21st Century Challenges: How Performance Budgeting Can Help	 
(20-SEP-07, GAO-07-1194T).					 
                                                                 
As part of its work to improve the management and performance of 
the federal government, GAO monitors progress and continuing	 
challenges in using performance information to inform budgetary  
choices (performance budgeting). In light of the nation's	 
long-term fiscal imbalance and other 21st century challenges, we 
have reported that the Government Performance and Results Act of 
1993 (GPRA) and performance budgeting can support needed	 
reexamination of what the federal government does, how it does	 
it, and who does it. GAO remains committed to working with	 
Congress and the Administration to help address these important  
and complex issues.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1194T					        
    ACCNO:   A76528						        
  TITLE:     21st Century Challenges: How Performance Budgeting Can   
Help								 
     DATE:   09/20/2007 
  SUBJECT:   Accountability					 
	     Budget functions					 
	     Budget obligations 				 
	     Budget outlays					 
	     Budgeting						 
	     Federal taxes					 
	     Fiscal policies					 
	     Future budget projections				 
	     Regulatory agencies				 
	     Strategic planning 				 
	     Tax expenditures					 
	     Program goals or objectives			 

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GAO-07-1194T

   

     * [1]Long-Term Fiscal Challenge Provides Context and Impetus for
     * [2]Performance Budgeting Can Help Facilitate Reexamination
     * [3]Congressional Support and Comprehensive, Crosscutting Progra

          * [4]Lack of Congressional "Buy-in" and Participation Limits the
          * [5]Performance Budgeting and Reexamination Require a Crosscutti
          * [6]Tax Expenditures Have Doubled in Number and Represent a Subs

               * [7]Tax Expenditures Receive Little Scrutiny

     * [8]Future Performance Budgeting Efforts Must Continue to Build

          * [9]Executive Branch Actions
          * [10]Congressional Actions

     * [11]Concluding Observations
     * [12]GAO's Mission
     * [13]Obtaining Copies of GAO Reports and Testimony

          * [14]Order by Mail or Phone

     * [15]To Report Fraud, Waste, and Abuse in Federal Programs
     * [16]Congressional Relations
     * [17]Public Affairs

                 United States Government Accountability Office

Testimony

GAO

Before the Committee on the Budget, House of Representatives

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, September 20, 2007
                                               
                                    21ST CENTURY CHALLENGES                   
                                                         
                                    How Performance Budgeting Can Help        
                                    Statement of David M. Walker, Comptroller 
                                    General of the United States              

GAO-07-1194T

21ST CENTURY CHALLENGES How Performance Budgeting Can Help

  What GAO Found

Reexamining the base of all major existing federal spending and tax
programs, policies, and activities by reviewing their results and testing
their continued relevance and relative priority for our changing society
is an important step in the process of assuring fiscal responsibility and
facilitating national renewal. Reexamination can arm decision makers with
better information on both individual program results and entire
portfolios of programs and tools-- encompassing a wide range of
discretionary, entitlement, tax, and regulatory approaches--addressing
common goals.

GPRA provided a foundation for strengthening government performance and
accountability. The President's Management Agenda and the Program
Assessment Rating Tool (PART)--OMB's framework for assessing federal
program performance--continue to build on GPRA's foundation. Properly
done, these and future efforts--along with a set of Key National
Indicators (KNI)--could provide a strong basis to support the needed
review, reassessment, and reprioritization process.

Moving forward, for performance budgeting and program reviews to hold
appeal beyond the executive branch and actually have an impact on
legislation, congressional buy-in on what to measure and how to present
this information is critical. In addition, tax expenditures result in
forgone revenue that in some years has approximated the size of total
discretionary spending. Yet relatively little is known about the
effectiveness of these provisions, which are often aimed at policy goals
similar to those of federal spending programs. To date, PART has generally
not been applied to tax expenditures. GAO continues to urge as a next step
a more comprehensive and consistent approach to evaluating all programs
relevant to common goals. This would require assessing the performance of
all programs related to a particular goal--including tax
expenditures--using a common framework.

Figure 1: Federal  Income Tax  Expenditures Reported  by Treasury  Doubled
from 1974 to 2006 Number

180 180 160

160 140

140 120

120 100

100 80

80 60 60 40 40 20 20

    1974 1976 1978 1980 1982  1984 1986 1988 1990  1992 1994 1996 1998  2000
    2002 2004 2006 Fiscal year

Source: GAO  analysis of  Office  of Management  and Budget  (OMB)  budget
reports on tax expenditures, fiscal years 1976-2008

Note: The number of tax expenditures reflects all provisions reported by
Treasury, including those enacted but effective for future fiscal years.
Fluctuations in the trend lines from year to year may reflect changes in
Treasury's methodology.

                 United States Government Accountability Office

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss performance budgeting as a way to
help government meet the pressing challenges of the 21^st Century by
prompting review of federal activities and programs. The federal
government is in a period of profound transition and faces an array of
challenges and opportunities to enhance performance, ensure
accountability, and better position the nation for the future. A number of
overarching trends--including the nation's long-term fiscal imbalance--
drive the need to reexamine what the federal government does, how it does
it, and who does it. The term "performance budgeting" encompasses a range
of approaches, activities, and processes but they all have in common the
idea of more explicitly linking resources to results. As such it holds
promise as a means for facilitating a reexamination effort. Reexamination
can enhance the government's capacity to assess competing claims for
federal dollars by arming decision makers with better information both on
the results of individual programs as well as on entire portfolios of
programs and tools--encompassing a wide range of discretionary,
entitlement, tax, and regulatory approaches--addressing common goals.

Through the President's Management Agenda (PMA) and its related
initiatives, including the Office of Management and Budget's (OMB) Program
Assessment Rating Tool ^[18]1 (PART), the Administration has taken steps
in the right direction by calling attention to successes and needed
improvements in federal management and performance. As we have previously
reported, ^[19]2 PART itself has certain weaknesses we believe should be
addressed and several strengths on which future efforts should
build. Whatever approach is taken in the future, however, it will be
important to include not only those programs and activities run through
the spending side of the budget but also those run through the tax side.
Any reexamination or performance budgeting effort that fails to include
tax expenditures in the review of federal activities and whether they are
achieving their intended policy goals will fall short of its potential.

^1OMB describes PART as a diagnostic tool meant to provide a consistent
approach to assessing federal programs as part of the executive budget
formulation process. It applies 25 questions to all "programs" under four
broad topics: (1) program purpose and design, (2) strategic planning, (3)
program management, and (4) program results (i.e., whether a program is
meeting its long-term and annual goals) as well as additional questions
that are specific to one of seven mechanisms or approaches used to deliver
the program. There is no standard definition for the term "program." OMB
defined the unit of analysis (program) as (1) an activity or set of
activities clearly recognized as a program by the public, OMB, and/or
Congress; (2) having a discrete level of funding clearly associated with
it; and (3) corresponding to the level at which budget decisions are made.

^2 GAO, Performance Budgeting: Observations on the Use of OMB's Program
Assessment Rating Tool for the Fiscal Year 2004 Budget, GAO-04-174
(Washington, D.C.: Jan. 30, 2004) and Performance Budgeting: PART Focuses
Attention on Program Performance, but More Can Be Done to Engage Congress,
GAO-06-28 (Washington, D.C.: Oct. 28, 2005).

In my testimony today I will focus on three main points:

     o The extent of our long-term fiscal and governance challenges
       necessitates a thorough reexamination of government programs and
       spending;
     o Performance budgeting can help accomplish the goal of reexamination;
       and
     o Congressional support and comprehensive crosscutting program
       assessments are critical to reexamination.

In addition, I offer some ideas for moving forward.

This testimony draws upon our wide-ranging work on the use of performance
information in government--including the Government Performance and
Results Act of 1993 ^[20]3 (GPRA), PART, agency coordination and
collaboration, tax expenditures, and key national indicator (KNI) systems.
We conducted our work for this statement during August and September 2007
in accordance with generally accepted government auditing standards.

Long-Term Fiscal Challenge Provides Context and Impetus for Reexamining
Federal Programs

As I have previously testified before this committee, ^[21]4 known
demographic trends and rising health care costs are major drivers of the
nation's large and growing structural deficits. The nation cannot ignore
this fiscal pressure: it is not a matter of whether the nation deals with
the fiscal gap, but how and when. Although it is the "big three"--Medicare
and Medicaid and to a lesser extent, Social Security--that drive this
phenomenon on the spending side, other federal spending cannot be ignored.
Difficult as it may seem to deal with these long-term challenges,
policymakers must not only address these entitlement programs but also
reexamine other budgetary priorities in light of the changing needs of
this nation in the 21^st century. It
will be necessary to work on several fronts at once. In fact, our history
suggests that all major spending and revenue programs and policies need to
be subject to periodic reviews and that exempting major areas can
undermine the credibility and support for the entire process. ^[22]5

^3Pub. L. No. 103-62 (1993).

^4GAO, Long-Term Budget Outlook: Deficits Matter--Saving Our Future Requires
Tough Choices Today, GAO-07-389T (Washington, D.C.: Jan. 23, 2007).

These challenges would be difficult enough if all we had to do is figure
out how to fund existing commitments. But as the nation continues to
change in fundamental ways, a wide range of emerging needs and
demands--for example, evolving defense and homeland security policies,
increasing global interdependence, and advances in science and
technology--can be expected to compete for a share of the budget. Whether
national security, transportation, education, or public health, a growing
population will generate new claims for federal actions on both the
spending and tax sides of the budget. Many of our programs were designed
decades ago to address earlier challenges. Outmoded commitments and
operations constitute an encumbrance on the future that can erode the
capacity of the nation to better align its government with the needs and
demands of a changing world and society.

Accordingly, reexamining the base of all major existing federal spending
and tax programs, policies, and activities by reviewing their results and
testing their continued relevance and relative priority for our changing
society is an important step in the process of assuring fiscal
responsibility and facilitating national renewal. A periodic reexamination
offers the prospect of addressing emerging needs by weeding out programs
and policies that are redundant, outdated, or ineffective. Those programs
and policies that remain relevant often could be updated and modernized by
improving their targeting and efficiency through such actions as
redesigning allocation and cost-sharing provisions, consolidating
facilities and programs, and streamlining and reengineering operations and
processes.

We recognize that taking a hard look at existing programs and carefully
reconsidering their goals and financing are challenging tasks, as making
decisions about reforming programs and activities creates winners and
losers. Furthermore, given the wide range of programs and issues covered,
the process of rethinking government programs and activities may take a
generation to unfold. We are convinced, however, that reexamining the
base offers compelling opportunities to both redress our current and
projected fiscal imbalance while better positioning government to meet
the new challenges and opportunities of this new century.

^5For more information on reexamination of federal programs, see GAO, 21st
Century Challenges: Reexamining the Base of the Federal Government,
GAO-05-352T (Washington, D.C.: February 2005) and Suggested Areas for
Oversight for the 110th Congress, GAO-07-235R (Washington, D.C.: Nov. 17,
2006).

Performance Budgeting Can Help Facilitate Reexamination

generation to unfold. We are convinced, however, that reexamining the base
offers compelling opportunities to both redress our current and projected
fiscal imbalance while better positioning government to meet the new
challenges and opportunities of this new century.

Performance budgeting can help enhance the government's capacity to assess
competing claims in the budget by arming budgetary decision makers with
better information on the results of both individual programs as well as
entire portfolios of policies, tools, and programs designed to address
common outcomes. It is useful to start with a review of the current
landscape. The management and performance reforms enacted by Congress in
the past 15 years have provided some new ways to gain insight into the
financial, program, and management performance of federal agencies and
activities. With GPRA as its centerpiece, the statutory and management
framework laid out in the 1990s provided a foundation for strengthening
government performance and accountability. As our work as shown, ^[23]6
GPRA has succeeded in expanding the supply of performance information and
promoting institutionalization of a culture of performance as well as
providing a solid foundation for more recent budget and performance
initiatives.

As I have previously said, ^[24]7 PMA and its related initiatives,
including PART, demonstrate the Administration's commitment to improving
federal management and performance. Properly done, performance assessment
and performance budgeting information produced by GPRA and PART could
provide a strong basis to support the needed review, reassessment, and
reprioritization process. By calling attention to successes and needed
improvements, the focus that these initiatives bring is certainly a step
in the right direction toward providing the kind of information needed for
effective reexamination, and our work shows that progress has been made in
several important areas over the past several years. For example, we have
reported that the PART process continues to aid OMB's oversight of
agencies and encourage improvements in executive budget formulation and
agency program management. The PART has helped to structure and discipline
OMB's use of performance information for internal program
analysis and budget review, and made its use of this information more
transparent. Many agency officials told us that the PART helped to create
or strengthen an evaluation culture within agencies by providing external
motivation for program review and focused attention on performance
measurement and its importance in daily program management. Some officials
said that the PART and the PMA helped them move away from "analysis by
anecdote" and refocused their attention on the impact their programs have,
instead of largely on output measures. Others echoed a similar
sentiment--one indicated that the PART scores helped to create "a new
sense of urgency" about performance measures and completing the changes to
performance systems that were already under way.

^6GAO, Results-Oriented Government: GPRA Has Established a Solid  Foundation
for Achieving  Greater  Results,  GAO-04-38 (Washington,  D.C.:  Mar.  10,
2004).

^7GAO, 21^st Century  Challenges: Performance Budgeting  Could Help  Promote
Necessary Reexamination, GAO-05-709T (Washington, D.C.: June 2005).

Congressional Support and Comprehensive, Crosscutting Program Assessments
Are Critical to Reexamination

Even the best performance data are insufficient to achieve real
improvements in management and program results unless they are used by
decision makers and managers alike to inform policy and management
decisions. Key stakeholder outreach and involvement in developing
performance information is critical to encouraging the use of such
information in both performance budgeting and reexamination efforts.
Moreover, little is known about the performance of tax expenditures, which
are often aimed at policy goals similar to those of federal spending
programs, such as those intended to encourage economic development in
disadvantaged areas, finance postsecondary education, and stimulate
research and development. Yet tax expenditures and their relative
contributions toward achieving federal missions and goals are often less
visible than spending programs, which are subject to more systematic
review.

Lack of Congressional "Buy-in" and Participation Limits the Potential of
Performance Budgeting Efforts

In order for performance budgeting and program reviews to hold appeal
beyond the executive branch, and to actually have an impact on
legislation, garnering congressional buy-in on what to measure and how to
present this information is critical. Without congressional involvement
and buy-in, these efforts are unlikely to play a major role in the
authorization, appropriations, and oversight processes. Although
congressional support is critical to sustain any major management
initiative, Congress's constitutional role in setting national priorities
and allocating the resources to achieve those priorities makes it
especially important for performance budgeting and reexamination efforts.
Lack of consensus by a community of interested parties on goals and
measures and the way that they are presented can detract from the
credibility of performance information and, subsequently, its use. Fifty
years of past executive branch efforts to link resources with results have
shown that any successful effort
must involve Congress as a full partner. We have previously reported that
past performance budgeting initiatives faltered in large part because they
intentionally attempted to develop performance plans and measures in
isolation from the congressional authorization, appropriations, and
oversight processes. ^[25]8

Some tension about the amount of stakeholder involvement in the internal
deliberations surrounding the development of measures used in budget
formulation and the broader consultations more common to the GPRA
strategic planning process is inevitable. Compared to the relatively
openended GPRA process, any budget formulation process is likely to seem
closed. However, if performance information--and budget recommendations
based on such information--is to hold appeal beyond the executive branch,
congressional understanding and acceptance will be critical. Moreover, any
performance budgeting effort that does not involve Congress will be
limited in its ability to function as a tool to comprehensively reexamine
the entire scope of federal spending, as a major player will be left out
of the effort.

Performance Budgeting and Reexamination Require a Crosscutting Perspective

Existing performance budgeting initiatives provide a foundation for a
baseline review of federal policies, programs, functions, and activities.
Building on this foundation, several changes are in order to support the
type of reexamination needed. For example, PART focuses on individual
programs, but key outcome-oriented performance goals--ranging from
low-income housing to food safety to counterterrorism--are addressed by a
wide range of discretionary, entitlement, tax, and regulatory approaches
that cut across a number of agencies, levels of government, and sectors.
PART's program-by-program approach fits with OMB's agency-by-agency budget
reviews, but it is not well-suited to addressing crosscutting issues or to
looking at broad program areas in which several programs or program types
address a common goal. The evaluation of programs in isolation may be
revealing, but a broader perspective is necessary for an effective overall
reexamination effort. It is often critical to understand how each program
fits with a broader portfolio of programs, tools, and strategies to
accomplish federal missions and goals.

^8GAO, Performance  Budgeting:  Past  Initiatives Offer  Insights  for  GPRA
Implementation, GAO/AIMD-97-46 (Washington, D.C.: Mar. 27, 1997).

Such an analysis is necessary to capture whether and how a program
complements and supports other related programs, policies, and tools, or
whether it actually works at cross-purposes to such other initiatives. OMB
has reported on a few crosscutting assessments ^[26]9 in recent budget
requests. We would urge as a next step a more comprehensive and consistent
approach to evaluating all programs relevant to common goals. Such an
approach would require assessing the performance of all programs related
to a particular goal--including tax expenditures and regulatory
programs--using a common framework.

Our federal tax system includes hundreds of billions of dollars of forgone
revenue annually. In some years, total tax expenditures have approximated
the size of total discretionary spending. Yet relatively little is known
about the effectiveness of tax incentives in achieving the objectives
intended by Congress. ^[27]10 PART, OMB's current framework for assessing
the performance of federal programs, has generally not been applied to tax
expenditures.

Tax Expenditures  Have  Doubled  in Number  and  Represent  a  Substantial
Federal Commitment

Tax preferences--which are legally known as tax expenditures--result in
forgone revenue for the federal government due to preferential provisions
in the tax code, such as exemptions and exclusions from taxation,
deductions, credits, deferral of tax liability, and preferential tax
rates. Excluding tax expenditures from program reviews is especially
problematic because tax expenditures represent such a substantial
investment in such a wide range of policy goals. Whether gauged in
absolute numbers, by revenues forgone, or in comparison to federal
spending, tax expenditures have been substantial over the last three
decades. ^[28]11 Between fiscal years 1974 and 2006, tax expenditures
doubled in number from 67 to 161, as shown in figure 1. While some were
dropped over the period, considerably more were added.

^9In addition, OMB recently announced two new PMA initiatives aimed at
improving the performance of federal credit programs and health
information quality and transparency across the major relevant federal
agencies.

^10For more information on tax expenditures, see GAO, Government Performance
and Accountability: Tax Expenditures Represent a Substantial Federal
Commitment and Need to Be Reexamined, GAO-05-690 (Washington, D.C.: Sept.
23, 2005).

Figure 1: Federal Income Tax Expenditures Reported by Treasury Doubled
from 1974 to 2006                       
Number                                                              Number 
180                                                                    180 

60                                                                      60 
40                                                                      40 
20                                                                      20 

19741975

     19761977197819791980198119821983 198419851986198719881989 199019911992
                 1993199419951996199719981999200020012002 2003

                                    20032004

      Fiscal year

Source: GAO analysis of Office of Management and Budget (OMB) budget
reports on tax expenditures, fiscal years 1976-2008.

Note: The number of tax expenditures reflects all provisions reported by
Treasury, including those enacted but effective for future fiscal years.
Fluctuations in the trend lines from year to year may reflect changes in
Treasury's methodology.

^11Summing the individual tax preference estimates is useful for gauging the
general magnitude of the federal revenue involved, but it does not take
into account possible interactions between individual provisions. Despite
the limitations in summing separate revenue loss estimates, these are the
best available data to measure the value of tax expenditures and make
comparisons to other spending programs. Summing the estimates provides
perspective on the use of tax expenditures as a policy tool and represents
a useful gauge of the general magnitude of government subsidies carried
out through the tax code. The estimates also can be used to compare tax
expenditures to federal spending overall and by budget function. Other
researchers also have summed tax expenditure estimates to help gain
perspective on the use of this policy tool and examine trends in the
aggregate growth of tax expenditure estimates over time.

Tax expenditures span almost all federal mission areas, but their relative
size differs across budget functions. As figure 2 shows, the sum of
revenue loss estimates was greater than federal spending in these budget
functions: energy, commerce and housing credit, and general government.
For example, the $42.4 billion in outlays for the Department of Housing
and Urban Development in fiscal year 2006 are far surpassed by the
estimated revenue losses of $68.3 billion from the mortgage interest
deduction (the second largest tax expenditure for that year). Moreover, as
figure 3 indicates, revenue losses due to tax expenditures exceeded
discretionary spending for half of the last decade.

Figure 2: Tax Preference Revenue  Loss Sums Compared with Federal  Outlays
by Budget Function, Fiscal Year 2006

Dollars in billions

National defense

International affairs

General science,space and technology

Energy

Natural resourcesand environment

Agriculture

Commerce and housing credit

Transportation

Community and regional development

Education, training, employment, and social services

Health

Income security

Social security

Veterans benefitsand services

General government

Net interest

                                      549

Revenue loss in 2006 Federal outlays in 2006

Source: GAO analysis of OMB budget reports on tax expenditures, fiscal
year 2006.

      Figure3: Federal Tax Expenditures Exceeded Discretionary Spending for Half
      of the Last Decade

Dollars in billions(in 2006 dollars) 1,600 1,600

        1,400

1,400

1,200

1,200

1,000

1,000

800

800

600

600

                                    400 400

                                    200 200

        1983 1982 1984 1985 1986 1988 1987 1989 1990 1991 1992 1993 1994 1995
        1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Fiscal year

Mandatory spending excluding net interest

Sum of tax expenditure revenue loss estimates

Discretionaryspending Source: GAO analysis of OMB budget reports on tax
expenditures, fiscal years 1976-2008.

Note: Summing tax expenditure estimates does not take into account
interactions between individual provisions. Outlays associated with
refundable tax credits are included in mandatory spending.

Much of the revenue loss due to individual income tax expenditures is
attributable to a small number of large tax expenditures. The six tax
expenditures shown in figure 4--each with an annual revenue loss estimated
at $40 billion or more--accounted for about 44 percent of the sum of
revenue losses for all tax expenditures for fiscal year 2006.

Figure 4: Revenue Loss Estimates for the Largest Tax Expenditures Reported
for Fiscal Year 2006 Revenue loss estimates (dollars in billions) 200
187.5

                                      150

                                      100

                                       50

                                       0

Exclusion of employer contributionsfor medical insurance premiums and
medical care

Deductibility  Net exclusion   Capital gains Deductibility  Net            
of mortgage    of pension      (except       of nonbusiness exclusion of   
interest       contributions   agriculture,                 pension        
on             and earnings:   timber, iron  state and      contributions  
owneroccupied  defined benefit ore,          local taxes                   
homes          plans           and coal)     other than on  and earnings:  
                                                owner                         
                                                occupied         401(k) plans 
                                                homes                         

Approximate payroll tax revenue lossesTreasury estimated income tax
revenue losses

Source: GAO analysis of OMB, Analytical Perspectives, Budget of the United
States Government, Fiscal Year 2008.

aThe value of employer-provided health insurance is excluded from Medicare
and Social Security payroll taxes. Some researchers have estimated that
payroll tax revenue losses amounted to more than half of the income tax
revenue losses in 2004, and we use this estimate for 2006. The research we
are aware of dealt only with health care, therefore the 50 percent figure
may not apply to other items that are excluded from otherwise applicable
income and payroll taxes.

Tax expenditure estimates reflect federal income tax revenue forgone and
do not account for provisions that exclude certain earnings from payroll
taxes. As a result, this understates the total revenue forgone by the
federal government for some of the largest tax exclusions. If payroll tax
revenue losses were 50 percent of the $125 billion in income tax revenue
loss estimated by the Department of the Treasury, the combined revenue
loss
associated with the exclusion of employer contributions for health
insurance premiums would be $187.5 billion in 2006. ^[29]12

Tax Expenditures Receive Little Scrutiny

So far, OMB has used PART to review tax expenditures in only a few cases,
such as the Earned Income Tax Credit (EITC) compliance initiative, the New
Markets Tax Credit, and the Health Care Tax administration. Generally,
these reviews assessed how well Treasury and IRS administer the tax
expenditures rather than the efficacy of the tax expenditures themselves.
Since tax expenditures represent a significant investment of resources and
in some program areas tax expenditures may be the main tool used to
deliver services, this is a significant gap. For example, in the fiscal
year 2006 budget request, OMB reported on a crosscutting PART assessment
for Community and Economic Development (CED) programs. The CED crosscut
examined the performance of 18 of the 35 federal community and economic
development programs that were identified by OMB and that account for the
majority of the $16.2 billion OMB estimates is spent annually in this
area. Although OMB identified three tax expenditures in the CED portfolio,
it did not assess all of them with the PART instrument even though
Treasury's estimate of their combined "cost" was nearly $1.4 billion, or
about 57 percent of Treasury's revenue loss estimates for community
development.

Periodic review and reexamination of programs--including tax
expenditures--is important to identify and mitigate against mission
fragmentation, overlap, and conflict, as well as service gaps. In the same
way that federal spending programs can work at cross purposes, tax
expenditures meant to address certain policy challenges may exacerbate
other key private sector and public policy challenges. For example, the
income tax exclusion of employer-paid health insurance premiums reduces
the after-tax cost of insurance for the beneficiary. However, the
exclusion offers no benefit to workers whose employers do not offer health
benefits or who purchase their own insurance. Further, this tax benefit
also leads people to obtain more comprehensive coverage than they would
otherwise and could increase the demand for health care to
the extent that it shields those insured from the full costs of health
care, complicating efforts to moderate health care spending. The exclusion
also tends to favor higher-income workers more likely to have
employersponsored coverage. Another example is higher education: students
seeking federal grants and loans are penalized for having saved funds to
pay for their education although the Internal Revenue Code encourages
saving by exempting individuals from federal income taxation on interest
income used to pay for postsecondary education.

^12Some researchers have estimated that payroll tax revenue losses amount to
more than half of the income tax revenue losses. See John Sheils and
Randall Haught, "The Cost of Tax-Exempt Health Benefits in 2004," Health
Affairs (Feb. 25, 2004); and Leonard E. Burman and Jonathan Gruber, "Tax
Credits for Health Insurance," Tax Policy Center Discussion Paper No. 19
(Washington, D.C.: The Tax Policy Center, June 2005). This work dealt only
with health care. Payroll tax revenue losses for certain other tax
expenditures, such as pensions, could differ.

If well designed and effectively implemented, tax expenditures can be an
effective tool and appropriate to further some federal goals and
objectives. Moreover, sometimes it may be cheaper and simpler to subsidize
through the tax code than by setting up a separate program using a
different tool. For example, the incremental administrative and compliance
costs to deliver the tax credit for child and dependent care expenses may
be relatively low compared to the costs of setting up a separate system
for processing child care applications and sending vouchers to those
eligible. However, tax expenditures may not always be efficient,
effective, or equitable; consequently, information on these attributes can
help policymakers make more informed decisions about resource allocation
and the most effective or least costly methods to deliver federal support.

Regular review could also provide needed scrutiny of certain expenditures
that have few controls. With some exceptions, tax expenditures generally
are not subject to reauthorization and therefore lack the opportunity for
regular review. Moreover, many tax expenditures--like mandatory spending
programs--are governed by eligibility rules and benefit formulas, meaning
funds are spent as required to provide benefits to those who are eligible
and wish to participate. Thus, because they are not as visible in the
budget as discretionary spending programs, tax expenditures run the risk
of simply being a form of "back-door spending" embedded in the tax code
and are effectively "fully funded" before any discretionary spending is
considered.

Future Performance Budgeting Efforts Must Continue to Build on Lessons
Learned in Order to Facilitate Effective Reexamination

The federal government is in a period of profound transition and faces an
array of challenges and opportunities to enhance performance, ensure
accountability, and better position the nation for the future. In our
February 2005 report on 21^st century challenges, ^[30]13 we outlined a
number of approaches that could facilitate a reexamination effort.
Agencies and OMB will need to continue to focus on ensuring that the
growing supply of performance information is credible, useful, reliable,
and used both in day-to-day program management and in formulating budget
requests that focus on outcomes that can be achieved with resources
requested. Further, the executive branch can help promote demand for and
acceptance of performance information by developing goals and measures
relevant to the large and diverse community of stakeholders in the federal
budget and planning processes and presenting this information in a way
that is tailored to the needs of congressional stakeholders. Engaging
Congress early in the process may help target reviews with an eye toward
those areas most likely to be on the agenda of Congress, thereby better
ensuring the use of performance assessments in resource allocation
processes throughout government. Lastly, taking a comprehensive and
crosscutting approach to program assessment by more strategically
selecting programs and policy areas for review--regardless of the agency
in which programs are housed, and inclusive of all tools (e.g., grant,
credit, regulatory programs, and especially tax expenditures) that bring
resources to bear on a particular program or policy area--will provide
robust, rich information about the performance of all tools aimed at
federal and national challenges. Moving forward will require actions by
both the executive branch and the Congress. Let me elaborate.

                            Executive Branch Actions

Although recent OMB efforts to assess programs in a crosscutting fashion
represent progress, to provide the kind of information that can be of
assistance in reexamining the base of government, we encourage a more
extensive and consistent approach to evaluating all programs relevant to
common goals. We recommended in 1994 and again in 2005 that OMB design and
implement a structure for conducting reviews of tax expenditures'
performance. Our recommendation is consistent with language in the Senate
Committee on Government Affairs' Report on GPRA, which specified that the
Director of OMB was to establish an appropriate framework for periodic
analyses of the effects of tax expenditures in achieving performance
goals. To significantly increase the
oversight and analysis of tax expenditures, the committee report also
called for a schedule for periodic tax expenditure evaluations.

^13 GAO-05-325SP.

Although incorporating tax expenditures into crosscutting reviews presents
significant analytical challenges, we do not believe such challenges are
insurmountable. Moreover, assessing the performance of tax expenditures is
critically important given that many function as entitlement
programs--although perhaps with even less transparency-- and do not
compete overtly in the annual budget process. Presenting tax expenditures
alongside outlays is a first step in providing the public and policymakers
with a more useful and accurate picture of the extent of federal support
and activities. In fact, in the tax expenditure chapter in Analytical
Perspectives, OMB has in the past included a section outlining possible
performance measures developed by Treasury, which could be used to present
information about the performance of tax expenditures. Although this
overview was initially introduced in the 1997 budget and expanded in the
1999 budget, no performance information is actually displayed. OMB states
that the measure examples provided are "illustrative" in nature,
acknowledges that the performance measure discussion "although broad, is
nonetheless incomplete," and notes that many tax expenditures are not
explicitly cited.

One of the key impediments to moving forward in conducting reviews of tax
expenditures' performance is the continuing lack of clarity about the
roles of OMB, Treasury, IRS, and departments or agencies with
responsibility for related spending programs. Designing a structure and
approach for including tax expenditures in performance reviews will be
challenging, but it is important. Ideally, reviews would look at federal
involvement in a given policy area across related agencies and tools,
which means a decision would have to be made as to which tax expenditures
and which spending programs are relevant. The review would need to involve
the departments or agencies with related spending programs, Treasury, and
OMB. It might make sense for OMB and Treasury to conduct some case studies
of the proposed review structure to identify

(1)
           successful methods agencies devise for reviewing tax expenditures'
           performance, (2) how best to report the results of these reviews,
           and

(3)
           how to ensure that adequate resources are available for such
           reviews. This type of effort can both strengthen the budget
           process itself and provide a valuable tool to facilitate a
           fundamental reexamination of the base of government.

Reexamination is not a one-time activity. It must be a continuing process
and we should expect even the initial round to take several years. The
process could be helped by the governmentwide performance plan required by
GPRA, as well as a governmentwide strategic plan and a set of KNIs. GPRA
requires the President to include in his annual budget submission a
federal government performance plan. Congress intended that this plan
provide a "single cohesive picture of the annual performance goals for the
fiscal year." The governmentwide performance plan could help Congress and
the executive branch address critical federal performance and management
issues, including redundancy and other inefficiencies in how we do
business. It could also provide a framework for any restructuring efforts.
Unfortunately, this provision has not been fully implemented. Instead, OMB
has used the President's budget to present high-level information about
agencies and certain program performance issues. The agency-by-agency
focus of the budget does not provide the integrated perspective of
government performance envisioned by GPRA.

In addition, we have previously said that a governmentwide strategic plan
could provide a framework to identify long-term goals and strategies to
address issues that cut across federal agencies. ^[31]14 Such a plan for
the federal government, supported by key national outcome-based indicators
and a fully developed governmentwide performance plan to assess the
government's performance, position, and progress, could be a valuable tool
for governmentwide reexamination of existing programs, as well as
proposals for new programs. Developing a strategic plan can help clarify
priorities and unify stakeholders in the pursuit of shared goals and is
therefore an important first step in articulating the role, goals, and
objectives of the federal government. A governmentwide strategic plan can
potentially provide a cohesive perspective on the long-term goals of the
federal government and provide a much needed basis for fully integrating,
rather than merely coordinating, a wide array of federal activities. The
development of a set of KNIs could both be used as a basis to inform the
development of governmentwide strategic and annual performance plans as
well as link to and provide supporting information for outcome-oriented
goals and objectives in agency-level strategic and annual performance
plans. Successful strategic planning requires the involvement of key
stakeholders and thus could serve as a mechanism for building consensus.
Further, it could provide a vehicle for the President to articulate
long-term goals and a road map for achieving them. In addition, a
strategic plan can
provide a more comprehensive framework for considering organizational
changes and making resource decisions.

^14 GAO-04-38.

Fully implemented, governmentwide strategic and performance plans--if
developed in consultation with Congress--could also provide a framework
for congressional authorization, appropriation, and oversight processes.

                             Congressional Actions

Congress of course has a number of regular opportunities to provide its
perspective on specific performance issues and performance goals. When you
create a new spending program or tax provision, you have the opportunity
to say what you expect that program or incentive to achieve-- and to
direct that performance be tracked. I believe Congress should be clear
about what performance information it wants and should expect that
information to be provided. For discretionary spending programs, the
annual appropriations process provides an opportunity to ask about the
performance of an individual program and/or a group of programs within the
same agency or within the jurisdiction of the appropriations subcommittee.
When Congress considers the reauthorization of a program, it should have
information on that program's performance--and on how that performance
compares with other tools addressing the same or similar objectives.
Reauthorization can--and should--be informed by performance information
and evaluations.

Discretionary spending programs may be looked at in the annual
appropriations process or when they are up for reauthorization. Although
some entitlement programs require reauthorization and so offer up
opportunities for evaluation and reexamination, others do not. With few
exceptions, programs run through the tax code--tax expenditures--
generally are not subject to reauthorization; as a result no review or
evaluation of their effectiveness is triggered. For many mandatory
spending programs and tax expenditures, congressionally initiated
oversight may be the vehicle for evaluation. I would suggest that Congress
specify the kind of performance information it would like for these
programs and use that in crosscutting reviews.

The institutional challenge before you is to find a way to broaden your
assessment beyond individual programs or agencies or even committee
jurisdiction. It is not uncommon for multiple tools or programs--
administered through more than one agency--to address a similar goal or
national priority. Although this may make sense, it also complicates the
task of evaluation, oversight, and reexamination.

We have previously suggested that Congress consider the need to develop a
more systematic vehicle for communicating its top performance concerns and
priorities; develop a more structured oversight agenda to prompt a more
coordinated congressional perspective on crosscutting performance issues;
and use this agenda to inform its authorization, appropriations, and
oversight processes. Just as the executive branch needs a vehicle to
coordinate and address programs and challenges that span multiple
departments and agencies, Congress might need to develop structures and
processes that better afford a coordinated approach to overseeing agencies
and tools where jurisdiction crosses congressional committees.

In the past we have also suggested that one possible approach could
involve developing a congressional performance resolution identifying the
key oversight and performance goals that Congress wishes to set for its
own committees and for the government as a whole. Such a resolution could
be developed by modifying the current Congressional Budget Resolution,
which is already organized by budget function. I note that this year your
Committee took the first step by including in this year's Budget
Resolution a directive that Committee "Views and Estimates" reports
include recommendations for improved governmental performance based on
"committee performance reviews of programs within their jurisdiction." I
hope this Committee remains interested and continues to urge and support
the other Committees in this effort.

You may also wish to consider what kind of structures will facilitate
crosscutting reviews. If a performance resolution or some other mechanism
specifies areas for reexamination in any given year, what structure will
enable you to look across agencies and at both programs run through the
spending side of the budget and those run through the tax side?
Challenging as this task may be, I believe it is critical to the
successful assertion of Congress' role in setting the goals and objectives
to be achieved with the programs it establishes and the resources it
provides.

Concluding Observations

Much is at stake in the development of a collaborative performance
budgeting and reexamination process. This is an opportune time for the
executive branch and Congress to consider and discuss how agencies and
committees can best take advantage of and leverage the new information and
perspectives coming from the reform agenda under way in the executive
branch. Through PMA and its related initiatives, including PART, the
Administration has taken important steps in the right direction by calling
attention to successes and needed improvements in federal
management and performance. Some program improvements can come solely
through executive branch action, but for any performance budgeting or
reexamination effort to meet its full potential the assessments it
generates must also be meaningful to and used by Congress and other
stakeholders. I cannot stress this point enough--to make a difference,
performance information must be useful and used. Hence I believe it is
important for Congress to develop structures and processes that are
flexible, adaptable, and inclusive of various perspectives to conduct
successful performance reviews on those issues that cross jurisdictional
boundaries. GAO stands ready to assist Congress in addressing the much
needed baseline review of existing federal programs, policies, functions,
and activities.

Mr. Chairman, this concludes my prepared statement. I would be pleased to
answer any questions you or the other Members of the committee may have at
this time.

For future information on this testimony, please contact Michael Brostek,
[32]at (202) 512-9110 or [email protected] or Susan J. Irving at (202)
512-9142 or [33][email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this testimony. Individuals making key contributions to this testimony
were Jacqueline M. Nowicki, Assistant Director; Elizabeth Curda; Edward
Nannenhorn; Amy Rosewarne; and MaryLynn Sergent.

        (450623)

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