Under the Airport Improvement Program (AIP), the Federal Aviation Administration (FAA) provides airports with grants for expanding capacity and improving terminals. About half of the grant money is apportioned by formula. The other half is considered discretionary, although the Congress has imposed some restrictions on its allocation. Over the past decade, about two-thirds of AIP funding has gone to primary, commercial service airports; about onequarter has gone to general aviation and reliever airports; and the rest has been divided among other special programs. Eliminating those grants would result in savings of $261 million in 1997 and about $6.4 billion over the 1997-2002 period measured from the 1996 funding level. Measured from the 1996 level adjusted for inflation, savings would be $269 million in 1997 and nearly $7 billion over the six-year period.

Recent trends in aviation have increased the importance of larger airports (as measured by the number of embarking passengers). If airport grants were eliminated, those airports would have little trouble financing capital improvements from the fees they collect or the additional bonds they could issue. In

1991, the Congress passed legislation allowing airports to levy passenger facility charges of up to $3 per passenger. By the end of 1995, the FAA had approved such charges at more than half of the eligible major airports. Those charges can supplement the revenues received from concessionaire rents, landing fees, and airline lease payments and, unlike federal grants, can be used to pay the interest on bonds issued by the airport. In 1995, passenger facility charges yielded revenues of about $1 billion.

Small reliever airports have been financed by the FAA in the expectation that they would draw general aviation aircraft away from major airports. To date, they have not done so. Thus, some critics would argue against providing federal subsidies to those airports.

Supporters of the current program argue that the benefits provided by the system of airports are nationwide in scope. They also argue that more assistance is needed to overcome airport congestion and to allow airports to construct new gates and terminals. Those improvements will promote competition among airlines, with benefits accruing to passengers.

The Essential Air Service (EAS) program was created by the Airline Deregulation Act of 1978 to continue air service to communities that had received federally mandated air service prior to deregulation. The program provides subsidies to air carriers serving small communities that meet certain criteria. Subsidies currently support air service to 72 communities exclusive of Alaska, to which separate rules apply, with about 600,000 passengers served annually. The subsidy per passenger ranges from $4 to nearly $404. The Congress has directed that such subsidies not exceed $200 unless the community is more than 210 miles from the nearest large or medium-size hub airport.

Program outlays for 1995 were $29 million. The Congress has reduced the appropriation to $22.6 million for 1996. If the program was eliminated, budgetary savings would be $18 million in 1997 and $133 million over the 1997-2002 period measured against the 1996 funding level, and $19 million in 1997 and $145 million over the 1997-2002 period measured against the 1996 level adjusted for inflation. To mitigate disruptions from eliminating the program, it could be phased out over several years. Total budgetary savings would depend on the speed of the phaseout.

Critics of the EAS program contend that the subsidies are excessive, providing air transportation at a high cost per passenger. They also maintain that the program was intended to be transitional and that the time has come to phase it out. Air transportation to small communities is not a vital part of the national transportation system. If states or communities derive benefits from that service, they could provide subsidies themselves. The Congress has called for states, local governments, and other entities to begin pursuing cost-sharing mechanisms in anticipation of a cost-sharing requirement of 50 percent in 1997.

Supporters of the subsidy program claim that it prevents the isolation of rural communities that would not otherwise receive air service. Subsidies are not available for service to communities located less than 70 miles from a large or medium-size hub airport (except in Alaska). The availability of airline transportation is an important ingredient in the economic development of small communities. Without continued air service, according to some proponents, some towns might lose a sizable portion of their economic base.

The National Aeronautics and Space Administration (NASA) funds the development of technology and systems intended for use in commercial airliners-both subsonic and supersonic--with the explicit objective of preserving the U.S. share of the current and future world airliner market. Eliminating NASA's Advanced Subsonic Technology and High-Speed Research Programs would reduce outlays by $140 million in 1997 and $2.1 billion from 1997 through 2002 measured against the 1996 funding level. Measured against the 1996 level adjusted for inflation, outlays would be reduced by $146 million in 1997 and by $2.3 billion from 1997 through 2002.

The industry that produces large commercial aircraft is among the nation's most significant when measured by value of shipments, employment, or export sales. Two U.S. firms, Boeing and McDonnell Douglas, account for all of the nation's final sales of large commercial aircraft, but many other aerospace and nonaerospace businesses supply components to those firms. Along with the European-based Airbus Industrie, the two U.S. producers dominate the world market for large commercial aircraft (although McDonnell Douglas's share is significantly smaller than Boeing's).

NASA holds that the federal support offered in its Advanced Subsonic Technology Program--$170 million in 1996--is necessary to maintain the current U.S. share of the global market for subsonic aircraft. Among the key elements of the program are the test

ing of improved electronic controls and components under actual flight conditions and the developing and testing of new technologies that will allow continued operation of aging jet aircraft. The High-Speed Research effort funded at $246 million in 1996 is a second conduit of support for the producers of commercial airliners. The program has two phases. Phase I is devoted to developing technologies that mitigate the atmospheric and noise effects of supersonic flight. Phase II, a cooperative venture with U.S. industry, is devoted to "high-leverage" technologies necessary for the economic viability of future supersonic commercial jet airplanes. NASA justifies the supersonic part of its aeronautical research and technology program the same way it justifies the program's subsonic component: the agency needs to support U.S. businesses that produce large commercial aircraft for the world market.

The case for eliminating federal support to U.S. producers of commercial airliners rests on the notion that the applied and systems-oriented research and development (R&D) necessary to maintain the U.S. market share is a private rather than a public responsibility. The owners and employees of aircraft companies benefit from success in the world market; accordingly, they should shoulder the burden of paying for the R&D necessary to produce better aircraft. The facts that the investments needed to develop, produce, and market a new commercial aircraft are very large--$8 billion to $10 billion by some estimates--and that the development of new aircraft

requires many years should have little bearing on whether the public or private sector pays the cost of producing the necessary technologies.

Although a case can be made for federal support of R&D that ultimately benefits private businesses and is consistent with an economically efficient allocation of resources, it applies only weakly, or not at all, to the production of large aircraft. The benefits from the R&D supported by the NASA programs in question fall almost exclusively to aircraft manufacturers, their suppliers, and airlines. Left to their own devices, those parties should spend enough on the type of R&D supported by the NASA programs to leave society and themselves in the best position possible. Moreover, the type of research that is likely to be underfunded from society's point of view is supported by other NASA spending on aeronautical research and technology--$490 million in 1996.

The case for continued support of these programs is based largely on the unique competitive features of the market for large commercial aircraft. The United States and the European Union are parties to a bilateral agreement permitting public support for the de

velopment of commercial airliners. If the federal government failed to grant U.S. producers support comparable to that being provided by the governments of European competitors, opponents of this option would argue, U.S. producers would find themselves at a severe disadvantage in the global market.

A second argument for continuing NASA's expenditures on these programs is that limitations on noise levels and atmospheric pollutants impose an unfunded federal mandate on aircraft producers and airlines. Federal funds spent for research on noise and pollution abatement, as opposed to spending directed toward enhancing the economic viability of commercial aircraft, might be justified on the grounds that those funds cover a cost imposed on the industry by federal law. The force of that argument is diminished, however, to the extent that noise and atmospheric pollutants generated by jet air travel are unpaid "costs" that air travelers impose on the public at large. From that point of view, it is appropriate that aircraft producers, airlines, and, ultimately, air travelers pay the full social cost of their activities-including the cost of R&D that is directly applied to current and future jet aircraft.

The Department of Agriculture assists rural communities through a variety of programs. With the enactment of the Department of Agriculture Reorganization Act of 1994, the Rural Development Administration (RDA) transferred its functions to the Rural Housing Service, the Rural Utilities Service, and the Rural Business Service. In general, the programs provide loans, loan guarantees, and grants for rural water and waste disposal projects, community facilities, rural development, and fire protection. Funds are generally allocated among the states based on rural population and the number of rural families with income below the poverty threshold. Within each state, funds are awarded competitively to eligible applicants, including state and local agencies, nonprofit entities, and (in the case of loan guarantees for business and industry) for-profit organizations.

The amount of interest that loan applicants pay varies with the type of aid they receive and, in some programs, with the economic condition of the area.

For example, for rural water and waste disposal loans, interest rates can range from 4.5 percent to market rates, depending on the median family income in the service area. If repayment of a loan would impose an undue financial burden on the residents of relatively poor areas, those areas may receive grants instead.

For 1996, the Congress appropriated $195 million in budget authority to support the costs of nearly $1.4 billion in combined direct loans and loan guarantees. Under credit reform, those costs include the present value of interest subsidies and the cost of loans that go into default. In addition, the Congress appropriated $464 million for grants, of which $404 million was for water and waste disposal. Eliminating the loan programs would reduce federal outlays for subsidizing direct loans and loan guarantees by $744 million over the 1997-2002 period measured from the 1996 funding level. Measured from the 1996 level adjusted for inflation, savings would be