Albion Monitor /Commentary

Ending (Corporate) Welfare

by Janice Shields

From the White House to Capitol Hill, the mantra in Washington these days is "We want to end welfare as we know it." Billions of dollars have been cut from housing, nutrition, health care and education programs. Remaining relatively unscathed are billions in Aid for Dependent Corporations (AFDC) in all its omnipresent forms.

Cash subsidies, free or below-cost government services and products, tax breaks, and business-protection laws fill the corporate welfare trough and multiply. The Corporate Welfare Project in Washington, DC has conservatively identified over 150 examples of federal corporate welfare totalling more than $167 billion in fiscal year 1995 alone.

Brother, Can You Spare A Billion?

Lockheed and Martin Marietta merged last year to form Lockheed-Martin, a company that will generate $11.6 billion in annual military sales. In a scenario of bizarre federal giveaways, U.S. taxpayers will spend $1 billion to cover the costs of related plant shutdowns and employee relocations, even though 30,000 workers will lose their jobs. Another $31 million in federal money will go to top officials of the two companies, one-third of their $92 million bonus package.

Defense Secretary William Perry and his then deputy, John Deutch, officially approved the deal; both had been employed as consultants by Martin Marietta before joining the Pentagon. Last year, the duo secretly reversed the Pentagon's 40-year ban on reimbursing expenses related to defense company acquisitions and mergers so that Martin Marietta could get $330 million in federal payments in connection with its acquisition of a General Electric defense subsidiary.

Before approving that payout, Perry and Deutch obtained waivers of an ethics regulation that prohibited Pentagon officials from dealing with former employers for one year. Ironically, Daniel M. Tellep, the Chairperson and CEO of Lockheed-Martin, received the Public Sector Council Leadership Award in April. The goal of the Council is to encourage cooperation between business and government.

The Agriculture Department's Market Promotion Program (MPP) provides more than $100 million annually in taxpayer hand-outs to private companies and their trade associations for overseas promotional activities, such as advertising, market research, technical assistance and trade servicing.

According to a Center for Study of Responsive Law report, five businesses each received more than $1 million from the MPP in 1993. They included Sunkist Growers, Inc. ($6.6 million), E. & J. Gallo Winery ($4.3 million), Sunsweet Growers, Inc. ($2.4 million), Dole ($1.57 million), and Brown-Forman Corporation ($1.1 million). The fiscal year 1994 budget contained promotional funding for alcohol, wine and beer ($6.34 million), mink ($1.9 million) and pet food ($1.1 million).

Incredibly, while the current U.S. Congress has been cutting spending for food programs for needy people, the MPP, which funds wealthy corporations' dog food advertisements overseas, has survived intact.

Corporate "Free Cheese"

Instead of direct cash handouts, some welfare programs provide free or below-cost government goods and services to companies. For the beneficiaries, cost savings give the same bounce to the bottom line as revenues from subsidies do.

On April, 11, 1995, the Department of Health and Human Service's National Institutes of Health announced that they had relinquished the right to require "reasonable pricing" on drugs developed in cooperation between the federal government and private industry. The reasonable pricing policy had required companies to provide documentation showing a reasonable relationship between the price of a product, the public investment in that product, and the health and safety needs of the public.

The policy had been adopted in 1987 because of Congressional and public criticism of the pricing of the anti-AIDS drug, AZT. Although federal scientists had done much of the work to develop the drug, Burroughs Wellcome, the pharmaceutical company that marketed AZT, initially priced AZT to cost each patient $8,000 to $10,000 per year. Now, Bristol-Myers Squibb has been given the exclusive right to commercialize the cancer drug, Taxol, even though Taxol was discovered, developed and tested by the federal government.

According to the Taxpayer Assets Project, the drug costs about $52.50 per shot to produce, but the current wholesale price is $1,022.70. Bristol-Myers Squibb, whose 1994 profits were $1.8 billion, pays no royalties to the government on the company's Taxol sales, which are expected to generate $480 million in revenues in 1995.

The federal Overseas Private Investment Corporation (OPIC) provides below- market-rate loans and political risk insurance to multinational companies that are at least 50 percent beneficially owned by U.S. citizens, to encourage private U.S. investment in developing countries. OPIC made loan commitments of $1.7 billion and insurance commitments of $6 billion during fiscal year 1994, which marked the highest level of activity in the agency's 23-year history.

U.S. West, a telecommunications company, received $170 million in taxpayer-subsidized OPIC loans in 1994 even though U.S. West generated profits of $1.4 billion that year. Citibank obtained subsidized OPIC insurance coverage exceeding $388 million in 1994 even though Citibank's 1994 profits exceeded $3.4 billion. Perhaps the Clinton administration and Congress should recommend means-testing for corporate welfare recipients, rather than destitute families.

a.k.a. Tax Breaks and Loopholes

Congressional leaders have proposed cuts in corporate welfare (subsidies), but plan to use the government savings to offset federal revenue losses resulting from increases in yet another form of corporate welfare tax breaks. The Congressional Joint Committee on Taxation (JCT) estimates that fiscal year 1995 corporate tax expenditures (bureaucratese for special tax provisions or regulations that provide tax benefits to particular taxpayers) will exceed $58 billion.

Accelerated depreciation deductions allow companies to decrease their taxable income by amounts that exceed the dollar decline in the useful life of an asset in its early years. The extra deductions reduce company tax liabilities and amount to interest-free loans from taxpayers to businesses. These "loans" show up as deferred taxes in company annual reports and, according to the JCT, create federal tax expenditures of $19 billion per year.

IBM's 1994 10-K reported accumulated deferred taxes of $1.653 billion related to depreciation. Hasbro's showed deferred taxes of $64 million due to depreciation. The tax bill passed by the House of Representatives in April would continue to allow accelerated depreciation and, as an added bonus, let companies take depreciation deductions in excess of the cost of the asset.

According to Department of Treasury estimates, the tax subsidy would cut government revenue an additional $14 billion per year over the long term by reducing the corporate income tax take by about 8 percent.

The JCT estimates that tax credits for companies with operations in Puerto Rico and the Virgin Islands will reduce U.S. Treasury receipts by $3.7 billion in 1995. The credit allows qualified U.S. corporations to deduct from their U.S. tax bill the amount of U.S. taxes that would have been due on profits from business operations, sales of assets and investments in Puerto Rico and the Virgin Islands.

Merck & Company's 1993 10-K reported tax savings of $158.7 million because of its Puerto Rican operations. According to Pfizer's 10-K, the company was able to reduce its taxes from the statutory rate of 35 percent to 25.1 percent due to the effect of its partially tax-exempt operations in Puerto Rico.

Regulatory Deform

Corporate welfare also includes business-protection laws and pro-business changes in existing rules. This welfare helps companies increase revenues or cut costs, but is more difficult to quantify.

Certain industries are fighting to maintain import restrictions that control domestic supplies and reduce competition. The U.S. government currently guarantees sugar producers a minimum price, in part by limiting sugar imports. According to a U.S. General Accounting Office (GAO) study, consumers pay an average $1.4 billion dollars in higher grocery bills annually as a result.

Sugar producers claim that dropping the price support program would place 420,000 sugar-producing jobs in jeopardy in other words, U.S. consumers are paying at least $3,333 per job [$1.4 billion/420,000]. Compounding the criticisms, just one percent of sugar farms benefit from 42 percent of the higher revenues resulting from this corporate welfare program.

According to the Center for Responsive Politics, one family alone enjoyed $64.6 million in federal sugar benefits in 1993 and 1994 not a bad return on its federal election contributions of $1.5 million from 1979 through 1994.

Many companies have lobbied vigorously on Capital Hill for changes in tort law that would effectively limit suits by victims of defective products, medical malpractice and securities fraud and for reductions in the so-called "regulatory burden" of consumer-, worker- and environmental-protection laws. CEOs admit that federal subsidies are small change compared to potential cost savings from tort and regulatory "reform."

During the first 100 days of the 104th Congress, the House of Representatives passed legislation that would place a moratorium on new regulations and include requirements that risk assessment and cost-benefit analysis be completed for new rules. According to the Union of Concerned Scientists, estimates of costs of regulations are plagued with uncertainties and generally overstate expenses.

Two studies of the costs of regulations to the banking industry yielded widely varying results. The American Bankers Association (ABA) estimated that regulations cost 45 percent of pretax bank income; the Independent Bankers Association of America (IBAA), another trade group, estimated 24 percent.

However, neither the ABA nor the IBAA studies made any attempt to quantify the benefits from complying with regulations, even though bankers, such as the president of the Bank of Boston, say, "We've already proved to ourselves that we can make money making Community Reinvestment Act-related loans." Despite the divergent statistics and incomplete analyses, the bankers' Congressional lobbyists are now begging for corporate welfare in the form of reduced regulation of the industry and targeting the Community Reinvestment Act, among others.

Bidding for Business

Complementing federal Aid for Dependent Corporations is corporate welfare at the state and local level, which has burgeoned as competition to retain or attract companies has intensified. The costs of the resulting jobs are outrageous.

According to the American Federation of State, County and Municipal Employees, in 1993 Alabama offered tax breaks to Mercedes Benz that were valued at $150,000 per job created; new jobs resulting from Kentucky's tax breaks for Dofasco Steel cost $350,000 each; and, Minnesota paid an amazing $558,000 per job in tax breaks for Northwest Airlines.

States and cities have even obtained federal grants to steal companies from each other. Poplar Bluff, Missouri, for example, used a $205,000 U.S. Housing and Urban Development (HUD) Community Block Grant to provide infrastructure to encourage Briggs & Stratton to relocate from Milwaukee. Schutt Sports Group accepted a low-interest HUD Block Grant loan of $500,000, funneled through the Illinois Community Development Assistance Program, to purchase machinery and equipment, then relocated 60 jobs from Knoxville to Salem, Illinois. Proposed legislation (H.R. 1842) would ban the utilization of federal funds by one state to lure jobs and businesses from another state.

Rio Rancho, New Mexico provides a smorgasbord of incentives lower corporate income taxes, exemption from property taxes and gross receipts taxes on equipment purchases, recruitment and training of workers, rapid grants of permits, and deep discounts on everything from moving and storage fees to utility deposits to attract employers.

In 1993, Intel announced plans to build a $1 billion plant, then crassly circulated the company's "ideal incentive matrix" among officials of competing states . A bidding war raged between New Mexico, California, Arizona and others. Rio Rancho was declared the ultimate winner when the town offered a $114 million package of incentives and tax breaks; Intel's 1994 profits were $2.3 billion. Unfortunately, after handing out big tax breaks to attract employers, Rio Rancho can't afford schools. High school students are bused to an overcrowded Albuquerque school and local middle and elementary schools are packed to twice their capacity.

Providing tax breaks and other incentives doesn't guarantee anticipated results. In 1978, Volkswagen played Pennsylvania and Ohio off against each other when the company decided to open a plant to produce Rabbits. Pennsylvania "won" after the state agreed to provide a $40 million 1.75 percent loan (which VW will not begin repaying until 1998), $25 million in highway and rail construction, $3 million in training subsidies, and five years of local tax abatements. However, only half of the five thousand jobs that VW had promised were created and the company closed the plant in less than ten years.

General Motors has requested and received $1.3 billion in tax abatements from Ypsilanti, Michigan since 1975, including a twelve-year property tax abatement for investment in GM's Willow Run facility in 1988. In 1992, GM announced plans to close Willow Run and transfer production to Texas. Ypsilanti filed suit, alleging that GM had violated agreements and representations that the company had made to obtain the abatements. The town won, but GM prevailed on appeal when the court ruled that an abatement did not carry a promise of continued employment.

Strange Bedfellows

The prospect of rich corporations on the taxpayer dole has brought together strange bedfellows, from the conservative Cato Institute and the Competitive Enterprise Institute to the progressive Center for Budget and Policy Priorities and Essential Information to fight to end welfare for wealthy companies.

In June, a coalition of the Cato Institute, the Progressive Policy Institute and Ralph Nader's Essential Information released its first Dirty Dozen list of federal subsidies and grants to corporations, that the three organizations unanimously recommended should be cut from the fiscal year 1996 and future budgets, for savings of more than $16 billion over five years.

The list included eliminating maritime operating subsidies, OPIC loans and insurance, the MPP, the Export Enhancement Program, subsidies for military exports, and more. At a Washington news conference to announce the list, Representatives DeFazio, Sanders and Owens spoke in support of axing corporate welfare.

Groups from across the political spectrum challenge corporate welfare programs for several compelling reasons:

Subsidies and grants may corrupt the relationship between business and government. For example, Commerce Secretary Ron Brown has led nine international trade missions for 170 CEOs. The Commerce Department insists that seats on the trips are awarded based on genuine needs for a government boost in closing deals. Yet, according to a New York Times report, the CEO of Cellular Communications International, Inc. was included in a trip to India after one of President Clinton's classmates wrote to Commerce aides, noting that the CEO was a "very generous donor" to the Democratic Party.

Subsidies and grants encourage corporate executives to focus their energies on politics instead of business. In April, the Senate voted to cut nutrition and housing programs, but tabled an amendment to eliminate the MPP. During the debate, Senator Cochran declared, "I am hoping that we can increase the funding [for the MPP]." He then asked permission to include in the Congressional Record a copy of a letter he had received from a coalition which consisted of Sunkist, the National Wine Coalition, Sunsweet, Dole, the Kentucky Distillers Association and other recipients of the MPP.

Subsidies and grants create corporate winners and losers based on political decisions. The Clinton Administration is lobbying Congress to save the Advanced Technologies Program (ATP), which was budgeted to receive $340 million in taxpayer funds in 1995 to support research and development projects of private U.S.- and foreign-owned companies. However, the program has targeted only certain commercial technologies for funding, such as car manufacturing and telecommunications. Big companies like 3M and IBM have been the big winners of ATP grants.

Subsidies and grants disburse taxpayer monies for business costs properly borne by the private sector. The Export-Import Bank provides subsidized loans, loan guarantees and tied-aid grants. In the 60 years since its creation, the Ex-Im Bank has lost $8 billion on its operations, according to the Congressional Budget Office. Even David Stockman and other Reagan politicians tried to get rid of the Ex-Im Bank, arguing that its practice of financing export projects with below-market interest rates amounted to "corporate welfare."

While conservatives and progressives agree on the need to cut corporate welfare, old differences re-emerge when the groups are faced with the question of what to do with the freed funds. The Competitive Enterprise Institute, for example, would use the budgetary savings to reduce the deficit. Essential Information would ensure that needy people have access to safe shelter, nutritional food, affordable health care and quality education.

Progressive Agenda

The Corporate Welfare Project recommends a number of changes to improve the accountability of corporate welfare programs:

  • Disclosure Requirements: The U.S. government should consolidate and regularly report information about corporate welfare programs, expenditures and recipients so that the number of programs and dollar costs are known. In 1994, Senators Lieberman and Riegle asked the U.S. General Accounting Office (GAO) to prepare a list only of the federal programs that provide management and technical assistance to businesses. GAO concluded, "We found no particular federal office that tracks or coordinates all the various management and technical assistance programs at the different government agencies."
  • Recipients should be required to provide a publicly-available report each year identifying the specific types of corporate welfare received, the purposes and uses of that welfare, and the cost and benefits to the taxpayers. According to the Securities and Exchange Commission, corporations currently are not required to disclose information about government grants and subsidies received.
  • Recipient Restrictions: Means testing should be required for corporate welfare recipients and limits should be placed on the length of time that companies may remain on welfare. A three strikes and you're out rule should require removal of corporate welfare abusers and companies convicted of crimes and misdeeds from the welfare rolls.
  • Corporate Welfare Evaluations: Public hearings should be held before new corporate welfare programs may be introduced and periodic cost-benefit analyses should be completed to determine whether existing programs should continue.
  • Fighting Back

    Activists at the local, state and federal level are beginning to mobilize to put pressure on legislators to reign-in corporate welfare. Minnesota's Corporate Welfare Reform Law, which went into effect on August 1, 1995, requires a business that receives state or local government assistance for economic development or job growth purposes to create a net increase in jobs in Minnesota within two years of receiving the assistance or to repay the assistance to the government agency.

    The National Lawyers Guild of Los Angeles has proposed a California ballot initiative, the Corporate Welfare Responsibility Act. If passed, any citizen of California would be able to bring action in superior court against any domestic or foreign corporation doing business in California, for a judicial declaration that a corporation is a welfare abuser. The penalties would include reimbursement to the public treasury of the dollar value of tax and other benefits gained by the corporation because of the abuse, plus interest, punitive damages, and revocation of the corporation's privilege to do business in California when the corporation is declared a welfare abuser by three final judgements within any ten year period.

    These efforts should continue and spread. Failure to control and shrink corporate "welfare as we know it" makes a tragic mockery of the current debates on social spending.

    Janice Shields is Coordinator for the Corporate Welfare Project & TaxWatch Center for Study of Responsive Law.


    Albion Monitor January 31, 1996 (http://www.monitor.net/monitor)

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