Congressional Attention Is Warranted When User Charges or Other Policy Changes Cause Capital Losses

PAD-83-10: Published: Oct 13, 1982. Publicly Released: Oct 13, 1982.

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In response to a congressional request, GAO described how increases in user charges for products and services provided by the Government can cause capital losses. Using an irrigation project as a case study, GAO also showed how the resulting compensation issues can be resolved and provided guidelines which should be useful to Congress and the Federal agencies when they consider changing public policies.

GAO found that the price of irrigation water should be changed, because current pricing schemes are inefficient, charging for water use by the acre rather than by the unit of water. In addition, the price that water would get in some alternative use, such as the production of electricity, is often higher than the charge paid by irrigators. Those who are most dependent on irrigation to water their crops would suffer greater capital losses than would those who benefit from considerably more rainfall. Capital losses could also vary by the size of farming operations and would differ among farm owners depending upon the form of land ownership. Compensation for capital losses could offset the relatively large losses that some groups would suffer. Compensation could also be justified on equity grounds because of disproportionately high losses on those with little wealth and the disappointment of reasonable expectations. However, compensation may either aid or inhibit desirable productive activity. There are a number of ways in which compensation could be provided for capital losses if such compensation were justified. Revenues from selling water to electricity producers could be used to compensate farmland owners. Farmland owners could be permitted to claim capital losses as deductions from taxable income or as tax credits, or the Government could use debt to compensate the farmland owners. Congress could delay the irrigation water price increase or give irrigators legal title to the amounts of water which they currently use, which they could sell to electricity producers.

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