Budget Issues: Selected GAO Work on Federal Financial Support of Business
(Letter Report, 03/07/96, GAO/AIMD/GGD-96-87).

Pursuant to a congressional request, GAO summarized previously issued
GAO work on spending programs and tax benefits available to businesses,
focusing on: (1) examples of GAO work assessing selected financial
support programs; and (2) work published after 1992.

GAO found that: (1) government-provided financial benefits to businesses
fulfill a wide range of public policy objectives and are spread
throughout the budget; (2) poorly designed programs can cause the
government to spend more money or lose more revenue than necessary to
achieve program objectives; (3) ineffective or inefficient transfers
benefit businesses doing things they would have done anyway; (4) other
program problems include preemption of market forces, which promotes
inefficiency, moral hazards, which cause businesses to take greater
risks, and duplication and overlap; and (5) Congress needs to address
issues regarding the reduction or redesign of programs, including the
necessity for new legislation.

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

 REPORTNUM:  AIMD/GGD-96-87
     TITLE:  Budget Issues: Selected GAO Work on Federal Financial 
             Support of Business
      DATE:  03/07/96
   SUBJECT:  Program abuses
             Erroneous payments
             Business assistance
             Subsidies
             Economic analysis
             Ethical conduct
             Cost control
             Transfer payments
             Tax credit

             
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Cover
================================================================ COVER


Report to the Honorable
Charles F.  Bass, House of Representatives

March 1996

BUDGET ISSUES - SELECTED GAO WORK
ON FEDERAL FINANCIAL SUPPORT OF
BUSINESS

GAO/AIMD/GGD-96-87

Federal Business Support

(935199)


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


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


B-271294

March 7, 1996

The Honorable Charles F.  Bass
House of Representatives

Dear Mr.  Bass: 

You asked us to summarize previously issued GAO work on spending
programs and tax benefits available to businesses.  As agreed with
your office, our objective was to produce examples from GAO work
assessing selected financial support programs available to
businesses.  This letter presents many examples of federal programs
from GAO work published primarily after 1992 where we identified
efficiency or effectiveness concerns and provides GAO's observations
on program design and implementation.  The examples do not represent
a comprehensive inventory of all federal financial support for
business.  We compiled our summary in Washington, D.C., in March
1996.  The appendixes list the most recent GAO product; however,
other related GAO work also may be available.  Appendix I contains
information on 40 spending programs and appendix II, information on
13 tax benefits. 

The Congress is now considering action on several of the programs
included in our examples.  Notwithstanding pending congressional
actions, we included the examples to provide you the fullest
information possible. 

The federal government provides financial benefits to businesses as a
means of fulfilling a wide range of public policy objectives.  Our
work shows that these benefits are spread throughout the budget,
including programs in international affairs, energy, natural
resources and environment, agriculture, and transportation. 

In those cases where programs are poorly designed, including those
benefiting businesses, the federal government may spend more money or
lose more revenue than needed to reach its intended audience and
achieve program or service goals.  These issues can be grouped under
the following headings. 

  Ineffective or Inefficient Transfers:  Some businesses receive
     federal funds or tax benefits to do things they would have done
     anyway.  For example, as noted in appendix II, the job creation
     benefits attributed to some small issue industrial development
     bonds would likely have occurred without their issuance. 

  Preemption of Market Forces:  Artificially increasing the price of
     goods to consumers can encourage inefficient production, can
     impose cost on taxpayers, and also may encourage production of
     goods that otherwise would not have been produced.  Examples
     include federal payments for such farm commodities as rice,
     cotton, and milk presented in appendix I. 

  Moral Hazard:  Federal programs may provide an incentive for
     businesses to undertake more risky activity than they would
     without the program.  An example in appendix I is the
     availability of federal crop insurance where government costs
     rise because producers who do not employ loss-prevention
     measures enjoy the same premium schedule as those who do. 

  Duplication, Overlap, and Tools Working at Cross Purposes:  Several
     federal programs may address the same problem, or one program
     may counteract the beneficial effects of another program.  Our
     reports on water and crop programs, housing assistance, and
     disaster assistance programs identify numerous instances of this
     condition.  For example, as we discuss in appendix I, some
     farmers receive federally subsidized water to produce federally
     subsidized crops due to the design of federal water and crop
     programs. 

The question of whether funding should be reduced or programs
redesigned is an issue for the Congress to decide.  If changes are
made, some businesses may receive less funding and fewer resources,
while others could receive somewhat more.  In some cases, changes in
the design of a spending or tax program could be made without
changing current law.  In other cases, however, the Congress would
need to change underlying legislation, consistent with its new views. 

Copies of this report will be available upon request.  Major
contributors to this report were Margaret Wrightson, Assistant
Director, Budget Issues; Carolyn Litsinger, Senior
Evaluator-in-Charge, Budget Issues; Kevin Daly,

Senior Economist, Tax Policy and Administration Issues; and Anne
Stevens, Senior Economist, Tax Policy and Administration Issues.  If
you or your staff have any questions concerning the report, Paul
Posner may be reached at (202) 512-9573 and James White, at (202)
512-5594. 

Paul L.  Posner
Director, Budget Issues
Accounting and Information
Management Division

James R.  White
Associate Director
Tax Policy and Administration Issues
General Government Division


SELECTED GAO WORK ON FEDERAL
SPENDING PROGRAMS FOR BUSINESS BY
BUDGET FUNCTION
=========================================================== Appendix I



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SELECTED GAO WORK ON FEDERAL TAX
BENEFITS TO BUSINESS BY BUDGET
FUNCTION
========================================================== Appendix II



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