Ending Corporate Welfare

[Janice Shields <jshields@essential.org>]

                  PUBLISHED IN BUSINESS & SOCIETY REVIEW, SUMMER 1995
                                     

                     ENDING (CORPORATE) WELFARE AS WE KNOW IT

                               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 this 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 com panies 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 Coordinator, 
Corporate Welfare Project & TaxWatch Center for Study of Responsive Law
P.O. Box 19367, Washington, DC  20036
202-387-8030			|   Internet:	jshields@essential.org