CORPORATE WELFARE



Corporate welfare is an unofficial term used to describe government subsidies and tax breaks that support American businesses and industries. The term implies that these subsidies are equivalent to the government assistance, or welfare, traditionally provided to poor persons. It is also sometimes called "corporate pork." "During one of the most robust economic periods in our nation's history," according to a 1998 Time magazine cover story, "the Federal Government has shelled out $125 billion in corporate welfare, equivalent to all the income tax paid by 60 million individuals and families." No accurate figures existed for the additional amount handed over by state and local governments, but Time claimed that it was certainly "in the many billions of dollars each year" and still growing. In fact, corporate welfare—which is administered by a bureaucracy consisting of 11,000 federal, state, and local organizations and agencies—costs the average American taxpayer two paychecks per year.

Some programs currently termed corporate welfare were initiated to address a specific societal need. For example, the Rural Electrification Administration (REA) began receiving federal funds in 1949 to provide electricity and telephone services to the nation's rural farmers. But loopholes, oversights, intense lobbying efforts, and corporate greed turned some of the programs into expensive and embarrassing examples of government waste. The REA program has come under fire in recent years for using $2 billion in government subsidized loans to enable large, wealthy companies to provide the electricity for lighting the strip in Las Vegas and running the ski lifts in Aspen. By 1995 analysts across the political spectrum—from liberal Democrat Labor Secretary Robert Reich to conservative Republican leaders of Congress—had identified corporate welfare as the last large source of funds available for federal budget cuts. "Like it or not, GOP lawmakers just about have to clip corporate goodies if they're serious about balancing the budget," Howard Gleckman explained in an editorial for Business Week. "Without such cuts, Republicans will have the worst of all worlds: They'll fail to control spending, and then they'll have to explain to voters why they targeted poor children but not wealthy corporations." In fact, the Republican Congress did trim corporate welfare by 15 percent in 1995, as James K. Glassman noted in U.S. News and World Report. But a year later they awarded a 1.3 percent increase in funding to the top 55 federal programs benefiting businesses.

Most outlays considered to be corporate welfare can be broken into six major categories: agricultural programs (for which the largest portion of funds consist of price supports for various crops); energy programs; transportation programs (with the largest portion of funds supporting airline user fees); aerospace and other high-technology industries; construction programs (the largest portion consisting of an allowance for rapid depreciation of rental properties); and miscellaneous programs, which include financial services and natural resources programs (the largest portions of this last category of corporate welfare goes toward tax exemptions for companies operating in Puerto Rico and tax deductions for advertising).

CORPORATE WELFARE STIRS PUBLIC
OUTRAGE

Supporters of corporate welfare—mostly business leaders, lobbyists, and politicians representing industrial regions—argue that government support for certain strategic industries helps ensure the health of the American economy. They also claim that it keeps American industry competitive on a global scale. One of the most commonly cited reasons for maintaining corporate welfare programs is that they create jobs. A 1998 Time magazine study, however, found that this was not the case, for either federal or state programs. For example, the five biggest beneficiaries of financing from the Export-Import Bank of the United States (which has received $5 billion in federal funding since 1992) have slashed their payrolls by 38 percent during the 1990s, translating into a loss of 350,000 jobs for the American economy. In 1997 the state of Pennsylvania provided $307 million in economic incentives to lure a Norwegian engineering firm to take over the former Philadelphia Naval Shipyard and create 950 jobs, meaning that each job cost the state $323,000. If every new worker earned $50,000 annually and paid income taxes at the average rate, it would take more than 50 years of tax collections for Pennsylvania to recoup its investment. Although 10 million new jobs were created across the country between 1990 and 1998, the majority were created by small and medium-sized firms, which do not tend to benefit from corporate welfare. In contrast, the Fortune 500 firms, which are the main beneficiaries, have eliminated more jobs than they have created during this period.

Opponents of corporate welfare—ranging from taxpayer and environmental groups to free-market economists and politicians intent on reducing the federal budget deficit—claim that federal aid often leads industries to become dependent and lose their competitive edge. According to Reader's Digest, corporate welfare also tends to corrupt the political process, since "some industries become trapped in a system where success is achieved not by ability to produce but by skill at political manipulation." Opponents also argue that corporate welfare increases final costs to consumers and diverts government resources from other, potentially more productive uses.

Another prominent argument against corporate welfare is that it tends to favor large, influential businesses over small, innovative competitors. For example, the U.S. government spends $100 million annually to support Sematech, a consortium of the 14 largest American producers of semiconductors. Sematech was originally formed when Japanese companies dominated the global semiconductor industry and many American firms had begun to flounder. Since chip technology was considered vital to national interests, the consortium was formed to facilitate technology exchange and help U.S. companies become more competitive in overseas markets. In recent years, however, Sematech has benefited only the largest firms and has discouraged smaller ones, which may possess innovative new technologies, from entering the industry—thus threatening future U.S. competitiveness. As Gleckman stated, "Such government interference distorts markets and promotes established businesses over more creative start-ups with fewer political connections."

A similar example involves the $110 million annually that goes toward advertising certain American agricultural products overseas. The program was originally intended to help U.S. producers overcome trade barriers to entering foreign markets. As of 1990, however, producers no longer had to prove that they faced unfair trade practices in another country in order to use federal subsidies to advertise there. Furthermore, the funds were distributed unevenly and went almost exclusively to large companies. As Stephen Moore explained in a New York Times editorial, "tens of thousands of businesses export products abroad; perhaps 1 percent receive federal assistance." Two further arguments against corporate welfare are that the government has a relatively poor record in identifying and supporting the important companies and industries of the future, and that subsidies may actually be harmful to the economy because they often disguise significant problems in troubled companies.

In the late 1990s, as lawmakers continue to pare social programs in an attempt to get the budget deficit under control, the business and popular press has abounded with stories detailing abuses of corporate welfare. This publicity has centered around the ability and willingness of many large businesses to manipulate the system and use taxpayer money for their own gain. For example, environmental groups have focused on reducing the money the government spends to build roads in national forests that make it easier for forest products companies to cut down and remove trees, as well as subsidies to large farm owners for using water for irrigation or for grazing animals on public lands. Taxpayer groups have targeted the $33 million in annual price supports on commodities such as sugar. The government restricts sugar imports in order to keep the prices artificially high for U.S. producers, which opponents argue acts like a regressive tax and harms poor people the most. Others have objected to the $19.7 billion in tax breaks that companies, including many large pharmaceutical manufacturers, receive for operating in Puerto Rico. Finally, some opponents have focused on the destructive bidding wars that have erupted between different cities and states to woo companies to expand or relocate in their jurisdictions.

As public pressure mounts, lawmakers and analysts have proposed various plans for capping outlays or significantly reducing payments in several categories of corporate welfare. Donald L. Bartlett and James B. Steele, in a 1998 special report for Time, suggested several possible solutions to the corporate welfare problem. For example, to effectively eliminate corporate welfare at the state and local level, they suggested levying a federal excise tax equal to the value of incentives offered to companies—meaning that any benefit a company received from a state would be immediately confiscated by the federal government. In addition, they noted that legal scholars believe that corporate welfare programs would be declared unconstitutional—in violation of the commerce clause—if a lawsuit challenging them were to make it to the U.S. Supreme Court. Finally, they suggested forming a special commission to study and report to Congress about federal corporate welfare programs. This measure would force Congress to evaluate each program's value and vote to either preserve or scrap it.

[ Laurie Collier Hillstrom ]

FURTHER READING:

Bartlett, Donald L., and James B. Steele. 'Five Ways Out: There Are Solutions to the Corporate Welfare Mess—But Who Goes First?" Time, 30 November 1998, 66.

Celente, Gerald. "Capitalism for Cowards." New York Times, 16 October 1998, A27.

"Corporate Welfare." Time, 9 November 1998, 36.

Dennis, Richard J. "Privilege and Poverty." Reason, April 1993, 29.

Donlan, Thomas G. 'The Big Handouts: Corporate Welfare Impoverishes the Productive Economy.' Barron's, 27 March 1995, 50.

Ferguson, Tim W., and Josephine Lee. "Corporate Welfare.'" Forbes, 20 April 1998, 42.

Glassman, James K. "The Corporate Welfare Queens: When It Comes to Subsidies for Companies, Congress Can't Say No." U.S. News and World Report, 19 May 1997, 53.

Gleckman, Howard. "Welfare Cuts: Now, It's Corporate America's Turn." Business Week, 10 April 1995, 37.

Hemphill, Thomas A. "Confronting Corporate Welfare." Business Horizons 40, no. 6 (November/December 1997): 2.

Hershey, Robert D., Jr. "A Hard Look at Corporate 'Welfare." New York Tines, 7 March 1995, Cl.

Ingersoll, Bruce, and others. "Do We Really Need Corporate Welfare?" Reader's Digest, March 1992, 70.

Moore, Stephen. "How to Slash Corporate Welfare." New York Times, 5 April 1995, A25.

Olson, Paulette, and Dell Champlin. "Ending Corporate Welfare as We Know It." Journal of Economic Issues 32, no. 3 (September 1998): 759.

Rodgers, T. J. "End Corporate Welfare Now!" Chief Executive (U.S.), December 1998, 42.



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