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The original documents are located in Box 8, folder "FY 1976 - 12/6/74, Commerce,
Treasury, SBA, Small Agencies" of the White House Special Files Unit 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States of America his copyrights in all of his unpublished writings in National Archives collections.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
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 8 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
1976 Budget
Session With The
President
12/6/74
1976 Budget
Session With The
President
12/6/74
FORD i LIBRARY 01VN35
THE WHITE HOUSE
WASHINGTON
December 5, 1974
MEETING WITH ROY L. ASH
Friday, December 6, 1974
2:00 p.m. (60 minutes)
Oval Office
FORD VIBRART
From: Roy A
Ash
I. PURPOSE
To make final FY 76 budget decisions for the Departments
of Commerce and Treasury, for the Small Business Admini-
stration, and for several smaller agencies.
II. BACKGROUND, PARTICIPANTS AND PRESS PLAN
A. Background: The FY 76 budget submissions of the
Departments of Commerce and Treasury, the SBA and
several smaller agencies have been reviewed by OMB
and members of the White House staff. The results
of these reviews have been discussed with the
affected departments and agencies. This meeting
will focus on the issues raised during the budget
review process that require Presidential consider-
ation and determinations.
B. Participants: Roy L. Ash, Paul O'Neill, Wally Scott,
and Dale McOmber
C. Press Plan: David Kennerly photo
III. TALKING POINTS
A. Wally Scott, will you describe the first issue we
shall be considering for the Department of Commerce?
B. Wally Scott, would you begin our discussion of the
issues raised in the FY 76 budget for the Small
Business Administration?
C. Wally Scott, what is the first issue we should discuss
for the Treasury Department?
- 2 -
D. Wally Scott, would you describe the issues raised by
the budgets of the smaller agencies for us?
SALD ** FORD LIBRAR
Commerce
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR: THE PRESIDENT
GERALO FORD LIBRA.
FROM:
Roy L. Ash
SUBJECT:
1976 Budget decisions: Department of Commerce
The agency request and my recommendations with respect to 1976 budget
amounts for the Department of Commerce are presented in the tabulation
attached (Tab A). A summary of the principal budget decisions reflected
in my recommendation is provided as background information (Tab B).
Three key issues have been identified for your consideration (detail at
Tab C).
I.
Ship construction program.
Commerce proposes to continue to encourage expansion of U.S. ship con-
struction activities through a subsidy program of $286 million in 1975 and
$285 million in 1976.
OMB proposes to restrain this subsidy program by holding it to
$256 million in 1975 and $198 million in 1976. This will help reduce
Commerce competition with Navy for scarce shipbuilding resources, and
reduce inflationary pressures in the industry.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
II.
Export promotion services.
A. Full cost recovery fees.
OMB recommends that no funds be appropriated for subsidizing
Commerce services to experienced exporters. These firms recognize the
benefits of exporting, and should pay the full cost of Commerce services
if those services are considered useful by the exporters.
2
Commerce believes that it should continue to subsidize its services
for all exporters, in order to promote more U.S. exports.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
B. Trade centers in developed markets.
Commerce proposes to continue funding for seven trade centers in
the developed export markets of Europe, Japan and Australia, because it
believes the centers are useful means of promoting exports, and closing them
may have an adverse impact on the international trade environment.
OMB recommends closing these seven centers because they are not
needed to promote exports to these well developed markets and they are more
costly than alternative export promotion mechanisms.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
III. Tourism program.
Commerce proposes that legislation be requested to extend the authoriza-
tion for the U.S. Travel Service program indefinitely, to promote foreign
travel to the U.S.
OMB recommends that the program be continued only through the end of
calendar year 1976 (until the end of the Bicentennial year). We recommend
that the program be terminated after the Bicentennial because it is not needed
to meet any U.S. economic or foreign relations objectives.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
FORD
Attachments
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR: THE PRESIDENT
FROM:
Roy L. Ash
SUBJECT:
1976 Budget decisions: Department of Commerce
The agency request and my recommendations with respect to 1976 budget
amounts for the Department of Commerce are presented in the tabulation
attached (Tab A). A summary of the principal budget decisions reflected
in my recommendation is provided as background information (Tab B).
Three key issues have been identified for your consideration (detail at
Tab C).
I.
Ship construction program.
Commerce proposes to continue to encourage expansion of U.S. ship con-
struction activities through a subsidy program of $286 million in 1975 and
$285 million in 1976.
OMB proposes to restrain this subsidy program by holding it to
$256 million in 1975 and $198 million in 1976. This will help reduce
Commerce competition with Navy for scarce shipbuilding resources, and
reduce inflationary pressures in the industry.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
II.
Export promotion services.
GERALD FORD VIBRARY
A. Full cost recovery fees.
OMB recommends that no funds be appropriated for subsidizing
Commerce services to experienced exporters. These firms recognize the
benefits of exporting, and should pay the full cost of Commerce services
if those services are considered useful by the exporters.
2
Commerce believes that it should continue to subsidize its services
for all exporters, in order to promote more U.S. exports.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
B. Trade centers in developed markets.
Commerce proposes to continue funding for seven trade centers in
the developed export markets of Europe, Japan and Australia, because it
believes the centers are useful means of promoting exports, and closing them
may have an adverse impact on the international trade environment.
OMB recommends closing these seven centers because they are not
needed to promote exports to these well developed markets and they are more
costly than alternative export promotion mechanisms.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
III. Tourism program.
Commerce proposes that legislation be requested to extend the authoriza-
tion for the U.S. Travel Service program indefinitely, to promote foreign
travel to the U.S.
OMB recommends that the program be continued only through the end of
calendar year 1976 (until the end of the Bicentennial year). We recommend
that the program be terminated after the Bicentennial because it is not needed
to meet any U.S. economic or foreign relations objectives.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
Attachments
GERALE FORD ELERARY
Tab A
Department of Commerce
1976 Budget
Summary Data
($ in Millions)
Employment
Budget Authority
Outlays
Full-time Permanent
Total
1974 actual
1,513
1,455
28,592
35,182
1975 January budget
1,727
1,712
29,138
35,698
enacted
1,647
1,664
XXX
XXX
outlay reduction
-6
-25
XXX
XXX
supplemental recommended
+6
0
XXX
XXX
OMB recommendation
1,647
1,639
28,645
36,073
1976 planning ceiling
1,665
1,780
XXX
XXX
agency recommendation
1,766
1,739
28,840
35,743
OMB recommendation
1,671
1,718
28,612
35,515
Transition period
agency recommendation
462
440
28,840
35,743
OMB recommendation
435
430
28,612
35,515
1977 OMB estimate
1,766
1,860
28,495
35,382
GERALD
FORD
Tab A
LIBRARY
Tab B
Tab B
1976 Budget
Department of Commerce
Background Information
GERALD
The OMB recommendations for Commerce provide a $24 million increase in budget
authority. With unused funds which will be available from 1975, this will
provide $1,761 million in total funds available in 1976, an increase of
$105 million from 1975. Commerce initially requested an increase of
$235 million. The estimate of outlays for 1976 is $1,718 million, an increase
of $79 million from 1975, and $47 million less than initially requested by
Commerce.
We estimate that continuation of these program recommendations into 1977 will
result in 1977 outlays of $1,860 million, compared to the Commerce estimate of
$2,030 million for its initial request.
OMB and Commerce have now reached agreement on budget and program recommenda-
tions for about 85% of the recommended budget. The major program areas where
we have reached agreement are as follows:
1. National Oceanic and Atmospheric Administration. The agency requested
an increase of $83 million. We have agreed on a total program level
of $514 million, an increase of $57 million. Emphasis will be given
to improving the productivity of the weather services, and to preparing
for increased exploitation of ocean living and mineral resources.
Increases are provided to help States plan for accelerated oil and gas
exploitation on the continental shelf. The Department agreed that it
should not undertake programs to try to "revitalize" the U.S. fishing
industry through subsidies or protection from competition.
2. Economic Adjustment Assistance. $356 million is included for assisting
communities or regions to adjust to serious, structural economic problems.
This is an increase of $42 million from 1975, and $23 million less than
requested. The increase includes funds for assisting communities
impacted by imports, Defense base closings, and natural disasters, as
well as for those depressed rural and urban areas which are suffering
from long-term economic declines. These programs are being restructured
to increase the decision making role of States and local governments.
No funding is included to help respond to temporary unemployment prob-
lems; these programs are not effective means of creating quick, short-
term employment.
3. Science and Technology. $156 million is included for the programs of
the National Bureau of Standards, the Patent Office and the new Fire
Administration. This is an increase of $14 million over 1975, but is
$8 million less than initially requested by Commerce. This will permit
continuation of efforts to improve productivity through technology,
acceleration of patent approvals, and initiation of the new program to
improve fire prevention capabilities of States and communities.
2
4. Social and Economic Statistics. The recommended budget includes
$80 million for data collection and analysis by the Bureau of Census
and the Bureau of Economic Analysis. The increase of $11 million over
1975 is primarily to improve the quality and timeliness of data gathered
on economic conditions, and to begin work on the periodic censuses
of Economics, Agriculture, Governments and the 1980 Decennial Census.
5. Ship Operating Subsidies. The recommendation includes $287 million
in outlays for subsidies for operation of U.S. ships in international
trade. The subsidy represents the higher costs of U.S. ship operations
compared to foreign competitors. The 1976 expenditures are $44 million
higher than 1975, and result entirely from past contractual commitments
to ship operators.
The areas of disagreement with the Department are discussed under Tab C.
GERALD FORD LIBRARY
Tab C
Issue Paper
Department of Commerce/MARAD
1976 Budget
SERALE FORD LISBARY
Issue #1: Ship Construction Program
Statement of Issue
What actions can the Federal Government take in the short term to reduce the
inflationary demand on the U.S. ship construction industry and reduce the
potential for competition between Navy and MARAD for scarce yard resources?
Background
In developing the President's Budget last year it was decided that the MARAD
program should not be focused on attaining certain arbitrary trade penetration
goals through subsidizing the construction and operation of ships. Its focus
should rather be on improving the international competitive position of the
shipping industries, consistent with defined national security requirements for
the industries, in order to minimize the continuing need for Federal support.
In response to OMB guidance, MARAD conducted a review of national security
requirements for the program, which concluded that the current construction
differential subsidy (CDS) program level does not need to be maintained to
provide for national security needs, and that any available CDS funding could
be focused on improving the international competitive position of the industry
rather than used to build certain ships or support certain yards for national
security purposes.
During this past year the shipbuilding industry has been affected by several
developments. First, yards are now approaching their actual capacity to produce
ships. Second, labor and material shortages are developing, and ship prices
are projected to increase as much as 40% during the next year. Third, there is
concern that MARAD is now competing with the Navy for scarce shipbuilding
resources; the Navy has recently advocated the initiation of ship construction
in Navy-owned yards, because of the lack of interest in their contracts by
private yards.
Alternatives
#1. Continue the Commerce approach of funding a variety of ship types in a
number of yards to encourage the continued expansion of the ship
construction industry. (Agency request)
#2. Reduce MARAD ship construction funding to stabilize demand on shipyards
at about the current level. (OMB recommendation)
2
Analysis
July 1-Sept.
1974
1975
1976
30,
1976
1977
Program Level/Outlays
PL
0
PL
0
PL
0
PL
0
PL
0
($ Millions)
Construction Subsidy Funding:
Agency request
293
200
286
256
285
313
76
83
378
340
OMB recommendation
293
200
256
256
198
303
50
77
170
299
The Department of Commerce recommends the continuation of the current approach
to the subsidy program, which would result in continued rising employment in
the ship construction industry. Employment on new ship construction in U.S.
shipyards has grown from 44,000 in 1970 to 66,000 today. Commerce projections
indicate that employment would rise to 78,000 by 1978 if the MARAD programs
continue as requested.
OMB recommends reducing CDS funding by $30 million in 1975, by $87 million in
1976 (to $198M rather than $285M) and to $170M in 1977. This should have the
following desirable impacts:
- It would reduce competition with Navy for scarce shipbuilding resources;
and
- The reduction would help reduce the inflationary pressure on ship
prices, and help assure that additional shipyard capacity which might
require continued Federal support, would not be created.
This reduced funding level will still result in an increase in the size of the
U.S. flag fleet engaged in international trade.
The recommended funding level will not create serious shipyard employment
reductions. There may be some reductions in a few yards if those yards fail to
obtain Navy work. Because of the long lag time between MARAD funding and the
start of ship construction, any changes in shipyard employment would not occur
until late 1976.
Agency Request: Commerce continues to push for an expanded ship construction
program, while spreading funding among the yards to meet political demands and
to maintain or expand employment in the ship construction industry. Commerce
argues that a reduction in the program would be perceived by the industry and
the unions as a withdrawal of Administration support for efforts to "revitalize"
the U.S. maritime industries.
OMB Recommendation. Reducing 1975-76 funding would help reduce inflationary
pressures on the industry, and would reduce the potential for competition
between MARAD and Navy.
ERALO FORD VIBRART
Issue Paper
Department of Commerce
1976 Budget
Issue #2: Export Promotion Services
Statement of Issue
This paper covers two separate but related issues regarding Commerce's
export promotion programs.
Background
The Department of Commerce provides marketing assistance and information
to assist U.S. firms to export. Nominal fees are charged which recover
approximately 7% of total program cost. In developing the 1975 President's
Budget, it was decided that subsidized services to established exporters should
be eliminated by the end of 1975, primarily because established exporters are
familiar with the risks and complexities of marketing overseas. Established
exporters could continue to use the Commerce services if they were willing to
pay a full cost recovery fee.
Over the past year OMB has chaired an interagency review of export promotion
programs, the findings of which support last year's budget decision to end sub-
sidies to established exporters. This interagency study concluded that continua-
tion of subsidies to established exporters promotes behavior that is uneconomic
from the national viewpoint. It encourages exporters to continue to export
where the cost of that activity (including the cost of the subsidy) is unprofit-
able.
As part of its export promotion services, Commerce maintains 14 trade
center facilities around the world which are used to display U.S. products.
Based on the interagency study of export promotion programs, continuation of
these trade centers in the developed markets of Western Europe, Japan and
Australia does not appear to be necessary or cost effective.
Issue A:
Should experienced exporters using Commerce export services be charged the
full cost for the services?
Alternatives
#1. Continue to provide subsidized export promotion services to established
exporters. (Agency request)
#2. Eliminate from the budget the funds for subsidized services for
established exporters. (OMB recommendation)
2
Analysis of Alternatives
July 1-Sept.
1974
1975
1976
30, 1976
1977
Budget Authority/Outlays
($ in Millions)
Agency request
22
21
20
5
20
OMB recommendation
22
21
14
4
14
Agency request: Commerce recommends continuation of subsidized services in
order to "provide a leadership role in trade promotion".
Commerce believes that established exporters will not use its services at full
cost recovery fees, and that the government should continue to subsidize all
exporters to help solve U.S. balance of trade problems.
OMB recommendation: OMB recommends alternative #2. There is no good economic
basis for taxpayer subsidy of these experienced exporters. Established exporters
are familiar with the risks and complexities of marketing overseas, and can
continue profitable activities without Federally-subsidized services.
The continuation of the subsidized services is not essential to solving balance
of trade problems. The experienced exporters will continue to export when it is
profitable for them, without the Commerce services or with full cost fees for
the services.
Full cost fees will result in putting the services to a market test and should
result in established exporters choosing the most cost-effective marketing
alternatives. Also, full cost recovery fees would create an incentive for
Commerce to reduce the cost of its services and generally increase the efficiency
of its operations. The Department has provided no basis for reversing last year's
decision on this issue.
Issue B:
Should Commerce continue to maintain trade center facilities in developed
foreign markets?
Alternatives
GERALD FORD
#1. Continue to maintain trade centers in both developed and emergent
markets. (Agency request)
#2. Discontinue trade centers in developed markets. (OMB recommendation)
Agency request: Commerce believes that the developed market trade centers are
effective in expanding U.S. exports. It also is concerned that closing these
3
facilities would be detrimental to the U.S. negotiating posture in the upcoming
GATT trade negotiations by sending "an inappropriate signal to our major trading
competitors of a decline in U.S. interest in expanding trade."
OMB recommendation: OMB recommends closing the trade centers in the United
Kingdom, Germany, Italy, France, Sweden, Japan and Australia. This will save
$4.5 million and 50 people required for these facilities. We recommend that
Commerce be permitted to use $2.4 million of these savings for more cost
effective trade promotion activities for inexperienced exporters.
Analysis of the Commerce programs shows that other programs are more cost
effective than the trade center program in stimulating exports. The trade
center and the trade fair programs, for example, are almost identical in their
methods of operations and objectives. The major difference is that trade fairs
have a broader product theme, attract more visitors, and are not held at U.S.
facilities. Based on 1972 actual data, trade fairs are more efficient than
trade centers; a dollar of Federal expenditure resulted in $45 of export sales
under the trade fair program, compared with $32 of sales per dollar spent for
the trade centers.
In addition to Commerce programs, there are numerous well-developed alternatives
in developed markets which could be used instead of a Federal trade center to
bring buyer and seller together. These include industry associations and other
privately arranged exhibitions, mailings, agents, distributors and the general
services of export management associations.
Closing the trade centers in developed markets can certainly be explained so
as not to give the impression of decreasing U.S. interest in international trade.
It is, rather, an effort to improve the effectiveness of total resources available
for stimulating trade.
U.S. ambassadors in the affected countries may resist closing the seven centers
largely because of fears that the host country will interpret the action as a
"diplomatic signal" of decreasing importance placed on their country by the U.S.
Since this proposal does not single out any one country, but would apply equally
to all developed markets, the "perceived downgrading" should not be a problem.
Issue Paper
Department of Commerce
1976 Budget
Issue #3: Tourism Programs
Statement of Issue
Should the tourism promotion programs be terminated after calendar year 1976
(i.e., after the Bicentennial year)?
Background
The United States Travel Service (USTS) was established in 1961 with the principal
objective of encouraging foreigners to visit the United States in order to help
solve balance of payments problems. USTS maintains offices in six foreign
countries (Canada, Mexico, the United Kingdom, France, West Germany and Japan)
and, through advertising and direct promotional events with foreign travel agents,
attempts to encourage foreigners to travel to the United States.
USTS estimates that approximately 14 million foreign travelers visited the United
States in 1973 and that approximately 385,000 foreign visitors will come to the
United States in 1976 as a result of its programs, providing a $200 million
contribution to the U.S. balance of payments. Based on these figures and the
agency's 1976 request of $12 million, each foreign visitor spends approximately
500, and USTS spends about $30 per visitor.
USTS has stated that beginning in 1975 it will emphasize the Bicentennial through-
out all its programs. USTS is doing this indirectly and as an added theme to its
existing promotional events. There is, therefore, no specific or identifiable
amount in the USTS budget which is targeted on the Bicentennial.
Alternatives
#1. Continue tourism promotion programs in 1976 and request a long-term
extension of the current authorizing legislation. (Agency request)
#2. Continue tourism promotion programs through calendar year 1976 and
oppose an extension of the authorizing legislation beyond calendar year
1976. (OMB recommendation)
Analysis of Alternatives
GENALD FORD CIBRARY
July 1-Sept.
1974
1975
1976
30, 1976
1977
Budget Authority/Outlays
BA
0
BA
0
BA 0
BA
0
BA 0
($ Millions)
Agency request
11
11
11
11
12
12
4
4
12
12
OMB recommendation
11
11
11
11
12
12
5
3
0
2
2
The agency request would permit the indefinite continuation of the USTS
programs. The Department contends that the program is necessary to encourage
international travel to improve relations among countries, and to increase
foreign exchange earnings.
The OMB recommendation would continue the program in fiscal year 1976, and
provides $5 million for the transition period to continue the program through
the end of calendar year 1976. The program would be terminated at the end of
the Bicentennial year (end of calendar year 1976).
Strong interest already exists among foreigners in traveling to the United States,
and numerous organizations other than USTS continue to promote the United States
as a desirable travel destination. The major obstacle to travel to the United
States is its high costs, and USTS programs have no significant impact on this
factor.
The program is not essential to improve relations among nations. The program
is limited to only six countries which already have extensive tourism travel
and generally good relations with the United States. The U.S. Information
Agency has the primary responsibility for improving foreign understanding of
the United States. It has a budget of over $200 million, and programs in over
100 countries, for this purpose.
The USTS contribution to the U.S. balance of payments (accepting the USTS
estimate of $200 million) is insignificant when compared to total U.S. exports
of goods and services, which were $71.3 billion in 1973. This program is not
an essential means of maintaining an equilibrium in the balance of payments.
Flexible exchange rates are the primary means of maintaining an equilibrium.
Agency Request: The agency proposes indefinite continuation of the Travel Service
activities.
OMB Recommendation. OMB recommends termination of the program at the end of
calendar year 1976. USTS programs are unnecessary to meet U.S. balance of pay-
ments objectives, and by the end of calendar year 1976 the USTS program will
have completed all promotional work related to the Bicentennial.
GERALD FORD LIBRARY
SBA
THE WHITE HOUSE
WASHINGTON
FORD LIBRARY
MEMORANDUM FOR: THE PRESIDENT
FROM:
Roy L. Ash
SUBJECT:
1976 Budget decisions: Small Business Administration
The agency request and my recommendations with respect to the 1976 budget
amounts for the Small Business Administration are presented in the tabulation
attached (Tab A). A summary of the principal budget decisions reflected in
my recommendation is provided as background (Tab B).
The following key issue has been identified for your consideration (detail
at Tab C).
Full cost recovery interest rates on loans.
OMB recommends that legislation be requested to require full cost
recovery interest rates on SBA direct loans, except on loans for the
socially or economically disadvantaged (primarily minorities). This
would prevent unwarranted demands for low interest funds, and end tax-
payer subsidy for the loan recipients.
SBA opposes full cost recovery interest rates because it believes
loan recipients should receive the additional assistance provided by the
interest subsidy.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
Attachments
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR: THE PRESIDENT
FROM:
Roy L. Ash
SUBJECT:
1976 Budget decisions: Small Business Administration
The agency request and my recommendations with respect to the 1976 budget
amounts for the Small Business Administration are presented in the tabulation
attached (Tab A). A summary of the principal budget decisions reflected in
my recommendation is provided as background (Tab B).
The following key issue has been identified for your consideration (detail
at Tab C).
Full cost recovery interest rates on loans.
OMB recommends that legislation be requested to require full cost
recovery interest rates on SBA direct loans, except on loans for the
socially or economically disadvantaged (primarily minorities). This
would prevent unwarranted demands for low interest funds, and end tax-
payer subsidy for the loan recipients.
SBA opposes full cost recovery interest rates because it believes
loan recipients should receive the additional assistance provided by the
interest subsidy.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
Attachments
GLRALD FORD LIBRART
Tab A
Small Business Administration
1976 Budget
Summary Data
($ in Millions)
Employment
Budget Authority
Outlays
Full-time Permanent
Total
1974 actual
249
753
3,957
4,640
1975 January budget
448
471
4,321
4,413
enacted
443
470
XXX
XXX
outlay reduction
0
-22
XXX
XXX
supplemental recommended
0
0
XXX
XXX
OMB recommendation
443
398
4,196
4,494
1976 planning ceiling
435
335
XXX
XXX
agency recommendation
288
339
4,171
4,457
OMB recommendation
288
339
4,171
4,457
Transition Period
agency recommendation
89
41
4,171
4,457
OMB recommendation
89
41
4,171
4,457
1977 OMB estimate
400
482
4,171
4,457
GERALD 9. FORD VIERART
Tab A
Tab B
Tab B
1976 Budget
Small Business Administration
GERALD FORD VIBRAR,
Background Information
FY 1976 is expected to be a year of transition for SBA, as it completely
reevaluates its basic goals and objectives and redirects its programs to
more effectively achieve the redefined objectives.
OMB has discussed with SBA our concerns about its lack of effective efforts
to assist established small businesses. The bulk of SBA resources have been
going to a very small proportion of all small firms (less than one-third of
1%) and many of these are marginal firms which are likely to have little
economic impact. SBA agrees that there is a need to reevaluate its programs,
and we have agreed to undertake a thorough study, to be completed by next
September.
Loan Guarantees
Pending the outcome of that study, the agency will not undertake any major
expansion of its principal loan guarantee program, which will be limited to
$1.2 billion in 1976, a slight increase over 1975, but a decrease from the
1974 level of $1.8 billion. Upon completion of the study, the program may
be expanded, terminated or redirected.
Direct Loans For Firms In Temporary Difficulty
Because of the severe problems facing many small businesses in the current
economic situation, SBA will be giving top priority in 1976 to assisting
established firms in temporary difficulty. The principal assistance will
be long term direct loans which generally are not available from private
institutions. The recommended budget amounts include $200 million for these
direct loans, which is double the 1975 level. OMB recommends that this
$200 million be made contingent upon a legislative change to provide for
full cost recovery interest rates on these loans. (See Tab C)
Minority Business Development
The recommended budget will permit $125 million for direct loans, management
assistance and procurement assistance, and approximately $195 million in
guaranteed loans, for minority-owned businesses. This is approximately the
same level of funding as in 1975. These programs are the subject of an on-
going OMB, SBA and Commerce study, which is to be completed by next April.
It is expected that the study will result in recommendations for major pro-
gram changes, including some organizational restructuring. It is recommended
that the funding be held at the 1975 level pending decisions resulting from
that study.
Tab C
Issue Paper
Small Business Administration
1976 Budget
Issue: Full Cost Recovery Interest Rates
GERALD FORD LIBRARY
Statement of Issue
Should interest charges on SBA direct loans be set at a level to recover
full costs, including estimated average default losses?
Background
Current statutory authority for SBA loan programs places ceilings on the
interest rates that SBA can charge on its direct loans to small firms. The
rates vary by program, but they generally cannot be higher than the Treasury
average cost of money (about 6.5% now).
The allowable interest rates do not recover the losses resulting from defaults
on the loans, or the costs of administering the program. Recovery of these
additional costs would increase interest rates by about 3% to 4% on programs
which are effectively administered; this assumes that loans will be made only
to established, competitive firms which are in temporary difficulty.
The current low SBA interest rates are very attractive to potential
borrowers, and they result in demand for the SBA direct loans even when reason-
able financing is available from private institutions. The low interest rates
also result in a taxpayer subsidy to the individual borrower.
Alternatives
1. Continue to charge the low interest rates. (Agency request)
2. Request a legislative change to require full cost recovery interest
rates. (OMB recommendation)
Analysis of Alternatives
Alternative #1. SBA objects to the full-cost recovery requirement. SBA
disagrees with placing the burden of losses on the recipient of the loan. It
believes this would place too high a burden on the people who are to be helped
by these programs. SBA instead proposes that the interest rate be Government
cost of money (currently 6.5%) plus 1% for recovery of administrative costs.
The agency believes the full-cost recovery requirement would result in interest
charges of at least 10.5% and perhaps more.
Alternative #2. OMB believes that subsidized interest rates are unnecessary
and inappropriate for SBA loans, except those for the socially and economically
disadvantaged. The small businesses which will be receiving SBA's direct loans
will be established, competitive small businesses which are in temporary financial
2
difficulty due to adverse cyclical economic conditions, material shortages,
etc. These firms are primarily in need of long-term loans (5, 10 or even 20
years) which they cannot obtain in the private sector. The long-term loans
will help them spread the cost of adjusting to the temporary economic problem.
These firms are not in need of interest subsidies. They can afford the interest
costs if they can obtain a long term on the loan.
The Federal Government is providing an important service for these firms by
making available long-term loans. There is no economic or social reason why
the taxpayers should subsidize these firms through low interest rates.
Agency request: SBA opposes requesting legislation to obtain full cost recovery.
OMB recommendation: The OMB proposes that the $200 million planned for 1976,
for direct loans for competitive firms in temporary difficulty, be requested
from Congress only upon enactment of legislation to permit full cost recovery
interest rates on the loans.
Tab C
Treasury
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR: THE APRESIDENT
FROM:
Roy L. Ash
SUBJECT:
1976 Budget decisions: Department of the Treasury
The agency request and my recommendations with respect to 1976 budget
amounts for the Department of the Treasury are presented in the tabula-
tion attached (Tab A). A summary of the principal budget decisions
reflected in my recommendation is provided as background information
(Tab B).
Seven key issues have been identified for your consideration (detail at
Tab C).
I.
IRS Tax Audit
Treasury proposes strengthening tax compliance by raising the level
of audit coverage to 2.6 per cent of tax returns filed, thereby generating
additional revenues and contributing to a balanced budget.
OMB recommends maintaining the 1975 level of 2.5 per cent audit
coverage which will increase the absolute number of tax audits. Tax
compliance will be encouraged by program increases in areas other than
audit.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
FORD LIBRARY
II.
IRS Information Returns Processing (document matching)
Treasury proposes annually transcribing, correcting, and matching
one-fourth of all information documents and tax returns.
OMB recommends initiating a selective program of document matching
to stimulate voluntary taxpayer compliance by concentrating on documents
with the highest potential yield or greatest likelihood of reporting in-
accuracy.
2
Decision: Approve agency recommendation
Approve OMB recommendation
See me
III. IRS Data Processing
Treasury proposes adding 950 man-years in 1976, representing a 3
per cent growth in personnel, to process an estimated increase of 2 per
cent in the number of tax returns filed.
OMB recommends maintaining the 1975 level of manpower, thereby relying
on increased productivity aided by additional automatic data processing equip-
ment to process the larger number of returns.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
IV. IRS Administration of Pension Reform
Treasury proposes a supplemental appropriation of $10.0 million in
1975. For 1976 they request a further increase of $14.1 million. This
would provide funds to handle increased responsibilities under the new
Employee Retirement Security Act of 1974.
OMB recommends $6.6 million of the $10.0 million 1975 request and
a further increase of $4.1 million for the program in 1976. It defers
additional increases in 1976 pending receipt of actual workload data.
This is the same approach being recommended in the Labor Department
request for this program.
FORO
Decision: Approve agency recommendation
Approve OMB recommendation
See me
V.
IRS Tax Fraud Investigation
Treasury proposes adding 8 man-years in 1976 to handle increased
case complexity, as part of an overall effort to demonstrate to taxpayers
that those who do not meet their tax obligations are identified and pro-
secuted.
OMB recommends investigating the same number of criminal cases which
IRS projects for 1975 and 1976, using an investigation-to-man-year standard
similar to the ratio achieved in 1973 and 1974 and budgeted for in 1975,
thereby reducing the 1976 budget 329 positions below the 1975 level.
3
Decision: Approve agency recommendation
Approve OMB recommendation
See me
VI.
Taxpayer Service
Treasury proposes adding 63 positions on top of the base of 3,956
man-years provided in the OMB alternative (which reflects an increase of
878 man-years over the 1975 base) to conduct a special assistance program
for the elderly and inner city taxpayers.
OMB recommends accomplishing the special emphasis program by redeploy-
ing some of the 3,956 man-years already provided in the 1976 budget for tax-
payer service.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
VII. U. S. Customs Service
Treasury proposes to add 311 man-years and $19 million in 1976 to
handle additional imports and people entering the United States and to
expand enforcement programs to uncover duty fraud and interdict narcotics
and other contraband.
OMB recommends handling the additional imports and people through a
2.5% increase in productivity, thereby reducing 323 positions below the
1975 level.
Decision: Approve agency recommendation
Approve OMB recommendation
See me
FORD LIBRARY 018839
Attachments
DEPARTMENT OF THE TREASURY
1976 Budget
Summary Data
(In millions)
Employment, end-of-period
Budget
Full-time
authority
Outlays
Permanent
Total
1974 acutal
36,019
35,888
104,391
113,892
1975 January budget
37,688
37,633
111,431
119,250
enacted
37,683
37,637
:
XXX
XXX
supplementals recommended for operating
...
accounts
26
24
XXX
XXX
outlay reduction
-24
-24
-80
-80
OMB recommendation
40,094*
40,061*
108,976
116,795
1976 planning ceiling
39,294*
39,259*
XXX
XXX
agency request (revised)
40,793*
40,680*
123,221
135,227
OMB recommendation
40,507*
40,391*
111,623
121,123
agency recommendation
40,593*
40,481*
118,522
128,722
Transition period
agency request (revised)
10,443*
10,423*
123,221
135,227
OMB recommendation
10,365*
10,344'
111,623
121,123
agency recommendation
10,387*
10,365*
118,522
128,722
1977 OMB estimate
41,881 *
41,894*
113,855
123,545
*Requests and recommendations do not include estimates of the net cost of the October 1974 pay increase:
1975: BA, $54 M; Outlays, $50 M. 1976: BA, $93 M; Outlays, $93 M.
Tab A
GERALD LIBRARY FORD
DEPARTM
THE TREASURY
2
1976 Budget
Distribution of Budget Authority#
July 1 -
1974
1975
1976
Sept. 30, 1976
1977
Jan.
Agency
OMB
Agency
OMB
Agency
OMB
OMB
Actual
budget
recom.
recom.
recom.
recom.
recom.
recom,
est,
A. Open-ended programs and fixed costs
(relatively uncontrollable under
present law)
1.
Interest on the Public Debt
29,319
30,500
33,000
33,000
33,200
33,200
8,500
8,500
34,400
2.
General Revenue Sharing
6,055
6,205
6,205
6,205
6,355
6,355
1,664
1,664
6,520*
3.
Miscellaneous Permanent and
Trust Funds
557
612
814
814
837
837
177
177
822
4.
Offsetting receipts
-1,838
-1,930
-2,208
-2,208
-2,286
-2,286
-586
-586
-2,344
Total, open-ended and
fixed costs
(34,093)
(35,387)
(37,811)
(37,811)
(38,106)
(38,106)
(9,755)
(9,755)
(39,398)
B. Discretionary programs (relatively
controllable)
1.
Office of the Secretary
20
25
26
26
27
27
7
7
29
2.
Office of Revenue Sharing
--
--
2
2
3
3
1
1
3
3.
Federal Law Enforcement Training
Center
2
22
22
22
17
17
1
1
8
4.
Government Financial Operations
97
103
122
122
121
121
30
29
126
5.
Alcohol, Tobacco and Firearms
81
94
92
92
97
97
26
26
106
6.
U. S. Customs Service
241
286
282
282
301
285
76
73
300
7.
Bureau of the Mint
25
45
34
34
80
80
10
10
51
8.
Bureau of the Public Debt
81
88
96
96
97
97
27
27
102
9.
Interest Revenue Service
1,309
1,558
1,530
1,526
1,651
1,581
426
408
1,661
10.
U. S. Secret Service
70
80
81
81
93
93
28
28
97
Total, discretionary programs
(1,926)
(2,301)
(2,287)
(2,283)
(2,487)
(2,401)
( 632)
( 610)
(2,483)
Total, Budget Authority
36,019
37,688
40,098
40,094
40,593
40,507
10,387
10,365)
41,881
*Assumes enactment of legislation to continue General Revenue Sharing
#Requests and recommendations do not include estimates of the net cost of the October 1974 pay increase: 1975, $54 M; 1976, $93 M.
Tab B
1976 Budget
Department of the Treasury
Background Information
Treasury requests $40.8 billion in new budget authority for 1976. Of this
amount, $38.1 billion is requested for uncontrollable accounts such as
Interest on the Public Debt, Payments from the General Revenue Sharing
Trust Fund, and other permanent accounts. The remaining $2.7 billion
is requested for discretionary operating programs, which fund the
Department's major activities.
The OMB recommendation provides $40.5 billion, which grants the Department's
full request for uncontrollable programs but reduces the initial request for
operating programs by $217 million. OMB and Treasury have subsequently come
into agreement on most 1976 budget recommendations, and the areas of dispute
have been reduced to $86 million. Items still in dispute, which are confined
to the Internal Revenue Service and the Customs Service, are discussed in
detail at Tab C.
The reductions in the Treasury request recommended by OMB in Treasury's
operating programs stem largely from two major concerns:
- very large staff expansion beyond the requirements of reasonable
workload increases (a requested 13 percent staffing increase
over 1975); and,
GERALE FORD LIBRARY
- failure by the Department to reflect increased productivity in
some of its major programs.
The requested 13 percent increase in staff comes on top of substantial increases
provided to the Department over the past few years. In both 1974 and 1975
employment increased by 4 percent over the previous year. These increases
were well in excess of population growth (a basic ingredient in several
Treasury programs) or workload.
The major staff expansion proposed by the Department comes in the Internal
Revenue Service and the Customs Service, which historically have accounted
for approximately 80 percent of the total Treasury work force. Over the
years, the Department has been accustomed to requesting and receiving size-
able increases for these bureaus because, as revenue producers, they have
been considered essentially costless. Treasury has maintained and continues
to maintain that rapidly increasing staff in its tax collections and compliance
forcing programs are necessary to avoid revenue losses. In several of these
programs, staffing increases have exceeded actual workload requirements, result-
ing in static or declining employee productivity.
2
In light of the Administration's policy of maximum budget restraint in 1976,
OMB has subjected the Treasury budget request to a more critical review than
in recent years. While OMB agrees with Treasury on the need to maintain and
improve the integrity and capability of the tax collection and enforcement
system, we have attempted to more accurately relate staffing and budget
needs to projected workload requirements and to assume productivity increases
where appropriate. Although the OMB recommendation proposes significant re-
ductions from Treasury's initial budget request for operating programs, it
does provide $118 million and 2,647 additional staff (2.4 percent increase)
over 1975 to cope with workload increases and priority program improvements.
Given the sizeable work force already in place, we believe this recommendation
is adequate to successfully accomplish the 1976 program proposed by the Depart-
ment and to continue progress toward the overall goal of the tax system:
maximum voluntary compliance.
FORD
Tab C
Issue Paper
Department of the Treasury
1976 Budget
Issue #1: IRS Tax Audit
Statement of Issue
What proportion of tax returns should IRS audit in 1976?
Background
Reliance on a voluntary system of tax payments requires a level of audit
activity which raises the threat that the validity of returns filed will be
checked. Overall audit coverage steadily declined from 5.8 percent in 1963
to a low of 1.9 percent in 1971 and 1972, and then began rising from 2.0
percent in 1973 to 2.4 in 1974 and a projected 2.5 in 1975. There is no
evidence to support the thesis that voluntary compliance changed significantly
as the audit level fluctuated. In fact, voluntary compliance was estimated
to be only 93.0 percent during the peak audit year of 1963, as compared to
92.6 percent when audit coverage was only 3.2 percent in 1969. It is projected
by IRS to be 94.6 percent in 1976 with audits of 2.6 percent of returns.
Audit of certain income classes expected to generate the greatest potential yield
far exceeds the level of overall coverage. For example, during the past four
years audit of businesses with over $30,000 in adjusted gross income has fluctuated
from 8.8 to 13.0 percent, the rate projected for 1975. IRS plans comprehensive
rates of audit coverage in 1975 for estate returns (24.2 percent), individuals with
over $50,000 adjusted gross income (15 percent), corporate returns (9.5 percent),
and reported gifts (4.8 percent).
IRS estimates that the total amount of individual income tax owed to the Federal
Government in 1976 will be $157 billion. $148.6 billion of this amount will be
paid voluntarily, representing a compliance rate of 94.6 percent. Another $1.3
billion will be collected as a result of audit examinations conducted by personnel
requested in the FY 1976 budget. The remaining $7 billion constitutes the projected
tax gap between the estimated individual income tax owed and that actually received,
Alternatives
#1. Raise the level of audit coverage to 2.6 percent in 1976. (Agency request)
#2. Continue the 2.5 percent audit coverage budgeted for 1975. (OMB recommendation)
Analysis
July 1-
Sept 30,
Budget Authority/Outlays
1974
1975
1976
1976
1977
($ Millions)
BA
0
BA
0
BA
0
BA
0
BA
0
Agency request
497
482
595
595
635
623
159
156
656
656
OMB recommendation
497
482
595
595
620
610
155
152
640
660
2
IRS is requesting $15.0 million and 946 man-years in additional resources to
raise the audit level in 1976 to 2.6 percent of tax filings. Treasury supports
its case for additional audit resources with the claim that the investment of an
additional dollar in audit returns an average of six dollars in net direct tax
revenues. However, IRS does not value the importance of this program to be
great enough to warrant shifting resources from other IRS activities in order
to maximize revenues. An OMB review of this estimate in 1972 concluded that a
ratio closer to 2.5:1 more accurately represented the relationship of yield to
cost, when taking into account IRS overhead and increased costs to the private
sector required by tax audits. There are no data available to measure the
effect of additional audit on potential noncompliers.
Arguments over the exact revenue producing ability of tax audits may be strictly
academic and subject to an indeterminate margin of error. The real objective
of this program is to encourage voluntary compliance, which accounts for over 99
percent of individual income taxes paid. Tax returns are selected for audit either
because of characteristics which indicate underpayment of taxes or as part of a
strategy to review a minimum number of returns in every income category in order
to demonstrate the breadth of IRS audit coverage. The mix of audits expected to
generate the greatest yield and audits intended to encourage voluntary compliance
is decided by the Commissioner of IRS. There is some suspicion that any suggested
reduction in the recommended level of audit coverage is priced from the revenue-
producing cases to present the worst-possible direct revenue loss expected from
such a decision. It is also difficult to accept the IRS contention that a
relatively insignificant fluctuation in audit coverage, for example between
2.6 and 2.5 percent, actually causes individual taxpayers to cheat on their
taxes or can really be measured.
Agency Request: Raise the level of audit coverage to 2.6 percent, thereby
generating additional revenues which contribute to a balanced Federal budget.
OMB Recommendation: Maintain the 1975 level of audit coverage (2.5 percent)
which should continue to assure a satisfactory level of voluntary compliance.
Issue Paper
Department of the Treasury
1976 Budget
Issue #2: IRS Information Returns Processing (document matching)
Statement of Issue
To what extent should IRS match information documents in 1976?
Background
In 1976 IRS expects to receive 400 million information documents related to
individual income taxes--employer statements of wages earned, reports of
interest and dividend payments, and declarations of profits distributed by
partnerships. While taxpayers may have initially surmised that these data
have been used to verify income reported by filers, the large quantity of
information documents prevented IRS from actually doing so in most cases.
IRS believes that many taxpayers are aware of this and are thereby encouraged
not to report all sources of taxable income.
The 1975 budget provides 1,700 man-years to conduct a limited program to
match information documents submitted on machine-readable tape, follow up on
the non-filers identified by this tape match over the preceding two tax
years, and correct missing or inaccurate spouse social security numbers on
8 million tax returns in preparation for more extensive document matching.
All of these resources may be applied to whatever document matching program
is approved for IRS in 1976. Of the 2.5 million discrepancies uncovered by
the cursory 1975 match, IRS followed up on 250,000 cases in collections and
audit. A large number of questions about unreported or under-reported income
were therefore unanswered.
Alternatives
#1. In addition to the 1,700 man-years included in the 1975 budget, provide
1,430 additional man-years in 1976 to conduct an expanded program to
correct taxpayer identification numbers and match the information documents
and tax returns of one-fourth of the filers, conducting related audit and
collection activities in 1977. (Agency request)
#2. Utilize the 1,700 man-years provided in the 1975 budget to initiate a
selective program (covering 5 percent of the returns) of matching documents
with high potential yield in 1976, and to expand audit and collection follow-
up on discrepancies and non-filers identified. (OMB recommendation)
Analysis
July 1 -
Sept 30,
1974
1975
1976
1976
1977
Budget Authority/Outlays
BA
0
BA
0
BA
0
BA
0
BA 0
($ Millions)
Agency request
2
2
24
24
43
42
11
11
51
51
OMB recommendation
2
2
24
24
25
25
6
6
26
26
2
It is important to agree on the objective of document matching and the most
cost-effective way of achieving it before launching a massive program of random
transcribing and matching millions of documents. As in the audit program, the
IRS objective here is to encourage voluntary compliance, in this instance to
cause taxpayers to accurately report all taxable income on their filings.
Moving in this direction need not require a blanket match of every taxpayer
or even every fourth taxpayer, as IRS proposes, but rather can selectively
identify potential violators and use these matches as an example to encourage
compliance from the general public (again similar to the approach used in tax
audit).
The agency request proposes matching tax returns with 100 million information
documents related to one-fourth of the population, selected by surname. Matches
would be made of 60 million paper documents and 40 million machine-readable
documents. The 60 million paper documents would have to be sorted, batched,
edited, transcribed, corrected, and entered into the ADP system. Substantial
personnel are requested in the collection activity to follow up on unresolved
cases where no taxpayer identification number is shown on information documents.
Some attention would be given to addressing discrepancies between reported income
and income reflected on information documents, but investigation into underreported
cases and non-filers would not begin until 1977.
In contrast to the agency request which would compare 100 million documents (25
percent of the total), the OMB recommendation would match 20 million high-potential
documents (constituting 5 percent of the total), chosen according to predetermined
criteria to maximize potential yield. The candidates for selection would be
taken from 172 million documents (43 percent of total documents filed), consisting
of the 160 million tape documents and 12 million paper documents entered into
the ADP system in an initial step to begin some degree of paper sorting and
matching in 1976. Only those documents selected would be corrected to enter
valid taxpayer identification numbers. The OMB recommendation also includes
resources for expanding and improving use of machine-readable tape input. It
provides collection and audit personnel to follow up on a large proportion of cases
developed by matching documents, whereas the agency request would use a larger
number of collection personnel primarily to correct missing or inaccurate taxpayer
identification numbers.
Agency Request: Begin annually transcribing and matching one-fourth of all
information and tax returns.
OMB Recommendation: Initiate a selective program of document matching to stimulate
voluntary taxpayer compliance, while concentrating on documents with the greatest
yield potential, similar to the approach used in tax audit.
Issue Paper
Department of the Treasury
1976 Budget
Issue #3: IRS Data Processing
Statement of Issue
What consideration should be given to productivity in budgeting for data
processing in IRS?
Background
The data processing operations activity is responsible for receiving and
processing tax returns, issuing refunds and notices, and accounting for
revenues. In 1974 this program processed 121.6 million Federal tax returns.
IRS estimates it will receive 124.0 million returns in 1975 and 126.5 million
returns in 1976.
Alternatives
#1. Add 950 man-years ($11.3 million) to handle the increased workload
projected for 1976. (Agency request)
#2. Maintain the same work force provided in 1975 and expect the larger
number of returns to be processed through increased productivity.
(OMB recommendation)
Analysis
July 1 -
Sept 30,
1974
1975
1976
1976
1977
Budget Authority/Outlays
BA
0
BA
0
BA
0
BA 0
BA
FDAD LIBRARY
($ Millions)
Agency request
316
306
370
370
386
379
97
95
398
398
OMB recommendation
316
306
370
370
375
368
94
92
375
375
IRS supports its case for additional staff by citing the growth in returns
volume and complexity. Timely processing of returns is said to be important
in maintaining public confidence in the efficiency of the tax system.
OMB acknowledges the desirability of prompt returns processing and has provided
for procurement of additional automatic data processing equipment in 1976 to
facilitate this activity. The OMB alternative allows for purchase of 191
new entry terminals, additional capacity for central processing units, and
$400,000 in miscellaneous auxiliary and accessory equipment. In addition to
the workload savings generated by these additions, it is anticipated that
the three new service centers opened by IRS in 1975 will operate more efficiently
in 1976.
2
Data processing operations are particularly well-suited to productivity
increases because of their industrial nature. The OMB alternative assumes
a 2 percent productivity factor, a realistic goal which returns to the output-
per-man-year level achieved in 1974. New ADP equipment should offset any
increase in return complexity.
Man-years
Tax
Returns
in Returns
Returns
per
Processing
Filed
Man-year
1974 Actual Experience
24,817
121,600,000
4,899
1975 Budget
26,610
124,000,000
4,659
1976 IRS Request
27,560
126,500,000
4,589
1976 OMB Recommendation
26,610
126,500,000
4,753
Agency Request: Provide additional resources to process larger numbers of
tax returns in 1976.
OMB Recommendation: Expect increased productivity aided by additional ADP
equipment to offset the projected 2.0 percent increase in tax returns filed
in 1976.
Issue Paper
Department of the Treasury
1976 Budget
Issue #4: IRS Administration of Pension Reform
Statement of Issue
What should be the level of resources in 1975 and 1976 to implement IRS respon-
sibilities under the new pension reform law?
Background
The Employee Retirement Income Security Act of 1974 completely changes the
tax provisions relating to employee pension plans. Virtually all existing
plans will have to be amended to comply with the new qualification require-
ments. The Act provides a new right of appeal to the Tax Court for a
declaratory judgment as to plan qualification. To carry out these provisions
the new law specifically requires the establishment of an "Office of Employee
Plans and Exempt Organizations" to be headed by an Assistant Commissioner in
IRS. The responsibilities of the new organization include issuing determina-
tion letters concerning the qualification of employee plans and the tax exempt
status of other organizations, providing taxpayer guidance through the publica-
tion of rulings and procedures relating to the tax aspects of these plans and
organizations, examining required returns and other information documents,
providing administrative remedies to allow taxpayers to resolve differences
with the IRS in cases involving the qualification of employee plans, and
establishing and maintaining employee plans and exempt organizations master
files.
Alternatives
#1. Provide for implementation of the Employee Retirement Income Security
Act by adding 389 man-years and $10.0 million in a 1975 supplemental
appropriation and an additional 637 man-years and $13.4 million in
1976. (Agency request)
#2. Add 221 man-years ($6.6 million) in a 1975 supplemental appropriation
to begin implementation of the pension reform law but defer additional
increases beyond annualization (86 man-years; $1.8 million) in 1976
until better workload data are available and experience is gained in
administering the program; provide 112 man-years ($2.3 million) in
1976 to strengthen tax review of exempt organizations. (OMB recommenda-
tion)
?
Analysis
July 1 -
1975
Sept 30
1974
1975
Supp.
1976
1976
1977
Budget Authority/Outlays
BA
0
BA
0
BA
0
BA 0
BA
0
BA 0
($ Millions)
Agency request
45
44
49
49
+10
+10
73
72
19
19
75
75
OMB recommendation
45
44
49
49
+7
+7
60
59
15
15
62
62
IRS was appropriated $23.3 million in 1975 for its pension plan program prior
to passage of the 1974 Act and $26.1 million for its ongoing review of exempt
organizations. In implementing the new law, IRS has combined these two programs
under a single organization. Utilizing the impetus provided by the 1974 Act,
IRS seeks to strengthen both facets of the new organization through a supplemental
request in 1975 and an additional increase in 1976.
The OMB recommendation is consistent with the approach already approved for the
companion program in the Department of Labor to implement its responsibilities
under the 1974 law. OMB and Labor agreed that no additional resources beyond
a 1975 supplemental would be recommended for Labor until workload estimates
ecome available next spring to demonstrate whether the 1975 program is adequate
J carry out the Department's responsibilities. Using a similar approach, the
OMB recommendation adds positions in 1975 for pension reform (and annualization
in 1976), but defers further expansion in 1976 until experience is gained in
administering the new Act. This action will likely result in a request for
a spring supplemental. In addition, the OMB recommendation provides resources
in 1976 to assist in establishing new regional organizations for reviewing
exempt organizations and expanding IRS activities in this area at a slower
rate than proposed by IRS.
Agency Request: Provide for implementation of the Employee Retirement Security
Act and expand tax review of exempt organizations through a 1975 supplemental
of $10.0 million and new budget authority of $13.4 million in 1976.
OMB Recommendation: Consistent with the OMB approach to the Department of Labor,
submit a 1975 supplemental request of $6.6 million and approve $1.8 million in
annualization in 1976 for pension reform, recognizing that additional resources
may be required in 1976 when workload levels generated by the 1974 Act have been
determined; provide $2.3 million in 1976 for tax review of exempt organizations,
but disapprove a 1975 supplemental for this purpose on the grounds that no new
circumstances justify program expansion in the current year.
GERALD FORD LIBRAST
Issue Paper
Department of the Treasury
1976 Budget
Issue #5: IRS Tax Fraud Investigation
Statement of Issue
What is the appropriate level for tax fraud investigation in 1976?
Background
The objective of tax fraud investigations is "to encourage the highest degree
of compliance with Internal Revenue laws pertaining to income, estate, gift,
employment and certain excise taxes by enforcement of the criminal provisions
in such laws." There are two sides to this program, investigation into suspected
fraud by taxpayers in general and the special enforcement activity targeted
against persons believed to be engaged in organized crime or traffickers in
illicit narcotics.
Alternatives
#1. Add 8 man-years to tax fraud investigations in 1976 to offset increasing
case complexity. (Agency request)
#2. Reduce personnel by 329 man-years, but handle the same number of cases
projected by IRS through more productive employment of special agents
and support personnel. (OMB recommendation)
Analysis
July 1 -
Sept 30,
1974
1975
1976
1976
1977
Budget Authority/Outlays
BA 0
BA 0
BA 0
BA 0
BA 0
($ Millions)
Agency request
85
82
100
100
100
98
25
25
101
101
OMB recommendation
85
82
100
100
95
93
24
24
96
96
As the following data reflect, the estimate of tax fraud investigations to be
conducted in 1975 has declined from 10,100 when the 1975 budget was prepared
last fall to a current figure of 7,700. At the same time, man-years devoted
to the program have increased in non-professional supporting positions. The
resulting trend in declining productivity is projected to continue in 1976.
2
Change
1975 Program
from
Workload - investiga-
1973
1974
in 1975
in 1976
1976
1975
1976
tions
Actual
Actual
Budget
Budget
Request
budget
Recom.
Taxpayers in general
6,742
5,750
8,200
6,300
6,300
-17%
6,300
Special enforcement
1,859
1,465
1,900
1,400
1,400
-26%
1,400
Total
8,601
!
7,215
10,100
7,700
7,700
-19%
7,700
Man-years
Special agents
2,342
2,519
2,649
2,645
2,650
+9%
2,587
Other FTP
1,164
1,274
1,312
1,389
1,392
+5%
1,118
Total
3,506
3,793
3,961
4,034
4,042
+8%
3,705
Workload Per Man-year
Special agents
3.7
2.9
3.8
2.9
2.9
-1.0
3.0
Other
7.4
5.7
7.7
5.5
5.5
-1.7
6.9
The IRS request contains a slight increase in personnel in 1976 to handle workload
that will decline 19 percent from the level provided for in 1975 budget. IRS
explains the decrease in productivity as a result of growing case complexity.
The OMB recommendation budgets for the same number of tax fraud investigations
projected by IRS for 1976 but uses a workload standard closer to the investiga-
tions-per-man-year ratio budgeted for in 1975 and achieved in 1973 and 1974.
IRS has offered no convincing justification to explain increased case complexity,
however if this materializes, it would be offset in this alternative by higher
productivity.
Agency Request: Add 8 man-years in 1976 to address caseload complexity in 1976.
OMB Recommendation: Reduce 329 man-years but achieve the same results by relying
on investigative output comparable to the level budgeted for in 1975.
GERALD FORU LIBRARY
Issue Paper
Department of the Treasury
1976 Budget
Issue #6: Taxpayer Service
Statement of Issue
What is the appropriate level for taxpayer service in 1976?
Background
The taxpayer service program is responsible for providing taxpayers with the
quality and degree of assistance they need to meet their Federal tax filing
obligations. In 1975, 3,085 man-years will respond to an estimated 10 million
personal inquiries, 25.5 million phone inquiries, and 500,000 letters from
taxpayers. IRS projects a total of 43 million taxpayers inquiries will be
received in 1976, as contrasted to the 36 million estimated for 1975.
Alternatives
#1. Add 279 man-years to taxpayer service in 1976. (Agency request)
#2. Add 216 man-years to taxpayer service in 1976. (OMB recommendation)
Analysis
July 1 -
Sept 30,
1974
1975
1976
1976
1977
Budget Authority/Outlays
BA
0
BA
0
BA 0
BA
0
BA 0
($ Millions)
Agency request
93
80
101
101
119
119
30
30
121
121
OMB recommendation
83
80
101
101
118
118
30
30
120
120
IRS seeks the addition of 279 man-years and $9.2 million to taxpayer service
in 1976 to handle the anticipated growth in workload and to conduct special
assistance programs directed to the elderly and inner city taxpayers. The
request is justified as being responsive to congressional interest in expanding
taxpayer assistance and as part of a general effort to educate the public on its
tax responsibilities.
The OMB alternative allows for an increase of 216 man-years to handle increased
workload projected by IRS, despite the unusually large number of taxpayer
contacts estimated for 1976. The growth of 7 million in 1976 far exceeds the
increase of 1.6 million expected from 1974 to 1975. In the event this workload
does not materialize, IRS would be able to apply additional under-utilized
resources to its special assistance program for the elderly and inner city
residents. Otherwise, IRS would be forced to establish new priorities for
employment of its 3,956 man-years in order to accomplish this 63 man-year
requirement.
2
The 1976 budget will reflect an increase of an additional 655 man-years
in taxpayer service for 1976 attributable to shifting into the taxpayer
service activity accountability for audit and collection personnel actually
attached to this program. Consequently, under the OMB alternative a total
increase of 878 man-years will be shown for the taxpayer service activity in
1976, representing a 28 percent increase
Agency Request: Add 63 man-years on top of the 216 man-year increase provided
in the OMB alternative for taxpayer service.
OMB Recommendation: Provide 216 additional man-years for taxpayer service
in 1976 and rely on the 3,956 man-years budgeted for this activity in 1976
to accomplish the expanded special assistance program requested by IRS.
Issue Paper
Department of the Treasury
1976 Budget
Issue #7: U.S. Customs Service
Statement of Issue
What is the appropriate level of resources for the U.S. Customs Service in
1976?
Background
The U.S. Customs Service collects duties and other taxes on imports and enforces
customs and related laws. The Customs Service has grown rapidly over the last
several years. Since 1969, Customs manpower has increased by 57% to 12,918
man-years in 1975 while the two main indicators of workload, formal entries of
imports and the number of persons arriving from foreign countries, have increased
by 32% and 18% respectively. Customs manpower increases were achieved even though
the drug investigation function and associated resources (735 positions) were
transferred from Customs to the Drug Enforcement Administration in the beginning
of 1974.
The past increases in manpower occurred because of the emphases placed upon
the interdiction and investigation of drugs and increasing workload. Overall
productivity has declined over the past few years. In 1974, an absolute
decrease in formal entries of imports, the primary work indicator, further
aggravated the productivity decline. The requested Customs' budget shows
that productivity will continue declining in 1975 and 1976 from the 1974 level.
The Treasury Department is requesting an additional 311 man-years and $19 M
for Customs in 1976 to expand its enforcement program ($5.8 M), to process
additional workload ($3.4 M), to maintain current staff levels ($8.5 M) and
to expand other programs ($1.4 M).
Alternatives
#1. Add manpower (311 man-years and $19 M) to process imports and passenger
arrivals and to increase the enforcement of laws against smuggling and
fraud. (Agency request)
#2. Reduce manpower (-323 man-years) to force a 2.5% productivitiy increase
above the last actual year (1974), but add net increase in funds (+$3 M)
for cost increases and for additional staff for priority items which
contribute to increased productivity such as marihuana detector dogs
and the computer processing system for cargo. (OMB recommendation)
Analysis
July 1-
Sept 30,
Budget Authority/Outlays
1974
1975
1976
1976
1977
($ Millions)
BA
0
BA
0
BA
0
BA
0
BA
0
Agency Request
241
225
282
297
301
312
76.4
75.8
322
322
OMB Recommendation
241
225
282
297
285
290
72.6
71.8
300
300
2
From 1969 to 1973 Customs productivity in processing persons entering the U.S.
declined by approximately 50% while productivity in processing imports rose by
4%, although it varied from year to year. In 1974, productivity declined by
10% in processing persons and by 3% in processing cargo. The 1976 request
would decrease productivity below 1974.
In order to reverse this trend of declining productivity, OMB recommends a
reduction of 307 man-years in 1976 which is equivalent to a 2.5% increase
in productivity over 1974.
This increase will not recoup the productivity decreases which have occurred
over the last five years. However, it will reverse the declining trend and
provide a reasonable base for future year budget projections. Further reductions
in 1976 are not considered feasible because of potential disruptive effects upon
Customs' programs. Productivity increases should allow Customs to achieve its
work program as projected.
OMB also recommends a 40 man-year decrease in the law enforcement activity.
Productivity in law enforcement is difficult to measure but we believe that
the rise in Customs agents from 350 in 1969 to 548 in 1975 is excessive when
their major investigative function, drugs, has been transferred to DEA.
The Department of Treasury recommends additional manpower to maintain the
current program level and maintain that the workload indicators do not
capture the significant amounts of manpower devoted to searching for illegal
drugs, preventing and uncovering smuggling and other fraudulent activities.
The Department also points out that the OMB recommendation would reduce the
expected revenue by "many millions of dollars." The Department emphasizes
that these enforcement programs result in greater revenue collected, or value
of drugs seized, than the costs of the program.
OMB believes that the marginal benefit of minor decreases or increases in
personnel within Customs do not materially affect the availability of heroin
or other drugs in the U.S. or the amount of duties collected.
Even though the OMB recommendation reduces the Customs program, it does provide
24 positions for essential increases for the opening of new ports of entry,
additional detector dogs and expansion of the computer system to process cargo.
These increases should result in long-term productivity gains and more effective
enforcement.
Agency Request: Treasury wishes to maintain current programs and expand priority
enforcement programs by adding 311 man-years and $19 million in the Customs Service.
OMB Recommendation: Reducing Customs (-323 man-years and +$3 million) in order
to achieve a 2.5% productivity gain should not significantly affect revenues
collected or drug seizures.
Smaller Agencies
ADMINISTRATIVE CONFERENCE OF
THE UNITED STATES
Comments
No change from agency request.
10RD
LIBR
Full-time
Budget
permanent
authority
Outlays
employment:
(in thousands of dollars)
1974 actual
600
507
13
1975 current estimate
750
779
14
1976 agency request
790
780
16
1976 OMB recommendation
790
780
16
Effect of OMB recom-
mendation on agency
request
Transition period
198
190
16
1977 estimate
790
780
16
COUNCIL OF ECONOMIC ADVISERS
Comments
No change from agency request.
Full-time
Budget
permanent
authority
Outlays
employment
(in thousands of dollars)
1974 actual
1,414
1,343
37
1975 current estimate
1,600
1,554
46
1976 agency request
1,575
1,562
46
1976 OMB recommendation
1,575
1,562
46
Effect of OMB recom-
mendation on agency
request
Transition period
393
413
46
1977 estimate
1,575
1,524
46
THE RENEGOTIATION BOARD
Comments
OMB recommendation accepts request
to continue the program at essen-
tially the same level as 1975.
Agency will not appeal.
Full-time
Budget
permanent
authority
Outlays
employment
(in thousands of dollars)
1974 actual
4,805
4,709
183
1975 current estimate
5,163
4,995
200
1976 agency request
5,395
5,335
200
1976 OMB recommendation
5,395
5,300
200
Effect of OMB recom-
mendation on agency
request
-35
Transition period
1,346
1,334
200
1977 estimate
5,395
5,400
200
COMMISSION ON THE REVIEW OF THE
NATIONAL POLICY TOWARD GAMBLING
Comments
OMB recommendation would deny
personnel increases and reduce
contract research program and
support services. No signifi-
cant program effect is expected.
FORD LIBRANT
Full-time
Budget
permanent
authority
Outlays
employment
(in thousands of dollars)
1974 actual
250
248
8
1975 current estimate
1,000
951
20
1976 agency request
880
892
24
1976 OMB recommendation
750
762
20
Effect of OMB recom-
mendation on agency
request
-130
-130
-4
Transition period
135
175
20
1977 estimate
100
69