
Use an Alternative Measure of Inflation to Index Social Security and Other Mandatory Programs
182
Discretionary Spending (Other than that for health-related programs)
Option 1
Reduce the Size of the Military to Satisfy Caps Under the Budget Control Act
Option 2
Reduce DoD’s Operation and Maintenance Appropriation, Excluding Funding for the
Defense Health Program
251
49 to 151
Option 3
Cap Increases in Basic Pay for Military Service Members
21
Option 4
Replace Some Military Personnel With Civilian Employees
13
Option 5
Cancel Plans to Purchase Additional F-35 Joint Strike Fighters and Instead Purchase F-16s and F/A-18s
23
Option 6
Stop Building Ford Class Aircraft Carriers
15
Option 7
Reduce Funding for Naval Ship Construction to Historical Levels
27
Option 8
Reduce the Size of the Nuclear Triad
9 to 13
Continued
CBO
CHAPTER ONE: INTRODUCTION
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
Table 1-1.
7
Continued
Options for Reducing the Deficit
Savings,
2017–2026a
(Billions of dollars)
Option
Number
Title
Discretionary Spending (Other than that for health-related programs) (Continued)
Option 9
Build Only One Type of Nuclear Weapon for Bombers
6 to 8
Option 10
Defer Development of the B-21 Bomber
27
Option 11
Reduce Funding for International Affairs Programs
117
Option 12
Eliminate Human Space Exploration Programs
81
Option 13
Reduce Department of Energy Funding for Energy Technology Development
16
Option 14
Eliminate Certain Forest Service Programs
6
Option 15
Convert the Home Equity Conversion Mortgage Program From a Guarantee Program to a Direct Loan Program
Option 16
Eliminate the International Trade Administration’s Trade Promotion Activities
23 b
3
Option 17
Eliminate Funding for Amtrak and the Essential Air Service Program
16b
Option 18
Limit Highway Funding to Expected Highway Revenues
40
Option 19
Eliminate Federal Funding for National Community Service
8
Option 20
Eliminate Head Start
84
Option 21
Restrict Pell Grants to the Neediest Students
Option 22
Increase Payments by Tenants in Federally Assisted Housing
Option 23
Reduce the Number of Housing Choice Vouchers or Eliminate the Program
4 to 65b
18
16 to 111
Option 24
Reduce the Annual Across-the-Board Adjustment for Federal Civilian Employees’ Pay
55
Option 25
Reduce the Size of the Federal Workforce Through Attrition
50
Option 26
24
Option 27
Impose Fees to Cover the Cost of Government Regulations and Charge for Services Provided to the
Private Sector
Repeal the Davis-Bacon Act
13 b
Option 28
Eliminate or Reduce Funding for Certain Grants to State and Local Governments
56
Revenues (Other than those related to health)
Option 1
Increase Individual Income Tax Rates
93 to 734
Option 2
Implement a New Minimum Tax on Adjusted Gross Income
66
Option 3
Raise the Tax Rates on Long-Term Capital Gains and Qualified Dividends by 2 Percentage Points
57
Option 4
Use an Alternative Measure of Inflation to Index Some Parameters of the Tax Code
157
Option 5
Convert the Mortgage Interest Deduction to a 15 Percent Tax Credit
105
Option 6
Curtail the Deduction for Charitable Giving
229
Option 7
Limit the Deduction for State and Local Taxes
955
Option 8
Limit the Value of Itemized Deductions
Option 9
Change the Tax Treatment of Capital Gains From Sales of Inherited Assets
119 to 2,232
68
Option 10
Eliminate the Tax Exemption for New Qualified Private Activity Bonds
28
Option 11
Expand the Base of the Net Investment Income Tax to Include the Income of Active Participants in
S Corporations and Limited Partnerships
160
Option 12
Tax Carried Interest as Ordinary Income
20
Option 13
Include Disability Payments From the Department of Veterans Affairs in Taxable Income
38 to 94
Option 14
Include Employer-Paid Premiums for Income Replacement Insurance in Employees’ Taxable Income
336
Option 15
Further Limit Annual Contributions to Retirement Plans
92
Continued
CBO
8
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Table 1-1.
Continued
Options for Reducing the Deficit
Savings,
Option
Number
2017–2026a
(Billions of dollars)
Title
Revenues (Other than those related to health) (Continued)
Option 16
Tax Social Security and Railroad Retirement Benefits in the Same Way That Distributions From
Defined Benefit Pensions Are Taxed
423
Option 17
Eliminate Certain Tax Preferences for Education Expenses
195
Option 18
Lower the Investment Income Limit for the Earned Income Tax Credit and Extend That Limit to the
Refundable Portion of the Child Tax Credit
7
Require Earned Income Tax Credit and Child Tax Credit Claimants to Have a Social Security Number
That Is Valid for Employment
37
Option 19
Option 20
Increase the Maximum Taxable Earnings for the Social Security Payroll Tax
Option 21
Expand Social Security Coverage to Include Newly Hired State and Local Government Employees
633 to 1,008
78
Option 22
Increase the Payroll Tax Rate for Medicare Hospital Insurance by 1 Percentage Point
823
Option 23
Tax All Pass-Through Business Owners Under SECA and Impose a Material Participation Standard
Option 24
Increase Taxes that Finance the Federal Share of the Unemployment Insurance System
Option 25
Increase Corporate Income Tax Rates by 1 Percentage Point
Option 26
Capitalize Research and Experimentation Costs and Amortize Them Over Five Years
185
Option 27
Extend the Period for Depreciating the Cost of Certain Investments
251
Option 28
Repeal Certain Tax Preferences for Energy and Natural Resource-Based Industries
24
137
13 to 15
100
Option 29
Repeal the Deduction for Domestic Production Activities
174
Option 30
Repeal the “LIFO” and “Lower of Cost or Market” Inventory Accounting Methods
102
Option 31
Subject All Publicly Traded Partnerships to the Corporate Income Tax
6
Option 32
Repeal the Low-Income Housing Tax Credit
34
Option 33
Determine Foreign Tax Credits on a Pooling Basis
82
Option 34
Require a Minimum Level of Taxation of Foreign Income as It Is Earned
301
Option 35
Further Limit the Deduction of Interest Expense for Multinational Corporations
68
Option 36
Increase Excise Taxes on Motor Fuels by 35 Cents and Index for Inflation
474
Option 37
Impose an Excise Tax on Overland Freight Transport
343
Option 38
Increase All Taxes on Alcoholic Beverages to $16 per Proof Gallon
70
Option 39
Impose a 5 Percent Value-Added Tax
1,770 to 2,670
Option 40
Impose a Fee on Large Financial Institutions
98
Option 41
Impose a Tax on Financial Transactions
707
Option 42
Impose a Tax on Emissions of Greenhouse Gases
977
Option 43
Increase Federal Civilian Employees’ Contributions to the Federal Employees Retirement System
48
Continued
CBO
CHAPTER ONE: INTRODUCTION
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
Table 1-1.
9
Continued
Options for Reducing the Deficit
Savings,
Option
Number
2017–2026a
(Billions of dollars)
Title
Health
Option 1
Adopt a Voucher Plan and Slow the Growth of Federal Contributions for the Federal Employees
Health Benefits Program
Option 2
Impose Caps on Federal Spending for Medicaid
31b
370 to 680
Option 3
Limit States’ Taxes on Health Care Providers
16 to 40
Option 4
Repeal All Insurance Coverage Provisions of the Affordable Care Act
1,236
Option 5
Repeal the Individual Health Insurance Mandate
416
Option 6
Introduce Minimum Out-of-Pocket Requirements Under TRICARE for Life
Option 7
Change the Cost-Sharing Rules for Medicare and Restrict Medigap Insurance
18 to 66
Option 8
Increase Premiums for Parts B and D of Medicare
22 to 331
Option 9
Raise the Age of Eligibility for Medicare to 67
18
Option 10
Reduce Medicare’s Coverage of Bad Debt
15 to 31
Option 11
Require Manufacturers to Pay a Minimum Rebate on Drugs Covered Under Part D of Medicare for
Low-Income Beneficiaries
145
Option 12
Consolidate and Reduce Federal Payments for Graduate Medical Education at Teaching Hospitals
32
Option 13
Limit Medical Malpractice Claims
62b
Option 14
End Congressional Direction of Medical Research in the Department of Defense
9
Option 15
Modify TRICARE Enrollment Fees and Cost Sharing for Working-Age Military Retirees
18b
Option 16
End Enrollment in VA Medical Care for Veterans in Priority Groups 7 and 8
54 b
Option 17
Increase the Excise Tax on Cigarettes by 50 Cents per Pack
Option 18
Reduce Tax Preferences for Employment-Based Health Insurance
27
35
174 to 429
Sources: Congressional Budget Office; staff of the Joint Committee on Taxation.
ARC = Agriculture Risk Coverage; DoD = Department of Defense; LIFO = last in, first out; PLC = Price Loss Coverage;
SECA = Self-Employment Contributions Act; TANF = Temporary Assistance for Needy Families; VA = Department of Veterans Affairs.
a. For options affecting primarily mandatory spending or revenues, savings sometimes would derive from changes in both. When that is the case, the
savings shown include effects on both mandatory spending and revenues. For options affecting primarily discretionary spending, the savings shown
are the decrease in discretionary outlays. That same approach applies for the savings shown for health options; most are mandatory spending options
or revenue options, although 14, 15, and 16 are discretionary spending options.
b. Savings do not encompass all budgetary effects.
CBO
10
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Table 1-2.
CBO’s Baseline Budget Projections
Actual
2015 2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Total
201720172021
2026
In Billions of Dollars
Revenues
Outlays
Deficit
Debt Held by the Public
at the End of the Year
3,250 3,267 3,421 3,600 3,745 3,900 4,048 4,212 4,385 4,574 4,779 4,993 18,714 41,658
3,688 ______
3,854 ______
4,015 ______
4,120 ______
4,370 ______
4,614 ______
4,853 ______
5,166 ______
5,373 ______
5,574 ______
5,908 ______
6,235 _______
21,973 _______
50,229
______
-438 -587 -594 -520 -625 -714 -806 -954 -988 -1,000 -1,128 -1,243 -3,258 -8,571
13,117 14,173 14,743 15,325 16,001 16,758 17,597 18,584 19,608 20,649 21,824 23,118
n.a.
n.a.
As a Percentage of Gross Domestic Product
Revenues
Outlays
Deficit
Debt Held by the Public
at the End of the Year
18.2
20.6
_____
-2.4
17.8
20.9
_____
-3.2
17.9
21.0
_____
-3.1
18.1
20.7
_____
-2.6
18.1
21.2
_____
-3.0
18.2
21.6
_____
-3.3
18.2
21.9
_____
-3.6
18.3
22.4
_____
-4.1
18.3
22.4
_____
-4.1
18.3
22.3
_____
-4.0
18.4
22.7
_____
-4.3
18.5
23.1
_____
-4.6
18.1
21.3
_____
-3.2
18.3
22.0
_____
-3.8
73.6
77.0
77.2
77.0
77.5
78.4
79.3
80.5
81.7
82.7
84.0
85.5
n.a.
n.a.
Source: Congressional Budget Office. CBO’s most recent budget projections (2017 through 2026) were completed in August 2016. See Congressional
Budget Office, An Update to the Budget and Economic Outlook: 2016 to 2026 (August 2016), www.cbo.gov/publication/51908.
n.a. = not applicable.
CBO
CHAPTER
2
Mandatory Spending Options
M
andatory spending—which totaled about
$2.4 trillion in 2016, or about 60 percent of federal
outlays, the Congressional Budget Office estimates—
consists of spending (other than that for net interest) that
is generally governed by statutory criteria and is not normally constrained by the annual appropriation process.
Mandatory spending also includes certain types of payments that federal agencies receive from the public and
from other government agencies. Those payments are
classified as offsetting receipts and reduce gross mandatory spending.1 Lawmakers generally determine spending
for mandatory programs by setting the programs’ parameters, such as eligibility rules and benefit formulas, rather
than by appropriating specific amounts each year.
The largest mandatory programs are Social Security and
Medicare. Together, CBO estimates, those programs
accounted for about 60 percent of mandatory outlays,
on average, over the past 10 years. Medicaid and other
health care programs accounted for about 15 percent of
mandatory spending over that same period. The rest
of mandatory spending is for income security programs
(such as unemployment compensation, nutrition assistance programs, and Supplemental Security Income), certain refundable tax credits, retirement benefits for civilian
and military employees of the federal government, veterans’ benefits, student loans, and agriculture programs.2
1. Unlike revenues, which the government collects through
exercising its sovereign powers (for example, in levying income
taxes), offsetting receipts are generally collected from other
government accounts or from members of the public through
businesslike transactions (for example, in assessing Medicare
premiums or rental payments and royalties for extracting oil or gas
from federal lands).
2. Tax credits reduce a taxpayer’s overall tax liability (the amount
owed). When a refundable credit exceeds the liability apart from
the credit, the excess may be refunded to the taxpayer. In that case,
that refund is recorded in the budget as an outlay.
Trends in Mandatory Spending
As a share of the economy, mandatory spending more
than doubled between 1966 and 1975, from 4.5 percent
to 9.4 percent of gross domestic product (GDP). That
increase was attributable mainly to growth in spending
for Social Security and other income security programs,
and to a lesser extent for Medicare and Medicaid. From
1975 through 2007, mandatory spending varied between
roughly 9 percent and 10 percent of GDP. Such spending
peaked in 2009 at 14.5 percent of GDP, boosted by
effects of the 2007–2009 recession and policies enacted
in response to it. Mandatory spending as a share of GDP
dropped to 12.2 percent by 2014—as the effects of a
gradually improving economy, the expiration of temporary legislation enacted in response to the recession, and
payments from Fannie Mae and Freddie Mac partially
offset the longer-run upward trend—and then started to
rise again (see Figure 2-1). If no new laws were enacted
that affected mandatory programs, CBO estimates, mandatory outlays would increase as a share of the economy,
from 13.3 percent of GDP in 2016 to 15.2 percent in
2026.3 By comparison, such spending averaged 9.4 percent of GDP over the past five decades.
Spending for Social Security and the major health care
programs—particularly Medicare—drives much of
the growth in mandatory spending.4 CBO projects that,
under current law, spending for Social Security and
3. For more on the components of mandatory spending and CBO’s
baseline budget projections, see Congressional Budget Office, An
Update to the Budget and Economic Outlook: 2016 to 2026 (August
2016), www.cbo.gov/publication/51908.
4. Outlays for the major health care programs consist of spending for
Medicare (net of premiums and other offsetting receipts),
Medicaid, and the Children’s Health Insurance Program, as well as
spending to subsidize health insurance purchased through the
marketplaces established under the Affordable Care Act and
related spending.
CBO
12
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Figure 2-1.
Mandatory Spending
Percentage of Gross Domestic Product
16
Actual
Baseline
Projection
12
Under current law,
Total Mandatory Spending
mandatory spending
will continue to rise
8
Average Mandatory Spending,
1966 to 2015 (9.4%)
as a percentage of
gross domestic
product over the next
4
decade.
0
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
2021
2026
Source: Congressional Budget Office (as of August 2016).
Data include offsetting receipts (funds collected by government agencies from other government accounts or from the public in businesslike or
market-oriented transactions that are recorded as offsets to outlays).
the major health care programs will increase from
10.4 percent of GDP in 2016 to 12.6 percent in 2026,
accounting for almost two-thirds of the total increase in
outlays over that period. (Those percentages reflect
adjustments to eliminate the effects of shifts in the timing
of certain payments.) Factors driving that increase
include the aging population and rising health care costs
per person. In particular, over the next decade, as members of the baby-boom generation age and as life expectancy increases, the number of people age 65 or older is
expected to rise by more than one-third, boosting the
number of beneficiaries of those programs. Moreover,
CBO projects that spending per enrollee in federal health
care programs will grow more rapidly over the coming
decade than it has in recent years. As a result, projected
spending for people age 65 or older in the three largest
programs—Social Security, Medicare, and Medicaid—
increases from roughly one-third of all federal noninterest
spending in 2016 to about 40 percent in 2026.
In contrast, outlays for all other mandatory programs
would decline as a share of GDP, from 2.8 percent in
2016 to 2.5 percent by 2026. That projected decline
would occur in part because benefit levels for many programs are adjusted for inflation each year, and in CBO’s
economic forecast, inflation is estimated to be well below
the rate of growth in nominal GDP.
CBO
Analytic Method Underlying the
Estimates of Mandatory Spending
The budgetary effects of the various options are measured
in relation to the spending that CBO projected in its
March 2016 baseline.5 In creating its mandatory baseline
budget projections, CBO generally assumes that federal
fiscal policy follows current law and that programs now
scheduled to expire or begin in future years will do so.
That assumption applies to most, but not all, mandatory
programs. Following procedures established in the
Balanced Budget and Emergency Deficit Control Act of
1985 and the Balanced Budget Act of 1997, CBO
assumes that some mandatory programs scheduled to
expire in the coming decade under current law will
instead be extended. In particular, in CBO’s baseline, all
such programs that predate the Balanced Budget Act and
that have outlays in the current year above $50 million
are presumed to continue. For programs established after
1997, continuation is assessed on a program-by-program
basis in consultation with the House and Senate
Committees on the Budget. The Supplemental Nutrition
Assistance Program is the largest expiring program
assumed to be extended in the baseline.
5. See Congressional Budget Office, Updated Budget Projections:
2016 to 2026 (March 2016), www.cbo.gov/publication/51384.
CHAPTER TWO: MANDATORY SPENDING OPTIONS
Another of CBO’s assumptions involves the federal government’s dedicated trust funds for Social Security and
Medicare.6 If a trust fund is exhausted and the receipts
coming into it during a given year are not enough to pay
full benefits as scheduled under law for that year, the program has no legal authority to pay full benefits. Benefits
then must be reduced to bring outlays in line with
receipts. Nonetheless, in accordance with section 257 of
the Deficit Control Act, CBO’s baseline incorporates the
assumption that, in coming years, beneficiaries will
receive full payments and all services to which they are
entitled under Social Security or Medicare.
6. Social Security’s beneficiaries receive payments from the Old-Age
and Survivors Insurance Trust Fund and the Disability Insurance
Trust Fund. Medicare’s Hospital Insurance Trust Fund pays for
care in hospitals and other institutions under Part A; its
Supplementary Medical Insurance Trust Fund pays for care by
physicians and other providers under Part B and for prescription
drugs under Part D. Both Medicare trust funds also pay benefits
for people who join private Medicare Advantage plans under
Part C.
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
13
Options in This Chapter
The 26 options in this chapter encompass a broad array
of mandatory spending programs, excluding those involving health care. (Chapter 5 presents options that would
affect spending for health care programs, along with
options affecting health-related taxes.) The options are
grouped by program, but some are conceptually similar
even though they concern different programs. For
instance, several options would shift spending from the
government to a program’s participants or from the federal government to the states. Other options would redefine the population eligible for benefits or would reduce
the payments that beneficiaries receive.
Six options in this chapter concern Social Security.
Another five involve means-tested benefit programs
(including nutrition assistance programs and the
Supplemental Security Income program). The remaining
options focus on programs that deal with education,
veterans’ benefits, federal pensions, agriculture, Fannie
Mae and Freddie Mac, and natural resources. Each
option’s budgetary effect is estimated independently,
with no consideration of how it might interact with
other options.
CBO
14
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 1
Function 300
Change the Terms and Conditions for Oil and Gas Leasing on Federal Lands
Total
Billions of Dollars
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2017–2021
2017–2026
Change in Outlays
0
0
*
-1.3
-0.2
-0.2
-0.8
-0.2
-0.2
-0.4
-1.6
-3.4
This option would take effect in October 2017.
* = between –$50 million and zero.
The federal government lets private businesses bid on
leases to develop most of the onshore and offshore oil and
natural gas resources on federal property. By the Congressional Budget Office’s estimates, the federal government’s
gross proceeds from those leases will total $92 billion
during the next decade, under current laws and policies;
after paying a share of those receipts to states, the federal
government is projected to collect net proceeds totaling
$79 billion. Those net proceeds are counted in the budget as offsetting receipts—that is, as negative outlays.
This option would change the leasing programs in two
ways. First, it would increase the acreage available for
leasing by repealing the statutory prohibition on leasing
in the Arctic National Wildlife Refuge (ANWR) and by
directing the Department of the Interior to lease areas on
the Outer Continental Shelf (OCS) that are unavailable
under current administrative policies. Second, the option
would change the terms of all new leases, imposing a fee
that applied during years when oil or gas was not produced. (The latest available data indicate that such nonproducing leases accounted for about 75 percent of offshore leases at the end of fiscal year 2016 and about half
of onshore leases at the end of fiscal year 2015.) The fee
would be $6 per acre per year.
CBO estimates that those changes would reduce net
federal outlays by $3 billion from 2018 through 2026.
About three-quarters of that total would result from
leasing in ANWR and the increase in leasing on the
OCS, and the rest would result from the new fee on
nonproducing leases.
One rationale for offering leases in ANWR and additional leases on the OCS is that increasing oil and gas
production from federal lands and waters could boost
employment and economic output. The leasing also
could raise revenues for state and local governments; the
CBO
amounts would depend on states’ tax policies, the
amount of oil and gas produced in each area, and the
existing formulas for distributing some federal oil and
gas proceeds to states. The primary argument against
expanded leasing is that oil and gas production in environmentally sensitive areas, such as the coastal plain in
ANWR and other coastal areas, could threaten wildlife,
fisheries, and tourism. Moreover, increased development
of resources in the near term would reduce the supply of
oil and gas available for production in the future, when
prices might be higher and households and businesses
might value the products more highly.
One rationale for imposing a new fee on nonproducing
oil and gas leases is that doing so could slightly increase
the efficiency of oil and gas production: Firms would
have an additional financial incentive to refrain from
acquiring leases that they considered less likely to be
worth exploring, and also to invest sooner in exploration
and development of the leases that they did acquire. The
incentive’s effect would be small, however, because $6 per
acre would usually be a small part of a parcel’s potential
value and a minor factor in a leaseholder’s decisions about
when to begin exploration and production.
An argument against the new fee is that it might lead
businesses to reduce some of their bids on leases; furthermore, some parcels might go unleased entirely, generating
no receipts for the government either from bids or from
production royalties. However, CBO estimates that those
effects on receipts would be smaller than the receipts
from the new fee itself. The effect on bids would be small
because a fee of $6 per acre would significantly affect bids
for relatively few parcels—those that would generate low
bids even without the fee because of uncertainty about
the availability and production cost of oil and gas
resources. Similarly, the effect on royalty payments would
CHAPTER TWO: MANDATORY SPENDING OPTIONS
be small because the unleased parcels would be those with
the lowest likelihood of successful development. Moreover, some parcels that went unleased under the option
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
15
could be acquired later if their value increased; bids then
would probably be higher, and royalty payments could be
higher as well.
RELATED OPTION: Revenues, Option 28
RELATED CBO PUBLICATIONS: Options for Increasing Federal Income From Crude Oil and Natural Gas on Federal Lands (April 2016),
www.cbo.gov/publication/51421; Potential Budgetary Effects of Immediately Opening Most Federal Lands to Oil and Gas Leasing
(August 2012), www.cbo.gov/publication/43527; Energy Security in the United States (May 2012), www.cbo.gov/publication/43012
CBO
16
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 2
Function 300
Limit Enrollment in the Department of Agriculture’s Conservation Programs
Total
Billions of Dollars
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2017–2021
2017–2026
Phase out the
Conservation Stewardship
Program
0
*
-0.2
-0.4
-0.5
-0.7
-0.9
-1.0
-1.2
-1.5
-1.1
-6.4
Scale back the
Conservation Reserve
Program
0
*
*
*
-0.1
-0.1
-0.5
-0.6
-0.9
-1.0
-0.1
-3.3
Both alternatives above
0
*
-0.2
-0.4
-0.6
-0.8
-1.4
-1.7
-2.2
-2.4
-1.3
-9.7
Change in Outlays
This option would take effect in October 2017.
* = between –$50 million and zero.
Under the Conservation Stewardship Program (CSP),
landowners enter into contracts with the Department of
Agriculture (USDA) to undertake various conservation
measures—including ones to conserve energy and
improve air quality—in exchange for annual payments
and technical help. Those contracts last five years and can
be extended for another five years. For every acre enrolled
in the CSP, a producer receives compensation for carrying
out new conservation activities and for improving, maintaining, and managing existing conservation practices.
Current law limits new enrollment in the CSP to 10 million acres per year, at an average cost of $18 per acre; in
2015, USDA spent $1 billion on the program.
Under the Conservation Reserve Program (CRP), landowners enter into contracts to stop farming on specified
tracts of land, usually for 10 to 15 years, in exchange for
annual payments and cost-sharing grants from USDA to
establish conservation practices on that land. One type of
tract used in the program is a “conservation buffer”—a
narrow strip of land maintained with vegetation to intercept pollutants, reduce erosion, and provide other environmental benefits. Acreage may be added to the CRP
through general enrollments, which are competitive and
held periodically for larger tracts of land, or through continuous enrollments, which are available at any time
during the year for smaller tracts of land. Current law
caps total enrollment in the CRP at 24 million acres by
2017; in 2015, USDA spent $2 billion on the roughly
24 million acres enrolled.
CBO
Beginning in 2018, the first part of this option would
prohibit new enrollment in the CSP. Land enrolled
now—and therefore hosting new or existing conservation
activities—would be eligible to continue in the program
until the contract for that land expired. By the Congressional Budget Office’s estimates, prohibiting new enrollment would reduce federal spending by $6 billion
through 2026.
Beginning in 2018, the second part of this option would
prohibit both new enrollment and reenrollment in the
general enrollment portion of the CRP; continuous
enrollment would remain in effect under the option.
Prohibiting general enrollment would reduce spending by
$3 billion through 2026, CBO estimates. The amount of
land enrolled in the CRP would drop to about 10 million
acres by 2026.
One argument for prohibiting new enrollment in the
CSP and thus phasing out the program is that some provisions of the program limit its effectiveness. For example, paying farmers for conservation practices they have
already adopted may not enhance the nation’s conservation efforts. Moreover, USDA’s criteria to determine payments for conservation practices are not clear, and payments may be higher than necessary to encourage farmers
to adopt new conservation measures.
An argument against phasing out the CSP is that, unlike
traditional crop-based subsidies, the CSP may offer a way
to support farmers while also providing environmental
benefits. Furthermore, conservation practices often
CHAPTER TWO: MANDATORY SPENDING OPTIONS
impose significant up-front costs, which can reduce
the net economic output of agricultural land, and CSP
payments help offset those costs.
One argument for scaling back the CRP is that the land
could become available for other uses that would provide
greater environmental benefits. For example, reducing
enrollment could free more land to produce crops and
biomass for renewable energy products.
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
17
An argument against scaling back the CRP is that studies
have indicated that the program yields high returns—in
the form of enhanced wildlife habitat, improved water
quality, and reduced soil erosion—for the money it
spends. Furthermore, USDA is enrolling more acres targeting specific environmental and resource concerns, perhaps thereby improving the cost-effectiveness of protecting fragile tracts.
RELATED OPTIONS: Mandatory Spending, Options 3, 4, 5, 6
CBO
18
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 3
Function 350
Eliminate Title I Agriculture Programs
Total
Billions of Dollars
2017
2018
2019
2020
2021 2022
2023
2024
2025
2026
2017–2021
2017–2026
Change in Outlays
0
0
*
-0.3
-4.5
-4.2
-4.0
-4.0
-4.3
-4.8
-25.4
-4.1
This option would take effect in October 2018.
* = between zero and $50 million.
Since 1933, lawmakers have enacted and often modified
various programs to support commodity prices and supplies, farm income, and producer liquidity. The
Agricultural Act of 2014 (the 2014 farm bill) was the
most recent comprehensive legislation addressing farm
income and price support programs. Title I of that bill
authorized those programs through 2018 for producers of
major commodities (such as corn, soybeans, wheat, and
cotton) and specialized programs for dairy and sugar.
Beginning with the 2019 marketing year—when most
programs expire and after existing contracts end—this
option would eliminate all Title I commodity support
programs. (For example, that period begins on June 1,
2019, for wheat and September 1, 2019, for corn.) Under
this option, the permanent agriculture legislation enacted
in 1938 and 1949 also would be repealed. (That permanent legislation would offer producers price and income
support at a relatively high level after the 2014 farm bill
expired.)
Although authorization for the Title I programs expires
in October 2018, the option would generate savings with
respect to the Congressional Budget Office’s baseline projections because, in its baseline, CBO is required by law
to assume that those programs continue beyond their
expiration date. Reductions in government spending with
respect to CBO’s baseline would begin in fiscal year 2020
and savings would rise sharply in fiscal year 2021, when
most outlays for the 2019 marketing year appear in the
baseline. CBO estimates that this option would reduce
spending by $25 billion, with respect to that baseline,
over the 2019–2026 period.
During the Great Depression of the 1930s, the 25 percent of the U.S. population who lived on farms had
less than half the average household income of urban
CBO
households; federal commodity programs came about to
alleviate that income disparity. One argument for eliminating Title I commodity support programs is that the
structure of U.S. farms has changed dramatically since
then: The significant income disparity between farm
and urban populations no longer exists. In 2014, about
97 percent of all farm households (which now constitute
about 2 percent of the U.S. population) were wealthier
than the median U.S. household. Farm income, excluding program payments, was 58 percent higher than
median U.S. household income. Moreover, commodity
payments today are concentrated among a relatively small
portion of farms. Three-quarters of all farms received no
farm-related government payments in 2014; most program payments, in total, went to mid- to large-scale farms
(those with annual sales above $350,000).
Moreover, agricultural producers would continue to have
access to other federal assistance programs, such as subsidized crop insurance and farm credit assistance. In addition, eliminating Title I programs would limit spending
that may distort trade, thereby reducing the risk that
the World Trade Organization might again challenge
U.S. agricultural support (as it did with the U.S. cotton
program).
An argument against eliminating commodity programs is
that despite relatively high average income among farmers, the farm sector still faces significant challenges. Farm
income fluctuates markedly and depends on the vagaries
of the weather and international markets. Commodity
programs try to stabilize crop revenues over time. Also,
much of U.S. agricultural production is exported to markets where foreign governments subsidize their producers.
Without support from commodity programs, U.S. producers may not be able to compete fairly in those export
CHAPTER TWO: MANDATORY SPENDING OPTIONS
markets. Finally, many years of continual government
payments from commodity programs have been capitalized into the fixed assets of farm operations (primarily
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
19
land); abruptly removing that income stream would cause
farmers’ wealth to drop significantly.
RELATED OPTIONS: Mandatory Spending, Options 2, 4, 5, 6
CBO
20
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 4
Function 350
Reduce Subsidies in the Crop Insurance Program
Total
Billions of Dollars
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2017–2021 2017–2026
Reduce premium subsidies
0
-0.2
-2.3
-2.7
-2.8
-2.8
-2.8
-2.9
-2.9
-2.9
-8.0
-22.3
Limit administrative
expenses and the rate of
return
0
-0.1
-0.5
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-1.7
-4.7
Both alternatives above
0
-0.3
-2.8
-3.3
-3.4
-3.4
-3.4
-3.5
-3.5
-3.5
-9.7
-27.0
Change in Outlays
This option would take effect in June 2017.
The Federal Crop Insurance Program protects farmers
from losses caused by droughts, floods, pest infestations,
other natural disasters, and low market prices. Farmers
can choose various amounts and types of insurance protection—for example, they can insure against losses
caused by poor crop yields, low crop prices, or both. The
Department of Agriculture (USDA) sets rates for federal
crop insurance so that the premiums equal the expected
payments to farmers for crop losses. Of total premiums,
the federal government pays about 60 percent, on average, and farmers pay about 40 percent. Private insurance
companies—which the federal government reimburses
for their administrative costs—sell and service insurance
policies purchased through the program. The federal government reinsures those private insurance companies by
agreeing to cover some of the losses when total payouts
exceed total premiums.
Beginning in June 2017, this option would reduce the
federal government’s subsidy to 40 percent of the crop
insurance premiums, on average. It also would limit the
federal reimbursement to crop insurance companies for
administrative expenses to 9.25 percent of estimated premiums and limit the rate of return on investment for
those companies to 12 percent each year. Under current
law, by the Congressional Budget Office’s estimates, federal spending for crop insurance will total $88 billion
from 2017 through 2026. Reducing the crop insurance
subsidies as specified in this option would save $27 billion over that period, CBO estimates.
An argument in favor of this option is that cutting the
federal subsidies for premiums would probably not
substantially affect participation in the program. Private
lenders increasingly view crop insurance as an important
way to ensure that farmers can repay their loans, which
encourages participation. In addition, the farmers who
dropped out of the program would generally continue to
receive significant support from other federal farm programs. However, if significantly fewer farmers participate,
then some smaller crop insurance companies would probably go out of business.
Current reimbursements to crop insurance companies for
administrative expenses (around $1.3 billion per year)
were established in 2010, when premiums were relatively
high. Recent reductions in the value of the crops insured
(partly because of lower average commodity prices) have
resulted in lower average premiums for crop insurance.
However, administrative expenses have not shown a commensurate reduction. A cap of 9.25 percent, or about
$915 million per year, is close to average reimbursements
during the years before the run-up in commodity prices
in 2010. Furthermore, according to a recent USDA
study, the current rate of return on investment for crop
insurance companies, 14 percent, was higher than that of
other private companies, on average.
An argument against this option is that cutting the federal subsidies for premiums would probably cause farmers
to buy less insurance. If the amount of insurance declined
significantly, lawmakers might be more likely to enact
special relief programs when farmers encountered*
[*Text corrected on December 13, 2016]
CBO
CHAPTER TWO: MANDATORY SPENDING OPTIONS
significant difficulties, which would offset some of the
savings from cutting the premium subsidy. (Such ad hoc
disaster assistance programs for farmers cost an average
of about $700 million annually in the early 2000s.) In
addition, limiting reimbursements to companies for
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
21
administrative expenses and reducing the targeted rate of
return to companies could add to the financial stress of
companies in years with significant payouts for covered
losses.
RELATED OPTIONS: Mandatory Spending, Options 2, 3, 5, 6
CBO
22
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 5
Function 350
Eliminate ARC and PLC Payments on Generic Base Acres
Total
Billions of Dollars
Change in Outlays
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
0
0
-0.1
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
-0.6
2017–2021
2017–2026
-1.2
-4.2
This option would take effect in June 2018.
The Agricultural Act of 2014 replaced the existing agricultural support programs with the Agriculture Risk
Coverage (ARC) and Price Loss Coverage (PLC) programs. The law also removed upland cotton from the list
of commodities eligible for payments available to producers with base acres (those acres with a proven history of
being planted with covered commodities established with
the Department of Agriculture under statutory authority
granted by previous farm bills).1 Finally, the 2014 law
assigned upland cotton base acres to a new category called
generic base acres and allows for ARC and PLC payments
on generic base acres if producers plant a covered commodity on those acres.2
Beginning in crop year 2018, this option would eliminate
ARC and PLC payments on generic base acres.3 Most
savings from eliminating ARC and PLC payments on
generic base acres would begin in fiscal year 2020, when
ARC and PLC payments for the 2018 crop year would
be made.4 Because of its likely effects on peanut planted
acres, the option also would, starting in 2019, lead to
lower outlays for the government’s peanut marketing loan
program. The Congressional Budget Office estimates that
1. Only farmers who have established base acres may participate in
the ARC and PLC programs. The most recent opportunity was in
2002.
2. Covered commodities include wheat, oats, barley, corn, grain sorghum, long-grain rice, medium-grain rice, legumes, soybeans,
other oilseeds, and peanuts.
3. ARC and PLC payments are set to expire beginning with the 2019
crop year. However, following the rules for developing baseline
projections specified by the Balanced Budget and Emergency
Deficit Control Act of 1985, the Congressional Budget Office’s
10-year baseline incorporates the assumption that lawmakers will
extend those programs after they expire.
4. A crop year (also called a marketing year) begins in the month that
the crop is first harvested and ends 12 months later. For example,
the corn marketing year begins September 1 and ends the following August 31.
CBO
savings under this option would be $4 billion through
2026.
Linking payments on generic base acres to current (rather
than historical) planting decisions is a departure from
previous farm support programs, which had sought to
decouple support payments from planting decisions to
limit subsidies that may distort agricultural markets.5
Arguments in this option’s favor relate to removing such
potential distortions, particularly as they relate to peanuts. Motivated by a high peanut PLC support price,
growers have disproportionately planted peanuts on
generic base acres to collect larger payments. The number
of acres planted with peanuts increased by 27 percent in
2014 and by 20 percent in 2015, and ending stocks (the
quantity of peanuts remaining in storage at the end of the
crop year) for 2016 are projected to be slightly less than
the record-high peanut stocks at the end of 2005.
The increase in acres planted with peanuts has had a large
negative effect on U.S. peanut prices paid to farmers
because the market for the crop is relatively small
and inelastic.6 Peanut prices decreased by 12 percent
during the 2014–2015 marketing year and by an additional 12 percent in 2015–2016. As a result of those price
declines, per-acre payment rates in 2014 and 2015 were
higher for peanuts than for any other covered commodity. At the same time, the income of peanut growers who
do not have base acres (albeit a small segment of peanut
growers) has been dampened. This option would cut
the link between program payments and planting decisions. Planted acreage for peanuts would be expected to
contract, increasing the market price for peanuts and the
5. The World Trade Organization Agreement on Agriculture
imposes limits on agricultural subsidies linked to production.
6. Around 60 percent of U.S. peanuts are typically marketed to the
domestic food market (for peanut butter, candy, and snack nuts).
The price of peanuts is inelastic (meaning that a 1 percent change
in price results in a less than 1 percent change in consumption).
CHAPTER TWO: MANDATORY SPENDING OPTIONS
share of peanut growers’ income that is not accounted for
by government spending.
In addition, this option might avert potential World
Trade Organization (WTO) challenges to the U.S. peanut program. Government support has enabled domestic
peanut sellers to sell more peanuts internationally than
they otherwise might have. That increase has drawn the
attention of peanut-exporting countries, who might
argue that such an arrangement violates WTO rules.7
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
23
One argument against this option is that some producers
of covered commodities would receive less federal support. Although peanut prices paid to farmers might rise
without payments on generic base acres, many growers
appear to favor the income stability fostered by the
federal programs.
7. Brazil successfully challenged U.S. subsidies for upland cotton
through the WTO in 2002. Under threat of retaliatory trade
measures involving other U.S. industries, the U.S. government
changed its upland cotton support program. Many of those
changes were enacted in the 2014 farm bill, including removing
upland cotton from the list of covered commodities.
RELATED OPTIONS: Mandatory Spending, Options 2, 3, 4, 6
CBO
24
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 6
Function 350
Limit ARC and PLC Payment Acres to 50 Percent of Base Acres
Total
Billions of Dollars
Change in Outlays
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
0
0
0
-0.1
-1.9
-1.8
-1.9
-1.8
-1.8
-1.8
2017–2021
2017–2026
-2.0
-11.1
This option would take effect in June 2019.
The Agricultural Act of 2014 provides support to producers of covered commodities through the Agriculture
Risk Coverage (ARC) and Price Loss Coverage (PLC)
programs:1
per-acre basis) by a producer’s payment acres for that
crop. For ARC-CO and PLC, the number of payment
acres equals 85 percent of base acres; for ARC-IC, it is
65 percent of base acres.
B ARC guarantees revenue at either the county level
Beginning with the 2019 crop year, this option would
limit payment acres for ARC-CO and for PLC to
50 percent of base acres and would make a comparable
cut to ARC-IC (to 42 percent of base acres).4 Savings
would largely begin in fiscal year 2021, when ARC and
PLC payments for crop year 2019 would be made.5 Total
savings over the 2019–2026 period would be $11 billion,
the Congressional Budget Office estimates.
(ARC-County, or ARC-CO—accounting for
most coverage) or the individual farm level (ARCIndividual Coverage, or ARC-IC). The program pays
farmers when actual crop revenue in a given crop year
is below the revenue guarantee for that year.2
B PLC pays farmers when the national average market
price for a covered commodity in a given crop year
falls below a reference price specified in the law.
Eligibility under those programs is determined from a
producer’s planting history. Only producers who have
established base acres (that is, a proven history of planting
covered commodities on their farms) with the Department of Agriculture under statutory authority granted by
previous farm bills may participate. In general, growers
with base acres for covered commodities (corn base acres,
for example) need not plant a crop to receive payments.3
When a payment for a crop is triggered, total payments
are calculated by multiplying the payment rate (on a
1. Covered commodities include wheat, oats, barley, corn, grain sorghum, long-grain rice, medium-grain rice, legumes, soybeans,
other oilseeds, and peanuts.
2. A crop year (also called a marketing year) begins in the month that
the crop is first harvested and ends 12 months later. For example,
the corn marketing year begins September 1 and ends the following August 31.
3. Exceptions include generic base acres and ARC-IC. For generic
base acres (which are former upland cotton base acres), producers
must plant a covered commodity on that acreage to receive payments. Also, producers participating in ARC-IC must plant the
commodity to establish actual crop revenue.
CBO
One argument in favor of this option is that it would
limit program payments to nonfarmer landowners and
on land no longer used to grow crops. The economics literature suggests that nonfarmer landowners capture
between 25 percent and 40 percent—and sometimes up
to 60 percent—of program payments through increased
land rents; to the extent that program payments raise land
values, new farmers face higher costs to buy land. Also,
the benefits of farm program payments tend to accrue to
larger farms, which may speed consolidation and make it
4. Because producers entered into contracts with the Department of
Agriculture to receive payments on 85 percent of base acres
through the 2018 crop year, the Congressional Budget Office
assumes that the limit to payment acres would begin in crop year
2019. Though ARC and PLC are set to expire beginning with
the 2019 crop year, following the rules for developing baseline
projections specified by the Balanced Budget and Emergency
Deficit Control Act of 1985, CBO’s 10-year baseline incorporates
the assumption that lawmakers will extend those programs after
they expire.
5. Because of the option’s likely effects on peanut planted acres and
the resulting domestic peanut supply, savings would include
reduced outlays for the peanut marketing loan program, which
would occur starting in 2020.
CHAPTER TWO: MANDATORY SPENDING OPTIONS
harder for new farmers to enter. Finally, because only covered commodities are eligible for ARC and PLC support,
the availability of those payments tends to encourage
farmers to plant crops they might not otherwise plant.
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
25
An argument against this option is that farming is an
inherently risky enterprise. Many growers favor the
income stability fostered by federal programs.
RELATED OPTIONS: Mandatory Spending, Options 2, 3, 4, 5
CBO
26
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 7
Function 370
Raise Fannie Mae’s and Freddie Mac’s Guarantee Fees and Decrease Their Eligible Loan Limits
Total
Billions of Dollars
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2017–2021
2017–2026
Increase guarantee fees
0
-0.8
-0.3
-0.1
-0.3
-0.5
-0.5
-0.7
-1.0
-1.4
-1.6
-5.6
Decrease loan limits
0
-0.1
-0.1
*
-0.1
-0.2
-0.2
-0.1
-0.2
-0.3
-0.3
-1.2
0
-0.9
-0.4
-0.1
-0.4
-0.6
-0.6
-0.7
-1.0
-1.4
-1.8
-6.0
Change in Outlays
a
Both alternatives above
This option would take effect in October 2017.
* = between –$50 million and zero.
a. If both alternatives were enacted together, the total effect would be less than the sum of the effects of each alternative because of interactions
between them.
Fannie Mae and Freddie Mac are government-sponsored
enterprises (GSEs) that were federally chartered to help
ensure a stable supply of financing for residential mortgages, including those for low- and moderate-income
borrowers. Those GSEs carry out that mission through
two activities in the secondary mortgage market (that is,
the market for buying and selling mortgages after they
have been issued): by issuing and guaranteeing mortgagebacked securities (MBSs) and by buying mortgages and
MBSs to hold as investments. Under current law, the
entities generally can guarantee and purchase mortgages
up to $625,500 in areas with high housing costs and
$417,000 in other areas, and regulators can alter those
limits if house prices change. Those two GSEs provided
credit guarantees for about half of all single-family mortgages that originated in 2015.
In September 2008—after falling house prices and rising
mortgage delinquencies threatened the GSEs’ solvency
and impaired their ability to ensure a steady supply of
financing to the mortgage market—the federal government took control of Fannie Mae and Freddie Mac in a
conservatorship process. Because of that shift in control,
the Congressional Budget Office concluded that the
institutions had effectively become government entities
whose operations should be reflected in the federal budget. By CBO’s projections under current law, the mortgage guarantees that the GSEs issue from 2017 through
2026 will cost the federal government $12 billion. That
estimate reflects the subsidies inherent in the guarantees
at the time they are made—that is, the up-front payments
that a private entity would need to receive (in an orderly
market and allowing for the fees that borrowers pay) to
CBO
assume the federal government’s responsibility for those
guarantees. CBO’s estimates are constructed on a presentvalue basis. (A present value is a single number that
expresses a flow of current and future payments in terms
of an equivalent lump sum paid today; the present value
of future cash flows depends on the discount rate that is
used to translate them into current dollars.) By contrast,
the Administration’s projections focus on the cash flows
between the enterprises and the Treasury. Those cash
flows reflect a mix of existing and new business. Both
CBO and the Administration expect the government to
receive substantial net cash inflows from Fannie Mae and
Freddie Mac over the 2017–2026 period.
This option includes two approaches to reduce the federal subsidies that Fannie Mae and Freddie Mac receive.
In the first approach, the average guarantee fee that Fannie Mae and Freddie Mac assess on loans they include in
their MBSs would increase by 10 basis points (100 basis
points is equivalent to 1 percentage point), to more than
65 basis points, on average, beginning in October 2017.
In addition, to keep guarantee fees constant after 2021—
when an increase of 10 basis points that was put in place
in 2011 is scheduled to expire—the average guarantee fee
would be increased, with respect to the amount under
current law, by 20 basis points after 2021. The increased
collections of fees, which the GSEs would be required to
pass through to the Treasury, would reduce net federal
spending by $6 billion from 2017 through 2026, would
cause new guarantees by Fannie Mae and Freddie Mac to
fall by around 10 percent, and would change the mix of
borrowers, CBO estimates. (The effect on spending is the
sum of the present values of the decreases in subsidies for
CHAPTER TWO: MANDATORY SPENDING OPTIONS
mortgages made in each of nine years after the option
would take effect.)
In the second approach, the maximum size of a mortgage
that Fannie Mae and Freddie Mac could include in their
MBSs would be reduced, beginning with a drop to
$417,000 in October 2017, followed by drops to
$260,000 in 2021 and $175,000 in 2024. (Guarantee
fees would remain as they are under current law.) That
reduction in loan limits would save $1 billion from 2017
through 2026 because new guarantees would fall by
about 20 percent, CBO estimates.
Taking both approaches together would lower federal
subsidies for Fannie Mae and Freddie Mac by $6 billion
from 2017 through 2026 and would result in a drop in
new guarantees of about 25 percent, according to CBO’s
estimates. Because raising guarantee fees by 10 basis
points would eliminate most of the federal subsidies for
the GSEs, taking the additional step of lowering loan limits would have little effect on subsidies. For consistency,
similar changes could be made to the limits on loans
guaranteed by the Federal Housing Administration
(FHA). The estimates presented here do not include the
effects of lower limits on FHA loans, which would affect
discretionary spending subject to appropriations.
Because some of the subsidies that Fannie Mae and Freddie Mac receive flow to mortgage borrowers in the form
of lower rates, both approaches in this option would raise
borrowing costs. The higher guarantee fees would probably pass directly through to borrowers in the form of
higher mortgage rates. The lower loan limits would push
some borrowers into the so-called jumbo mortgage market, where loans exceed the eligible size for guarantees by
Fannie Mae and Freddie Mac and where rates might be
slightly higher, on average.
The major advantage of those approaches to reduce federal subsidies for Fannie Mae and Freddie Mac is that
they could restore a larger role for the private sector in
the secondary mortgage market, which would reduce
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
27
taxpayers’ exposure to the risk of defaults. Lessening subsidies also would help address the current underpricing of
mortgage credit risk, which encourages borrowers to take
out bigger mortgages and buy more expensive homes.
Consequently, the option could reduce overinvestment in
housing and shift the allocation of some capital toward
more productive activities.
A particular advantage of lowering loan limits, instead of
raising fees, is that many moderate- and low-income borrowers would continue to benefit from the subsidies provided to the GSEs. More-affluent borrowers generally
would lose that benefit, but they typically can more easily
find other sources of financing. The $175,000 limit
would allow for the purchase of a home for about
$220,000 (with a 20 percent down payment), which was
roughly the median price of an existing single-family residence in March 2016; thus, lowering loan limits as specified here would not affect most moderate- and lowincome borrowers.
One disadvantage of reducing subsidies for the GSEs and
thereby increasing the cost of mortgage borrowing is that
doing so could weaken housing markets because new
construction and new home sales have not completely
recovered from their sharp drop several years ago. Moreover, mortgage delinquency rates remain elevated, and
many borrowers are still “underwater” (that is, they owe
more than their homes are worth). Posing another drawback, the slightly higher mortgage rates resulting from
lower subsidies would limit some opportunities for refinancing—perhaps constraining spending by some consumers and thereby dampening the growth of private
spending. Phasing in the specified changes more slowly
could mitigate those concerns, although that approach
would reduce the budgetary savings as well. Finally, by
affecting the GSEs, this option would make FHA loans
more attractive to some borrowers (without corresponding changes to the rules governing FHA loans), which
could increase risks for taxpayers because FHA guarantees
loans with lower down payments than do the GSEs.
RELATED OPTIONS: Discretionary Spending, Option 15; Revenues, Option 5
RELATED CBO PUBLICATIONS: The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital (October 2016), www.cbo.gov/publication/
52089; The Federal Role in the Financing of Multifamily Rental Properties (December 2015), www.cbo.gov/publication/51006;
Transitioning to Alternative Structures for Housing Finance (December 2014), www.cbo.gov/publication/49765; Modifying Mortgages
Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness (May 2013), www.cbo.gov/publication/44115; Fannie Mae,
Freddie Mac, and the Federal Role in the Secondary Mortgage Market (December 2010), www.cbo.gov/publication/21992; CBO’s Budgetary
Treatment of Fannie Mae and Freddie Mac (January 2010), www.cbo.gov/publication/41887
CBO
28
OPTIONS FOR REDUCING THE DEFICIT: 2017 TO 2026
DECEMBER 2016
Mandatory Spending—Option 8
Function 500
Eliminate the Add-On to Pell Grants, Which Is Funded With Mandatory Spending
Total
Billions of Dollars
2017
2018
2019
2020
2021 2022
2023
2024
2025
2026
2017–2021
2017–2026
Change in Outlays
-1.6
-6.0
-6.2
-6.3
-6.4
-6.6
-6.7
-6.8
-6.9
-26.5
-60.0
-6.5
This option would take effect in July 2017.
The Federal Pell Grant Program is the largest source of
federal grant aid to low-income students for undergraduate education. For the 2016–2017 academic year, the
program will provide $28 billion in aid to 7.8 million
students, the Congressional Budget Office estimates. A
student’s Pell grant eligibility is chiefly determined on the
basis of his or her expected family contribution (EFC)—
the amount that the federal government expects a family
to pay toward the student’s postsecondary education
expenses. The EFC is based on factors such as the student’s income and assets. For dependent students (in general, unmarried undergraduate students under the age of
24 who have no dependents of their own), the parents’
income and assets, as well as the number of people
(excluding parents) in the household who are attending
postsecondary schools, are also taken into account. To be
eligible for the maximum grant, which is $5,815 for the
2016–2017 academic year, a student must have an EFC
of zero and be enrolled in school full time. For each dollar
of EFC above zero, a student’s eligible grant amount is
reduced by a dollar. Students with an EFC exceeding
90 percent of the maximum grant (that is, an EFC of
$5,234 for the 2016–2017 academic year) are ineligible
for a grant. Part-time students are eligible for smaller
grants than those received by full-time students with the
same EFC.
Since 2008, funding for the Pell grant program has had
both discretionary and mandatory components. The discretionary component, which is set in each fiscal year’s
appropriation act, specifies a maximum award of $4,860
per student for the 2016–2017 academic year. That
award is bolstered by mandatory funding, which provides
an “add-on.” The add-on for the 2016–2017 academic
year is $955, resulting in the total maximum award of
$5,815. Under current law, the add-on is indexed to
CBO
inflation through the 2017–2018 academic year and
remains constant thereafter.
This option would eliminate the add-on to Pell grants,
thereby reducing the maximum grant awarded to students with an EFC of zero to $4,860 for the 2016–2017
academic year. There would be two e…
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