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The original documents are located in Box 64, folder "FY 1977 Presidential Review -
Treasury" of the James M. Cannon Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 64 of the James M. Cannon Files at the Gerald R. Ford Presidential Library
THE WHITE HOUSE
WASHINGTON
November 20, 1975
MEMORANDUM FOR:
JIM CANNON
FROM:
PAUL LEACH
Paul
SUBJECT:
Budget Review For
Treasury, Commerce
and SBA
I assume that you will have had a chance to examine
the summary information in the budget book and con-
sequently I will limit myself to the issues.
TREASURY
1. Level of IRS Activities
This is a highly technical "management" issue
which I would let OMB and Treasury fight out
between themselves.
2. Level of U.S. Customs Service Activities
This too is a technical issue, but the arguments
seem to favor the OMB position, i.e., that
increased productivity can be achieved with no
major increase in resources.
COMMERCE
1. Ship Construction Program
I would recommend support for the OMB position,
i.e., lower funding. It appears that the
recovery in ship construction demand will be
more gradual and that the OMB funding level will
be sufficient.
2. NOAA Marine Programs
I defer on this to George Humphreys (I have supplied
him with the budget book materials).
-2-
3. NOAA Weather Programs
Again, I defer to George Humphreys.
4. Economic Development Administration
I would recommend approval of the OMB recommend-
ation, i.e., reductions in planning and research,
technical assistance and economic adjustment program
funding totalling $21 million below the EDA/Commerce
recommendation. While it is not certain that the
proposed reductions can be sold on the Hill, they
should be tried since the programs provide relatively
small substantive benefits.
SMALL BUSINESS ADMINISTRATION
1. Management Assistance and Portfolio Management
I would recommend support for the OMB position, which
provides for some increase in people and funding ---
but does not provide all that SBA requests.
2. Lease and Surety Bond Guarantee Programs
I would recommend support for the SBA position on
this issue. In a time of budget tightness, the
lease and surety guarantee programs seem to be low
cost programs with political/symbolic value which
outweighs any benefit to be gained from a reduction
in budget levels.
Treasury
1977 Presidential Review
Department of the Treasury
Table of Contents
TAB A
Summary tabulation of the 1977 Budget
amounts requested and recommended.
TAB B
Summary of the principal budget decisions
reflected in the OMB recommendation.
TAB C
Issue Papers
Issue
Effect of issue on outlay request
(dollars in millions)
1977
1978
1. Level of Internal Revenue Service
a. Audit
-83
-83
b. Collection
-44
-44
C. Employee Pension Plans
-13
-13
2. Level of U. S. Customs Service
Activities
-71
-71
TAB A
Department of the Treasury
1977 Budget
Summary Data
Employment, end-of-year
Budget
Full-time
Authority
Outlays
Permanent
Total
1975 actual
41,365
41,177
108,138
119,281
1976 February budget
43,565
43,453
XXX
XXX
enacted
43,520
43,466
XXX
XXX
supplementals transmitted
26
25
XXX
XXX
supplementals recommended
17
16
XXX
XXX
agency request
46,047
46,092
114,398
126,792
OMB recommendation
45,261
45,350
113,995
124,118
OMB employment ceiling (current)
XXX
XXX
112,309
121,809
TQ February budget
11,675
11,703
XXX
XXX
enacted
11,669
11,697
XXX
XXX
supplementals transmitted
7
8
XXX
XXX
supplementals recommended
7
7
XXX
XXX
OMB recommendation
12,353
12,381
XXX
XXX
1977 planning target
48,347
48,389
XXX
XXX
reduction target
XXX
52,799
XXX
XXX
agency request
53,562
53,589
127,304
140,520
OMB recommendation
52,857
52,831
109,940
120,632
1978 OMB estimate
56,860
56,795
109,940
120,632
A-1
TAB B
1977 Budget
Department of the Treasury
Summary and Background Information
Agency Request
Secretary Simon's initial budget request provided for a 13.6% outlay expansion in virtually every on-going program.
Excluding interest on the public debt, General Revenue Sharing payments, and other uncontrollable programs, the
Department's request included $2,930 million in outlays for operating programs (up $351 million from 1976) and
127,304 in employment (up 12,906 or 11.3% from 1976). The most significant increases were requested for the
Internal Revenue Service and the U. S. Customs Service, which historically have accounted for over 80% of the
Department's operating budget and employment requirements.
Treasury was given a revised outlay target of $2,425 million for operating programs. The revised target
represented a reduction of $51 million from OMB's estimate of a 1977 adjusted base level, and a reduction of
$505 from Treasury's initial request for 1977. In response to the revised planning target, Treasury proposed
reductions totaling $207 million from their initial request, primarily the elimination of selected program
increases. Treasury subsequently identified further reductions of $298 million which would be required to
meet their revised planning target. However, the Department strongly opposes these further reductions.
Because Treasury is a labor-intensive agency, budget reductions of the magnitude under discussion would
primarily affect employment.
Treasury estimates that the full $505 million reduction would reduce non-personnel requirements below base levels
for most operating programs and would result in work-year reductions of 20,494 (10,660 of which represent requested
increases and 9,834 of which represent reductions below Treasury's request for 1976 - approximately 8.5%). The
Department concludes that "such cuts would undermine productivity gains and be counterproductive to our revenue
producing efforts, as well as create severe operating problems." Furthermore, they predict revenue losses of
$1.7 billion associated with these reductions.
OMB Recommendation
The OMB recommendations for 1977 provide $2,457 million in outlays for operating programs and a full-time employ-
ment level of 109,940. These recommendations represent reductions below 1976 of $59 million in outlays (2.3%)
and 4,055 in employment (3.6%). OMB does not believe these reductions will impair the effectiveness of on-going
programs, nor result in revenue losses of any significant magnitude.
The OMB recommendation for achieving the revised planning target differs from Treasury proposals in the following
areas:
B-1
-- The application of tighter standards in establishing 1977 base requirements.
In this regard, the OMB recommendations assume greater productivity from the
existing work force than projected by Treasury. OMB recommendations assume
productivity achieved in the past, projected by Treasury, or 2%, whichever is
greater.
-- Minimization of reductions in revenue producing programs.
-- Greater reductions in non-personnel programs.
-- No program expansion. Several high priority initiatives or program expansions
may be desirable, but would have to be funded through reprogramming.
-- Reductions in new equipment procurement, including additional cars.
The differences in approach are illustrated on the chart at Table A.
In view of significant staff expansion (16% in last 4 years) granted to Treasury recently, OMB believes that
employment granted under our 1977 recommendation will be sufficient--with increased productivity--to accommodate
workload increases in tax administration, currency production, and other operating programs of the Department.
(See Table B for listing of past year staffing increases provided the Department.)
Areas of Expected Disagreement with Treasury
We expect Treasury will have strong objections to the OMB recommendations regarding the Internal Revenue
Service and the Customs Service. OMB recommendations for these bureaus--including the revenue loss issue--are
discussed at Tab C.
Treasury also may appeal on other small issues:
The allowance for the Federal Law Enforcement Training Center reduces staffing to reflect a more
favorable student-teacher ratio, as well as reductions in the number of Federal law enforcement
agents to be trained in 1977.
The allowance for the Bureau of Alcohol, Tobacco and Firearms reduces employment in the illegal liquor
enforcement program and assumes greater productivity in their enforcement programs.
The allowance does preserve the 500 agents devoted to gun control strike forces--an initiative of your
recent Crime Message.
B-2
The allowance for the Secret Service assumes a freeze on employment after political conventions are
concluded next summer.
The productivity and equipment reductions are assumed for the Bureau of Engraving and Printing, the
Bureau of the Mint, and the Bureau of the Public Debt. The allowance also includes a 10% reduction in
the promotion program of the Savings Bond Division of the Bureau of the Public Debt.
B-3
TABLE A
Department of the Treasury
Outlays
Reductions Identified to Achieve Revised Target
(In millions of dollars)
Treasury
Proposals for reaching
OMB Planning Target
OMB Recommendations
Personnel
Non-Personnel
Personnel
Non-Personnel
Outlays
%
Outlays
%
Outlays
%
Outlays
%
U.S. Customs Service
-20
34
-39
66
-23
32
-48
68
Internal Revenue Service
-250
76
-80
24
-165
56
-129
44
All Other
-39
34
-77
66
-34
31
-74
69
Subtotal
-309
61
-196
39
-222
47
-251
53
TOTAL
-505
-473
B-4
TABLE B
(
DEPARTMENT OF THE TREASURY
Increases or decreases in employment provided in past Presidents' budgets and the OMB recommendation
for 1977.
1973
%
1974
%
1975
%
1976
%
1977
%
End-of-year, full-time permanent
+700
.7
+1,000
1.0
+6,700
6.4
+3,500
3.2
-4,055
3.6
Work-years, Total
+4,117
4.0
+3,796
3.5
+7,948
7.1
+2,887
2.4
-3,410
2.8
B-5
(
1977 Budget
Department of the Treasury
Summary of Recommended Program Reductions
($ in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
Employ.
0
BA
0
Employ.
0
Employ.
Current base
45,613
112,664
12,371
52,621
62,614
113,569
56,823
113,569
Less Interest, General Revenue Sharing,
and other Miscellaneous permanent
accounts
43,117
---
11,754
50,160
50,133
---
54,342
---
Current base, Operating Accounts
2,496
112,664
617
2,461
2,481
113,569
2,481
113,569
Recommended level
2,516
113,995
640
2,455
2,457
109,940
2,472
109,940
Reductions
+39
+1,331
+23
-6
-24
-3,619
-9
-3,619
Program Reductions:
Main Treasury renovation and staff,
Office of the Secretary
-1
0
0
-2
-5
+13
-5
+13
Administration of Law Enforcement
Training Center
-1
0
-1
-1
-1
-133
-1
-133
Enforcement of Customs laws
0
+200
+3
-4
-14
-92
-14
-92
Manufacture of Coins
0
0
0
0
-1
+193
-1
+193
Assessment and Collection of Internal
Revenue Taxes
0
+350
+5
-58
-66
+3,353
-66
+3,353
B-6
TAB C
Issue Paper
Department of the Treasury
1977 Budget
Issue #1: Level of IRS Activities
Agency
Approach
1976 Agency Request
1976
1977
Revised
To
1977 OMB Recom.
1975
Current
Proposed
OMB
Agency
Agency
Planning
Program
Actual
Estimate
Supplementals
Recom.
Request
Request
Target
Base
Changes
Recom.
Budget Authority ($M)
1,586.6
1,646.0
44.2
1,650.0
1,916.5
1,814.5
1,603.5
1,626.3
-38.6
1,587.7
Outlays ($M)
1,601.8
1,644.0
34.1
1,647.8
1,872.4
1,770.4
1,545.4
1,616.4
-38.4
1,578.0
Work-years
82,339
84,164
1,696
84,336
94,128
89,081
75,740
81,586
-742
80,844
Treasury's original 1977 budget request for IRS proposes an increase of $270 million in budget authority and 9,964
work-years above the appropriated level for 1976. When asked to submit a revised budget reflecting restraint in
Federal spending, Treasury still requested increases of $168 million and 4,917 work-years above 1976. The plan
proposed by Treasury to reach the $395 billion outlay target in 1977 would require reductions below the base of
5,674 work-years and $68.8 million in IRS. Treasury estimates these actions would reduce revenues by $1.4 billion
below the level achievable in its original 1977 request.
In contrast, the OMB approach to reaching the $395 billion outlay target represents a reduction of 742 work-years
and $43.5 million in budget authority below the 1977 base, as calculated by OMB. There would be virtually no loss
in revenues from the 1976 program level funded by the Congress. Reductions from the 1976 appropriated level would
be achieved by taking 2 percent productivity cuts in all tax administration activities and making minimal additional
program reductions--reducing the match of tax information documents to the 5 percent level authorized for 1976,
targeting tax audits under $10,000 to those returns identified by the computer as exhibiting characteristics which
indicate incorrect tax declaration, eliminating work-years previously devoted to the now-defunct narcotics traffickers
tax fraud program, eliminating IRS initiatives and cutting quality control in taxpayer service, and making consistent
reductions in other supporting program.
C-1
The different approaches taken by Treasury and OMB to reaching the $395 billion outlay target are graphically
depicted on attachments A, B, and C. The most vivid portrait of the different approaches taken by Treasury
and OMB is provided by the first graph. It shows a substantial growth in non-personnel costs under the Treasury
plan above either the 1976 appropriated level, the 1977 base, or the OMB recommendation. The difference of
$56.3 million between the Treasury and OMB approaches to non-personnel costs represents the resources required to
fund 3,750 work-years, thereby accounting for a large measure of the differences in work-years available for the
basic tax administration activities shown on the other graphs.
The graphs displaying audit, data processing (primarily processing tax returns), and collection work-years account
for 80 percent of IRS personnel funded for 1976. It can be seen that Treasury projects much more severe cuts in audit
and data processing than OMB believes are necessary to achieve the outlay objective. Conversely, OMB would cut more
deeply into other supporting IRS personnel than would Treasury. Audit and collection are further discussed below as
separate issues, as is the matter of carrying out IRS responsibilities under the 1974 employee pension plan act.
Data processing is not expected to be an issue with Treasury, since the OMB recommendation would add 745 work-years
to process additional tax returns expected to be filed in 1977.
Audit
IRS seeks to expand audit coverage from the current rate of 2.53 percent of all tax returns filed to a level of 2.69
percent of the 90.5 million tax returns expected to be filed. This proposal is supported by traditional arguments
that every dollar invested in audit activities returns six dollars. However, an OMB analysis conducted in 1972 concluded
that a ratio closer to 3.5:1 more accurately represents the relationship of yield to cost. The difference is due
primarily to higher OMB estimates of the total direct and overhead cost related to audit. Using the IRS rule of thumb
that the costs of the private sector are equal to or greater than the Government's cost, the net return may be as low
as 2.5:1 or even 2:1.
OMB has consistently argued that a balanced tax administration program is the best approach to encouraging voluntary
compliance. In constructing a constricted program at a lower base consistent with the overall budget objective of
395 billion in outlays, it is necessary to make a comparable reduction in audit coverage. However, the OMB recom-
mendation of 2.46 percent coverage in 1977 is not expected to adversely affect revenues, because the reduction of
200,000 audit examinations in 1977 is planned to be taken from tax returns under $10,000, where revenue return
barely equates to the cost of audit. In contrast, the Treasury plan to reach the agency outlay target envisions a
drop down to 2.38 percent audit coverage with a corresponding revenue loss of $365 million below the 1976 level.
C-2
Collection
Along with audit, the collection activity is one of the two big revenue producers in IRS. The 1977 budget request
proposes 415 more work-years to close additional anticipated accounts receivable and reduce inventories, 450
work-years to institute a new delinquency prevention program, and 384 work-years to identify more non-filers.
The OMB mark would deny all of these additions. The inventory level is not of particular concern since the 1976
appropriation provides sufficient resources for IRS to reduce the level by 275,000 cases, from 1,125,000 to 850,000.
The remaining proposals appear to be "nice to have" ideas which are not feasible to fund in the current budget
environment.
In describing the impact on IRS programs of the Presidential outlay target, Treasury identifies $250 million in lost
revenues in the collection activity. Only $50 million of this amount is ascribed to the increases sought in 1977 and
discussed above. The remainder is associated with a reduction of 447 work-years below the 1977 base. OMB does not
agree that a revenue loss is inevitable at this work-year level. OMB calculates the same work-year reduction by
assuming 2 percent increase in productivity and restricting the match of tax information documents to the 5 percent
level authorized in last fall's budget review. Document matching is estimated to generate revenues at between 1:1
and 1.2:1, and so if any lost revenues are experienced in the collection activity, they should be minimal ($750,000
at most).
Employee Pension Plans
The Employee Retirement Income Security Act of 1974 (ERISA) requires IRS to review and certify an estimated 520,000
employee plan applications, amendments, and terminations. The bulk of this workload is expected to arrive at IRS
during 1977. Consequently, IRS seeks 867 additional work-years to address this workload, plus 110 personnel to
expand investigation of delinquent tax returns related to these plans. The 1975 IRS Long-Range Plan estimates that
91% of the increased personnel resources needed in 1977 will no longer be required in succeeding years, after the
one-year workload bulge. On its own initiative, the House Appropriations Committee has included in the 1976 Supple-
mental Appropriation Bill, recently reported to the House, an increase of $4 million for IRS which would provide an
additional 172 work-years for this program.
Instead of adding more personnel for this task in 1977, the approach recommended by OMB would temporarily redeploy
personnel presently assigned to lower priority functions in this and its companion program, reviewing tax exempt
organizations. The OMB approach would reapply productivity savings already identified by IRS in examining employee
pension plans to the reduced program level which Treasury spoke to in constructing its plan to reach the OMB outlay
target. At the same time, IRS would be expected to defer delinquency investigations and examinations of tax returns
filed by pension plans and exempt organizations in order to mount a maximum effort to review the new proposals within
the legal time requirements. When these management actions are combined with the 172 additional man-years likely to
be appropriated by the Congress, there appear to be adequate resources in the 1977 base to address the one-time
workload increase resulting from passage of the 1974 Act.
C-3
ATTACHMENT A
539.9
Original
Treasury
Request
NON-PERSONNEL COSTS
(Budget Authority; $Millions)
Revised Treasury Request
479.1
452.0
Treasury Approach
to Planning Target
3,750
WORK-YEARS
OMB
Recommendation
395.7
1976
393.9
BUDGET
OMB/Treasury Base
389.5
C-4
ATTACHMENT B
Original
Treasury
Request
32,002
(2.69% coverage)
Original
Treasury
Request
28,293
Revised Treasury Request
30,017 (2.59% coverage)
Revised Treasury
Request
27,121
(2.53%
Coverage
1976
28,100
26,623
PUDGET
Treasury
Base 27,940
OMB
26.353
Base
OMB
27,547
27,089
OMB/Treasury Base
Recommendation
OMB
26,030
Recommendation
(2.46%
coverage)
AUDIT WORK-YEARS
25,984
(2.38% coverage)
DATA
Treasury Approach
PROCESSING
to Planning Target
WORK-YEARS
Treasury Approach to
C-5
Planning Target
21,896
Original
ATTACHMENT C
Treasury
Request
COLLECTION WORK-YEARS
20,275
Original
Treasury
Request
13,558
Revised Treasury Request
19,047
Revised Treasury Request
12,896
(Include pending
Supplemental)
19⁻
12,604
17,009
BL
r
Treasury
16,802
OMB Base
Base
Treasury
16,632
16,822
Approach
to Planning
Target
OMB Recommendation
16,245
OTHER
PERSONNEL
WORK-YEARS
Treasury
Base
11,605
OMB Base
11,377
OMB
Treasury Approach to
Recommendation
Planning Target
11,157
11,158
C-6
Iss
aper
Department of the Treasury
1977 Budget
Issue #2: Level of U.S. Customs Service Activities
Agency
Approach
1976 Agency Request
1976
1977
Revised
To
1977 OMB Recom.
1975
Current
Proposed
OMB
Agency
Agency
Planning
Program
Actual
Estimate
Supplementals
Recom.
Request
Request
Target
Base
Changes
Recom.
Budget Authority ($M)
292.4
310.0
14.5
310.0
381.2
351.2
320.9
311.6
-5.1
306.5
Outlays ($M)
298.5
329.0
14.1
329.0
375.7
346.5
316.2
309.3
-4.3
305.0
Work-years
13,076
13,255
313
13,255
14,358
14,068
13,359
12,928
+8
12,936
Customs seeks a 23% increase in resources above the 1976 appropriation to expand all of its programs. Special emphasis
would be given to revenue producing and law enforcement programs, especially efforts to intercept air smugglers along
the southwest border. The latter program, which Customs believes is now effective, would require additional jet planes
and sophisticated radar to raise the risk to air smugglers. If the additional resources are not approved, Customs
estimates that receipts from duties and excise taxes will decline by $180 million in 1977 and by $300 million in
1978. The requested resources are divided between a 1976 supplemental (+14 million) to enforce the Trade Act and Oil
Proclamation, and the 1977 budget request (+$57 million) to expand all programs.
After examining Customs revenue loss estimates, OMB concludes that those estimates are invalid. Chart A shows that
past receipts have not fluctuated with changes in staffing levels. Instead, staffing has increased by 8% per annum
over the past five while receipts declined by 8% in real dollars.
The traditional drug arguments were not emphasized by Customs this year because: (1) 1975 drug seizures either
equaled or declined from 1974 levels even though work-years increased by 10% during the same period; and (2) almost
all Customs' seizures are soft drugs, primarily marihuana, which were assigned lower priority by the Domestic Council
Drug Abuse Task Force in its White Paper on Drug Abuse.
C-7
Because drug seizures and revenue receipts do not directly depend upon Customs' staffing levels, OMB continue.
to believe that Customs can anticipate productivity gains without jeopardizing either receipts or drug seizures.
Customs has anticipated some increase in productivity but not enough to compensate for the substantial drop in
productivity which occurred during 1975. This decline was due to an unanticipated decrease in workload and is
reflected in Chart B. In order to bring productivity back to past levels, OMB recommends that the 1976 supplemental
request be absorbed by Customs and that 1977 increases be disapproved. No increase in the program to intercept air
smugglers is recommended because the program is targeted against lower priority drugs and its effectiveness remains
questionable.
The OMB recommendation would disapprove the requested increases of 1,103 work-years and $71 million. Staffing in
1977 would be reduced by 319 work-years in order to return productivity to the rates achieved in prior years.
C-8
Chart A
CUSTOMS RECEIPTS DATA
( STAFFING LEVEL VS ADJUSTED RECEIPTS )
15,000
4,500
CUSTOMS REQUEST
14,000
4,200
13,000
3,900
12,000
OMB
3,600
RECOMMENDATION
11,000
3,300
CUSTOMS TOTAL WORKYEARS
TOTAL WORKYEARS
10,000
3,000
TOTAL RECEIPTS (MILLIONS)
9,000
2,700
CUSTOMS TOTAL
8,000
RECEIPTS
2,400
(1958 $)
7,000
2,100
(1976
and 1977
6,000
not available)
1,800
5,000
1,500
1969
'70
'71
'72
'73
'74
'75
'76
'77
FISCAL YEAR
C-9
Chart B
CUSTOMS PRODUCTIVITY DATA
4,500
12,000
4,000
NUMBER OF
3,500
IMPORT ENTRIES
(MILLIONS)
3,000
CUSTOMS
8,000
REQUEST
DIRECT WORKYEARS
2,500
OMB
TO PROCESS IMPORT ENTRIES
RECOMMENDATION
IMPORT ENTRIES
6,000
2,000
DIRECT WORKYEARS
1,500
4,000
NUMBER OF IMPORT ENTRIES
PER DIRECT WORKYEAR
500
OMB
RECOMMENDATION
(THOUSANDS)
450
400
CUSTOMS REQUEST
350
1969
'70
'71
'72
'73
'74
'75
'76
'77
FISCAL YEAR
C-10