This document describes Subsidyscope’s methodology for measuring spending on federal programs that contain subsidies and the subsidies they provide. This methodology is organized in three parts. First, it describes the important difference between measuring spending on programs that contain subsidies and measuring actual subsidies. Second, it describes, in four steps, how Subsidyscope identifies programs that contain subsidies. Third, it describes how Subsidyscope collects data on these programs, and where available, data on subsidies.
In order to measure subsidies, one must identify those programs that produce them. Unfortunately, there is no one definition of the term “subsidy” and people disagree about which federal programs do or do not produce subsidies. In order to inform our thinking Subsidyscope uses, as a starting point, the Government Accountability Office’s definition of "subsidy":
Generally, a payment or benefit made by the federal government where the benefit exceeds the cost to the beneficiary. Subsidies are designed to support the conduct of an economic enterprise or activity …. They may also refer to (1) provisions in the tax laws for certain tax expenditures and (2) the provision of loans, goods, and services to the public at prices lower than market value. These include interest subsidies.
Even this definition is quite general, and as straightforward as it may sound, interpreting it is not a simple task. Subsidies are not often discernable line items in the federal budget; rather, the amount provided in subsidies is a portion of the amount spent on programs that provide subsidies. The amount spent on programs containing subsidies is, in turn, a subset of all government spending (see the figure below). Within total government spending, Subsidyscope first identifies spending on government programs that contain subsidies.
Defining what government programs provide a subsidy is a matter of judgment. Determining what activities “support the conduct of an economic enterprise or activity” as the GAO definition suggests is difficult. Some government activities provide specific benefits to specific people. Governments also support the economy by providing diffuse benefits such as public safety.
Not all spending on programs that provide a subsidy, however, translates into a subsidy. The subsidy is the net monetary benefit a recipient receives from a program.1 In some cases this may be significantly less than what the federal program actually spends. For example, a policy holder of federal flood insurance may receive $10,000 from the government to cover a claim. While the federal government has spent $10,000, the net benefit to the policy holder would be less if the policy holder paid insurance premiums to the government before filing the claim.
Unless a government agency or some other entity calculates what portion of spending on subsidy programs is a subsidy, the exact amount of subsidy may be unknown. Subsidyscope presents government data on the programs that contain subsidies, and data on specific subsidies, when available. When subsidy estimates do not exist, the amount of spending on the programs containing subsidies provides an upper limit for the estimate of the actual subsidy.
It is important to note this project does not include all government subsidies. First, Subsidyscope only looks at federal programs. Subsidies provided by state or local governments are not considered unless they originate from federal funding. Second, subsidies provided by regulations or tariffs are not included in the scope of the project. Finally, Subsidyscope is not attempting to measure negative subsidies (e.g., excise taxes). Some or all of these categories may be added in the future.
In order to estimate spending on programs that provide subsidies and the subsidies they produce, Subsidyscope must identify what federal programs contain subsidies. To do this, Subsidyscope follows a four-step process.
Direct expenditures include direct transfers of money (e.g., cash grants) or goods and services (e.g., donation of government surplus).2 This does not include contracts for goods and services which are covered in a separate category below. Tax expenditures provide tax relief to certain parties by allowing special tax exemptions, deductions, credits or exclusions of income. Risk transfers convey financial risk from recipients to the federal government through insurance contracts, loans, loan guarantees and similar instruments.3 Government contracts may also be used to encourage or change market behavior by paying for goods or services at prices above fair market value. For instance, the federal procurement system includes preferences for everything from alternative fuel vehicles to minority-owned businesses.
Importantly, the last two categories of subsidies, regulatory subsidies and tariffs, are not measured by Subsidyscope. Regulations affect market prices and have the effect of subsidizing firms or individuals that are not regulated or can help existing firms that are regulated by discouraging new competition. Likewise, tariffs – or fees charged on certain imports or exports – are a negative subsidy, discouraging the purchase of goods subject to the tariffs. While Subsidyscope recognizes that they can have a significant impact on economic behavior, these categories are currently excluded from our scope to keep the project manageable. Subsidy information on regulations and tariffs may be added in the future.
Second, Subsidyscope selects a particular economic sector to focus on. In order to define a sector in a way that lends itself to data collection and aggregation, we begin by using established federal budget functions to define sectors. Using the budget function makes it easier to define the scope of a sector and identify federal programs in that sector. For instance, the transportation sector is budget function 400 and the energy sector is budget function 270. However, there are many exceptions as some activities within a sector cut across multiple budget functions. We use a variety of means to identify these cross-cutting programs and apportion their costs to appropriate sectors.
Third, the Subsidyscope team identifies federal programs in a selected sector (e.g., transportation) by using the first four categories, created in the first step above, and various government data sources. This is done as follows:
Using this information, Subsidyscope compiles a list of federal programs (including contracts but excluding regulations and tariffs) that are directed at a particular sector of the economy.
Finally, having identified the federal programs within a specific sector that may fall into one of the four subsidy categories, Subsidyscope identifies the subset of these programs that are likely to contain a subsidy. This process is different for each category of subsidy.
For direct expenditures Subsidyscope assigns "tags" to each program to identify both the function(s) of the program and/or the specific mechanism(s) the government uses to deliver its services. The list of tags is shown below. (More specific information on tagging can be found here.)
| Tags describing a program's function: | Tags describing spending mechanism: |
|---|---|
| Economic Development Education Equity Infrastructure National Security Natural Resource Protection Research and Development* Safety Income maintenance Other | Insurance Intergovernmental Transfer Regulatory Compliance Regulatory Enforcement Research and Development Training Operating Expenses |
* Research and development is considered a purpose when it is basic research. Applied research is considered a mechanism. Click here for Subsidyscope’s definition of these tags.
The tags are then used to sort programs into those that are likely to provide a subsidy, and those that are not. This requires judgment. Subsidyscope has decided that all direct expenditure programs listed in the Catalog of Federal Domestic Assistance create a subsidy of some kind except those that provide funding to state or local governments to provide public safety or enforce federal regulations. It is our opinion that federal assistance to states or local governments for the core government functions of improving public safety and enforcing federal law does not meet a necessary element of a subsidy as they do not support an economic enterprise or activity (see the definition of subsidy in section A above).4
Thus, Subsidyscope removes all programs that have a primary tag of 'safety' or 'enforcement' and a secondary tag of 'intergovernmental transfer' from consideration as a program that contains a subsidy. We believe the remaining assistance programs likely provide a subsidy of some kind in the particular sector.
Subsidyscope’s decision to omit these assistance programs is, of course, our assessment. This does not preclude others from using our data and applying a different definition. In order to provide wide usability, and to account for different interpretations, we present all government direct expenditure data within a sector with their tags. This allows users to, for instance, include safety programs in their database search and count them as subsidies or omit other types of programs (e.g., infrastructure programs). In this way, users may make their own judgments, or change the scope of their research, and conduct their own analyses.
For tax expenditures and risk transfers, we assume all programs within a sector provide a subsidy.
Finally, for contracts, many contracts are awarded at a fair market price for the goods or services provided so the actual subsidy provided may be low or zero. For this reason, Subsidyscope focuses, in particular, on non-competed contracts, which are more likely to include a subsidy.
Having identified federal programs that are likely to contain a subsidy in a sector, Subsidyscope obtains estimates of the amount spent on these programs and the amount of subsidy delivered to the recipients, where available. This is done by mining different government databases and documents. The sources depend on the category of the program as defined in sub-section B.1. above, and requires a different process of determining subsidies for each type of federal spending.
Direct expenditure programs are often the easiest on which to collect data. However, subsidies delivered through direct expenditures are often the most difficult to identify, given that not all of the money spent through direct expenditures is a subsidy, and measuring the subsidy requires economic data that may or may not be available (such as a market price in the absence of government spending).
To that end, Subsidyscope presents the direct expenditure data obtained through USAspending.gov in a way that allows users to sort the data across various categories. The data are already classified by the government according to assistance type (grants, direct payment, loan guarantee, etc.), as well as by recipient type (state, county, nonprofit, etc.). It is important to note that most spending data presented are in obligations, but some are only available in outlays. Thus they cannot strictly be added together.
For tax expenditures, Subsidyscope uses data from the U.S. Department of the Treasury’s estimates presented in the Analytical Perspectives of the President’s Fiscal Year 2010 Budget. As previously noted, the subsidy provided through a tax expenditure may not be 100 percent of the estimated revenue loss of the tax expenditure. For example, certain tax expenditures place compliance costs on the recipient which may reduce the value of the tax expenditure. However, compliance costs are not calculated, therefore the entire amount of a tax expenditure will be presented as a tax subsidy.
Estimated credit subsidies provided through risk transfers come from a number of sources, including the Analytical Perspectives volume and the Federal Credit Supplement of the President’s Fiscal Year 2010 Budget, and other agency-specific sources. Under the Federal Credit Reform Act, the federal government requires the subsidy costs of loans and loan guarantees to be estimated and presented in the budget. Estimates of subsidies provided through insurance programs are not required and thus harder to find. Subisdyscope will include such estimates when they are available.
Data on government contracts are pulled from USAspending.gov, which houses the Federal Procurement Data System. These data are presented separately from the other categories and should be viewed with additional caution for at least three reasons. First, many contracts, even those that are not competed, are awarded at a fair market values the actual subsidy provided may be low or zero. Second, Subsidyscope is unable to use budget functions to organize these data into sectors. As mentioned above, we are using North American Industry Classification System (NAICS) codes to identify the appropriate economic sector, or Product Service Codes, if NAICS codes are not available. Because contracts cannot be sorted by budget function, Subsidyscope is reluctant to combine contract data with expenditure data. Finally, Subsidyscope has found the quality of contract data in USAspending.gov to be very poor. For instance, despite there being a requirement that contracting officers identify NAICS codes for each contract, in 2008 approximately half the contract records are missing NAICS codes. This lowers our confidence in the contract data.
Of course, all of Subsidyscope’s estimates of subsidy spending and subsidies rely on the quality of data provided by the government databases. Overall we believe the estimates to be lower bounds due to missing data in federal data sets. To the extent these data are found to be of poor quality or omit important information, Subsidyscope will attempt to obtain more accurate information directly from agencies or other sources of raw data. For graphic presentations of data on our site where we know the omissions are significant, such as subsidy estimates for direct expenditures, we will not supply an estimate but insert a statement such as "subsidy unknown".
