September 24, 1995
"Corporate 'Welfare' is Tricky"
San Jose Mercury News
By Timothy Taylor
<< Back to 1995 menu

LAST NOVEMBER, as the Republicans chirped happily about how their new congressional majority would deliver tough-minded welfare reform, President Clinton's secretary of labor delivered a pre-emptive strike. Robert Reich argued that it was time to cast an equally skeptical eye on what he called corporate welfare.

As Reich said months later, "I didn't expect the explosion that ensued." Studies on corporate subsidies emerged from the libertarian Cato Institute, the conservative Heritage Foundation, and the liberal Progressive Policy Institute. They came from interest groups like the conservative National Taxpayers Union and liberal Citizens for Tax Justice, and from government agencies like the Congressional Research Service and Congressional Budget Office.

These lists have clearly demonstrated that corporate welfare is a squishy concept.

Sometimes, corporate welfare becomes a term used to discredit any program with which the author disagrees. For example, those who favor reductions in weapons spending call it ''welfare'' for the defense contractors. But even if one believes that defense spending should shrink, it is hardly ''welfare'' when government negotiates a contract to pay a private company for goods and services.

In other cases, ''welfare'' is used to describe a policy of not charging for something. For example, privatizing the Federal Aviation Administration and charging airlines for air traffic control and safety expenses would raise about $2 billion per year.

But the notion that not charging for something is "welfare" gets tricky. After all, not charging doesn't involve any expenditure of money, and not necessarily a reduction in taxes paid. Liberals may not end up very happy if "welfare" is expanded to mean that everyone should pay fees for using parks, libraries, police, schools and roads.

The non-partisan Congressional Budget Office worked through these and other issues last summer and compiled its own list of how much the federal government spends on business support. The table presents an abbreviated version of the list, limited to items that will cost more than $2 billion this year.

The dollar limit means that some of the least defensible examples of corporate welfare don't appear on this list.

For example, the Department of Agriculture spends $100 million a year in a marketing promotion program to help large producers export their produce. The biggest beneficiaries are corporations like Sunkist and Gallo. Another example - the manner in which the U.S. Forest Service builds roads and subsidizes logging in national forests to help private timber companies - also costs about $100 million per year.

These programs exemplify corporate welfare at its most venal, and they should be lopped off. But in the context of overall federal spending, they aren't much. Clinton proposed total spending of $1.6121 trillion for his 1996 budget. Cut these two programs, and the budget would have been $1.6119 trillion.

You would need to identify 40 programs of $100 million to equal the $4 billion tax break given to companies with income from U.S. possessions, mainly drug companies producing in Puerto Rico. But when you begin to look at the big-ticket corporate subsidies, labeling them as ''corporate welfare'' doesn't do much to clarify the arguments.

In most cases, the subsidies at least try to serve some purpose. For example, accelerated depreciation is a tax break to stimulate business investment. Other tax breaks on the list are intended to assist small businesses, the Puerto Rican economy, low-income housing, and research and development. Government has a well-justified role in supporting research and development, whether in the biomedical or energy industry.

Farm subsidies given through the Commodity Credit Corporation are intended as a form of support to rural America. The tax breaks affecting the sale of inventory property and life insurance companies should be ended, but in all fairness they do pose some complex issues - trust me on this - involving offsetting foreign tax credits and regulations on reserve accounting.

Of course, saying that something has a discernible purpose doesn't show that it's a good idea. For example, farm subsidies tend to end up in the pockets of large corporate farmers and landowners, not the small family farm. Government support for alternative fuel has often supported the large agricultural companies that produce ethanol, rather than a broad array of alternative technologies.

The talk about corporate welfare has had some effect. The Republican-led House Ways and Means Committee is targeting the tax breaks aimed at Puerto Rico and low-income housing, along with many smaller tax provisions, and the subsidies for ethanol.

But the Republicans, like the Democrats before them, aren't making much progress in reforming farm subsidies. With some justification, they aren't even talking about removing the incentives for business investment provided by accelerated depreciation.

In the end, the term "corporate welfare" is more deceptive than useful, because it implies a false common standard for judging subsidies to corporations and assistance to the poor. Welfare reform for the poor matters because of its side-effects: its links to a cycle of dependency, girls having children, violent crime, and blighted neighborhoods.

These issues simply don't arise when the government, say, pays for a foreign marketing program. Any corporate subsidy needs to be justified as a cost-effective way of attaining a larger public purpose. But that's all.

<< Back to 1995 menu