Deficit Reduction: Better Targeting Can Reduce Spending and Improve
Programs and Services (Letter Report, 01/16/96, GAO/AIMD-96-14).

Targeting is a promising approach to deficit reduction that can help
reduce spending as well as improve federal programs and services. When
resources are poorly targeted, the federal government spends more money
than needed to reach its intended population and achieve program goals.
Moreover, in a climate of large budget deficits, the inefficiencies
resulting from poorly targeted programs and services has sometimes
called into question the legitimacy of continuing these programs or
maintaining them at current levels. This report summarizes previous GAO
work that proposed "better targeting" as a strategy for downsizing
government. In past reports, GAO has identified instances in which
individuals, organizations, and jurisdictions have received program
funds, service benefits, or tax subsidies. This report presents examples
illustrating better targeting in a wide range of federal programs.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-14
     TITLE:  Deficit Reduction: Better Targeting Can Reduce Spending and 
             Improve Programs and Services
      DATE:  01/16/96
   SUBJECT:  Budget deficit
             Deficit reduction
             Budget outlays
             Formula grants
             Economic analysis
             Cost control
             Budget administration
             Fiscal policies
             Intergovernmental fiscal relations
IDENTIFIER:  Maternal and Child Health Block Grant
             USDA Market Promotion Program
             Medicaid Program
             CDC Vaccines for Children Program
             USDA Targeted Export Assistance Program
             HHS Child Support Enforcement Program
             AFDC
             Aid to Families with Dependent Children Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Government Reform and Oversight,
House of Representatives

January 1996

DEFICIT REDUCTION - BETTER
TARGETING CAN REDUCE SPENDING AND
IMPROVE PROGRAMS AND SERVICES

GAO/AIMD-96-14

Targeting Beneficiaries

(935187)


Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families with Dependent Children
  CBO - Congressional Budget Office
  GAO - General Accounting Office
  IDB - sindustrial development bonds
  LEA - local educational agencies
  MCH - Maternal and Child Health
  MPP - Market Promotion Program
  OMB - Office of Management and Budget
  QMB - qualified mortgage bonds
  TEA - Targeted Export Assistance
  VA - Department of Veterans Administration
  VFC - Vaccines for Children

Letter
=============================================================== LETTER


B-266015

January 16, 1996

The Honorable William F.  Clinger, Jr.
Chairman, Committee on
 Government Reform and Oversight
House of Representatives

Dear Mr.  Chairman: 

You asked us to summarize previously issued GAO work suggesting
better targeting of federal programs and services as a strategy for
downsizing government.  In previous reports,\1 we have identified
instances in which individuals, organizations, and jurisdictions
outside the population originally targeted for assistance have
received program funds, service benefits, or tax subsidies.  As
agreed with your office, this letter presents examples illustrating
better targeting in a wide range of federal programs and services and
discusses targeting in general. 


--------------------
\1 See Addressing the Deficit:  Budgetary Implications of Selected
GAO Work for Fiscal Year 1996 (GAO/OCG-95-2, March 15, 1995) and
Deficit Reduction:  Opportunities to Address Long-Standing Government
Performance Issues (GAO/T-OCG-95-6, September 13, 1995). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Targeting is a promising approach to deficit reduction that can bring
about both reduced spending as well as improved federal programs and
services.  When resources are poorly targeted, the federal government
spends more money than needed to reach its intended audience and
achieve program or service goals.  Moreover, in a climate of large
budget deficits, the inefficiencies resulting from poorly targeted
programs and services have sometimes called into question the
legitimacy of continuing these activities or maintaining them at
their current levels. 

The question of whether funding for particular programs should be
reduced and the allocation of resources altered are issues for the
Congress to decide.  Regardless of the form increased targeting
takes, some beneficiaries of federal programs will receive less
funding and resources, while others could receive somewhat more.  In
some cases, increased targeting would be wholly consistent with
stated legislative and program objectives.  In other cases, however,
the Congress would need to refocus these objectives to be consistent
with how it wishes to shift resources. 

As the Congress examines federal programs and considers how to meet
its deficit reduction goals, our past work suggests many different
kinds of programs and services for which resources could be better
targeted.  Examples include the following: 

  Formulas for grants to state and local governments, such as the
     Maternal and Child Health block grant formula, could be revised
     to better reflect differences in the fiscal capacity of
     recipient jurisdictions to fund the program from their own
     resources as well as differences in jurisdictions' needs for the
     program.  If grant funding were reduced, this strategy could
     permit lower overall funding while simultaneously reallocating
     remaining grant funds more equitably.\2

  Eligibility rules for federal benefit programs, such as the Market
     Promotion Program, could be altered to restrict or reduce
     benefits going to some groups or individuals without altering
     program or service objectives. 

  Fees could be instituted for individuals, groups, and/or industries
     that directly consume certain kinds of government-provided,
     business-type services (for example, inspections, claims
     processing, or recreation).  In addition, existing charges, such
     as those applied to private ski operators using federal land,
     could be increased in these business-type activities so that a
     greater portion of the activity costs are borne by the direct
     beneficiaries. 

  Tax preferences, such as those given to state and local governments
     that issue industrial development bonds (IDBs), could be
     narrowed or eliminated by revising eligibility criteria and/or
     limiting the amount of the preference allowable. 


--------------------
\2 An equitable allocation of federal assistance to state and local
governments is promoted when grant formulas reflect three dimensions
of need:  (1) the number of people potentially eligible for services
under a given grant program, (2) the cost of providing such services,
and (3) the ability of state and local taxpayers to support the
nonfederal share of financing such services.  Funding formulas that
reflect these three dimensions would promote an equitable allocation
of federal resources in the sense that if all states imposed taxes at
comparable rates, comparable services would be available to those
with similar needs. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

As agreed with your office, we limited our examination of targeting
opportunities to our published work.  To answer your questions about
whether targeting can help the federal government downsize and to
provide illustrative examples of a targeting strategy for deficit
reduction, we updated information from our March 1995 report on the
budgetary implications of our work.\3 At this date, the Congress is
considering several of the options described in this report. 
Notwithstanding pending congressional actions, we included the
options because they illustrate how targeting can fit in an effective
deficit reduction strategy.  That report presents a deficit reduction
framework consisting of three broad themes.  The first focuses on
reassessing the objectives of federal programs and services.  Our
premise is that periodically reconsidering a program's original
purpose, the conditions under which it continues to operate, and its
cost-effectiveness is appropriate.  The second focuses on improved
targeting of federal programs and services to beneficiaries.  This
theme concerns how efficiently federal programs and services reach
their intended recipients.  The third focuses on improving the
efficiency of program and service delivery.  This theme suggests that
focusing on the approach or delivery method can significantly reduce
spending or increase collections. 

This letter expands on the second theme--improved targeting--as a
strategy that allows for reducing the deficit while improving the
design of federal government activities.  We did this work in
Washington, D.C., from August 1995 through October 1995. 


--------------------
\3 GAO/OCG-95-2, March 15, 1995. 


   APPLYING THE TARGETING
   FRAMEWORK:  ILLUSTRATIVE
   EXAMPLES
------------------------------------------------------------ Letter :3

The following examples from our work illustrate potential
opportunities to better target federal programs and services. 
Examples are detailed under one of four strategies for better
targeting the intended beneficiaries:  revise grant formulas, change
eligibility rules, target fees and charges, and narrow tax
preferences. 


      REVISE GRANT FORMULAS
---------------------------------------------------------- Letter :3.1

At a time when federal domestic discretionary resources are
constrained, better targeting of grant formulas offers a strategy to
concentrate lower federal spending levels on states or localities
with greater needs and lower capacity to absorb grant reductions. 
Through this process, federal funding reductions would fall more
heavily on those communities with lesser relative needs and with
greatest fiscal capacity to finance services from their own revenue
base.  We have issued many reports over the past decade showing that
the allocation of federal grants to state and local governments is
not well targeted.  This work has been confirmed by many economic
analyses from other sources.\4 As a result, program recipients in
areas with relatively lower needs and greater wealth received a
higher level of services than those available in harder pressed
areas, or wealthier areas were able to provide the same level of
services at lower tax rates. 

Reductions in federal grants to states could be targeted by adjusting
the allocation formulas to concentrate funding on those states with
relatively lesser fiscal capacities and greater needs.  Similarly,
reductions in federal grants to local governments could be targeted
by either concentrating cuts on areas with the strongest tax bases or
by changing program eligibility to restrict grant funding in places
with high fiscal capacity and/or few programmatic needs. 


--------------------
\4 See, for example, Federal-State-Local Fiscal Relations, U.S. 
Treasury Department, Office of State and Local Finance, (Washington,
D.C.:  1985). 


         MATERNAL AND CHILD HEALTH
         SERVICES BLOCK GRANTS
-------------------------------------------------------- Letter :3.1.1

For example, in 1992 we reported that Maternal and Child Health (MCH)
Services block grants could be allocated more equitably.\5 This
program was designed to secure basic health care for low-income and
moderate-income expectant mothers, their infants, and children with
special health care needs.  However, our report concluded that the
allocation method for distributing MCH grants to states ran counter
to the equity standards we developed.  We found that while the number
of children at risk, the costs of providing maternal and child health
services, and the states' ability to pay for these services varied
from state to state, the current MCH allocation method did not
consider these factors.  As a result, Louisiana--with the second
highest proportion of children at risk and average service
costs--ranked 14th in per capita grant funding.  Similarly, at the
time of our analysis, Kansas and Illinois received nearly equal per
capita grants, even though Illinois had about 28 percent higher
health care costs.  In practical terms, this meant that Illinois
consumers had to spend more money than Kansans to buy the same MCH
services. 

We concluded that a new MCH allocation method that strikes a balance
between each state's (1) need adjusted for costs and (2) ability to
pay could substantially improve the overall equity of the MCH
program.  Federal spending for the MCH program reached a reported
$687 million in fiscal year 1994.  If overall funding for this
program were reduced, such a new allocation method could help target
the remaining MCH program funds more equitably. 


--------------------
\5 Maternal and Child Health:  Block Grant Funds Should Be
Distributed More Equitably (GAO/HRD-92-5, April 2, 1992). 


         MEDICAID PROGRAM FORMULA
-------------------------------------------------------- Letter :3.1.2

In another example, we found that the Medicaid program formula does
not target most federal funds to states with weak tax bases and high
concentrations of poor people.\6 In 1990, we reported that while the
program covered 75 percent of those below the poverty line
nationwide, the coverage varied from 37 percent in Idaho to 111
percent in Michigan.  We suggested that a formula using better
indicators of states' financing capacities and poverty rates coupled
with a reduced minimum federal share would more equitably distribute
the burden state taxpayers face in financing Medicaid benefits for
low-income residents in their respective states. 

Federal spending for Medicaid in fiscal year 1994 reached a reported
$82 billion, and the Office of Management and Budget (OMB) projects
spending to reach $136.5 billion by fiscal year 2000.  Should the
Congress act to reduce federal Medicaid spending, a revised grant
allocation system could help target the reduced funding more
equitably.  Along these lines, a block grant that the Congressional
Budget Office (CBO) estimated would reduce federal Medicaid spending
by $163 billion over the next 7 years was included in the recently
passed Balanced Budget Act of 1995.  Under this proposal future
Medicaid costs would be reduced and equity in the distribution of the
remaining funding would be improved because the allocation formula
uses new factors that more precisely measure differences in states'
fiscal capacity and poverty levels. 


--------------------
\6 Medicaid Formula:  Fairness Could Be Improved (GAO/T-HRD-91-5,
December 7, 1990) and Medicaid:  Alternatives for Improving the
Distribution of Funds to States (GAO/HRD-93-112FS, August 20, 1993). 


         TITLE I GRANTS TO LOCAL
         EDUCATIONAL AGENCIES
-------------------------------------------------------- Letter :3.1.3

In another example, Title I grants to local educational agencies
(LEAs), which fund supplementary education services for low achievers
in poverty areas, could be modified to improve targeting among
counties.  Under these grants, formerly known as Chapter 1 grants,
school districts have broad discretionary powers to determine how
resources are distributed to schools, specifying the grades served
and the type and extent of services, and defining which students are
low achievers.  In 1992, we reported that these factors resulted in
considerable variation among students who receive Title I LEA
services.\7 For example, in some school districts Title I LEA funds
served only children scoring below the 20th percentile on
standardized tests.  In other districts, program funds served some
children scoring above the national average (the 50th percentile). 

We found that the legislatively mandated formula for Title I LEA
grants did not (1) accurately reflect the distribution of
poverty-related low achievers, (2) provide extra assistance to areas
with relatively less ability to fund remedial education services, or
(3) adequately reflect differences in local costs of providing
education services.  We concluded that modifications to the Title I
LEA allocation method could target more funds to counties with the
largest numbers of poverty-related low achievers and those least able
to finance remedial instruction. 

Federal funding for Title I grants to local educational agencies
reached a reported $6.3 billion in fiscal year 1994.  If the Congress
decides to reduce funding for these grants, a revised formula could
better target Title I LEA grants to those counties with the greatest
overall need.  The formula could be revised to rely on a more precise
method of estimating the number of poverty-related low achievers, use
an income adjustment factor to grant additional assistance to areas
least capable of financing remedial instruction, and employ a uniform
measure of educational services costs that recognizes differences
within and between states. 


--------------------
\7 Remedial Education:  Modifying Chapter 1 Formula Would Target More
Funds to Those Most in Need (GAO/HRD-92-16, July 28, 1992). 


      CHANGE ELIGIBILITY RULES
---------------------------------------------------------- Letter :3.2

Changing eligibility rules to better target the intended
beneficiaries of federal programs offers another strategy that can
allow for deficit reduction by concentrating reductions on
beneficiaries with little demonstrable need for government
assistance.  We have issued many reports in recent years showing that
programs could be better targeted to more cost-effectively address
those beneficiaries most in need. 


         VACCINES FOR CHILDREN
         PROGRAM
-------------------------------------------------------- Letter :3.2.1

For example, we found that the Vaccines for Children (VFC) Program is
not well targeted.\8 This program was created to improve immunization
rates for measles, mumps, rubella, and other childhood diseases by
lowering the cost of immunization for all children.  However, we
found that most children had already been immunized because cost was
not a significant barrier and that a disproportionate number of
children in underserved areas were not immunized.  We suggested that
the Congress consider targeting the program.  Services could be
improved by directing VFC funds to children in those particular
geographic areas where underimmunization has been a persistent
problem.  Fiscal year 1995 costs for the childhood vaccine program
were estimated at about $450 million. 


--------------------
\8 Vaccines for Children:  Reexamination of Program Goals and
Implementation Needed to Ensure Vaccination (GAO/PEMD-95-22, June 15,
1995). 


         MARKET PROMOTION PROGRAM
-------------------------------------------------------- Letter :3.2.2

Based on our examinations of the Market Promotion Program (MPP), we
believe that the program's eligibility rules could be tightened to
provide support to small, generic, new-to-export companies, but not
to large companies with substantial corporate advertising budgets.\9
The MPP uses federal funds to subsidize efforts to expand export
markets for U.S.  agricultural products by financing such activities
as advertising and consumer promotions.  From 1986 through 1994,
about one-third of MPP funds and those of its predecessor program
(the Targeted Export Assistance (TEA) program) supported private
for-profit companies' brand-name promotions.  These companies
included many large for-profit businesses with substantial corporate
advertising budgets, such as Sunkist Growers and E.J.  Gallo Winery. 
In fiscal year 1995, MPP funding was reduced to $84.5 million from
the budgeted level of $110 million. 

Eligibility rules could be revised to ensure that MPP funds are
supporting additional promotional activities rather than simply
replacing company or industry funds.  While large firms receive MPP
funds to increase exports of U.S.  agricultural products, the
resources otherwise available to such firms may indicate that they
have no demonstrable need for government assistance. 


--------------------
\9 International Trade:  Changes Needed to Improve Effectiveness of
the Market Promotion Program (GAO/GGD-93-125, July 7, 1993). 


         CROP PRICE SUPPORTS
-------------------------------------------------------- Letter :3.2.3

Our reviews of U.S.  Department of Agriculture crop price supports
show that the program's eligibility rules allow producers to avoid
payment limits and reduced program payments.\10 These income support
payments, known as deficiency payments, are the principal payments
made to producers who participate in farm programs for wheat, feed
grains, cotton, and rice.  The payments are designed to protect
producers' incomes when crop prices fall below a legally established
target price.  The Food Security Act of 1985 limited the payments for
those commodities to $50,000 per person annually.  For the act's
purposes, a person is broadly defined as an individual, an entity
(such as a corporation, limited partnership, association, trust, or
estate), or a member of a joint operation (such as a general
partnership or joint venture).  Despite reforms made by the Congress
in 1987, producers have avoided the payment limit by reorganizing
their farming operations to include additional persons. 

According to OMB, deficiency payments amounted to $6.4 billion in
fiscal year 1994.  One option to further tighten payment limits as a
means to reduce program costs would be to change eligibility rules to
limit payments to $50,000 per individual and only provide benefits to
individuals actively engaged in farming. 


--------------------
\10 Agriculture Payments:  Number of Individuals Receiving 1990
Deficiency Payments and the Amounts (GAO/RCED-92-163FS, April 27,
1992) and Agriculture Payments:  Effectiveness of Efforts to Reduce
Farm Payments Has Been Limited (GAO/RCED-92-2, December 5, 1991). 


         VETERANS DISABILITY
         COMPENSATION
-------------------------------------------------------- Letter :3.2.4

In another example, narrowing eligibility rules for veterans
disability compensation could generate savings without affecting
veterans who suffered disabilities as a result of military service. 
In 1994, CBO reported that about 250,000 veterans were receiving
about $1.5 billion annually in Department of Veterans Affairs (VA)
compensation for diseases neither caused nor aggravated by military
service.  Our study of five other countries' veterans programs shows
that they do not compensate veterans under these circumstances.\11
Dollar savings could be achieved by targeting disability benefits
more narrowly, as is done by other countries. 


--------------------
\11 Disabled Veterans Programs:  U.S.  Eligibility and Benefit Types
Compared With Five Other Countries (GAO/HRD-94-6, November 24, 1993). 


      TARGET FEES AND CHARGES TO
      BENEFICIARIES FOR
      BUSINESS-TYPE GOVERNMENT
      ACTIVITIES
---------------------------------------------------------- Letter :3.3

Adjusting fees and charges to the beneficiaries of some business-type
federal programs and services offers a third targeting strategy to
reduce the deficit.  Fees exist for many services provided by the
federal government, including customs and other inspections, use of
recreation and other facilities, and mail delivery.  However, in many
cases, the direct beneficiaries of these kinds of governmental
activities contribute little to support the program or administrative
costs of the activity.  As a result, the programs and services are
often overused and/or under-provided, and money must be found
elsewhere in the budget to make up the difference between
administrative costs and beneficiary charges. 


         CHILD SUPPORT ENFORCEMENT
         PROGRAM
-------------------------------------------------------- Letter :3.3.1

For example, although many beneficiaries of the Child Support
Enforcement Program have higher incomes than the population
originally envisioned to be served by this program they pay
relatively little to support the program's administrative costs.  The
Congress created the Child Support Enforcement Program in 1975 to
strengthen state and local efforts to obtain child support for both
families eligible for Aid to Families with Dependent Children (AFDC)
and non-AFDC families.  Child support enforcement services were made
available to non-AFDC individuals because it was believed that many
families might not have to apply for welfare if they had adequate
assistance in obtaining the support due from the noncustodial parent. 

In 1994, the program collected a reported $7.3 billion for 8.2
million non-AFDC clients.  Bureau of the Census data for 1991 showed
that about 65 percent of the individuals requesting non-AFDC child
support enforcement services in that year had family incomes,
excluding any child support received, exceeding 150 percent of the
federal poverty level.  Because states have exercised their
discretion to charge only minimal application and service fees, they
are doing little to recover the federal government's 66-percent share
of program costs.  In fiscal year 1994, state fee practices returned
$33 million of the reported $1.1 billion spent to provide non-AFDC
services.  Rising non-AFDC caseloads and new program requirements
could lead to administrative costs exceeding $1.6 billion by fiscal
year 2000, with very little offset from those benefiting from the
services. 

We have reported and testified on opportunities to defray some of the
costs of child support programs.\12 Based on this work, we believe
that mandatory application fees should be dropped and that states
should charge a minimum percentage service fee on successful
collections for non-AFDC families.  Under this proposal, non-AFDC
beneficiaries would pay an increased share of the costs of
administering this program. 


--------------------
\12 Child Support Enforcement:  Opportunity to Defray Burgeoning
Federal and State Non-AFDC Costs (GAO/HRD-92-91, June 5, 1992) and
Child Support Enforcement:  Opportunity to Reduce Federal and State
Costs (GAO/T-HEHS-95-181, June 13, 1995). 


         VETERANS' LONG-TERM CARE
-------------------------------------------------------- Letter :3.3.2

As a second example, veterans' long-term care costs could be reduced
and comparability among retirees increased if veterans' copayments
for these services were increased.  All veterans with a medical need
for nursing home care are eligible to receive such care in VA and
community facilities to the extent that space and resources are
available.  VA is required to collect a fee, commonly known as a
copayment, from certain veterans with nonservice-connected problems
and incomes above a designated level.  Nursing home care is free for
other veterans who receive care in VA or contract community nursing
homes.  By contrast, we found that state veterans' homes recovered as
much as 50 percent of the costs of operating their facilities through
charges to veterans receiving services.\13 Similarly, through estate
recoveries during the 12 months ending June 30, 1992, Oregon
recovered about 13 percent of the costs of nursing home care provided
under its Medicaid program.  However, in fiscal year 1990, the VA
offset less than one-tenth of 1 percent of its costs through
beneficiary copayments. 

OMB reported that in fiscal year 1994, VA's operating expenses were
about $1.7 billion to provide nursing home and domiciliary care to
veterans.  The Congress may wish to consider increasing cost sharing
for VA nursing home care by adopting cost-sharing requirements
similar to those imposed by most state veterans' homes and by
implementing an estate recovery program similar to those operated by
many states under their Medicaid programs.  The potential for
recoveries appears to be greater within the VA system than under
Medicaid.  Home ownership is significantly higher among VA hospital
users than among Medicaid nursing home recipients, and veterans
living in VA nursing homes generally contribute less toward the cost
of their care than do Medicaid recipients, allowing veterans to build
larger estates. 


--------------------
\13 VA Health Care:  Offsetting Long-Term Care Costs by Adopting
State Copayment Practices (GAO/HRD-92-96, August 12, 1992). 


         SKI FEE SYSTEM
-------------------------------------------------------- Letter :3.3.3

In another example, we found that the current ski fee system does not
ensure that the Forest Service receives fair market value for the use
of its land.\14 In 1991, privately owned ski areas operating on
Forest Service land--such as those in Vail, Colorado; Jackson Hole,
Wyoming; and Taos, New Mexico--generated $737 million in gross sales. 
After making adjustments reflecting the revenues generated from
federal land, these areas paid about $13.5 million, or about 2.2
percent of the total revenues generated, in fees to the government. 
When the Forest Service ski fee system was developed in 1965, the
rates were to be adjusted periodically to reflect changes in economic
conditions for these business-type operations.  However, the rates by
which fees are calculated have not been updated since the fee system
was developed. 


--------------------
\14 Forest Service:  Little Assurance That Fair Market Value Fees Are
Collected From Ski Areas (GAO/RCED-93-107, April 16, 1993). 


      NARROW TAX PREFERENCES
---------------------------------------------------------- Letter :3.4

Changing eligibility rules for tax preferences offers a fourth
targeting strategy to reduce the federal budget deficit.  While tax
expenditures can be a valid means for achieving certain federal
objectives, studies by GAO and others have raised concerns about the
effectiveness, efficiency, and equity of some tax expenditures.  As
with poorly targeted fees, poorly targeted tax preferences often lead
to overutilization by beneficiaries and reduced revenues that either
add to the deficit or must be made up elsewhere in the budget. 


         INDUSTRIAL DEVELOPMENT
         BONDS
-------------------------------------------------------- Letter :3.4.1

For example, tax-exempt industrial development bonds (IDBs) are
poorly targeted.  IDBs are issued by state and local governments to
finance the creation or expansion of manufacturing facilities to
create new jobs or to promote start-up companies or companies in
economically distressed areas.  However, in a review of IDB-funded
projects, we found that only about one-fourth of the projects were
located in economically distressed areas.\15 We also found that the
job creation benefits attributed to IDBs would likely have occurred
anyway.  In addition, most developers contacted said that they would
have proceeded with their projects without IDBs.  Moreover, few
companies obtaining tax subsidized financing were start-up companies. 
OMB estimated that revenue loss due to the tax exempt status of small
issue IDBs reached $690 million in fiscal year 1994. 


--------------------
\15 Industrial Development Bonds:  Achievement of Public Benefits Is
Unclear (GAO/RCED-93-106, April 22, 1993). 


         QUALIFIED MORTGAGE BONDS
-------------------------------------------------------- Letter :3.4.2

Similarly, we found that achievement of public benefits from
qualified mortgage bonds (QMBs) is questionable.  We found that QMBs
did little to increase home ownership, were usually provided to home
buyers who did not need them to obtain a conventional (unassisted)
mortgage loan, and were not cost-effective.\16 OMB estimated that
revenue loss due to the tax-exempt status of QMBs amounted to $1.76
billion in fiscal year 1994. 

Both IDBs and QMBs could be better targeted.  For example, IDBs could
be focused on economically distressed areas or start-up companies,
and QMBs could be directed toward home buyers who could not
reasonably qualify for unassisted conventional loans. 


--------------------
\16 Home Ownership:  Limiting Mortgage Assistance Provided to Owners
With High-Income Growth (GAO/RCED-90-117, September 26, 1990). 


         TAX TREATMENT OF HEALTH
         INSURANCE
-------------------------------------------------------- Letter :3.4.3

In another example, the current tax treatment of health insurance
gives few incentives to workers to economize on purchasing health
insurance.\17 Some analysts believe that the tax-preferred status of
these benefits has contributed to the overuse of health care services
and large increases in our nation's health care costs.  Improved
targeting for this subsidy could play a role in reducing the
associated revenue losses and improving the efficiency of the
nation's health care system. 

Targeting is a viable approach because higher income employees are
more likely to have health care coverage and, because they pay higher
marginal tax rates than low-income earners, the tax benefits from
employer-provided health benefits are greater for high-wage earners. 
The Department of the Treasury estimated that revenue loss due to the
tax-exempt status of employer-provided health insurance amounted to
$33.5 billion in fiscal year 1992.  An option to better target this
tax preference would be to place a cap on the dollar amount of health
insurance premiums that could be excluded from income.  Including in
a worker's income the dollar amount over the cap could improve the
efficiency of the health care system and, to a lesser extent, tax
equity.  Alternatively, including health insurance premiums in income
but allowing a tax credit for some percentage of the premium would
improve equity since tax savings per dollar of premium would be the
same for all taxpayers, irrespective of the tax brackets. 


--------------------
\17 Tax Policy:  Effects of Changing the Tax Treatment of Fringe
Benefits (GAO/GGD-92-43, April 7, 1992). 


   TARGETING CAN ALLOW FOR DEFICIT
   REDUCTION WHILE IMPROVING
   PROGRAMS AND SERVICES
------------------------------------------------------------ Letter :4

As the examples from our published work show, more effective
targeting is one of several available approaches that can allow for
reducing spending while improving federal programs and services. 
Programs and services, such as grants to states to provide health
care for low- and moderate-income individuals or export promotion
support for emerging firms, are created due to some perception of
eligibility and/or need.  In these instances, individuals,
organizations, or jurisdictions outside the original targeted
population--that is, populations with a greater capacity to provide
the program or service from their own resources or having fewer
needs--have received program funds, services, or tax subsidies.  This
poor targeting may have occurred because grant formulas or
eligibility rules were constructed too broadly or fees did not fully
reflect beneficiaries' capacity to offset program costs.  In other
instances, the circumstances creating a need for the program or
service may have changed. 

The end result of poor targeting is that the federal government
spends more money than needed to reach the intended beneficiaries and
achieve its program or service goals.  Moreover, in a climate of
continuing large budget deficits, the inefficiencies resulting from
poorly targeted programs and services have sometimes called into
question the legitimacy of continuing these activities or maintaining
them at their current levels. 

In many instances, broad support remains for the objectives of poorly
targeted programs and services.  In these areas, better targeting can
increase the efficiency and effectiveness of the program or service
while allowing for program reductions.  In other cases, poor
targeting raises fundamental questions about the program's or
service's merit and/or feasibility.  In these circumstances,
decisionmakers may want to consider whether the program or service
should be eliminated. 


---------------------------------------------------------- Letter :4.1

We are sending copies of this report to the Ranking Minority Member
of the House Committee on Government Reform and Oversight.  Copies
will be available to others upon request.  Major contributors to this
report were

Margaret T.  Wrightson, Assistant Director, and Timothy L.  Minelli,
Senior Evaluator.  Please contact me at (202) 512-9573 if you or your
staff have any questions concerning the report. 

Sincerely yours,

Paul L.  Posner
Director, Budget Issues


*** End of document. ***