PUERTO RICO VIRGIN ISLANDS GUAM AND AMERICAN 54110(U) GENERAL ACCOUNT ING OFFICE &ASIINGTOI DC I4SJIAN RESOURCES uU NCSSIFIED DIV SEP 87 F/ 5/2 U Eh~a hEmmommhEIoE EhEEEEmohmhEmhE EhEEohhEEEEmhI EhhmhshEEEEEEE Ml mum ME : OTIC FILE CpORY United States General Accounting Office "- GAO Report to the Acting Chairman, Subcommittee on Public Assistance and Unemployment Compensation, Committee on Ways and Means, House of Representatives September 1987WE F R \JD '- " ""'WELFARE AND TAXES 00 Extending Benefits and Taxes to Puerto Rico, Virgin Islands, Guam, and American Samoa S V, ,2 4 4', GAO/HRD-87460 ~ ~ h *4 :7 'rtv ~ AUnited States General Accounting Office Washington, D.C. 20548 Human Resources Division B-220538 September 15, 1987 The Honorable Thomas Downey, Acting Chairman Subcommittee on Public Assistance and Unemployment Compensation Committee on Ways and Means House of Representatives Dear Mr. Downey: This report responds to the Subcommittee's request that we estimate the potential effects of fully extending selected federal welfare programs and income taxes to Puerto Rico, the Virgin Islands, Guam, and American Samoa. We are sending copies of this report to Congressmen Harold E. Ford and Fortney H. (Pete) Stark, who requested the review; other interested House and Senate committees; the Secretaries of Agriculture, Health and Human Services, Interior, and Treasury; the Director, Office of Management and Budget; the governors, legislative leaders, and congressional delegations of the four areas; and other interested parties. Sincerely yours, Acces son For NTIS G1RA&I DTIC TAB ;r Richard L. Fogel justificatio Assistant Comptroller General By_ ~Distribution/ Availability od e Dist special " O T IC InSPECtE_ This doimt Wo be.. uppW0 Executive Summary Purpose As requested by the House Ways and Means Subcommittee on Public Assistance and Unemployment Compensation, GAO analyzed the poten- tial effects of fully extending Supplemental Security Income (ssi), Aid to Families with Dependent Children (AFDc), Medicaid, foster care, Child Support Enforcement, Food Stamps, and federal income taxes to Puerto Rico, the Virgin Islands, Guam, and American Samoa. The United States treats these insular areas differently than states in providing federal aid and taxing income. Welfare coverage is generally more limited, leaving many needy individuals with less support, although it is sometimes more liberal than the states' counterpart pro- grams. Area residents and businesses generally are exempt from federal taxes, and business tax incentives encourage the areas' economic self- reliance. Recently, there has been congressional interest in making wel- fare programs and income taxes more comparable between the areas and states. Background For decades, the federal government has fostered social and economic development in the areas through welfare programs and special tax treatment. Some of the six programs GAO analyzed operate in the four areas, but federal funding and sharing rates often are lower and pro- gram requirements different than in the states. ssi is not available in the areas, although some have counterpart programs; only the Virgin Islands and Guam have Food Stamps, although Puerto Rico's Nutrition Assistance Program is patterned after Food Stamps; and American Samoa has only Medicaid. U.S. corporations, by using the U.S. Internal Revenue Code's section 936 tax credit or foreign tax credit, pay reduced or no federal taxes on their area income. Also, area businesses and residents are exempt from U.S. taxes on their area income, but such income is subject to local income taxes, which are patterned after federal taxes. Results in Brief Using 1984 data, GAO estimates that federal expenditures in the four areas would have doubled-from about $1 to $2 billion-had the six programs been fully extended to those areas. Federal increases would result from higher benefits, more recipients, and greater cost sharing. Conversely, areas' costs would have decreased about 37 percent-from $244 to about $154 million, due to full federal funding of ssi, lower cost sharing, and fewer Medicaid participants than the areas' counterpart Page 2 GAO/HRD-87-0 Welfare and Taxes -wk Executive Sununary Medicaid programs. Most area leaders favored extending ssi, but views on the other programs varied. GAO estimates from 1983 data-the latest available-that federal tax revenue, negligible in 1983, would have been about $2.7 billion more and area tax revenue $1.4 billion less if federal income taxes had been fully extended and replaced area income taxes. But, because such changes could adversely affect local business activity, GAO believes annual fed- eral tax revenue could decline significantly over the long term as some businesses close, relocate, or down-size operations after tax incentives disappear. Nearly all area leaders strongly opposed federal income taxes, citing the likely flight of businesses and other taxpayers and depressed economies-which in turn could lead to more welfare costs and less area tax revenue. Because of their susceptibility to variation, GAo advises caution in using the interdependent cost and revenue estimates, as well as their overall net effect. GAO's Analysis Federal Costs Would Comparing 1984 actual with estimated program costs shows that federal Increase cost increases would have differed by program and area. ssi would cost about 27 times more than the areas' counterpart adult assistance pro- grams, due to full federal financing of benefits and higher participation under more liberal eligibility criteria, Federal AFD Ccosts would increase about 1- 1/2 times, due to increased federal cost sharing and higher par- ticipation under more liberal eligibility criteria. Medicaid costs would increase nearly 5 times-assuming areas' costs would eventually approach states' costs-due to higher federal cost sharing ad removal of federal funding ceilings. Federal costs for Food Stamps, already extended to the Virgin Islands and Guam, would increase about 25 per- cent if extended to American Samoa and Puerto Rico-mostly due to removing the federal funding ceiling on Puerto Rico's Nutrition Assis- tance Program. Areas' Costs Would Areas' costs would decrease, mainly because (1) with sm,. their adult Decrease assistance program costs would shift to the federal government and (2) the number of Medicaid participants would decrease about 34 percent Page 3 (1A() HRI)-87-60 Welfarr and Taxesi 0 " Executive Summary under more restrictive eligibility criteria. Puerto Rico would have the greatest decrease-about $88 million, or 38 percent. : Representatives' Views on Most area leaders surveyed by GAO favored extending ,si and many Extending Programs favored extending AFDC, Medicaid, and Food Stamps, but not foster care. Varied They saw (1) more adequate benefits, (2) better services, and (3) fairer treatment for residents. They were concerned about (1) welfare depen- dency and work disincentives, (2) immigration from neighboring islands to obtain assistance, and (3) disruption of their area cultures, particu- larly in American Samoa. * Federal Income Tax Expected revenue from extending federal taxes would result mainly Revenue Increases Might from eliminating section 936 credits for U.S. corporations operating in Decline Over Time Puerto Rico. GAO estimates that in 1983, federal corporate tax revenue from the four areas would have been about $2.14 billion and personal tax revenue about $531 million, but believes that-mostly because of the loss of business tax incentives-over the long run annual federal revenue could decline to less than $2.1 billion. Areas' Tax Revenue Would Areas would have lost about $524 million in corporate and $892 million Decrease in personal tax revenue had U.S. taxes replaced area taxes. Estimated federal corporate tax revenue is higher than area losses because federal tax law would not have allowed all of the areas' tax systems' exemp- tions and rebates. Estimated federal personal tax revenue is lower than area losses mostly because federal income taxes are lower than some areas' taxes. All Areas Oppose Business leaders and nearly all area officials opposed extending federal Extending Taxes taxes because, they told GAO, businesses would relocate, revenues and jobs would diminish, and the need for welfare would increase, as would areas' fiscal dependence on the Tnited States. Some were concerned about taxation without representation, and the Puerto Rico governor and other officials there questioned whether, without area concurrence, the I Inited States legally could impose taxes on their area-an issue involving I'.S./Puerto Rican political relationships. Page 4 (AO HRI-87440 Welfare and Taxes * - ' * .,'.'~, * b-.% Executive Sununary Estimates Subject to Many factors could affect GAO'S estimates, including (1) areas choosing Variation different designs for fully extended programs than were envisioned dur- ing GAO'S review, (2) changes in areas' economies or business activities that affect the demand for welfare services or potential income tax rev- enue, and (3) recent and future legislative changes. Thus, GAO advises caution in using the estimates. There are inherent uncertainties in predicting the effects of fully Matters for extending welfare and, particularly, taxes to the areas. Should the Con- Congressional gress endeavor to make changes in the programs or taxes, it should Consideration consider: " Extending one program at a time to an area or subarea on an experimen- tal basis and determining the actual costs and the extent and nature of other effects. Area views would help in selecting experiments. " Gradually increasing corporate tax revenues (such as by decreasing sec- tion 936 credits) up to the cost of the program extension, rather than eliminating business tax incentives altogether. f.- - Agency Comments GAO received comments from Puerto Rico's governor, Senate president, and resident commissioner; the Virgin Islands' governor; Guam's speaker of the Legislature; American Samoa's governor and Senate pres- ident; and the U.S. Departments of Agriculture, Treasury, Interior, and mis. (See p. 74-80.) Area officials generally restated their positions-as discussed in the report-on fully extending welfare programs. Also, all area officials restated strong opposition to fully extending federal income taxes, reem- phasizing the likelihood of reduced business activity, increased unem- ployment, and the consequent need for more welfare. Agriculture said GAO downplayed the significance of Food Stamps in the areas and the Nutrition Assistance Program in Puerto Rico. Treasury said that GAO's long-term estimate of the revenue effects of tax exten- sion should be deemphasized. GAO, however, believes the report properly characterizes these matters. Interior opposed any policy that would extend additional programs or taxes, citing its interest in having area residents attain self-government and plan their own futures. ims said the report was a fair and accurate portrayal of its programs in the areas. Page 5 (AO HRN84740 Welfare and Taxes 0 4 1 W , ." Contents Executive Summary 2 Chapter 1 10 Introduction Availability of Selected Welfare Programs in the Four 14 Areas Special Federal Tax Treatment for the Four Areas 17 Objectives, Scope, and Methodology 19 Chapter 2 25 Extending Federal Effects on Program Costs 25 W laePorm :Summary of Area Views on Extending Programs 29 Area-by-Area Analysis of Effects of Extending Six 31 Costs and Area Views Welfare Programs About Effects Chapter 3 53 Effects of Extending Effects on Revenues 53 Feea nom ae: Summary of Area Views on Extending Federal Income 55 Fedeal ncom Taes: Taxes Revenues and Area Area Business Reaction Could Reduce Federal Tax 56 ViewsRevenue ViwsArea-by-Area Analysis of Effects of Extending Federal 59 Income Taxes Chapter 4 72 Conclusions, Matters Matters for Congressional Consideration 73 for Congressional Agency Comments 74 Consideration, and Agency Comments * Appendixes Appendix 1: Descriptions of Six Federal Welfare Programs 82 1 Reviewed and Area Counterparts Appendix II: Descriptions of Income Taxes in the Four 101l Areas Appendix III: Cost-Estimating Methodology for Extending 108 Six Welfare Programs to the Four Areas Appendix IV: Section 936 Tax Credit of the U.S. Internal 124 Revenue Code: Effects of Its Repeal for Puerto Rico Page 6 GiAO !HRDR7410 Welfare and Taxes Contents Appendix V: Revenue-Estimating Methodology for 138 Extending Federal Income Taxes to the Four Areas Appendix VI: Selected GAO and Other Reports and 145 Studies Related to Selected Insular Area Welfare Programs and Income Taxes Appendix VII: Comments From the Governor of Puerto 147 Rico Appendix VIII: Comments From the President of the 158 Senate of Puerto Rico Appendix IX: Comments From the Resident Commissioner 173 of Puerto Rico Appendix X: Comments From the Governor of the Virgin 176 Islands of the United States Appendix XI: Comments From the Speaker of the Guam 180 Legislature Appendix XII: Comments From the Governor of American 196 Samoa Appendix XIII: Comments From the President of the 200 Senate of American Samoa Appendix XIV: Comments From the Department of 203 Agriculture Appendix XV: Comments From the Department of the 205 Treasury Appendix XVI: Comments From the Department of the 207 Interior Appendix XVII: Comments From the Department of 209 Health and Human Services Tables Table 1.1: Selected Characteristics of the Four Insular 12 Areas Table 1.2: Federal Program Availability in the Four Areas 14 Table 1.3: Federal Funding Limits for Area Welfare 15 Programs Table 2.1: Costs of Welfare Programs in the Four Areas in 25 1984, and Estimated Costs If Programs Were Fully Extended Table 2.2: Participants in Welfare Programs in the Four 26 Areas in 1984, and Estimated Participants If Programs Were Fully Extended Table 2.3: Costs in the Four Areas in 1984 for Welfare 31 Programs, and Estimated Costs If Programs Were Fully Extended Page 7 GAO/HRD8740 Welfare and Taxes d "aim Contents Table 2.4: Costs of Welfare Programs in Puerto Rico in 31 1984, and Estimated Costs If Programs Were Fully Extended Table 2.5: Participants in Welfare Programs in Puerto 32 Rico in 1984, and Estimated Participants If Programs Were Fully Extended Table 2.6: Costs of Welfare Programs in the Virgin Islands 39 in 1984, and Estimated Costs If Programs Were Fully Extended Table 2.7: Participants in Welfare Programs in the Virgin 40 Islands in 1984, and Estimated Participants If Programs Were Fully Extended Table 2.8: Costs of Welfare Programs in Guam in 1984, 44 and Estimated Costs If Programs Were Fully Extended Table 2.9: Participants in Welfare Programs in Guam in 45 1984, and Estimated Participants If Programs Were Fully Extended Table 2.10: Costs of Welfare Programs in American 49 Samoa in 1984, and Estimated Costs If Programs Were Fully Extended Table 2.11: Participants in Welfare Programs in American 49 Samoa in 1984, and Estimated Participants If Programs Were Fully Extended Table 3.1: Estimated Federal Revenue Increases Under 53 Fully Extended Federal Income Taxes (Tax Year 1983) Table 3.2: Area Income Tax Revenues (Tax Year 1983) 54 Table 3.3: Comparison of U.S. and Puerto Rican Income 61 Taxes for a Hypothetical Family Table 1. 1: Coverage of Selected AFDC Options by Puerto 88 *Rico, the Virgin Islands, and Guam (1984) Table 1.2: AFDC Need and Payment Standards for Puerto 90 Rico, the Virgin Islands, and Guam (1984) Table 1.3: Federal Expenditures for Six Welfare Programs 190 (1984-86) Table 1.4: Participation in Six Welfare Programs (1984-86) 100 Page 8 GAO/RD-8740 Welfare and Taxes Contents Figures Figure 1.1: U.S. Territories and Possessions 10 Abbreviations AMC Aid to Families with Dependent Children GAO General Accounting Office fils Department of Health and Human Services SSA Social Security Administration 551I Supplemental Security Income TEFRA Tax Equity and Fiscal Responsibility Act of 1982 Page 9 GAO/HRD-8740 Welfare and Taxes Chapter I Introduction The United States provides financial and other assistance to its territo- ries and possessions, which in the Caribbean include the Commonwealth of Puerto Rico and the Virgin Islands and in the Pacific, Guam and American Samoa (see figure 1.1). Historically, these "insular areas" have depended heavily on federal programs and such other forms of assistance as special tax treatment. The need for such treatment stems in part from factors limiting the areas' ability to attain economic self- sufficiency and social development. These factors-varying in applica- bility among the areas-include scant natural resources, geographic remoteness from major world markets including the U.S. mainland, small land areas and populations, and limited investment capital. Figure 1.1: U.S. Territories and Possessions Puerto Rico *c /Virgin Islands -1 0 American Samoa Page 10 GAO HIRD.740 Welfare' and Tax"s It T R 1, ? 1* 1 .. ' .- ' P Chapter 1 Introduction Over the years, the United States has contributed to the social develop- ment of the areas by extending federal assistance programs. It has sup- ported schools, hospitals, housing, and other infrastructure projects. In addition, grant programs have provided resources that enable the areas to deliver various social services. In some cases, grant programs are extended differently to the areas than to the states. Often the historical reasons for different treatment are not readily discernible. Sometimes programs were tailored to meet special area needs and circumstances. For example, under federal law that authorizes the Secretary of Health and Human Services (imis) to waive most Medicaid requirements for American Samoa, a unique program was established to meet the area's needs. Long-standing federal policy also has aimed at fostering the areas' fiscal autonomy and economic self-reliance. For several decades, area residents and corporations have been exempted from federal taxes on income earned in the areas, and area governments have been allowed to retain the proceeds of area taxes. Also, as early as 1954 special tax -. - incentives were enacted to encourage U.S. businesses to locate and otherwise operate in the areas, thus helping to enhance the areas' economies. There were significant demographic and economic differences among the four areas in 1984-the general base period for our study (see table 1. 1). For example, Puerto Rico's population of 3.3 million dwarfed those of the other three areas. Likewise, Puerto Rico's labor force of 953,000 was almost 10 times larger than the combined labor forces of the other three. American Samoa had the smallest labor force-about 11,900. PaeII0OHD8-6 efr n ae M i 0~& Chapter 1 Introduction Table 1.1: Selected Characteristics of the Four Insular Areas Virgin American Characteristic Puerto Rico Islands Guam Samoa Populationa 3,270,000 107,500 112.100 35.300 Labor force 953,000 43,470 44,389 11.936 Number employed 742,000 40,230 41,569" 10,400 Number unemployed 210.000 3,240 2.800 1 536 Unemployment rate (percent) 22 75 6 129 Per capita income $4,096 $7,455 $7.504 $3270 ajuly 1984 estimate. Civilian population shown for Guam, no active-duty U S military personnel included bAn employee was counted at each place employed Thuq. if employed by two or more employers the employee would be counted more than once cExcludes military salaries Puerto Rico had the highest unemployment rate, averaging 22 percent in 1984-from a 1983 high of 23.5 percent. Guam's rate, 6 percent, was the lowest, partly because it reflected approximately 10,000 active-duty U.S. military personnel. (Guam's rate was close to 8 percent when mili- tary personnel were excluded). Per capita income also varied widely among the areas, with American Samoa having the lowest per capita income and Guam the highest. Additionally, the areas are unique culturally and politically, both from the 50 states and from each other. Puerto Rico, whose Spanish heritage is evident in its vernacular language, architecture, and culture, is unique in that the area's political relationship with the United States permeates virtually all public policy, economic, and social issues. Guam is charac- terized by an extensive U.S. military presence, which covers much of its land area and directly influences the area's economy. American Samoa, the only area whose residents are not U.S. citizens but I.S. nationals, has a culture based on the tightly knit extended family, which affects not only its economy but also its demands for social services. Each of these areas is represented in the U.S. Ilouse of Representatives by a resident commissioner (Puerto Rico) or delegate who can vote in committee but not on the floor. Its residents provide delegates to U .S. political party conventions, but do not vote in presidential elections. Over the years, attempts have been made in the Congress to remove some of the differences in program and tax treatment between the areas and the states. For example, bills have been introduced, but not enacted, to extend ssi as it exists in the states to the areas. In a similar way. Page 12 (AO HRD-87-40 Welfare and Taxes Chapter I Intrmduction attempts have been made to reduce or eliminate special tax treatment for the areas. For example, a proposal that led to the Tax Reform Act of 1986 provided for repealing the major tax incentive for U.S. businesses operating in the areas. This proposal was not adopted. Noting the interest in extending certain federal programs to areas where they do not exist or are extended differently than in the states and the lack of adequate information upon which to legislate, the chairman and the ranking member of the House Ways and Means Committee's Subcom- mittee on Public Assistance and Unemployment Compensation asked us to determine the possible effects of fully extending selected major wel- fare programs and income taxes to the four areas. As agreed, the pro- grams included in our review were: " Supplemental Security Income (%i) - Cash assistance directly provided by the federal government to aged, blind, or disabled individuals meet- ing federally established income, resource, and other requirements. " Aid to Families with Dependent Children (AFDC) -Grants providing cash for children in single-parent families or-at state/area option--certain two-parent families that meet state/area established income, resource, and other eligibility requirements. • Medicaid -Grants for providing medical assistance to the "categorically needy"-primarily persons eligible for si and AFDC-and other low- income individuals, including the "medically needy"-persons whose income is too high to qualify for ssI, AFDC, adult assistance, or other cash assistance, but after deducting incurred medical expenses is below the state/area assistance standard. • Foster care - Grants for providing food, clothing, and other services for children living away from home when both parents are incapacitated, * absent, or otherwise unable to provide adequate care. Federal funds are available under Social Security Act titles IV-B, IV-E, and XX. To receive assistance, recipients must meet state/area eligibility requirements for each title. " Child Support Enforcement - Grants for administering the enforcement and collection of support obligations owed by absent parents. " Food Stamps - Grants providing food coupons to help ensure nutritious diets for families meeting federally established eligibility requirements. , Page 13 GAO/HRD87 O Welfare and Taxes K: I It wr oil ' - -,r Chapter I Introduction Five of the six federal programs currently operate in some form in most Availability of of the areas, but some programs, as shown in table 1.2, are not available Selected Welfare in every area. Programs in the Four Areas Table 1.2: Federal Program Availability in the Four Areas Puerto Virgin American Program Rico Islands Guam Samoa SSI Na Na Na N AFDC Y Y Y N Medicaid Y Y Y Y Foster care Y Y Y N Child Support Enforcement Y Y Y N Food Stamps Na Y Y N Y - Yes N - No aCounterpart programs with similar objectives but different program features are available When established, SSI was not extended to the four areas. According to statements of the Senate Finance Committee chairman (Congressional Record, March 11, 1976), the Congress thought it inadvisable to provide the guaranteed ssi income levels to areas whose economies were signifi- cantly different than those of the states. Instead of this 100-percent fed- erally funded and administered program, the Congress continued the areas' "adult assistance" programs, which provide cash assistance to needy aged, blind, or disabled persons. In the states, the adult assistance programs were replaced in 1974 when ssi went into effect. Under the adult assistance programs, eligibility requirements and bene- fit levels are set by the areas, and the federal government pays only part of the program costs. Federal law limits total federal funds availa- ble for the areas' combined expenditures for the adult assistance pro- grams, AFDC, and title IV-E foster care maintenance payments for children who have no caretaker relative but otherwise are eligible for * • AFDC. Similarly, federal expenditures on Medicaid in the areas are capped. The current federal funding limits on these programs are shown in table 1.3. Page 14 (AO HRD-8760 Welfare and Taxes -,J **,~'*,, - ~- - - - - --. . . . .. . . . . . . Chapter 1 Introduction I Table 1.3: Federal Funding Limits for Area Welfare Programs Dollars in millions Funding limit Combined adult assistance, Area AFDC, & title IV-E foster care" Medicaidb Puerto Rico $72.00 $63.40 Virgin Islands 2.40 2.10 Guam 330 2.00 American Samoa Not applicable 1.15 aCurrent limits have been in effect since 1977. 'Current limits have been in effect since 1984. The federal government reimburses the areas for their AFDC program * 'expenditures at rates lower than state rates. The maximum federal shar- ing rate for the areas is set by federal law at 75 percent. While states have the option to seek AFDC reimbursement under different formulas, all have opted to use the Medicaid rate, which can be as high as 83 percent. Among the six programs, only Medicaid is extended to each area. Along with funding ceilings, there are lower federal reimbursement rates and other substantial differences between Medicaid programs in the states and those in the areas. Most notably, the areas have waivers to the requirements that the income of "medically needy" participants gener- ally cannot exceed 133-1/3 percent of the applicable AFD payment standard. Also, the program's "freedom of choice" requirements histori- cally have been waived for the areas. (That is, area participants cannot select medical service providers.) States were given authority to seek waivers to this provision beginning in fiscal year 1982.' Foster care financing similar to that in the states, except for funding limits on title IV-E, is available to Puerto Rico, the Virgin Islands, and Guam. The Child Support Enforcement Program operates in each of the areas (except American Samoa) as it does in the states. Food Stamps operates in the Virgin Islands and Guam as it does in the states. It was not extended to American Samoa. In 1982, the program was replaced in Puerto Rico by the Nutrition Assistance Program as part I The waiver authority for states was provided under the Omnibus Budget Reconciliation Act of 1981 (42 U.S.C. 1396n). Page 15 GAO/HRD-87460 Welfare and Taxes Chapter I Introduction was replaced in Puerto Rico by the Nutrition Assistance Program as part of an effort to reduce federal costs. Puerto Rico's program, which serves almost half the area's total population, has the same basic objective as Food Stamps, but there are substantial differences. The Food Stamp Program has an "open-ended" authorization (no federal funding ceiling), while Puerto Rico's program had an $825 million federal funding ceiling from 1983 to 1986. (Maximum authorized amounts for subsequent fiscal years are progressively larger, ranging up to $936.8 million in fiscal year 1990.) But the Nutrition Assistance Program may be somewhat more flexible in that Puerto Rico is authorized, within limits of federal law and regulations, to establish program eligibility criteria, benefit levels, and administrative procedures and to provide benefits in cash rather than coupons. Details about the programs are provided in appendix I. At the federal level, HHS administers all programs except Food Stamps and Puerto Rico's Nutrition Assistance Program, which the Agriculture Department's Food and Nutrition Service administers. Within HHS, the Social Security Administration (ssA) administers ssi; the Family Support Administration administers the adult assistance, AFDC, and Child Sup- port Enforcement programs; the Health Care Financing Administration administers Medicaid; and the Office of Human Development Services administers foster care programs authorized by the Social Security Act. Federal agencies' responsibilities for the areas vary by program, but generally entail such functions as reviewing and approving the areas' plans, allocating and awarding funds, and monitoring compliance with federal laws and regulations. Except for specific programs, the Department of the Interior is responsi- ble for administering most areas. The Department, primarily through its International and Territorial Affairs Office, is charged with providing technical assistance, presenting the areas' budgets before the Congress, and promoting the economic, social, and political development of the Virgin Islands, Guam, and American Samoa. Puerto Rico is not under the jurisdiction of any federal agency. 2The Family Support Administration became functional on April 1, 1986. Until that time, SSA admin- istered the adult assistance and AFDC programs, and the Child Support Enforcement Program was administered by the Office of Child Support Enforcement, within the Office of the Secretary. Page 16 GAO/HRlD.8740 Welfare and Taxes -, . . ,., • , . - " .. . . I Chapter 1 Introduction Special Federal Tax To provide the four areas with operating revenues and encourage busi- ness investment, the federal government allows them special income tax Treatment for the treatment. Generally, area residents and corporations are exempt from Four Areas federal income taxes on part or all of their income, but pay area income taxes, which in many respects are similar to U.S. income taxes. These arrangements were intended to give the areas a measure of fiscal auton- omy and in some cases avoid annual appropriations against the U.S. Treasury. For federal income tax purposes, Puerto Rican citizens are taxed on worldwide income, the same as other U.S. citizens. But full-year residents of Puerto Rico, except federal employees, are exempt from federal taxes on income earned in Puerto Rico. Similarly, Puerto Rican corporations are exempt from federal tax on Puerto Rico-source income, but pay federal taxes on all other income. All Puerto Rican residents and corporations are subject to Puerto Rico's income tax, and U.S. residents and corporations are subject to Puerto Rican income tax on Puerto Rico- source income. In 1983, the Virgin Islands and Guam organic acts:, required them to operate income tax systems that precisely followed the U.S. Internal Revenue Code. This is referred to as the "mirror" principle of taxation. American Samoa opted through its own laws to "mirror"-with certain exceptions-the Code. As a result, the three areas' income tax systems were nearly identical to the federal income tax system, except as speci- fied by area law in American Samoa's case or otherwise by federal law. The Code provides special income tax treatment to I T.S. corporations operating in the areas to foster business investment in the areas. Most notably, qualifying corporations operating in Puerto Rico, Guam, and American Samoa (and, after 1986, the Virgin Islands) may claim a dollar-for-dollar credit against federal income tax liability on income derived from these and certain other U.S. areas. This credit, the "Puerto Rico and Possessions Tax Credit," was established by the Tax Reform Act of 1976 as section 936 of the Code, and is often referred to as the ,'Organic legislation is federal law that (.gtablishes the legal framework for governing insular areas. I 'nder the Tax Reform Act of 1986, G(jam is aothonzed to develop its own oiome tax laws Page 17 GAO 'HRD-87-60 Welfare and Taxe" < .?.Aa V l 1'""' '", ' - ' : * ' ' ' ' 2 ' " .- "Z " " Chapter 1 Introduction "section 936 credit."-4 The credit replaced special provisions, dating back to 1921, under which corporations had been exempted from U.S. income taxes on profits earned in insular areas. To qualify, corporations must derive at least 80 percent of gross income from these areas, and at least 75 percent of gross income from active trade or business conducted in the areas., Corporations opting for this credit generally must do so for a minimum of 10 years. U.S. corporations claiming the section 936 credit qualify for other spe- cial income tax treatment. They may repatriate (send back to the United States) dividends to their parent corporations free of tax, because their parent corporations generally are entitled to a 100-percent deduction for dividends received. This contrasts with the 85-percent deduction gener- ally available to U.S. corporations.' The corporations also qualify for special federal income tax treatment for income from intangible property such as patents, formulas, and copyrights. Generally, when intangible property is transferred to a con- trolled foreign corporation, the transferor must recognize as income any profits earned on this property by the foreign corporation. When intan- gible property is transferred to a subsidiary in an area, however, a por- tion of these profits, upon election, may be recognized by the subsidiary, or a portion of associated research and development costs may be recog- nized by the parent corporation. Either treatment essentially reduces the taxable income of the transferor and increases the subsidiary's tax- free income. Unlike corporations that qualified for the section 936 tax credit, in 1983 U.S. corporations' Virgin Islands' subsidiaries could not repatriate divi- dends free of tax, because their parent corporations generally were enti- tied to only the 85-percent dividends-received deduction. Virgin Islands 4While the term "possessions" may include Puerto Rico, the Virgin Islands. Guam. American Samoa. and vanotis other U.S. territories and immnlar possessions for federal incme tax purposes, the Virgin Islands was not considered a possession for purposes of this tax credit prior to the Tax Reform Act (of I986i The Tax Reform Act of 1986 applied section 9:36 to the Virgin Islands for tax years after 1986 IFrom 1954 to 1986. Virgin Islands inhabitants, including .some U .S corporations, satisfied their L.5 in ome tax obligations by paying taxes to the Virgin Islands. 'The gross income requirement for active trade or business, as opposed to interest and other passive income. was increased from 5o to 65 percent by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) The increase was phased in over a 3-year period beginning in 1984 The requirement is increased to 75 percent, effective in 1987, under the Tax Reform Act of 1986L " "nder the Tax Reform Act of 1986. corporations electing the section 936 credit may repatriate 4) percent of their profits tax-free. while most corpTrations may exclude PA) percent of dividends received from other corporations Page Is GAO/HRD-8740 Welfare and Taxes 04 ('hapter I Introduction corporations were eligible for special treatment of intangible property income only when at least 80 percent of their gross income was derived from Virgin Islands sources and at least 65 percent from conducting active trade or business in the Virgin Islands. The Code allows U.S. corporations operating in each area to claim the foreign tax credit for taxes paid to the area governments. This credit is limited to the total amount of U.S. tax liability related to foreign sources. It may not be taken jointly with the section 936 tax credit. Although the areas' income tax systems were patterned after the federal tax system, each area allows the exemption of income from taxes or the rebate of part or all of the area income taxes, under certain circum- stances. These and other differences, particularly in the Puerto Rican and American Samoan systems, can cause taxes paid by area taxpayers to differ considerably from what they would pay under unmodified fed- eral income tax rules. The areas administer their own tax systems. The U.S. Treasury Depart- ment's and Internal Revenue Service's involvement with the areas' income tax systems is limited to providing, upon request, training and technical assistance. A more detailed overview of the areas' income tax systems is provided in appendix II. Objectives, Scope, and Our objective was to determine the effects on the United States and the four areas of extending to the areas selected welfare programs and U.S. Methodology personal and corporate income taxes. Through discussions with the requesters' offices, we agreed upon the six programs to be included in the review and assumed that the welfare programs would replace existing federally supported counterpart programs in the areas. With respect to the tax issue, we assumed that (1) such special income tax treatment now available in the areas as section 936 and foreign tax credits would be eliminated, (2) area corporations and residents would be subject to U.S. income taxes, and (3) resulting tax revenues would be paid to the U.S. Treasury. We also obtained area officials' perspectives about the cost, revenue, and other effects of extending programs and taxes. We did our work between February 1985 and August 1986. We gathered data from the headquarters and regional offices of the federal agencies Page 19 GAO/HRD-h740 Welfare and Taxes Chapter I Introduction responsible for overseeing the areas, programs, and federal income taxes-the Departments of Interior, Agriculture, ltealth and Human Services, and Treasury. Also, we consulted with Bureau of the Census officials in the Department of Commerce about the availability and fea- sibility of using census data to develop program cost estimates. On-site work in the areas was done between ,July and December 1985. To develop program cost estimates, we used income and population data from the 1980 census-the latest available for the areas. We supple- mented these data to the extent possible with 1984 program and demo- graphic data obtained from the federal and area agencies responsible for the six programs or their program counterparts. Also, we identified existing program cost estimates and to the extent possible obtained sup- plementary information directly from the federal and area officials who had compiled them. Further, we reviewed federal laws and regulations, area plans, federal and area reports, and other relevant documents. Our program estimates reflect anticipated changes in program benefit and participant levels expected from federal program design require- ments and program design options that area policy-making officials, as they reported to us, likely would elect. To determine which program options areas might elect were the six programs fully extended, we interviewed high-level area policy-making government officials, includ- ing the governors of the Virgin Islands, Guam, and American Samoa7 ; leaders and members of the area legislatures; and cabinet and department-level program and other policy-making officials. Further, our estimates reflect interprogram linkages, where possible. For example, estimated Medicaid costs reflect estimated changes in ssi and AFDC participation rates because such participants would be eligible categorically for Medicaid. Similarly, our Food Stamp estimates reflect offsetting reductions in benefit amounts resulting from higher ssi and AFDC benefits. Food Stamp households receive the maximum amount of coupons allowed where they live, reduced by such countable income as AFI'D and si benefits. Also, estimated Child Support Enforcement costs * take into account estimated increased numbers of AFDC participants because such recipients must assign support rights to states/areas as a condition of eligibility. Correspondingly, AFDC cost estimates reflect off- setting adjustments for Child Support Enforcement collections from the absent parents of the increased numbers of AFD-eligible families. 7We did not have the opportunity to meet with the governor of Puerto Rico. Page 20 GAO/HRD-8740 Welfare and Taxes F0 Chapter 1 Introduction Details on our program cost-estimating methodology are provided in appendix III. To develop tax revenue estimates, we reviewed relevant parts of the Code, other federal laws and regulations, and the areas' own laws, iden- tifying differences between the U.S. and insular area income tax sys- tems. We also interviewed and obtained documentation from area officials responsible for administering area income taxes to develop our understanding of their systems and identify adjustments to area tax lia- bility needed to estimate U.S. tax liability and potential federal tax reve- nue. Our estimates were based on 1983 tax data" -the latest full-year tax data available for the areas. We used the most reliable data available at the time of our work. Most of our tax estimates assume that areas' business activity and economic conditions in 1983 would remain the same and that the federal taxes would replace area income taxes, although some officials told us the areas might retain or impose some unspecified area income tax. We did not attempt to adjust our estimates for this possibility, because area officials provided no details on the likely tax schemes, and we had no basis for an adjustment. Should areas impose income taxes, federal reve- nue could be reduced to the extent that these taxes would be allowed to be deducted from federal income tax liability. Our federal revenue esti- mates reflect actual area experience for tax year 1983, with reconciling adjustments to convert areas' systems to the U.S. tax system for esti- mating purposes. Because the tax changes doubtless would affect area business activity and hence economic conditions, we also estimated the possible effects of * such changes on business activity in Puerto Rico-the largest of the four areas both economically and tax revenue-wise. We did this through (1) an analysis of several recent studies and (2) discussions with repre- sentatives of businesses operating in the areas. (See app. IV.) Our detailed methodology for estimating income tax revenues is shown in appendix V. Appendix VI contains a list of recent studies relating to the effects of modifying taxes in Puerto Rico, relevant GAo reports, and other publications. 'Tax data for 1983 includoi prsmal tax liability generally covering calendar year I. M and corlxi- rate tax liability covering the tax repwling Ipn(Kis xginning between .hcly 1982 and -Icne 198:1. Page 21 GAO/HRD-87-60 Welfare and Taxes Chapter 1 Introduction In addition to high-level government officials and business representa- tives, we sought perspectives from private interest groups and acadenu- cians in the areas on the potential social and economic effects of extending the federal programs and income taxes. We obtained their views on such matters as whether the new federal programs would sup- plant or supplement existing federally supported and area programs. and to what extent the need for matching and support funds for the new programs might burden area governments. We sought perspectives on how the new programs might affect such matters as individuals' general well-being, standards of living, family relationships, dependency on wel- fare, and migration into and out of the areas. We also sought views on the economic impact of fully extending U.S. taxes, particularly the pos- sible effects on U.S. and other businesses operating in the areas. Finally, we explored with them some of the options available to compensate for operating revenue that would be lost if federal income taxes replaced area income taxes. These options included (1) imposing or continuing area income taxes similar to domestic state or local income taxes; (2) imposing or modifying sales, property, or other taxes; (3) adjusting expenditure plans, including reducing or eliminating current services; and (4) such others as issuing revenue bonds. Some data used to develop program cost and tax revenue estimates had limitations. Area program and demographic data were often not availa- ble at the federal level or were outdated, incomplete, or not comparable with data available on the states' programs. For example, the latest cen- sus data on the areas were 1979 data, and the nature and completeness of census information varied by area. Additionally, we identified no use- ful information on potential clients' assets-a key factor in determining eligibility for ssI, AFDC, and Food Stamps. Also, because the areas are not required to submit reports on some of their programs to the federal agencies, program participant and cost data were sometimes absent or inconsistent with that available on the states' programs. Further, the lack of information on area or nationwide participation rates in some programs and the difficulty predicting which of the many variables associated with program options areas' might elect under fully extended programs made cost estimating very complex for some programs, partic- ularly Medicaid. Normally, the federal government does not collect tax information on area income taxes. As a result, area tax data at the federal level was Page 22 GAO/HRD-8740 Welfare and Taxes Chapter 1 Introduction limited. At the area level, the nature and completeness of readily availa- ble tax information varied by area, but generally was limited. Because of data deficiencies, we made assumptions in estimating certain program costs and revenues. These assumptions generally were based on empirical U.S. data. For example, we estimated the numbers of ssl participants in Puerto Rico and the Virgin Islands by assuming that the ssi participation rate in those areas was the same as the rate for states' residents with comparable incomes. Additionally, we estimated area Medicaid per-participant costs by assuming that such costs would * approximate West Virginia's Medicaid costs-the lowest average- -, Medicaid-payment state. We also used U.S. experience in making certain tax revenue projections. For example, we used U.S. data on numbers of taxpayers itemizing deductions and the amounts of these deductions in estimating itemized deductions in Puerto Rico. The U.S. data, classified by filing status and income range, was applied to Puerto Rican data on numbers of taxpayers by filing status and income range. It was neces- sary to use U.S. data because of numerous differences in deductions allowed by Puerto Rico and the United States. Thus, certain of our reve- nue and program cost estimates would be affected to the extent that such assumptions prove inaccurate. Our assumptions are discussed more fully in appendices III and V. Because of the lack of information on American Samoa, we assumed that all income-eligible residents of the area would participate in Food Stamps. This may result in a high estimate because some applicants may (1) not meet applicable resource requirements or (2) choose not to par- ticipate, although eligible. The Department of Agriculture estimates that about one-third of the income- and resource-eligible individuals in the states and other areas do not participate in the program. Finally, our estimates reflect conditions in the areas at the time of our work. Thus, they are subject to change, given changes in the areas' eco- nomic, tax, or social policies and shifts in the areas' economies. Federal legislation affecting program or federal income tax system design, par- ticularly the 1986 immigration and tax reform legislation, also would affect current and future year estimates. The Immigration Reform and Control Act of 1986 authorizes certain welfare benefits for aliens who were illegal and thus ineligible for certain program benefits prior to its enactment. The Tax Reform Act of 1986, although expected to be revenue-neutral over a 5-year period, is expected to increase corporate income tax revenue and decrease personal income tax revenue and thus redistribute tax burdens. Our estimates would be affected accordingly. Page 23 GAO/HRD.8740 Welfare and Taxes NNW . Chapter I Introduction Neither law has been in effect for a long enough period to determine its effects in the states or areas. Page 24 GAOL HRtD-87-60 Welfare and Taxesi Rf- 1~. 1~ % % % - % Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Fully extending .SI, AFDC, Medicaid, foster care, Child Support Enforce- ment, and Food Stamps to the four areas would have major cost effects. Had the programs been fully extended in 1984, we estimate that federal costs would have increased by $1.049 billion and areas' costs decreased by $90 million. The net result would have been about $960 million more in program funds available for the areas. These effects stem from the design requirements of fully extended federal programs as well as the various program options that could, and as reported to us, likely would be elected by the areas. In effect, program benefit levels and the likely numbers of program participants would have increased. Effects on Program Federal and area cost changes would vary widely by program were the six programs fully extended. as table 2.1 shows. Both federal and area Costs costs would increase for each program except si and Medicaid, we esti- mate. For these two, federal costs would increase while area costs would decrease. A program-by-program analysis of the estimated cost effects follows. Table 2.1: Costs of Welfare Programs in " the Four Areas in 1984, and Estimated Dollars in millions Costs If Programs Were Fully Extended costsa Estimated, if fully Actual extended Program Federal Areas Federal Areas SSIi'adult assistance $159 $73 $441 3 $0 AFDC 57 2 230 1430 335 Medicaid 688 1868 4020 848 Foster care 04 01 39 1 5 Child Support Enforcement 30 1 2 39 1.5 *Food Stamps/Nutrition Assistance Program 862 5 25 1 1 063 6 32.2 Sublotal $1 007 8 $2436 $2 057 6 $1535 Total federal and area $1,251.3 $2,211 'Some columns do not add (lu to roundirG *, The cost changes result from several factors: the change in program par- 0* ti(ipants (see table 2.2). shifts in (-(osts because of high'r federal reim- . bursement rates, and elimination of federal fuinding ceilings. Page 25 G.AO IIRD.,87460 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Table 2.2: Participants in Welfare Programs in the Four Areas in 1984, and Participants in thousands Estimated Participants If Programs Were Participants Fully Extended Estimated, if fully Program Actual extended Change SSI/adult assistance 409 161.7 120.8 AFDC 189.6 254.5 64.9 Medicaid 1,640.9 1,075.5 -565.4 Foster care (title IV-E only) 0 2.5 2.5 Child Support Enforcement 110.9 111.7 .8 Food Stamps/Nutrition Assistance Program 1,525.4 1,879.0 353.6 Note: The numbers of participants should not be totaled because a person may participate in more than one program. SSI Had ssi been fully extended to the areas in 1984, federal costs for serv- ing the aged, blind, or disabled would have increased by an estimated $425.4 million, or 27-fold. The areas would have incurred no costs under ssi and would have saved the estimated $7.3 million they spent in 1984. The total net increase in funds available to the areas to serve such cli- ents would have been about $418.1 million. The higher federal and lower area costs primarily result from replacing the federally and area-funded adult assistance programs in Puerto Rico, the Virgin Islands, and Guam with the fully federally funded ssl pro- gram. For example, higher federal costs would result from eliminating the federal funding ceiling that exists on the combined adult assistance, AFDC, and title IV-E foster care expenditures in each of these areas. Higher federal costs also result from ssi's higher benefit levels and the numbers of additional persons who would be eligible to participate in the program. Because ssi's maximum monthly benefits are much higher than the maximum benefits of the areas' adult assistance programs, per- sons with higher incomes would qualify for ssi. We estimate that in 1984, 121,000 persons-in addition to the 41,000 served by adult assis- 61 tance programs in Puerto Rico, the Virgin Islands, and Guam-would have participated in ssi. Our estimate includes about 980 persons who would have been assisted by sl in American Samoa, which did not have an adult assistance program. Page 26 (AO HRD-87-O Welfare and Taxe I% Chapter 2 Extending Federal Welfare Programs: (.nts and Area Views About Effects AFDC Had AFDC been fully extended to the areas in 1984, federal costs of serv- ing dependent children and their caretakers would have increased an estimated $85.8 million, or about 150 percent, and area costs about $10.5 million. Combined 1984 costs would have increased by over $96.3 million. Fully extending AFDC would eliminate the federal funding ceilings on combined AFDC, adult assistance, and title IV-E foster care expenditures in Puerto Rico, the Virgin Islands, and Guam. Thus, the areas would have more funds to pay higher benefits, which in turn could increase program participation. Officials in each of these areas told us they would increase benefit payments were AFDC fully extended. Thus, we estimate that in 1984, 65,000 persons would have participated in AFDC in addition to the 190,000 served under modified AFDC programs in Puerto Rico, the Virgin Islands, and Guam. Our estimate includes about 1,500 persons in American Samoa, which has no AFDC program. Increased federal costs also result from higher AFc federal reimburse- ment rates, based on per capita income, instead of the fixed 75-percent rate applicable in Puerto Rico, the Virgin Islands, and Guam. Puerto Rico, the Virgin Islands, Guam, and American Samoa would receive a maximum 83-percent rate. These cost estimates reflect offsets for collections from absent parents of AFDC children through the Child Support Enforcement Program. Thus, total AFDC costs for Puerto Rico, the Virgin Islands, and Guam, where the Child Support Enforcement Program is already fully extended, would have declined by over $631,000. Additionally, American Samoa's esti- mated AFDC cost increase would have been offset by an estimated $85,000 in child support collections. Medicaid Had Medicaid been fully extended to the areas in 1984, federal costs of providing medical assistance would have risen by an estimated $333.1 million, or 484 percent. Areas' costs would decrease an estimated $102 million, for a net increase of $231.1 million. Medicaid cost estimates are particularly difficult to make because (1) numerous options are availa- ble to the areas (and states as well) under the program, and (2) Medicaid eligibility is closely linked with ssi and AFDC eligibility such that Medi- caid participation rates and costs could be affected by participation rates, payment levels, and the various design options chosen for the other programs. Page 27 GAO/HRD8740 Welfare and Taxes - *F Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects The higher federal costs partly result from removing areas' federal funding ceilings and replacing the 50-percent federal reimbursement rate with a higher rate. Also, in estimating the federal cost increases, we assumed that the areas' Medicaid costs would approximate those of the lowest average-cost-per-recipient state. Moreover, these costs were con- siderably higher than the areas' 1984 costs for their restricted programs. The estimated numbers of participants in fully extended Medicaid pro- grams, however, would decrease. Although the numbers of "categori- cally needy" persons would increase under fully extended SSi and AFDC, the numbers of "medically needy" persons would decrease due to Medi- caid's more restrictive eligibility criteria. Puerto Rico and the Virgin Islands are exempt from the income eligibility limits for the "medically needy" in their areas and serve persons with much higher incomes than could be done otherwise. Imposing Medicaid's limits would make fewer "medically needy" persons eligible. Also, the numbers of the Medicaid participants in American Samoa would be less than under its existing program, which "presumes" eligibility based on the American Samoan poverty level. Guam's requirements for "medically needy" were below the limits applied in the states, so the area's participants would increase if it opted to use a higher standard (limited at 133-1/3 percent of its AFDC payment standard). Taken together, Medicaid participants in the areas would decrease by an estimated 565,000, or about 34 percent, from the 1,641,000 participants served in 1984. Should the areas continue providing medical services to persons no longer eligible under fully extended Medicaid's stricter requirements, the areas would fund such costs without federal reim- bursement-which in effect would shift some current federal costs to the areas. Foster Care Had foster care been fully extended to the areas in 1984, federal costs would have increased an estimated $3.5 million. Area costs would increase an estimated $1.4 million, and total costs would increase $4.9 million. Cost increases would result partly from eliminating the funding ceiling on title IV-E foster care in Puerto Rico, the Virgin Islands, and Guam. None of the areas participated in the title IV-E foster care pro- gram in 1984. But the Virgin Islands Foster Care Program director and Guam's Social Services Administration supervisor in its Public Health and Social Services Department told us that increased title IV-E funding would have a positive effect on their programs. Some of the cost Page 28 GAO/HKRD-87.60 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects increase would have resulted from providing title IV-B child welfare ser- vices funds to American Samoa for the first time. Some of the children served in 1984 with area funds would have been served with federal funds under fully extended foster care. Moreover, some area officials told us they likely would elect to increase mainte- nance payments under fully extended foster care. Child Support Federal Child Support Enforcement program costs would have increased Enforcement an estimated $845,000, and area costs $341,000, for a total increase of $1.2 million. Child Support Enforcement was fully extended in 1984 to Puerto Rico, the Virgin Islands, and Guam, so program costs there would increase as a result of increased AFDC participants, many of whom must participate in the program. Extending the program to American Samoa for the first time would increase total costs about $96,000, which is reflected in the above estimates. Food Stamps Had Food Stamps been fully extended to the areas in 1984, federal costs would have increased an estimated $201.1 million, or about 23 percent. Area costs would have increased $7.1 million and total costs increased $208.2 million. The cost increases would result mostly from reestablish- ing the Food Stamp Program in Puerto Rico, which would provide higher benefits to more people than under its current Nutrition Assistance Pro- gram block grant. Cost increases also would result from extending the program to American Samoa for the first time. These cost estimates reflect offsets for increased ssi and AFDC benefits. Food Stamp costs in the Virgin Islands and Guam, where the program already is fully extended, would have declined by an estimated $1.7 and $3 million, respectively. Puerto Rico's and American Samoa's estimated Food Stamp cost increases would be offset an estimated $68.3 million and $835,000, respectively. Summary of Area Views of area officials on the desirability and effects of extending the Views on Extending programs varied by area and by program. Programs American Samoan officials generally opposed extending most of the pro- grams, except for ssi and their current version of Medicaid, because they believed doing so would disrupt their "extended-family"-based culture. Page 29 GAO/HRD-8740 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs Costs and Area Views About Effects Nearly all officials favored extending ssi, and most officials in areas with AFDc favored eliminating the funding ceiling-which would result from fully extending AFDC. Further, most officials favored extending Medicaid, although Virgin Islands officials wished to continue the cur- rent waiver of Medicaid's "freedom of choice" requirement, and Ameri- can Samoa officials wished to retain their specially tailored Medicaid program. Views on foster care were the most disparate. Puerto Rican officials told us they would not participate in title IV-E foster care; Virgin Islands and Guam officials said they would fully participate in titles IV-B and IV-E; and most American Samoan officials objected to all federal foster care. Most Puerto Rico officials favored eliminating the federal funding ceil- ing on their Nutrition Assistance Program, which would result from reinstating the Food Stamp Program that was replaced in 1983. But they generally wished to retain the present program's administrative flexibil- ity, including the authority to provide benefits in cash instead of cou- pons. Food Stamps already is extended to the Virgin Islands and Guam. Again, most American Samoans opposed extension. In summary, the key positive effects of extending the programs to the insular areas were seen as • service for needy persons not covered by existing programs; • higher benefits, enabling more recipients to meet basic living needs; * ,~ *improvements in service quantity and quality, particularly Medicaid and foster care; and .4 , • more equitable treatment for the areas under the programs. Key negative effects of extending the programs were seen as • increased welfare dependency among the areas' poor families; • increased disincentives to work due to the higher payment levels; * increased migration from nearby islands of the poor seeking assistance; and * possible cultural disruptions, particularly for American Samoa. Page 30 GAO/HRlN740 Wefare and Taxes eq Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Area-by-Area Fully extending the programs would affect each area's costs and the Se c - A nalsis federal costs for each area differently, as table 2.3 shows. of Effects of Extending Six Welfare Programs Table 2.3: Costs in the Four Areas in 1984 for Welfare Programs, and Dollars in millions Estimated Costs If Programs Were Fully .... ..... ... Cots" .... Extended Estimated, if fully Actual extended Area Federal Area Federal Area Puerto Rico $951.0 $231.5 $1.9522 $1431 Virgin Islands 307 4.6 39.5 43 Guam 24.9 5.7 41.5 4.8 American Samoa 1.2 1.8 24.2 1.4 Subtotal $1,007.8 $243.6 $2,0576 $153.5 Total federal and area $1,251.3 $2,211.0 aSome columns do not add due to rounding Puerto Rico The greatest estimated cost change would occur in Puerto Rico--the larg- est of the four areas-as table 2.3 shows. Federal costs for Puerto Rico would more than double, increasing an estimated $1 billion. Area costs would have decreased $88.3 million, or about 38 percent, Total costs would have increased $912.9 million. Actual and fully extended costs for the six programs in Puerto Rico are shown in table 2.4. Table 2.4: Costs of Welfare Programs in Puerto Rico in 1984, and Estimated Dollars in thousands Costs If Programs Were Fully Extended Costs Estimated, if fully Program Actual extended Adult assistance (SSI estimated) -- $21,551 $425,861 AFDC 71,488 153,106 Medicaid 243.963 471,199 Foster care 424 4,794 Child Support Enforcement 3,462 4.144 Nutrition Assistance Program (Food Stamps estimated) 841,612 1,036,261 Totals $1,182,500 $2,095,369a aDoes not add due to rounding Page 31 GAO/HIRD-8740 Welfarm and Taxes @4% Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Puerto Rico's largest program cost change, were the programs fully extended there, would result from ssi replacing the area's adult assis- tance program (see table 2.4). In 194, $21.6 million was spent on Puerto Rico's adult assistance program, of which $14.9 million was federally funded. In 1984, federal expenditures for ssi would have been an esti- mated $425.9 million. Also, the number of ssi participants would have been an estimated 117,000 more than the number of 1984 adult assis- tance program participants, as table 2.5 shows. Table 2.5: Participants in Welfare- - Programs in Puerto Rico in 1984, and Participants in thousands Estimated Participants If Programs Were Participants Fully Extended Estimated, if fully Program Actual extended Change Adult assistance (SSI estimated) 395 1570 117 5 AFDC 1789 2359 570 .1Medicaid 1,6070 1 045 0 -5620 Foster care (title IV-E only) 0 24 24 Child Support Enforcement 1036 103 6 0 Nutrition Assistance Program (Food Stamps estimated) 1.5387 1.8000 261 3 * Note The numbers of participants should not be totaled because a person may participate in more than one program The number of needy aged, blind, or disabled participants is estimated to increase becauset-,si benefit levels were much higher and eligibility requirements less restrictive than Puerto Rico's adult assistance pro- gram. In 1984, ss's maximum monthly benefits were $314 for an indi- vidual and $472 for a couple, while Puerto Rico's maximum adult assistance benefits were $32 for one person and $64 for two, which was * half its need standard., As a result. Puerto Rican individuals and couples with respec'tive annual inc'omes uip to $3,768 and $5,664 could qualify for ssi. U nder adult assistance, they were ineligible with respective annual inc'omes of $768 and $ 1,532.' I nier t lic itialt asistm*icc jiri grn. t hic areas estahlisli n4441 itandiard~s i( rIivi a iintutortiiiiut d,'wr mnenf'( eiu'~j~r% for indi iuisiti nuN! itail.v li% ing ni4d'. i im(ii N meaniit '.taidard (I l'it muaruini .it oiznt ataria A~ill ria untivr its. pirogranm. tit- to Ii Hi ;wren itii! O 1114 1 14d stIandardl I 'iiri Himo rnia ail,-u iIN p';urt it Ihe adult ;II.s'i'tiice pilrt lpants '. ilt ie.'i a IX '.; i'u l ni'u'd. but ft.%% rei'' 1-1%4- 1Ii 'i'.i'. tance. aiiirling to' F'iiertui Ifice iriugrfim ofi~iAb -A~e iil il abl Incomne dli'regards were ii- led. aiinuiu ainfiual incm.iiu lidr 1w,!Ii St'd .,it I'uerto Hp lo u..dult a'.'.i'taricv jaugri %vrv htighcr Page :l2 (.A( HRDS-7460 Welfare and Taxi', Chapter 2 Extending Federal Welfare Progranm: Costs and Area Views About Effects Federal AFDC Costs in Puerto Rico would increase by an estimated $72.3 million, Puerto Rico's costs by $9.3 million, and total costs by $81.6 million. Most of these increases would result from paying higher benefits and serving more persons qualifying under more liberal eligibility rules. Puerto Rican policy-makers told us that if AFDC were fully extended, they would double their payment standard and pay 100 percent instead of 50 percent of their need standard. In that event, payments for a mother with one child with no countable income would increase from $32 to $64. This and other program changes could cause the number of AFDC recipients to increase from the 1984 level of 179,000 to an esti- mated 236,000. Thus, new and actual 1984 participants would have received higher benefits under the fully extended program. Some of the federal AFDC cost increase results from the higher federal reimbursement rate available under a fully extended program. Instead of the current 75-percent rate, Puerto Rico would qualify for 83-percent federal reimbursement of its total AFDc benefit payments. Eliminating the existing $72 million federal funding ceiling on the area's combined AnDc, adult assistance, and title IV-E foster care expenditures makes the higher federal costs possible. AFDC families with absent parents must assign support rights to the areas. Collections from absent parents are used to offset AFC costs. We estimate a $144.2 million offset to Puerto Rico's AFDC program costs through increased collections under the area's Child Support Enforce- ment Program. * QFully extending Medicaid to Puerto Rico would have increased federal costs by an estimated $326.2 million. Puerto Rico costs would have decreased by $98.9 million and total net costs increased by $227.2 million. Medicaid's more restrictive "medically needy" eligibility requirements likely would have caused a substantial decrease from actual 1984 pro- gram participation, possibly necessitating Puerto Rico's funding its own medical costs for the displaced participants. For example, the "medi- cally needy" income limit for an individual under Medicaid would have been $85.31 per month were Puerto Rico to increase its AFC payment standards as envisioned at the time of our review. This limit would have been significantly below Puerto Rico's "medically needy" income limit- Page 33 GAO/HRD740 Welfare and Taxes - Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects $313 per month for an individual. Consequently, many of the approxi- mately 791,000 persons in Puerto Rico eligible for Medicaid benefits as "medically needy" would not have been eligible under the fully extended Medicaid program. On the other hand, more persons would be made eligible for Medicaid by virtue of their eligibility for the fully extended ssi and AFDC program- the "categorically needy". (Even more would qualify as "categorically needy" and "medically needy" if Puerto Rico were to establish a higher Ani payment standard.) The increase in "categorically needy" partici- pants, however, would not offset the numbers of Puerto Rico's "medi- cally needy" participants who would not be eligible under the fully extended program. Medicaid participants would decrease an estimated 562,000, from about 1.6 to about 1 million. Other factors affecting Puerto Rico's Medicaid participation rates and costs would be (1) eliminating the $63.4 million federal funding ceiling, (2) increasing the federal reimbursement rate from 50 to 83 percent, and (3) imposing the Medicaid "freedom of choice" requirement which, unless waived, allows Medicaid beneficiaries to choose their medical ser- vice providers. Currently, Puerto Rico Medicaid participants generally must obtain services from public health service providers. Also, Medi- caid costs would be affected by which program options-from among Medicaid's numerous options-Puerto Rico (and the other areas as well) elected. Puerto Rico received $318,000 in title IV-B foster care funds in 1984, and, according to program officials, spent none of its title XX funds on foster care and did not participate in title IV-E foster care. Had Puerto Rico participated in title IV-E foster care in 1984, we estimate that fed- eral costs would have increased $3.1 million and area costs by $1.2 million. The Child Support Enforcement Program already is as fully extended to Puerto Rico as it is to the states. However, an increase in clientele would ,* result from increases in the numbers of AFC participants. Thus, we esti- mate that federal costs for the Child Support Enforcement Program would increase by about $493.000 and Puerto Rico's cost by $189,000, for a total cost increase of $682,000. Reestablishing Food Stamps in Puerto Rico in 1984 would have increased federal costs by an estimated $188 million. Puerto Rico's .administrative costs would increase $6.6 million. The federal cost Page 34 GAO/HRD-8740 Welfare and Taxes "6 Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects increase would be considerably more than the area increase because all Food Stamp benefit costs would have been paid by the federal government. Fully extending Food Stamps would eliminate the federal funding ceiling that exists on Puerto Rico's Nutrition Assistance Program, allowing higher benefits for more recipients. After the Nutrition Assistance Pro- gram was established in July 1982, Puerto Rico reduced benefit levels and decreased the numbers of program recipients from the June 1982 Food Stamp Program level of about 1.8 million to 1.5 million. Puerto Rico's Nutrition Assistance Program assistant director told us that, if the Food Stamp Program were reinstated, the number of participants likely would rise to approximately the June 1982 level. As noted, cash assistance in Puerto Rico would increase significantly if ssi and AFDx were fully extended. Many recipients of Food Stamp bene- fits also would receive income from ssi or AFC. Such income would be counted in determining Food Stamp benefits, thus serving to offset the amounts of Food Stamp benefits. We estimated a $68.3 million offset for the increase in ssi and AFDC assistance. The administrative costs associated with providing coupons under the Food Stamp Program likely would be higher than those for Puerto Rico's Nutrition Assistance Program, which provides cash benefits. A June 1985 study of the effects of replacing Puerto Rico's Food Stamp coupon program with the Nutrition Assistance Program indicated that federal and area administrative costs would be reduced nearly $10 million if benefits were paid in cash. The report cited savings from eliminating (1) coupon production and distribution, (2) the need to monitor retail store authorizations and compliance, and (3) coupon redemptions by the Fed- eral Reserve Bank. Puerto Rican Officials' Most Puerto Rican policymakers with whom we spoke generally favored Views on Extending extending all programs except title IV-E foster care, with Medicaid Programs receiving the most support. Such officials as the governor, legislative members, political party (Com- monwealth and Statehood) leaders, and the Department of Social Ser- vices secretary favored ssI. In his comments on our draft report, the governor stated that such assistance should be governed by a concern for providing the minimum standard of living and assistance that any U.S. citizen should have. Puerto Rico's Senate minority speaker told us Page 35 GAO/HRD-8740 Welfare and Taxes % %' %'' Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects that the area's adult assistance program did not adequately provide for the special needs of aged, blind, and disabled persons. The former Puerto Rican governor told us that not having ssi in Puerto Rico drove up the costs of the area's Nutrition Assistance Program because fewer area residents would need or qualify for this program if more cash were provided under ssi. The San Juan mayor, who at the time of our review was the Statehood Party leader in Puerto Rico, told us that lack of ssi caused poor Puerto Ricans to migrate to the United States seeking assis- tance not available on the island. Additional funds made available through ssi and the other welfare programs, he said, would help boost Puerto Rico's economy and possibly create jobs. The Social Services Department's public assistance secretary responsible for the area's AFDC program told us that extending ssi also would allow area funds to be *used for providing more services and possibly increasing AFDC benefits. The general sense among Puerto Rico officials with whom we spoke was that extending ssi would help improve recipients' standards of living and otherwise benefit the economy. Extending AFDC also was favored. The assistant to the chairwoman of the Senate Social and Cultural Development Committee told us that the quantity and quality of AFDC services would be improved. According to 1% the San Juan mayor, eliminating the present federal funding ceiling would increase AFDC funding and program participation and thus benefit the economy. Similarly, the Social Services Department secretary told us the federal funding ceiling forced Puerto Rico to pay inadequately low AFDC benefits. Benefit levels would increase were the funding ceiling eliminated, the Department's pubic assistance assistant secretary told us, and consideration could be given to expanding program coverage to include (1) certain pregnant women during the final 4 months of preg- nancy and (2) 18-year-old students. Also, she said, additional funds 0would be used to provide needed training for AFDC caseworkers/ eligibil- ity workers. Medicaid was the most favored program, especially among legislators. According to the Senate president, additional Medicaid funds would cause a general expansion and improvement of present medical services, including more medicines, hospital beds, and needed equipment. The Health and Welfare Committee's chairwoman told us that full Medicaid was needed to help meet needs caused in part by high unemployment and shortages of medical facilities and personnel. The House minority (Statehood Party) speaker told us limited Medicaid funding contributed to a lack of physicians and medical support staff, and prevented Puerto Rico from assisting patients who need services not now available on the Page 36 GAO/HRD-8740 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects island. According to the Senate minority speaker (Statehood Party), full Medicaid was needed to enable the provision of services for all eligible persons. The Health Department's assistant secretary for administration told us that full Medicaid would allow Puerto Rico to provide better outpatient services, emphasize preventive medicine, and expand currently availa- ble services to include psychiatric care and certain laboratory services. Also, additional funding would help provide increased services to Puerto Rico's rural areas, he said. The Department's Federal Affairs Office director said that fully extended Medicaid would allow provision of bet- ter quality medical services. The existing federal funding ceiling, he said, forced the area to spend funds providing services that under full Medicaid could be used to provide other needed services. Views on foster care were diverse. More funding was needed for child abuse cases and group homes, several key policymakers told us. The Senate Social and Cultural Development Committee's assistant to the chairwoman said that Puerto Rico's Foster Care Program needed to pro- vide rehabilitating services for parents who abuse children. She and the Social Services Department's assistant secretary for family services told us that additional funds could be used to provide special counseling for parental child abusers. The assistant secretary also said additional fund- ing was needed to provide more group homes for foster children because of a shortage of family foster homes. Puerto Rico would welcome increases in titles IV-B and XX foster care funds that were less federally restrictive than title IV-E funds, she said, but title IV-B or XX funds might not be used for foster care because child abuse and child neglect currently were higher priority areas. Both the assistant secretary and the legal counsel of the Social Services Department told us that Puerto Rico had not and likely would not partic- ipate in title IV-E foster care. Federal law requires title IV-E foster care cases to be reviewed routinely by a court or court-appointed board, they pointed out. The legal counsel also said that involving the court in vol- o untary foster care cases could cause a form of "cultural shock." More- over, according to a 1985 Department of Social Services study, the Puerto Rico court took the position that it is not empowered to review matters involving the voluntary separation of children from their fami- lies that often occurred in title IV-E foster care cases. Historically, the court heard only disputed foster care cases such as when children legally were removed from a home, the legal counsel said, and voluntary .0 cases exclusively were administered by the Social Services Department. Page 37 GAO/HRD-87-60 Welfare and Taxes @4 % il &rM ir1 11-I, 1 1 111"..1.- ". I Mo Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Further, these program officials told us that the administrative require- ments for title IV-E were too costly, possibly exceeding program benefits. * As noted earlier, the Child Support Enforcement Program already is * fully extended to Puerto Rico. Its director told us that caseload increases from fully extending AFDC would increase the need for Child Support Enforcement services. Most legislators and programs officials favored removal of the funding ceiling on their Nutrition Assistance Program-which would result from extending Food Stamps-although some wished to retain certain fea- tures of the current program. If the existing federal funding ceiling were lifted, the assistant secretary's special assistant and the Nutrition Assis- tance Program director told us, the number of families receiving benefits also would increase. The fully extended program would improve living standards on the island, the former governor said, and afford more equi- table treatment under the program for island residents. He also told us the Nutrition Assistance Program costs were high because adult assis- tance and AFDc benefit levels were very low. According to the San Juan mayor, the federal funding ceiling on Puerto Rico's program caused poor persons not able to receive aid to flee to the states, and more persons could be covered under fully extended Food Stamps. The House majority speaker and the Senate president favored Puerto * Rico's receiving Food Stamp benefits as a block grant that also could be used for economic development, they told us. Additional Food Stamp funds could be used to provide wage supplements for workers on public projects and private sector jobs, according to the Senate president. The House speaker cited the area's need to stimulate agricultural production to reduce its need to import food. San Juan's mayor also told us that cash rather than coupons would be preferable, because coupons were more susceptible to fraud and abuse and had higher associated adminis- trative costs than cash payments. The Nutrition Assistance Program * director favored Puerto Rico's program because administration was sim- pler than under the Food Stamp Program, he told us. but lifting the funding ceiling would allow more persons to be served. Not all officials favored Food Stamps. The House floor leader told us that increased funding would prov-,le a disincentive to work. And the Nutrition Assistance Program, as well as the Food Stamp Program, leads to long-term welfare dependency, according to a Food Stamp Program consultant on the island. Page 38 GAO/IU).0 Welfare and Taxeo Chapter 2 Extending Federai Welfare Programs: Costs and Area Views About Effects The area should be treated as a state, some Puerto Rican officials such as the former governor told us. Inequitable treatment generally resulted in migration of Puerto Ricans to the states to obtain higher benefits, according to the former governor. Views on fully extending the programs were often divided along politi- cal lines. Many who generally favored fully extending the programs also advocated statehood for Puerto Rico. In addition, most of those support- ing continued commonwealth status favored program extension, although some leaders preferred that additional funding be in the form of a block grant. Those advocating independence favored program extension, because the needs of the poor were great, but were uncom- fortable with the increased dependence on the U.S. government that would accompany large programs. Our March 2, 1981, report, Puerto Rico's Political Future: A Divisive Issue With Many Dimensions, pro- vides more information about political status deliberations in that area. Virgin Islands Had the programs been fully extended to the Virgin Islands in 1984, fed- eral costs would have increased by an estimated $8.8 million and area costs decreased by about $350,000. Total net costs would have increased $8.5 million. Actual and estimated fully extended costs for each of the six programs in the Virgin Islands for 1984 are shown in table 2.6. Table 2.6: Costs of Welfare Programs in the Virgin Islands in 1984, and Estimated Dollars in thousands Costs If Programs Were Fully Extended Costs Estimated, if fully Program Actual extended Adult assistance (SSI estimated) $534 $3,742 AFDC 3,516 8,526 Medicaid 4,541 5,924 Foster care 85 418 Child Support Enforcement 424 637 Food Stamps 26,215 24.550 Total $35,317' $43,797 aDoes not total due to rounding Under ssi, federal costs of serving the Virgin Islands' needy aged, blind, or disabled would increase an estimated $3.4 million, and Virgin Islands' costs would decrease an estimated $150,000. In effect, costs would shift totally to the federal government and more people would be served under ssi's higher payment levels and more liberal eligibility criteria. Page 39 GAO/HRD-8740 Welfare and Tazes Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Under the area's counterpart program, 1984 maximum payment levels were $82 per month for one person and $164 per month for two,:, while ssI's maximum payments for an individual and couple respectively were $314 and $472 per month. The number of needy persons who would have been served under ssi's higher payment levels would have been an estimated 900 more than were served there in 1984, as shown in table 2.7. Table 2.7: Participants in Welfare Programs in the Virgin Islands in 1984, Participants in thousands and Estimated Participants If Programs Participants Were Fully Extended Estimated, if fully Program Actual extended Change SSI/adult assistance .4 1.3 .9 AFDC 3.9 7.7 3.8 Medicaid 14.5 13.4 - 1.1 Foster care (title IV-E only) 0 a a Child Support Enforcement 4.6 4.6 0 Food Stamps 35.7 35.7 0 aLess than 1,000. Note: The numbers of participants should not be totaled because a person may participate in more than one program. Fully extending AFDC would cause the largest program cost increase. Federal costs would increase an estimated $4.3 million while the Virgin Islands' costs would increase $726,000. Such increases would result from eliminating the $2.4 million federal fundidigiceiling on the area's combined AFX, adult assistance, and title IV-E expenditures. Lifting the funding ceiling would allow the area's need standard to be raised, and more people would be served by higher benefit levels and more liberal -0eligibility criteria. Program officials said that, although they likely would continue paying only 82 percent of the needs standard, the stand- ard would be doubled. They told us they would increase their needs standard of $154 per month for a family with one dependent child and a caretaker to $308. Thus, in 1984 an estimated 3,800 more persons would have participated in AFDC in the Virgin Islands, increasing the 1984 recipient count from 3,900 to 7,700. "The Virgin Islands also covers such special-need items as nursing care. Page 40 GAO/HRtD.87-80 Welfare and Taxes Chapter 2 Extending Federal Welfare Progranm: ('ots and Area Views About Effects The Virgin Islands AFDC program director did not believe the number of AFDC participants would increase appreciably under the higher eligibil- ity/benefit levels and different eligibility criteria, she told us. Participa- tion did not increase measurably in 1978, when the Virgin Islands last increased AFDC payment levels, she noted. But the availability of Virgin Islands' funds would, she said, govern the extent to which the AFDC pro- gram could be liberalized, and AFDC would be subject to funding restric- tions the Virgin Islands' government might seek to impose. She told us the current AFDC benefits were established within such considerations. We estimate that increased Child Support Enforcement collections from absent parents of increased AFDc-eligible families would be $155,000, which amount was deducted from estimated costs of fully extended AFDC. Fully extending Medicaid would increase federal costs an estimated $2.5 million and decrease the area's costs an estimated $1.1 million. Cost changes would result from (1) decreased numbers of "medically needy" recipients under Medicaid, (2) more "categorically needy" recipients as a result of fully extending ssi and AFDC, (3) increased federal financial participation in Medicaid, and (4) elimination of the $2.1 million federal funding ceiling on the Virgin Islands' 1984 Medicaid Program. A major reason Virgin Islands' costs would decrease and federal cost increases would be relatively small is the estimated drop in eligible Medicaid participants. "Categorically needy" participants resulting from higher (fully extended) ssi and AFDC eligibility standards would number an estimated 6,700 more than the 4,800 served in 1984 in the Virgin Islands. But "medically needy" participants would decrease an esti- mated 7,800 from the 9,600 served in 1984. While the net estimated drop of 1,100 in total participants would reduce costs, federal costs would increase due to potentially higher costs for covered medical ser- vices and higher federal financial participation in fully extended Medi- caid. Also, the Virgin Islands would have qualified for the maximum 83- percent federal Medicaid sharing rate, replacing their current 50-percent rate. In 1984, the Virgin Islands used only title IV-B and area funds for foster care, did not participate in title IV-E foster care, and used none of its available title XX funds for foster care. The area did not participate in title IV-E, the program director told us, because total federal funds for that program, AFD', and adult assistance were capped at $2.4 million. But the area likely would participate in the program, she said, were the Page 41 GAO HRD-87460 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects federal funding ceiling eliminated. Had the Virgin Islands participated in title IV-E foster care in 1984, federal costs would have increased an esti- mated $239,000 and Virgin Islands' costs an estimated $94.,000. The Child Support Enforcement program already is fully extended to the Virgin Islands as it is to the states. However, an increase in clientele resulting from increased AFxC participants would raise federal program costs by an estimated $148,000 and area costs by $64,000-or a total of $212,000. Food Stamps also is fully extended to the Virgin Islands, so that no changes in the program's benefit levels or eligibility criteria would have taken place. In 1984, however, federal Food Stamp costs would have been offset by an estimated $1.7 million due to increases in the counta- ble incomes of beneficiaries also participating in fully extended AFDC and ssI. V.l Virgin Islands' Officials' Virgin Islands' officials with whom we spoke generally favored Views on Extending extending the programs. Program officials, including the area's income Programs maintenance director, told us that the higher ssi and AFDC benefits would P g menable recipients to better meet their needs and that current benefits levels were inadequate to satisfy daily living requirements. The current adult assistance and AFDC need standard for one person, the official said, was less than the average rent cost in the Virgin Islands' low-cost areas. A consumer interest group representative told us that some adult assis- tance and AFDc participants lived in substandard housing because they could not afford higher rent payments with the low benefits they received. Also, extending ssi would enable disabled children under 18, who were not eligible under the area's adult assistance program, to receive assistance, program officials told us. According to the chairman of the Virgin Islands Senate Health and Human Resources Committee, additional foster care funds made availa- ble by eliminating the existing federal funding ceiling would help more children in need of such assistance. The additional funds could be used to recruit more foster care parents, the director of the Social Service Department told us. Some area children had to live in institutions at ,I 'high cost to the area government, the director said, because there were not enough foster care homes to meet area needs. The executive director of foster care told us that, because available foster care funds were so limited, many foster homes were not much better than the undesirable homes the children left. Page 42 GAO/HRDM740 Welfare and Taxes J4 Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects The chairperson of the St. Croix Foster Care Review Team, which over- sees foster care cases the Social Welfare Department administers, told us that limited funding and related staffing shortages were major barriers to their providing adequate foster care. In a May 12, 1986, letter to GAO, she pointed out that, although foster care in the Virgin Islands was intended to be a temporary service, according to 1985 case reviews the average length of care provided was over 7 years. Available staff for administering foster care was insufficient, she told us, to adequately screen and support foster families, prepare social summaries for the courts to clarify custody matters, counsel with children, work with nat- ural families so children could return home, seek adoptive families for waiting children, or handle much more than emergencies. Additional Medicaid funds made available by eliminating the funding ceiling would improve residents' well-being by allowing the area to pro- vide better medical services, according to the Insurance and Medical Assistance Bureau director. She told us that providing certain special- ized services under fully extended Medicaid would reduce area residents' need to migrate to the U.S. to obtain proper care. Also, certain medical services not provided would be provided under Medicaid, she told us. General area views about extending welfare programs were reflected in a 1975 Virgin Islands Social Welfare Department report entitled, Federal Financial Discrimination in the Public Assistance Programs of the U.S. Virgin Islands. The report stated: "The basic fact is that compared with welfare programs in the U.S., the Virgin Islands does not receive an equitable share of Federal support. The results are a discredit to all involved. Virgin Islands residents are deprived of the level of benefit services that they have a right to expect as U.S. citizens." Some officials including the Social Services Department's executive director and public interest group representatives told us that fully extending AFDC and Food Stamp benefits might increase welfare depen- dency in the area by creating disincentives to work. Increased welfare would stifle the ambitions of the area's youth, a prominent Virgin Islands businesswoman, active in national politics, said, and the area would be better served through assistance aimed at developing the econ- omy. In addition, it was unreasonable to expect the area with its limited federal funds to meet the same program administrative requirements for compliance with federal regulations as states, the income maintenance director told us. Page 43 GAO/H.D-8740 Welfare and Taxes @4 1! 1 & l Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects The Social Welfare Department executive director expressed concerns that higher welfare benefits could cause increased migration from other islands, such as St. Kitts. He told us he received frequent inquiries from foreign neighbors concerning their possible eligibility for current Virgin Islands' benefit programs and speculated that such interests would be even greater if benefits were expanded. Guam Had the programs been fully extended to Guam in 1984, federal pro- gram costs would have increased an estimated $16.6 million, while Guam's costs would have decreased an estimated $922,000. Total net costs would have increased about $15.7 million. Actual and fully extended costs for the six programs in Guam are shown in table 2.8. Table 2.8: Costs of Welfare Programs in Guam in 1984, and Estimated Costs If Dollars in thousands Programs Were Fully Extended Costs Estimated, if fully Program Actual extended Adult assistance (SSI estimated) $1.110 $8,377 AFDC 5,211 13,131 Medicaid 4,187 7.521 Foster care 0 82 Child .Support Enforcement 313 411 Food Stamps 19,736 16.728 Total $30,5580 $46,249' 'Does not total due to rounding. Under ssi, federal costs would increase an estimated $7.8 million, while Guam's costs for its eliminated adult assistance program would decrease $496,000. Most of the ssi cost increase results from higher benefits and more participants. An estimated 1,500 more persons than were served in Guam in 1984 would have been served under ssi, as table 2.9 shows. Guam's maximum monthly adult assistance benefit levels of $60 for one person and $120 for two 4 would have been be replaced with ssi's levels of $314 for one person and $472 for couples. 41n addition to cash assistance for basic needs, Guam provided up to $75 per month for special needs. According to a 1984 study of the potential cost of increasing Guam's need standard, however, most people did not receive assistance for special needs. Page 44 GAO/HRD-87-60 Welfare and Taxes 4r * . - . Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Table 2.9: Participants in Welfare Programs in Guam in 1984, and Participants in thousands Estimated Participants If Programs Were . . .. . . Participants Fully Extended Estimated, if fully Program Actual extended Change SSI/adult assistance 1 0 2.5 1 5 AFDC -68 94 26 Medicaid 82 140 59 a Foster care (title IV-E only) 0 U Child Support Enforcement 2 7 - 27- " 0 Food Stamps 222 222 0 'Some figures do not add due to rounding -Less than 1 000 Note The numbers of participants should not be totaled because a person may participate in more than one program Federal AFDC costs also would increase significantly-from $2.9 to $10.7 million, or about $7.8 million. Guam's AFDC costs would rise an estimated $158,000, for a total increase of $7.9 million. The high federal costs would result partly from (1) increasing federal benefit reimbursement rates from Guam's existing 75-percent rate to 83 percent and (2) greater program participants due to fully extended AFDC's higher benefit levels and more liberal eligibility criteria. Guam officials told us they would continue to pay 100 percent of the need standard but likely would increase the standard from $120 per month for a family with a care- taker and one dependent child to $258. Thus, we estimated that AFDC participants would have been about 2,600 more than the 6,800 served there in 1984, or 9,400 persons. We estimate that increased Child Support Enforcement collections from the absent parents of increased AFDC-eligible families would be $113,000, which was deducted from fully extended AFC's estimated costs. Federal Medicaid costs in Guam would have increased an estimated $4.0 million and Guam costs decreased an estimated $639,000. The net total 4.. increase would have been $3.3 million. Federal costs would increase due to potentially higher costs for covered medical services and higher fed- eral financial participation in Medicaid, and because an estimated 5,900 more persons than were served in 1984 under the area's program would have been served under fully extended Medicaid. Like the other areas. the estimated numbers of "categorically needy" Medicaid participants would increase as a result of fully extending ssi and AFCX. But unlike the other areas, the number of "medically needy" participants also would Page 45 GAOiHRD-8760 Welfare and Taxes W~* * l V W , - . - tb U S Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects increase. We estimate that in 1984, 5,400 new "categorically needy" per- sons and 450 more "medically needy" persons-in addition to the 7,527 "categorically needy" and 649 "medically needy" persons served- would have been served under Medicaid. Guam's "medically needy" numbers would have increased because Medi- caid's "medically needy" eligibility criteria is higher than Guam's 1984 criteria. That year, Guam served a small number of such persons and in 1985 discontinued serving the "medically needy" due to funding limita- tions. Public Health and Social Services Department officials told us that, were Medicaid fully extended, thus eliminating the federal funding ceiling on their Medicaid program, they likely would reinstate the pro- gram's "medically needy" component. In 1984, Guam consolidated funds from its title IV-B Child Welfare Ser- vices Program, title XX Social Services Block Grant, and several other programs to provide a variety of services, including foster care. Guam received about $826,000 in federal funds under its consolidated grant in 1984, but neither we nor Guam officials-because Guam is not required to report to the federal government on how its consolidated funds were used-could readily determine the amounts spent for foster care. The Public Health and Social Services Department's Social Services Adminis- tration supervisor told us that one counselor handling foster care was paid with such funds. The Social Services Administration supervisor told us Guam had not participated in title IV-E foster care due to funding limitations imposed by the $3.3 million federal funding ceiling on Guam's AFDC, adult assis- tance, and title IV-E expenditures. The area placed a higher priority on adult assistance and AFDC services and spent its entire funding allotment on such services, she said, and thus had not applied for title IV-E foster care funds. But the area would participate in the program if fully extended, with the funding ceiling removed, she told us. Had the pro- gram been fully extended to Guam in 1984, we estimate that federal fos- ter care costs would have been $58,000 higher and the area's costs about $24,000 higher. The Child Support Enforcement Program already is fully extended to Guam. However, an increase in clientele resulting from increased AFDC '! nder the authornty of title V of iiiblic Law 95-134. federal agencies may (imsolidate (certam grants to the Virgin Islands. Guam. American Samoa. and other areas; to minimize their hurden in applying for and reorrting on federal grant assistance Page 46 GAOHR1)740 Welfare and Taxes 4 Chapter 2 Extending Federal Welfare Program: Costs and Area Views About Effects participants would raise federal program costs by an estimated $69,000, and area costs by an estimated $29,000-or a total of $98,000. Food Stamps are also fully extended to Guam. Federal Food Stamp Pro- gram costs would have been offset, however, by an estimated $3 million due to increases in the countable incomes of beneficiaries also partici- pating in fully extended AFDC and ssi. Guam Officials' Views on Guam's governor, legislators, and program officials with whom we Extending Programs spoke generally favored extending most of the six programs, mentioning many of the positive effects cited by Puerto Rican and Virgin Islands officials. The potentially higher numbers of needy persons served and higher benefits, Guam officials told us, would improve the living stan- dards and general well-being of needy residents not adequately served under existing programs. They told us that area funds freed through increased federal funding could be used to improve program administra- tion and provide such needed services as education, employment, and better medical services. The latter could include psychiatric care and services not now available on the island. Also, higher medical reim- bursement rates could be paid to the area's private service providers, A some of which were receiving substandard reimbursement rates, offi- cials told us. In 1985, Guam's legislature passed a resolution requesting the U.S. Con- gress to amend the Social Security Act to extend ssi to Guam. The resolu- tion stated: ". .. the residents of the Commonwealth of the Northern Marianas are now receiving the full benefits of the Supplemental Security Income program as a result of their present political status; and. . . the people of Guam firmly believe in the right to equal treatment of any resident or citizen of the United States to the benefits availa- ble to them from the United States Federal Government without regard to ... geo- v graphical remoteness or boundaries." More recently, Guam officials have sought a modified Food Stamp Pro- gram that would require some funds to be spent on local produce--a pro- gram similar to that in the Northern Mariana Islands. According to the Child Support Enforcement Program coordinator, the area's program allowed some families to stay off welfare and forced absent fathers to face up to their child support obligations. The Food Stamp Program had improved the availability and quality of food on the 011Page 47 GAO/IUtD.8740 Welfare and Taxes Chapter 2 Extending Federal Welfare Programs: Cots and Area Views About Effects island, the social services administrator told us, and allowed some young couples and elderly persons who desired to do so to live relatively inde- pendently of their families. Officials said that the additional federal funds would help ease the financial burden on other families caring for their elderly. The Social Services Department administrator, however, told us that increased welfare benefits in Guam might result in increased welfare dependency and reduced incentives to work. According to the governor's federal programs special assistant, the current Food Stamp Program work requirement was not strict enough, and fully extended ssi and AFDC would place an increased financial burden on Guam's government to make higher Medicaid expenditures for a larger number of Medicaid recipients. With limited federal funds, the Public Health Department's health ser- vices administrator said, it was unreasonable for the area to be expected to meet the same fully extended program administrative requirements, including fraud prevention and quality control procedures, that states must meet. American Samoa Fully extending the six programs to American Samoa-the smallest of the four areas-would have significant cost and, in the opinion of most area officials, adverse social effects on the area. Were all six programs extended to American Samoa, five would have been available there for the first time. Except for ssi and the modified Medicaid program that * exists there, however, most American Samoan officials strongly opposed extending the programs. Had the programs been fully extended in 1984, federal costs would have increased an estimated $23.1 million and American Samoa's costs decreased $460,000-for a total net increase of $22.6 million. Actual and fully extended costs for the six programs in American Samoa are shown in table 2.10. Page 48 GAO/HRD-8470 Welfare and Taxes @ . dd'lv ' 1 a Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Table 2.10: Costs of Welfare Programs in American Samoa in 1984, and Estimated Dollars in thousands Costs If Programs Were Fully Extended ...... . Costs Estimated, if fully Program Actual extended Adult assistance (SSI estimated) $0 $3,362 AFDC 0 1,729 Medicaid 2,969 2085 Foster care 0 120 Child Support Enforcement 0 96 Food Stamps 0 18,214 Totals $2,969 $25,606 Federal ssi costs would have increased an estimated $3.4 million, and American Samoan costs would not be affected by the total federal fund- ing of the programs. Also, ssi would have served an estimated 1,000 needy aged, blind, or disabled American Samoans, as shown in table 2.11. Table 2.11: Participants in Welfare Programs in American Samoa in 1984, Participants in thousands and Estimated Participants If Programs Participants Were Fully Extended Estimated, if fully Program Actual extended Change SSI/adult assistance 0 1.0 1.0 AFDC 0 1.5 1.5 Medicaid 11.3 3.2 -8.1 Foster care (title IV-E only) 0 a a Child Support Enforcement 0 0.1 0.1 Food Stamps 0 21.1 21.1 aLess than 1,000 Federal AFDC costs would increase an estimated $1.4 million and area costs about $323,000. AFDC would serve an estimated 1,.500 dependent children and their caretakers for the first time. The benefit amounts used in making our AFDC estimate reflect the income levels needed to satisfy daily living needs as reflected in a 1982 American Samoan gov- ernment study, Household Survey of Expenditures. In addition, we esti- -., mate that increased child support collections from the absent parents of increased AFDC-eligible families would be $85,000, which was deducted from fully extended AFDC'S estimated costs. Page 49 GAO/IRD-87460 Welfare and Taxes r 1 a-M- Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Federal Medicaid costs would increase an estimated $520,000. American Samoa's Medicaid costs, however, would decrease about $1.4 million. Thus, total costs would decrease an estimated $884,000. -Lower Medicaid costs would result from conforming American Samoa's Medicaid program to the fully extended version. The area's Medicaid costs would be directly affected by the area's decisions on AFDC. Medi- caid costs would be higher than estimated if American Samoa opted for a higher payment standard. If it opted for lower AFDC benefits or did not implement AFDC, Medicaid costs would be lower. The area's program was established in 1982 under special federal legislation authorizing the HHS secretary to waive or modify most Medicaid requirements to meet the area's special needs. Also, federal reimbursement for the area's program is based on "presumed eligibility." That is, the federal government reim- Iburses American Samoa a percentage of its total medical costs presumed to have been incurred for needy individuals. The percentage takes into account the numbers of individuals in the area with incomes below the American Samoa poverty level-which is substantially below the U.S. poverty level. For 1984, the American Samoa government estimated approximately 11,000 persons were below the area's poverty level. We estimate that in 1984 only 3,200 persons would have been eligible for fully extended Medicaid. Had titles IV-B and XX as well as title IV-E foster care been fully extended to American Samoa in 1984, federal costs would have increased an estimated $88,000, and area costs an estimated $32,000. Total costs would increase $120,000. Also comparatively small would be the cost of extending Child Support Enforcement. Federal costs would increase almost $68,000 and area costs $29,000, for a total cost increase of $96,000. Extending Food Stamps would cause the largest cost change. Federal costs would have increased an estimated $17.7 million, and area costs an estimated $560,000. Also, an estimated 21,000 persons (about 60 per- cent of the area's 35,000 residents) would be eligible for Food Stamps because the average American Samoan family income was so low. In 1984, American Samoa's per capita income was $3,270 compared to the U.S. per capita income of $12,789. Our estimate of potential Food Stamps costs included an offset of about $836,000, accounting for increases in countable income from fully extended AFDTc and ssi for par- ticipants who would also receive Food Stamps. Page 50 GAO/HRD-8740 Welfare and Taxes II g ,1. . . . Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects America Samoan Officials' American Samoan officials, including the governor, lieutenant governor, Views on Extending and most legislature members, opposed extending most of the six pro- Programs grams to their area. Their primary concerns centered on the possible Padverse effects of the programs on their culture which, they told us, was why there are no welfare programs except Medicaid there. The American Samoan culture is rooted in the "extended family," whereby generations of families live and work together in communal support to meet their family living needs. The governor and many other officials told us that federal programs might shift to the government such responsibilities as care for the young, elderly, and disabled that historically have been met by extended families. Other subsistence needs were met, the governor said, by such programs as the Administra- tion on Aging's "food voucher" program, which provided food to low- income elderly persons, and the federally funded school lunch program for young children. Welfare had a negative connotation in the area, these officials told us, and inu viduals choosing to participate would be criticized within their communities-possibly resulting in limited program participation. Accorling to members of the attorney general's office, in their society a family receiving welfare would be viewed as not able to provide prop- erly for its own members, which would be disgraceful. One Health Department official told us that families using foster care would be viewed as unable to raise their children, as well as having publicly made the family's problems known. But members of the Office of Samoan Affairs, as well as a district gover- nor, favored extending ssi. The area culture had changed in some ways over the years, they pointed out, to the extent that the aged and dis- abled were not always properly cared for by their extended families, and ssi should help reduce financial burdens on families caring for their needy and infirm members. Some officials, including the governor, did not favor extending ssi for fear of destroying the area culture. Medicaid is viewed differently in American Samoa than are other wel- fare programs. A government official told us that medical care always has been provided by the U.S. government, beginning with the U.S. Navy's administration 9f the islands. Also, welfare's stigma is not attached to Medicaid because, under their modified Medicaid program, American Samoans need not meet low-income eligibility requirements to receive services. Page 51 GAO/HRD-87460 Welfare and Taxes II Chapter 2 Extending Federal Welfare Programs: Costs and Area Views About Effects Child abuse and neglect, the Samoan Affairs secretary told us, were problems the government could not adequately address because of inad- equate foster care funds. There was need for more foster care, Health Department officials said, and for higher payments for homes to provide foster care under the area's program. Also, they said, a group home was needed for foster children, as well as more professionals and counselors for the children. A few officials objected to the programs as potentially too costly. AFDC and Food Stamps would be too expensive, the governor's chief of staff , told us. The Health Planning Agency director told us that a fully extended Medicaid program would be costly because of the extensive administrative costs and requirements. Finally, the governor and the House speaker told us that extending the programs likely would increase migration to the area. Half the American Samoan residents now are from Western Samoa, they said, and more immigrants likely would come. Pa V.% Page 52 GAOiHRD.874;0 Welfare and Taxes U', , , 5 5% 'd ., ,. - ' ", ", , , - "" " "r' ,, , ,,,5' Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views Fully extending federal corporate and personal income taxes to the four insular areas would increase federal and decrease areas' revenues. Assuming the areas' business activity and economic conditions remained unchanged and the areas' income taxes were replaced by the federal taxes. federal revenue would have increased an estimated $2.7 billion for tax year 1983 (see table 3. 1). But we believe that over the medium and long term, annual federal revenue increases could be far smaller, possibly declining to $2.1 billion or less, after some businesses operating in the areas reacted to the tax extension by closing, relocating, or down- sizing operations. Correspondingly, the areas would have lost all income tax-generated revenue-an estimated $ 1.416 billion (see table 3.2). Table 3.1: Estimated Federal Revenue * Increases Under Fully Extended Federal Dollars i-n millions ., Income Taxes (Tax Year 1983) -__ - Revenue increases, estimated - Incmeta Purt Rco Virgin American Incmeta Purt Rco Islands Guam Samoa Total Individual - $3652 $84 6 $77 7 $37 $531.2 Corporate 2.080.0 _ _._36-9 132 106 .2,140.7 Total increase $2,445.2 $121.5 $90.9 $14.3 $2,671.9 S Effects on Revenues U.S. income tax revenue would have increased by fully taxing U.S. cor- porations, area businesses, and residents benefiting from special income tax treatment applicable to the areas. The increase would stem from (1) eliminating the 936 tax credit available to qualifying U.S. corporations, A' (2) eliminating the foreign tax credit available to certain U.S. corpora- tions that pay taxes to the area governments, (3) taxing U.S. corpora- tions exempt from federal income taxes as Virgin Island inhabitants, (4) taxing area-chartered corporations exempt from federal tax on area- source income, and (5) taxing area residents' income that is partly or 9 totally exempt from federal income tax. The estimates in table 3.1 assume no changes in the areas' 1983 tax base. About $2.1 billion of the potential $2.7 billion increase in federal reve- nue in 1983 would have come from increased corporate income taxes, as table 3.1 shows. This would have resulted primarily from fully taxing- through eliminating the 936 tax cIredit-1IT.S. corporations operating in the areas. For tax year 1983, 631 ITS, corporations qualified for and 552 APage 53 GAO HfRM-60 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views claimed over $1.966 billion in tax credits under this section. Not all fed- eral tax expenditures, associated with this credit likely would have con- verted to federal revenue, however, because corporations could have taken advantage of certain other income tax provisions not available to them when they claimed this tax credit. For example, corporations claiming the 936 tax credit in 1983 generally were not entitled to use the accelerated cost recovery system of depreciation. Allowing for such adjustments, we estimated that about $1.9 billion would have flowed to the U.S. Treasury from those U.S. corporations in 1983. Over $531 million of the potential increases in federal revenue would have come from personal income taxes. The estimated increase would have stemmed mostly from taxing Puerto Rico, Guam, and American Samoa residents' area-source income, which generally has been exempt from federal income taxes, and Virgin Islands inhabitants' worldwide income, which until 1987 was exempt from federal taxes. Area Income Tax Revenues Fully extended federal income taxes would have reduced area govern- Would Decline: Officials ments' revenue had federal income taxes replaced the areas' income Would Oppose taxes. Individual and corporate income taxes, important in financing area government operations, comprised from 31 to 41 percent of operat- ing revenues in 1984. As table 3.2 shows, the areas would have lost an estimated $1.4 billion of tax revenues had federal income taxes replaced area income taxes in 1983; about 85 percent of the loss would have been borne by Puerto Rico. Table 3.2: Area Income Tax Revenues (Tax Year 1983) Dollars in millions Revenue, estimated Virgin American Income tax Puerto Rico Islands Guam" Samoa Total Individual $725.1 $84.6 $77.7 $4.4 $891.8 Corporate 477.2 28.5 9.9 8.9 524.4 Total income $1,202.3 $113.1 $87.6 $13.2a $1,416.2 aDoes not add due to rounding. As shown, the areas collected an estimated $524 million in corporate income tax revenue for tax year 1983. However, the areas exempted or rebated another $2.35 billion of area income taxes to certain corpora- tions through incentive programs aimed at stimulating economic growth. 'Tax expenditures are special tax reductions and the asociated amount of revenue foregone, Page 54 GAO/HRIM740 Welfare and Taxes Chapter 3 Effects or Extending Federal Incoine Taxes: Revenues and Area Views Such exemptions and rebates, which the U .S. Code does not allow, account for much of the difference between estimated area corporate income tax collections and estimated federal corporate revenue increase for tax year 1983. Almost 65 percent of the areas' income tax revenues, except for Ameri- can Samoa, was generated from personal income taxes, which totaled an estimated $892 million for tax year 1983 (see table 3.2). Personal income tax collections and our estimates of federal personal tax revenue under fully extended federal income taxes were identical for the Virgin Islands and Guam. Puerto Rico and American Samoa personal tax collec- tions, however, were higher than estimated federal income tax revenue. This is because the areas' income tax systems were less generous than the federal personal income tax system. For example, in 1983 neither A area allowed the earned income tax credit" allowed by the United States for individuals with dependent children and adjusted gross incomes under $ 10,000. Su m r fA e In general, area officials strongly opposed extending U.S. income taxes. ~uminry ofAreaThe exceptions were leaders of the Puerto Rican Statehood Party, who Views on Extending favored a gradually phased-in U.S. income tax accompanied by state- Federal Income Taxes hood. Most often, officials expressed concerns about " adverse economic consequences of eliminating corporate tax incentives, " prospects and unknown consequences of changing their present fiscal autonomy, and " fiscal difficulties they would face trying to compensate for revenue shortfalls. In addition, some Puerto Rico officials questioned whether the United States can alter unilaterally the U.S./Puerto Rico tax relationship. The relationship is based on section 9 of the Puerto Rico Federal Relations Act (Public Law No. 81-600), which is part of the U.S./Puerto Rico Corn- pact that provided for Puerto Rico's constitutional form of government. Some interpret the Compact as preventing the Congress-without Puerto Rico's consent-from substantively changing the Puerto Rico Federal Relations Act, including changing the area's tax status. Others believe that, despite the Compact, Puerto Rico still is a U.S. territory '21n 1988. the earned income tax credit will be available for individuals with up to $17,M0 of adjusted gross income. 1Phase-out levels and maximum credit amounts are to be adjusted annually for inflation. Page 55 GAO/HRD.8740 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views subject to the Congress' plenary authority, including authority to unilat- erally alter its tax status. This controversial issue has not been resolved by the courts. Area Business Over the medium and long term, federal tax revenues could be reduced to $2.1 billion or less-to the extent businesses in the areas currently Reaction Could Reduce utilizing the tax preferences reacted to the loss of these preferences by Federal Tax Revenue relocating to foreign countries or down-sizing their U.S. operations. Such changes also would adversely affect corporate tax revenues from other businesses, particularly those that are suppliers to or otherwise depend heavily on the U.S. firms operating in the insular areas. Personal income tax revenues also would decrease to the extent such business contrac- 0 tions would lead to a reduction in jobs in the United States. It is impossible to predict precisely how business would react or how long those reactions would be delayed. Nonetheless, some idea of the Npossible impacts of corporate responses on Treasury receipts and the Puerto Rican economy can be derived from an analysis of the industrial composition of corporations claiming the section 936 credit. To the extent that firms in a given industry are likely to remain in Puerto Rico or return to the mainland, total Treasury receipts and total U.S. employ- *i ment might not be adversely affected. To the extent the firms in an industry are likely to relocate overseas, Treasury receipts and U.S. employment would be reduced. However, if firms left Puerto Rico, whether to relocate in the mainland or overseas, the island's economy would contract, reducing output and employment in its manufacturing sector, as well as other parts of its economy. As noted earlier, of the $2.7 billion in potential tax revenues that would have flowed to the U.S. Treasury in 1983, about $1.9 billion would have come from U.S. corporations in Puerto Rico, most engaged in manufac- turing. In the aggregate, these corporations employed about 81,000 workers, accounting for 11 percent of Puerto Rican employment. Pharmaceutical and food processing firms accounted for about $1 billion of the section 936 credit claimed in 1983 and employed about 18,000 workers in Puerto Rico. As discussed in appendix IV, firms in these two industries would be unlikely to leave the United States, although they might leave Puerto Rico. Treasury receipts from these industries, there- fore, probably would not be reduced. The Puerto Rican economy, how- ever, could suffer if corporations moved back to the mainland. Page 56 GAO/HRD-87-60 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views It is more likely that some electric and electronic firms would relocate to neighboring Caribbean nations, while others might stay in Puerto Rico or return to the United States mainland. These firms accounted for $422 million of the section 936 credit claimed in 1983 and employed about 26,000 workers in Puerto Rico. If, for example, one-third of these relo- cated outside of the United States, the estimate of 1983 Treasury corpo- rate profit tax receipts would be reduced by about $141 million, and the Treasury would lose the personal income taxes from about 8,700 work- ers displaced from these firms. Treasury receipts in corporate and per- sonal income taxes from other related local businesses also would be reduced accordingly. If another one-third of these firms left for the U.S. mainland, Puerto Rico would lose an additional 8,700 manufacturing jobs and another one-third of its electronic industry output. It also would suffer reduc- tions in output and employment in other related businesses. The probability of leaving the United States entirely is probably highest for firms in the apparel, hospital supply, scientific instrument, and other manufacturing industries. Together, these firms accounted for $462 mil- lion of the section 936 credit claimed in 1983 and employed about 37,000 workers. If all of them relocated outside the United States, the estimate of 1983 Treasury corporate tax revenues would fall by about $462 million, and additional losses of the personal income taxes other- wise paid by some 37,000 displaced workers would occur. In addition, the Treasury could lose corporate and personal income taxes from related businesses. Losses in output and employment would be borne largely by the Puerto Rican economy. Medium- and long-term adjustments of the type hypothesized here would reduce our estimate of Treasury corporate profit taxes by at least $603 million. Additional revenue losses would occur to the extent that the displacement of about 45,700 manufacturing jobs reduced personal income tax collection. Further losses would occur to the extent the adjustment reduced other business activities and employment. The " aadverse impact on the Puerto Rican economy could be larger to the extent that manufacturing jobs, corresponding output, and related busi- ness activities and employment moved from the island to the mainland. Similarly, the Virgin Islands, Guam, and American Samoan economies could be affected by full tax extension. To the extent that businesses relocated to foreign countries, closed, or downsized, federal tax reve- nues in these areas would be reduced below our 1983 projections. Page 57 GAO/HRD-87450 Welfare and Taxes 0. Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views Local tax incentives in the Virgin Islands were considered critical to attracting new businesses and retaining existing firms. Some officials told us that many firms came to the Virgin Islands primarily to avail themselves of the tax advantage such incentives provide. To the extent corporations claiming Virgin Islands incentives are not engaged in tour- ism or other business dependent on location, some might relocate should incentives be removed. Section 936 credits were not considered critical to Guam's economy, pos- sibly because few firms took advantage of the provision-only $1.6 mil- lion in credits were claimed in 1983. Local rebates, however, were considered very important. Much of Guam's local economy was depen- dent on the U.S. military presence and the tourist trade, especially from Japan. Guam business officials told us that elimination of local rebates could stymie business expansion, but did not forecast a large-scale effect on existing firms. Moreover, the large military presence would tend to stabilize personal tax revenues, because military pay is not dependent S on the island's economy, and Guam receives the proceeds of income taxes paid by U.S. military personnel stationed there. The extent to which military personnel obtain goods and services from Guam suppli- ers also may tend to stabilize the overall economy. However, according to the Speaker of Guam's legislature, the military meets much of its needs on base, without adding to the local economy. The combination of section 936 credits and local tax incentives were considered critical to American Samoa's economy. Officials were con- cerned that the tuna canneries operating there would relocate if U.S. taxes were fully extended. The tuna canneries, we were told, contrib- uted the largest portion of the area's revenues and had a major effect on other businesses, such that the economy would be seriously harmed should the canneries leave. Also, federal revenue increases could be reduced to the extent area gov- ernments imposed income or other taxes deductible from federal tax lia- bility. Puerto Rico officials told us that area income taxes likely would On be continued, although at reduced rates. Virgin Islands officialS said an area income tax likely would be imposed, but did not speculate about its design. Such area income taxes-although area officials did not specify potential rates-could increase estimated area revenues and lessen esti- mated revenues from federal income taxes, because such taxes could qualify as allowable personal itemizations or business deductions. Page 58 GAO/HRD-874MO Welfare and Taxes 04 . .. . . . 16 r r. A .. h i .- K '2V'X _. oC_ k VW- - Z-. - __ Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views ,Aa- -Area ,Analysis Revenue and other effects of fully extending federal income taxes would of Eff t fvary by area, as discussed below. of Effects of Extending Federal Income Taxes Puerto Rico Had federal income taxes been fully extended to Puerto Rico in 1983, federal revenue would have increased by an estimated $2.4 billion. About $2.1 billion would result from taxing corporations and $365 nil- lion from taxing individuals. Corporate Tax Revenue About $2.1 billion of the increase would have stemmed from fully taxing corporations, primarily from eliminating the section 936 tax credit, as discussed above. Some of the estimated federal revenue would result from eliminating the foreign tax credit taken by U.S. corporations for taxes paid to Puerto Rico. According to an Internal Revenue Service official, the amount of foreign tax credit received for tax year 1983 was not readily available. U.S. corporations claimed about $79 million of credit for tax year 1982 for taxes paid to Puerto Rico. Some of the revenue would have resulted from fully taxing corporations chartered in Puerto Rico, including taxing area-source income, which generally is exempt from federal income taxes. Potential revenues for 1983 from fully taxing such companies could not be reliably estimated *• from detailed tax data; at the time of our field work, the latest full-year corporate taxable income data available from the Puerto Rico Treasury Department was for tax year 1981. Instead, we estimated potential taxes from corporations that claimed section 936 credits and added . Puerto Rico taxes collected from other companies (Puerto Rico and U.S. tax rates were about the same in 1983). Puerto Rico would have lost a substantial portion of its operating reve- nue had its corporate income tax been replaced by the federal income tax. For tax year 1983, Puerto Rico collected about $1,202 billion in income taxes, representing about 32 percent of the area's 1984 operat- ing budget. Approximately 40 percent of the area's income tax revenue came from its corporate income tax and 60 percent from personal taxes. Page 59 GAO/HRD-87-60 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views We estimate that 1983 federal corporate income tax revenue would be about $1.603 billion higher than the $477 million actually collected by Puerto Rico. This is primarily because the federal income tax system does not allow exemptions authorized under Puerto Rico's tax system for certain corporations. More specifically, Puerto Rico exempts from income tax up to 90 percent of the income of corporations meeting such criteria as producing certain articles on a commercial scale. This benefit is one of several offered under the area's Industrial Incentives Act of 1978, designed to stimulate economic development and investment in Puerto Rico. According to the Puerto Rico Treasury Department, $2.34 billion in area income taxes was exempted during calendar year 1983.:, The differences between Puerto Rico's actual 1983 collections and our estimate of probable federal corporate tax revenue also are due to other differences in the Puerto Rican and U.S. income tax systems. In addition to tax exemptions and depreciation, there were some differences in cor- porate tax rates in 1983. Puerto Rico's rates ranged from 22 to 45 per- cent, and U.S. rates ranged from 15 to 46 percent. Personal Tax Revenue About $365 million of the federal revenue increase in Puerto Rico would come from taxing individuals whose area-source income was exempt from federal taxation. This estimated increase was about $360 million less than the $725 million Puerto Rico collected in personal income taxes for tax year 1983. The difference between estimated and actual area collections primarily was due to differences in the Puerto Rican and U.S. income tax systems. Many Puerto Rican personal income tax provisions, including allowances for personal exemptions and deductions, were less generous than the federal income tax provisions. Additionally, Puerto Ricans' personal rates were higher than the federal rates in 1983. Consequently, some Puerto Rican taxpayers could have paid higher income taxes than U.S. taxpayers with the same income, exemptions, deductions, and credits, as illustrated in table 3.3. :T "nder lhnerto Rico's )rede(c.ssor industrial incentives program. (.ortl rat ions coold reei\e 1mm1 me tax exemptions ais high as 100 jrwrcent. Sme (,or lratoi ls continue to rcm(', suli tnefits Page 60 GAO HRD-8740 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views -, Table 3.3: Comparison of U.S. and Puerto Rican Income Taxes for a Hypothetical Taxcalculation for marrie Family couplea with two children Puerto Rico U.S. Adjusted gross income $18,000 $18,000 Deduction Standard 2000 Auto license plates 25 0 Wj. Interest 975 0 Total deductions 3.000 0 Exemptions 3.800 4,000 Net taxable income 11,200 14,000 Total tax liability 1,916 1,510 i hng )ontly and claiming a standard deduction %,, 'Already incorporated in U S tax rates, the zero bracket allowance for this example would have been .4$3 400 The hypothetical Puerto Rican taxpayers have a higher income tax lia- bility than the U.S. taxpayers because their deductions and exemptions are smaller than those allowed under the U.S. income tax system, and Puerto Rico's tax rate is higher than the U.S. rate. For example, in 1983 the U.S. taxpayers would have been allowed $4,000 for exemptions ($1,000 for each), but the Puerto Rican taxpayer was entitled to $3,800 ($ 1,000 per adult, $800 for one child, and $1,000 per child in college). Also, the U.S. zero-bracket amount of $3,400-already incorporated in the U.S. tax tables-exceeded the $3,000 of total deductions allowed the Puerto Rican taxpayers. Further, the Puerto Rican taxpayers in this example paid a higher marginal rate4 on taxable income. In 1983, Puerto Rico's marginal tax rate for a married couple filing jointly with taxable * income between $10,000 and $12,000 was 25.65 percent, while the U.S. rate for taxable income between $11,900 and $16,000 was 17 percent (15 percent after 1988). In addition, Puerto Rico's maximum marginal 4rate was 67.55 percent during 1983 for incomes over $200,000, com- pared with the U.S. maximum rate in 1983 of 50 percent for incomes over $54,700, depending on filing status (28 percent in the United States ai after 1988). Tax law changes since 1983 still leave I.S. taxpayers in a more favorable position than their Puerto Rican counterparts. Puerto Rico's maximum personal rate was reduced to 50 percent effective January 1, 'Marginal tax rate refers to the rntage to be applied in calculating tax liability on income ab 'e the lower limit ol the applicable tax bracket. Page 61 GAO/HRD-8740 Welfare and Taxes --- Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views 1986, but this change would not affect the tax liability of the hypotheti- cal taxpayers. In contrast, the Tax Reform Act of 1986 would have fur- ther reduced the U.S. taxpayers' liability. For 1988, the U.S. taxpayers would be entitled to $7,800 in personal exemptions and a $5,000 stand- ard deduction. As a result, their $18,000 adjusted gross income in the example would be reduced to a taxable income of $5,200. Applying a 15- percent tax rate, their tax liability would be $780. Also, Puerto Rico's actual revenue for tax year 1983 was higher than our estimated federal revenue increase because the area's tax system did not allow the earned income credit. In 1983, about 29 percent of Puerto Rican taxpayers would have qualified for this federal income tax system credit.6 (The credit would not have been available to the hypo- thetical taxpayers in our example because their adjusted gross income was higher than the maximum allowed.) Had the credit been available in Puerto Rico in 1983, Puerto Rico would have collected an estimated $39 million less in personal income taxes. Had federal income taxes replaced Puerto Rico's income taxes in 1983 and all else remained unchanged, individuals with low income would have benefited from the earned income credit and lower tax rates. Simi- larly, individuals with high income would have benefited from lower tax rates in the high income categories. Officials' Views About Extending Puerto Rico government and business leaders' views frequently tied the Federal Taxes prospective tax changes to the area's political status question. The ques- tion of whether Puerto Rico should become a state, continue as a com- monwealth, or seek independence is a fundamental issue permeating many political decisions. The federal tax extension issue, therefore, raised questions not only about the possible impact of eliminating 936 tax credits, but also the potential effects on the island's fiscal autonomy and future relations with the United States. Some leaders also noted that, under current conditions, tax extension would be taxation without representation. At the time of our review, those advocating continuing and strengthen- ing the commonwealth arrangement controlled the governor's office and 5The above comparisons do not take into account income taxes that IS. taxpayers may pay to the states in which they reside, "Beginning in 1988, up to $17,)0 of adiusted income can be received, and credits up to $8(X) (an be received. Page 62 (AO/HRD87.60 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views both houses of the legislature. They generally opposed removing the 936 tax credit. In testimony before the Congress, Puerto Rico's governor stated that repealing the credit would "devastate" Puerto Rico's econ- omy. Commonwealth supporters in the legislature told us that repealing the credit would be particularly bad because the unemployment rate already at the time was very high (over 20 percent) and the economy was not strong enough to sustain and attract business on its own. Three of these legislators, including the Senate president, told us that local tax rates would have to be reduced if federal taxes were extended, thus reducing local revenues and restricting Puerto Rico's power to establish its own tax structure and to decide how tax monies may be spent. Statehood advocates favored phasing in U.S. income taxes, if accompa- nied by statehood and correspondingly full participation in federal grant programs. Noting Puerto Rico's current dependence on the 936 tax credit, they favored phasing out the provision rather than eliminating it all at once. Two party leaders suggested to us that Puerto Rico could F' recoup income tax revenue losses by creating a sales tax, increasing property or excise taxes, or improving income tax enforcement. Independence advocates opposed the imposition of U.S. income taxes. They favored tariff rights for Puerto Rico to protect domestic trade and retention of a relationship with the U.S. as a trading partner, they told us. According to one Independence Party leader, extending U.S. income taxes would constrain the government's capacity to raise essential oper- ating revenues. Generally, Puerto Rico department-level officials expressed views simi- lar to those of the governor and key procomxnonwealth legislative offi- cials. The Treasury assistant secretary for internal revenue told us that, were federal taxes imposed, Puerto Rico would have to reduce its own income tax rates and would probably have to compensate by cutting expenditures for government services. If the section 936 credit were removed, the Economic Development Office deputy director told us that unemployment would rise sharply. Puerto Rico's commerce secretary, * assistant secretary, and executive assistant all told us the United States legally could not extend taxes to Puerto Rico and, that if this were done, it would spell disaster for Puerto Rico's fragile economy. The Economic Development Administration's legal counsel and chief of the planning section also envisioned an adverse impact from removing the credit and extending federal income taxes. These officials favored continuing and even enhancing current business incentives. Page 63 GAO/HRD-87460 Welfare and Taxes, Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views The Treasury assistant secretary, the former governor, the Senate majority and minority (Statehood) leaders, and the House president speculated that, were federal taxes imposed, Puerto Rico would have to adopt an area income tax at reduced rates. These officials did not believe the existing Puerto Rican income tax could continue, because the combined U.S. and area tax would be exorbitant. Some officials said operating revenue might be obtained through other means, such as imposing higher property taxes, but they doubted sufficient income could be generated to compensate for lost income tax revenue. V Business officials were nearly unanimous in opposing removing the sec- tion 936 tax credit and imposing federal taxes on Puerto Rico. Among their comments were the following: " The market in Puerto Rico is not strong enough to attract business on its own; thus tax and other incentives are needed. " The economy depends heavily on the credit, and tax exemptions are nec- essary to maintain Puerto Rico businesses' competitive standing. " There would be a detrimental effect on local revenues with repeal of the credit, as business closings and unemployment narrowed the tax base. Virgin Islands Had federal income taxes been fully extended to the Virgin Islands for tax year 1983, federal revenue would have increased an estimated $121.5 million. An estimated $36.9 million would result from taxing cor- porations and $84.6 million from taxing individuals. Corporate Tax Revenue Virgin Islands corporations, which were taxed under the "mirror" provi- sions, generally would have been liable for the same taxes as under the federal income tax system. The major difference between the U.S. and Virgin Islands income tax systems was that certain corporations in the Virgin Islands qualified for rebates7 of up to 90 percent of their area income taxes under an Industrial Development Program. To qualify in 1983, a corporation had to derive at least 80 percent of gross income from the Virgin Islands and at least 65 percent of gross income from active trade or business in the Virgin Islands. For tax year 1983, $8.4 million was rebated under the Virgin Islands Industrial Development P~rogram. If these rebates were added to the estimated $28.5 million of 7'Rebates also were provided to some individuals, although suich rebates were small, totaling only about $84,M)O) in 198:3. Page 64 GAO/ttRD-87460 Welfare and Taxes Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views corporate taxes collected in 1983 by the Virgin Islands, federal revenue would have increased by about $36.9 million. While U.S. corporations could not claim the section 936 tax credit for their Virgin Islands operations in 1983, they could claim the foreign tax credit for taxes paid to the Virgin Islands.,, Data were not readily availa- ble on U.S. corporations that claimed the foreign tax credit for tax year 1983, but 28 firms claimed about $5.0 million in such credits for tax year 1982. Moreover, prior to the Tax Reform Act of 1986, U.S. corpora- tions and individuals who were inhabitants of the Virgin Islands ful- filled their federal income tax obligations by filing returns on and paying Virgin Islands income taxes. To the extent businesses in the Virgin Islands might curtail operations or relocate outside the islands, federal revenue could be reduced. Our long- term estimate assumes that businesses receiving rebates in 1983 would relocate, thus reducing federal corporate revenues by the amount of the rebates. We assume no effect on personal income taxes. S Personal Tax Revenue Assuming the federal income tax replaced the Virgin Islands income tax, federal personal income tax revenue is estimated to be virtually equal to the approximately $84.6 million collected by the Virgin Islands for tax year 1983. The Virgin Islands' income tax system "mirrors" the U.S. Internal Revenue Code, resulting in similar income adjustments, exemp- tions, deductions, credits, and tax rates. Correspondingly, unless the Vir- gin Islands imposed a personal income tax in addition to the federal personal income tax, there would be virtually no difference for individ- ual taxpayers. Officials' Views on Extending Virgin Islands officials expressed concerns about the possible effects of Taxes federal taxation on corporations. The governor told us he was "vehe- mently opposed" to extending federal income taxes. Further, he stated that (1) extension would be taxation without representation, and (2) the 0, Virgin Islands' ability to attract business through tax incentives would be drastically inhibited by any action subjecting U .S. corporations oper- ating in the Virgin Islands to U.S. taxation. Government and business representatives echoed the governor's view that the ability of the Virgin Islands to attract businesses would be "After 1985. torpo~rat ns oper1t itig iri the Virgin Ishinf(is c(eI d ee the setiv n1036 credItI Page 65 GAO HRD8740 Welfare and Taxe" @46 Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views severely harmed. Businesses had located in the Virgin Islands simply to take advantage of the preferential federal tax treatment, officials told us, and such businesses might move out and many jobs be lost. Some officials also speculated that businesses that remained would pass increased tax costs onto their customers. According to the Internal Revenue Bureau director, the area likely would have to establish its own income tax system to compensate for operating revenue lost to federal taxes. However, he did not speculate about possible tax rates or provide other insights about the design of such a system for the area. Furthermore, he told us, an income tax surcharge, allowed under 1976 legislation, would have limited feasibility and cause problems for certain individuals. Among these would be new residents with much of their income generated outside the Virgin Islands and residents with investment income. Extending federal income taxes would adversely affect the Virgin Islands' fiscal autonomy, according to some Virgin Islands' officials. Extending federal taxes would nullify the idea of Virgin Islands' self- sufficiency, the governor's Tax Task Force chairman told us. In addition to losing a large part of its operating budget, he said, the area would be unable to offer tax incentives to attract business investment, and would lose prospective and possibly established companies, as well as related jobs and job opportunities. Comments by the Internal Revenue Bureau director closely paralleled the Task Force chairman's views. Guam Had federal income taxes been fully extended to Guam in tax year 1983, the federal government would have gained an estimated $90.9 million, including $13.2 million from corporations and $77.7 million from indi- viduals. Like the Virgin Islands, Guam "mirrored" the U.S. Internal Rev- enue Code in 1983, with similar income adjustments, exemptions, deductions, credits, and tax rates.4 Consequently, corporations and indi- viduals paid the same taxes to Guam as would have been paid to the federal government under full federal taxation, except as noted below. t' 'ndar the Tax Reform Act of 1996. Guam is authorized to develop its own income lax a ws. Page 66 GAO/HRD-87460 Welfare and Taxes @4l Chapter 3 Effects of Extending Federal Income Taxes: Revenues and Area Views A major exception was that Guam rebated part of its income taxes to certain corporations.,,, Guam operates an incentive program to encourage economic development; qualifying corporations receive such benefits as rebates of up to 100 percent of their area income taxes. To qualify, companies must meet general requirements such as increasing employment, replacing imports, and creating needed facilities. For tax year 1983, $3.3 million in area income tax rebates were paid or owed to corporations. U.S. corporations operating in Guam are eligible for certain credits. Qualifying U.S. corporations operating in Guam may opt to claim the section 936 tax credit. For tax year 1983, U'.S. corporations operating in Guam claimed about $1.7 million under this credit. Corporations that do -not elect the credit may claim foreign tax credit against their federal tax liability for taxes paid to Guam. Data were not readily available on the amount of U.S. corporations' foreign tax credit claimed for taxes paid to Guam for tax year 1983, but 22 U.S. corporations claimed about $2.5 million in such credits for tax year 1982. Had federal income taxes totally replaced Guam's income tax in 1983, the effects on Guam's government operations could have been severe. Guam collected $87.6 million for tax year 1983, including slightly over $25 million remitted by the federal government for withholdings on fed- eral employees who were Guam residents." Income tax collections repre- sented 38 percent of Guam's 1983 operating budget. Guam officials told us that, if this revenue were not recouped, government operations, including expenditures for education and infrastructure projects, would be negatively affected. Officials' Views on Extending The Guam legislature's vice speaker and the Planning Bureau director, Taxes along with business and academic representatives, told us that fully extending taxes would amount to "taxation without representation." 'While it allowed tax robates by the Virgin Islands, the Internal Revenue (xh, in 1983 (ii( not SIsscif- icallv allow (Guam to rebate inoeic taxe's. lI owver, in Ramsey v ('haco 549 F 2(l 1335 (9th (ir. 1977 ). the I Cou (t fN 4'A - '. WEFAE N TAXES- EXTENDINiG BENEFITS AMD TAXES TO 213 PUERTO RICO VIRGIN ISLANDS GUAM AND AMERICAN SAOM(U) GENERAL ACCOUNTING OFFICE WASH4INGTON DC HUMAN RESOURCES UNCLASSIFIED DIV SEP 87 F/G 5/2 M ~IIR Fe alum- III,,-II. 315 *a~. liii,- L .~ 1*1 ~ IIIII~ MI 125 114 16 - *~.- **-. 0 0 0 S S .4 5... Appendix XI Comments Fron the Speaker of the Guam Legisature self-reliance" is something that federal policy has not done, unless the reference is only to special treatment for our limited ability to garner taxes through the area tax privilege of Sections 30 and 31 of the Organic Act of Guam. However, even this *privilege" does not represent federal policy aimed at "fostering fiscal autonomy" or "self-reliance" in the eyes of most residents. Not only is it socially, economically, politically (and geopolitically) necessary for Guam to redistribute its own taxes, but there are many limitations on our ability to enhance our tax base due to federal land use activities. Now on p. 12. Table 1.1 on p.16, is one of the most flagrant flaws of the report's presentation as it relates to Guam. The draft report even vindicates this point through several inconsistencies of its own. The inclusion of military salaries as a part of the per capita income skews the real per capita income upwards, and reduces Guam's percentage rate for funding eligibility in th,, AFDC program, which is a benchmark for other social programs. From a local perspective the military is largely responsible for the changing social conditions of the island. To include military salary as part of the island's per capita income fails to recognize the insulated and artificial economy that military spending has generated. With military contingencies for Guam slated to bring in thousands of additional personnel, the per capita income would be skewed higher still - again ignoring the problems of development the military itself has placed on our private sector development. Recipients of military salaries are "imported" labor, and as such use of their salaries should be excluded from Guam's per capita income level. 2 Page 192 GAO/NRD4740 Welfare and Taxes Appendix XI Comments From the Speaker of the Guam Legislature Military salaries are part of an unstable economy which local market factors have no control over. The Department of Commerce has established (recently adjusted) per capita income for the civilian sector in 1984 (including civilians paid by federal agencies) at $7,504. This figure would be more appropriate to use in reflecting Guam's needs for social programs. While many local residents join the U.S. military, their numbers do not match the number of active duty personnel on Guam. Moreover, one cannot be employed in the 4 military on Guam per se, but rather one is assigned to Guam by the military. Therefore, use of military employment as a factor of the island's unemployment rate is inappropriate. The fact that the inclusion of military salaries increases Guam's per capita income illustrates the lethargy of our locally generated salaries. Now on p. 58. The report notes on p. 79 that "...the large military presence would tend to stabilize personal tax revenues because military pay is not dependent on the island's economy..." illustrates the above mentioned points. Now on p. 112. The footnote (8) on p. 171 again shows how inclusion of military salaries in Guam's per capita income skews participation levels and reduces participation for local residents. Although the reference is to SSI benefits, the rationale can be easily applied to ceiling limitations for Guam's participation in the AFDC program. The footnote reads: "We used civilian population for Guam because of the large number of U.S. active duty personnel on the island, most of whom would not qualify for SSI benefits" The reference to Guam's per capita income on p.176 clearly shows the 3 Page 193 GAO/HMD-8740 Welfare and Taxes Appendix XI Comments From the Speaker of the Guam Legislature impact of including military wages in Guam's per capita income as it applies to federal assistance ceilings. The report notes that Guam's participation in Medicaid would be 2.41% below Puerto Rico, the Virgin Islands and American Samoa, because of Guam's higher per capita income. Since this higher per capita income for Guam is actually the result of including military pay - thereby increasing the per capita income by $900 - clearly the use of military pay reduces the benefits of the welfare programs available to those who are already subject to disadvantages vis-a-vis the military. The report's notation of the Department of Interiors, International and Territorial Affairs Office (ITAO) role with respect to the territories Now on p. 16. (p.22) is far too idealistic and should be reworded. It is hardly correct to say that the ITAO 'presents and defends the areas' budgets before Congress, and promotes the economic, social and political development of...Guam..." The International and Territorial Affairs Office is very much a political office, and the officials in charge have little choice but to support the wishes of the appointing authority. Besides the fact that the territories provide little or no input on ITAO's budget presentation, Congress has (of late particularly) seen fit to substantially increase the budget amounts which ITAO has recommended. One last technical correction which should be made to the draft report is Now on p. 58. at the bottom of p.79. The reference to military personnel obtaining goods from civilian suppliers as a stabilizing affect on the economy, hm ignores the unfair competition Guam's private sector retailers face from militaries subsidized stores. The Guam Chamber of Commerce has estimated that Navy's commissary sales alone would generate an 4 Page 194 GAO/IIND.740 Welfare and Taxes Appendix XII Commnts From the Speaker of the Guam Leglature additional $20,000,000 in Gross Receipts Tax (4%) annually. While some military expenditure does occur in the civilian sector, basic goods are generally purchased on base where prices are significantly lower. 5 Page 195 GAO/HRD8740 W~4arr and Taxes Appendix XII Comments From the Governor of American Samoa 0 MtRRoRY OF AMICAN SAMOA PAGAOGOUU A P. LUVALJ 00 4 mdisi W"eavob.n May 21, 1987 Serial: 952 Richard L. Fogel Assistant Comptroller General United States General Accounting Office Washington, D.C. 20549 Dear Mr. Fogel: Thank you for the opportunity to comment on the draft report "WEr.VARE AND TAXES: Extending Benefits and Taxes to Puerto Rico, Virgin Islands, Guam, and American Samoa," prepared by the staff of the United States General Accounting Office for submission to the House Ways and Means Committee, Subcommittee on Public Assistance end Unemployment Compensation. I wish to commend the staff who prepared this report. It is a well written document, but more importantly it has been written with considerable thought given to the economic, social, and cultural impacts of extending benefit programs and federal income taxes to the four areas. My comments on this report is limited to the scope of work performed in American Samoa. To begin, I wish to state that the report is correct, In that, of the six welfare programs investigated (SSI, AFDC, MEDICAID, FOSTER CARE, CHILD SUPPORT ENFORCEMENT, FOOD STAMPS), Medicaid is the only program available to the Territory. As indicated in the GAO report, American Samoa participates in the Medicaid Program under unique circumstances; and therefore, it is not perceived as a welfare program, but as a revenue measure for our health care delivery system. The GAO report correctly assesses the effect on the Territory of fully extending the Medicaid Program to American Samoa. I feel that the present arrangement, whereby American Samoa is able to receive the financial benefits of the Medicaid Program without the burdensome administrative and reporting requirements and the necesssity of identifying Medicaid eligible persons individually, is in line with our needs for assistance in this area. Page 196 GAO/HRD4740 Welfare and Taxes Appendix Xli Comments From the Governor of American Samoa -2- There is a preponderance of documented evidence to justify raising the Medicaid cap for American Samoa by a least $400,000 annually. Our Health Care Financing Administration combined Medicare/Medicaid Cost reports and annual Presumed Eligible Population Reports contain the information which justifies this need. The existing Medicaid cap prevents American Samoa from being reimbursed for the full amount of Federal Medicaid funds for which the Territory would otherwise be eligible. The Cho report estimates that if the welfare programs had been fully extended in 1964, federal costs would have increased $22.6 million and American Samoa's coats would have decreased 6460,000. The programs would have provided * substantial federal funding to the Territoy. I believe however that the implementation of the programs and funding would have come at a very high cost. A cost which would have destroyed the values of our culture, traditions, and extended family network. A cost which would have created welfare dependency and work disincentives. A cost portraying American Samoa as a welfare state which is contrary to our desires and efforts to become less dependent on the United States tax dollars. The GAO report indicates that approximately 21,000 participants in American Samoa would be eligible for Food * . stamps under the present federal system. This is approximately two thirds or sixty percent of our current population. What state or U.S. possession has two thirds of its population as welfare recipients? While it is true that area cost would decrease and more benefits would be made available to more people with the extension of these benefit programs, it is not true that it would eliminate our economic and social problems. One of the major concerns is the influx of alien immigrants to the Territory seeking to benefit from these welfare programs. American Samoa is presently experiencing severe economic and social hardships with its alien population. Our schools lack adequate educational facilities. Our sole hospital has similar physical problems. Our prison which was constructed to accommodate fifty prisoners is presently housing eighty-seven with the majority being non-residents. Our alien labor force has grown substantially in the last few years. I fear that the availability of these welfare programs may increase alien immigration and further compound Si some our economic and social problems. PaeB7ooHID84 Wlaean ae @4C BOO,~ Appendix XU Conmments From the Governor of American Samoa -3- 1 also believe the extension of federal income taxes to American Samoa may produce economic and social hardships. Presently, 7S percent of individuals pay the local 2 percent minimum tax. The draft report estimated that American Samoa collected about $633,000 more in personal income taxes for 1983 than the federal government would have collected. In 1986, American Samoa collected an estimated $2,228,061 more in personal income taxes than the federal government would have collected. This is due to the changes in the tax laws over the last three years. With the Tax Reform Act of 1986, the future figures could be lover because of increased deductions for dependents and the increase in the standard deduction. Had Federal income taxes been fully extended to American Samoa corporations in 1983, the revenues would have been $9.7 million instead of the $6.9 million as reported in the draft report. for 1986 corporate revenues would have been $7.4 million. The decrease is due to one cannery not showing a profit for the last three years. Corporate tax rates were also reduced in the 1966 Reform Act. This reduction will decrease actual revenues by an estimated $.5 million. The two canneries account for 90% of all corporate taxes in American Samoa. both canneries have expreased opposition to extending federal income taxes to American Samoa. One cannery stated that if federal taxes were extended to American Samoa, its management would be forced to reevaluate its position, and that there would be a high probability of relocating to more favorable economic locations. Although the extension of federal income taxes in American Samoa would gain the federal government additional revenues, it would, in the long run, be self defeating from a federal and local standpoint. The Imposition of federal taxes wouldI result in the decrease of area tax revenues which would certainly undermine our efforts to become economically self-sufficient. The elimination of tax credits and local * tax exemptions would make American Samoa less attractive to coporations currently operating In the Territory and to outside investors. This, too, would undermine our economic development efforts. It is fair to assume that with the extension of federal taxes, business activity would reduce substantially, unemployment would rise and ultimately federal tax revenue would decrease. If it is the intent of Congress to increase federal dollars by imposing federal Income taxes to American Samoa, I believe in the long run this objective would be defeated. In the same regard, it would also defeat our objectives to promote economic developement and to move towards a more self sustaining state. Page 198 GAO/M3D89740 Welfhaml Tax~m Appendk XU Conuent. From the Governor of Amercn Sao -4- 1 hope the member@ of Congress, prior to taking any final action on the report, take into consideration the facts presented in the report and the views expressed by the officials of Puerto Rice, Virgin Islands, Guam, and American Samoa. Thank you for the opportunity to comment on the report. very truly yours# Governor APL/mtl Page 1ff GAO/KRD.5?460 Welfare and Taxe Appendix X1l1 Comments From the President of the Senate of American Samoa AMERICAN SAMOA GOVERNMENT OFFICE OF THE PRESIDENT OF THE SENATE LEGISLATURE OF AMERICAN SAMOA Serial:052-87 LT/mtv LETULI TOLOA Tel: (6841 633-4565 President 633-5231 May 7, 1987 Mr. Richard L. Fogel Assistant Comptroller General Accounting Office Human Resources Division Washington, D.C. 20548 Dear Mr. Fogel: This responds to your March 27 letter and draft report regarding the extension of certain federal taxes and welfare programs to the territories. Speaking, of course, only for American Samoa, I concur with the reported responses of officials interviewed here which indicate opposition to the extension of most of these programs to American Samoa. After reviewing the draft report and the projected impact on federal and local costs of offering these programs, I wish to emphasize facts not thoroughly dealt qwith in the analysis of our population. Out of the reported population of approximately 35,000, nearly one half of the residents are under the age of 18. Also, it is reported by local authorities that aliens constitute nearly 40 per cent of the population. Obviously, there is an overlap between these two groups, though I do not know its extent. The point is that perhaps an unexpec- tedly large portion of our population may not qualify at all for any of these programs due to their status as aliens or their age of minority. Moreover, the demo- graphic changes of the next 5 or 10 years may dramatic- ally alter the makeup of the target groups and the resulting costs of servicing them. Therefore, it is premature and risky to implement the programs at this P. 0 Box 485, Legislature of American Samoa. Pago Pa&o. American Samoa - - - 96799 Page 200 GAO/MRDSV40 Welfae and Taxe. Appendix Xl Comments From the President of the Senate of Aminican Samoa Page 2 May 7, 1987 Mr. Richard L. Fogel General Accounting Office time until better data can be gathered. As has been demonstrated in other areas, there is a possibility of serious fraud in the application process for some welfare programs in the territory. With the cultural adaptation of extended family situations, persons can easily report absent spouses, numerous dependent children, lack of household income, and can exaggerate other eligibility criteria to gain the welfare benefits. It is my opinion that this problem would be difficult to control at best and would be compounded by additional immigrants at worst. Regarding labor statistics, American Samoans able to work are rarely "unemployed" in the cultural sense. Young and old, men and women, all have defined roles in the Samoan society with much of their time spent doing domestic non-paying tasks. These include plantation cul- tivation, animal keeping, cooking, weaving mats, building fales, etc. These occupations are very traditional and serve to support families, villages and chiefs as well as any cash paying job ever could in terms of cultural accomplishments. Money for wealth is only a recent inno- vation in Samoa, where wealth is traditionally measured in terms other than material assets. Extending the full six welfare programs would reportedly be a cost savings to the Territory of only about $400,000 per year. While we appreciate every oppor- tunity to save expenses, such an amount is not overwhelm- ing and we are not at all compelled to opt for such gains in comparision to the risk of much larger disadvantages. What will benefit this territory far more than welfare programs is a more diversified economic base. In such a small economy, the impact of new businesses is felt quickly and the economic gains do in fact ripple across the island. On the issue of extending federal income tax to American Samoa, the draft report is accurate as to the likely adverse effects of weakening or removing certain tax incentives. The tuna canneries are our economy and there is no doubt that this island would be devastated if they pulled out or substantially curtailed their produc- tion. I strongly oppose any change in the application of federal corporate tax law to the territory which would encourage the canneries to leave or cut back their oper- ations, particularly section 936 of the tax code. Page201 GAO/HRlD8740 Welfare and Taxes Appendi XIU Comments From the President of the Senate of American Samoa Page I May 7, 1987 Mr. Richard L. Fogel General Accounting Office Perhaps the extension of additional business in- centives would be better. The long run effect of more tax generating firms would not only increase tax revenue but decrease the number of persons in need of welfare support. Simple economics works well in American Samoa. Although the income levels in dollar terms are comparatively low here, the wealth of our social and cultural system more than adequately provides all basic needs, with one major exception; medical care. Given our small population, we will always be strained finan- cially to support a modern hospital with current health care technology. Medicaide payments which assist in obtaining or providing health care services to medically needy persons will likely always be acceptable here. Already we refer a large number of residents off-island for medical services at the government's expense. Monetary distributions directly to the medically needy may encourage them to seek private medical care and help them defray other costs of living related to their con- dition. Thank you for the opportunity to respond to your proposed report. If I can be of any further assistance, please let me know. Sincerely, LETULI PULOA President of the Senate Page 202 GAO/HRD4740 Welfare and Taxes 4E Appendix XIV Comments From the Department of Agriculture -i United States Food and 3101 Park Center Drive 4 D.ADepartment of Nutrition Alexandria. VA 22302 Agriculture Service 2 1 AN 2 Mr. J. Dexter Peach Assistant Comptroller General Resources, Community and Economic Development Division U.S. General Accounting Office Washington, D.C. 20548 Dear Mr. Peach: This report responds to your letter of March 27, 1987 requesting comments on your report entitled WELFARE AND TAXES: Extending Benefits and Taxes to Puerto Rico. Virgin Islands. Guam and American Samoa. My comments focus on those sections of the draft report related to the Food Stamp Program (FSP) and its counterpart in the Commonwealth of Puerto Rico, the Nutrition Assistance Program (NAP). Enclosed are detailed comments to clarify, refine and update particular points made in your draft report. I believe this descriptive report could be improved if it emphasized the significant current Federal commitment to providing assistance in these outlying areas. While assistance efforts are mentioned, the draft report tends to understate the extent of assistance that USDA continues to provide to low-income persons in the geographic areas discussed. In particular, the draft report acknowledges that Guam and the Virgin Islands participate fully in FSP; however, the report tends to downplay the significant role of Puerto Rico's NAP. The Nutrition Assistance Program serves approximately one-half of Puerto Rico's population. This single program provides over 80 percent of the total Federal funds channeled to Puerto Rico and the other three areas through the six assistance programs identified in your report. As mentioned in the draft report, the Food Stamp Program does not operate in American Samoa largely because officials there generally oppose Federal assistance programs. In sum, with the exception of American Samoa, FSP and its NAP counterpart are currently assisting those in need who choose to participate. Page 203 GAO/HRD740 Wefare and Taxes Appendix XIV Conunents From the Department of Agriculture Mr. J. Dexter Peach 2 The report could also be improved by supplementing the Fiscal Year 1984 program and cost information currently contained in the report with more recent information. I understand that Fiscal Year 1984 is the most recent period for which information is available on all six assistance programs addressed. However, various relevant changes in FSP and NAP have occurred since then. In particular, NAP funding is no longer capped at $825.0 million. The Fiscal Year 1987 appropriation for NAP is $852.8 million. Congress has authorized annual funding increases for Fiscal Years 1987-1990. The draft report did not include the current authorization level nor was this Fiscal Year 1987 level incorporated into relevant cost estimates. Only a vague parenthetic reference to authorized increases appears in the text. I hope these comments as well as those which are attached will help you in more fully describinq the commitment which the Federal Government has to assist needy individuals in these outlying areas. Sincerely, S. ANNA KONDRATAS Acting Administrator Enclosure Page 204 GAO/HURD640 We1fhe and Taxe Appendix XV Comments From the Department of the Treasury DEPARTMENT OF THE TREASURY WASHINGTON MAY 11 1987 Dear Mr. Anderson: I am responding on Secretary Baker's behalf to your request for comments on the draft GAO report, Welfare and Taxes: Extending Benefits and Taxes to Puerto Rico, the Virgin Islands, Guam and American Samoa. The comments we have on your discussion of taxes are: 'li 'ihe LtLererCc LC "Cax ydL " 1 1LL cledc. The CoLpOtate tax data used pertain mainly to calendar year 1982 and do not reflect the impact of the 1982 TEFRA legislation which applies to tax years beginning after December 31, 1982. The estimates should therefore reflect adjustment for the impact of TEFRA. (2) The assertions on the long run increase in revenue from extending federal taxes to the possessions are highly Nowonp. 3. speculative. (For example, the statement on page 4 of the executive summary that "GAO believes annual federal tax revenue could decline significantly over the long run [compared to the initial, short run, increase) ... ") They should be deemphasized and stated in a highly qualified manner. In addition, there should be a fuller discussion of the possible sources of error in the short run estimates. Now on pp. 56-57 and 132-136. The discussion on pages 77-79 and 156-160 of the industries that would leave Puerto Rico and move out of the United States altogether if they had to pay full federal tax is not systematic enough to be of any merit. The discussion does not consider the tax cost of transferring intangibles outside the United States. Now onp. 136 (3) on page 160, the report states that "half of 1982 earnings of corporations claiming the credit in Puerto Rico were from intangibles". This presumably is based on the Treasury's Fourth Report on Possessions Corporations. Our current view is that this is probably an underestimate of the significance of intangibles. (4) The reference on page 151 to a possible indirect employment "multiplier" of 2.35 should be deleted. The Treasury's Fifth Report explains why this estimate is spurious; the 2.35 estimate has even been disowned by Puerto Rican statisticians. Page 20 GAO/HRD1740 Wolfam mn Tm. Appendix XV Comments From the Department of the Treasury -2- (5) It is not clear why the report does not adopt the state model and assume that possessions taxes are maintained but are deductible against federal liability. Is there any reason for the specific assumptions adopted on local taxes? Sincerely, C. Eugene Steuerle Deputy Assistant Secretary (Tax Analysis) Mr. William J. Anderson Assistant Comptroller Ueneral U.S. General Accounting Office Washington, D.C. 20548 p Page 306 GAO/URD4?40 Welfhue and Taes Appendix XVI Comments From the Department of the Interior ?United States Department of the Interior OFFICE OF THE SECRETARY WASHINGTON, D.C. 2W40 MAY 13 1987 Mr. J. Dexter Peach Assistant Comptroller General U.S. General Accounting Office Washington, D.C. 20548 Dear Mr. Peach: On behalf of the Secretary of the Interior, this letter is in response to the U.S. General Accounting Office (GAO) draft report on extending welfare benefits and taxes to Puerto Rico, the Virgin Islands, Guam and American Samoa. The Department of the Interior, through the Office of Territorial and International Affairs, has administrative responsibility for coordinating Federal policy in American Samoa, Guam, the Northern Mariana Islands, the Trust Territory of the Pacific Islands, and the U.S. Virgin Islands. The mandate of this office is to promote economic, social and political development in these territories. The Office of Territorial and International Affairs is adamantly opposed to fully extending Supplementary Security Income (SSI), Aid to Families with Dependent Children (AFDC), Medicaid, Foster Care, Child Support Enforcement and Food Stamps, as well as Federal income taxes to the aforementioned areas. It would be difficult, if not impossible, for the territorial governments to meet the matching requirements of these programs. In addition, the bureaucracy that would be created to administer these programs would bankrupt the islands' fiscally as well as morally. In addition to consideration of the economic impact of these programs on the island governments, we must also look at potential damage to the culture. The Federal government must not be a party to the deterioration of a traditional and tremendously successful extended family concept still adhered to in the territories by 0* offering relief under far less effective and efficient welfare programs. Page 207 GAO/HRD10410 Welfare and Tax" ..... .... kxkmI l i + lJ'li"+ + Appendix XVI Comments Prom the Department of the Interior The Office of Territorial and International Affairs is leading an effort towards self-government for the territories and the active participation of their residents in the determination of their own future. Additional Federal programs would be an intrusion upon these objectives. Assistant Secretary--Territorial and International Affairs .. Pag~e 206 GAO/H3ID40 Welfa~e and Taxes Appendix XVII Comments From the Department of Health and Humani Services DEPARTMENT OF HEALTH & HUMAN SERVICES Offic, of Inspector Genera Wahington. DC 20201 1 N0 Mr. Richard L. Fogel Assistant Comptroller General U.S. General Accounting Office Washington, D.C. 20548 Dear Mr. Fogel: The Secretary asked that I respond to your request for the Deoartment's comments on your draft report, "Welfare And Taxes: Extending Benefits And Taxes To Puerto Rico, Virgin Islands, Guam, and American Samoa." The enclosed comments represent the tentative position of the Department and are subject to reevaluation when the final version of this report is received. We appreciate the onportunity to comment on this draft report before its publication. 6.9 rejy yours, Richard P. Kusserow Inspector General Enclosure Page 209 GAO/HRD8740 WelrMe and Taum Appendix VH Comments From the Department of Health and Human Services COEMENTS OF THE DEPARTMENT OF HEALTH AND HUMAN SERVIZrb U TnE I ZZKAL AIuUUrTiNUU uVFLUE.5 u VFJ 5 " REPORT, =WELFARE AND TAXES: ECTENDING BENEFITS AND TAXES TO PUERTO RICO, VIRGIN ISLANDS, GUAM, AND ANERICAN SAMOA." GAO/HRD-87-60 General Comments We appreciate the opportunity to comment on the draft report. We find the report to be a fair and accurate description of the operation of the Department's programs in the Commonwealth of Puerto Rico and the territories and of the consequences of fully extending the Department's programs to these areas. The report does not provide any recommendations. However-- because of uncertainties about the impact of extension of these programs and U.S. tax laws--GAO cautions Congress to consider an experimental approach rather than outright extension. We agree with GAO's concerns and suggest the report provide two additional caveats-- 0 First, there are a number of wilfare reform proposals being considered by Congress that would substantially alter the programs addressed in the report. These include an Administration proposal to allow states, on a demonstration basis, to exercise broad latitude in determining benefits, eligibility, and program structure for these and many other welfare-related programs. The report should indicate that the extension of the welfare programs to Puerto Rico and the territories should be addressed as a part of, or subsequent to, congressional consideration of those legislative proposals. 0 Second, GAO should be explicit in recognizing that the extension discussed in the report is only one approach to reforming the administration of these programs. There are other program design options that-- because of the concerns and uncertainties cited by GAO-- are worth congressional consideration. These include such options as block grants, program waivers, and other approaches that woul.d increase flexibility in determining eligibility and benefit levels. There is precedent for such treatment since there have been a number of instances in which Federal legislation has taken account of the unique circumstances of Puerto Rico and the territories. These include: replacement of the Food Stamp program in Puerto Rico by the Nutritional Assistance program: Page 2I0 GAO/HRDS40 Wefare and Taxes Appesndh XII Comments From the Department of Health and Human Services -- the extension of the Medicaid program to American Samoa: and -- the enactment of the program consolidation provisions of Public Law 95-134. In each of these cases, it was recognized that Federal programs designed for state operation are frequently not appropriate for Puerto Rico and the territories. Thus, in any consideration of program extension or modification, 4Congress should examine a full range of options. An important principle in assessing those options should be that Federal agencies, Puerto Rico, and the territories should have broad latitude to design and administer benefits and services in a manner that best meets the needs of the citizens of those jurisdictions. pS (14m) Page 211 GAO/RD, 740 Welfare amd Taxes *U.S. G.P.O. 1987- IAI-235,6009 -_ 4714 L - -- g 0 0 0 0 0 0 S .0 0.6- :0..