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The Balanced Budget Backpedal


News: Analysis & Commentary: THE BUDGET

THE BALANCED-BUDGET BACKPEDAL

For 20 years, Corporate America has been demanding that Washington get its fiscal house in order by cutting spending and balancing the federal budget. Now, House and Senate Republicans are taking steps toward doing just that. And the business community is backing them, right? Well, sort of.

Companies are deeply split over whether to endorse the massive spending cuts proposed by the House and Senate Budget Committees. Many companies are foursquare behind the budget-balancing plans and are willing to endure modest hits for the promise of lower interest rates. Others give lip service to deficit-cutting but add a menacing caveat: Don't kill my program.

HOUSE DIVIDED. It's no surprise that business is of two minds about deficit slashing. Farmers, hospitals, high-tech companies, contractors, and drugmakers, among others, enjoy federal subsidies or contracts now in the bull's-eye. Indeed, of the $1 trillion in proposed GOP cuts, about one-third would be absorbed by business. To liberal interest groups--lobbies for the elderly, children, and the poor--that spells opportunity. By uniting with GOP-connected business groups angry over parts of the new Republican fiscal blueprint, they hope to submarine many of the GOP's proposed cuts.

The biggest GOP fear is that business will succeed in protecting so many subsidies that voters will conclude that the poor are being made scapegoats to the wealthy. "We know the traditional Democratic constituencies are out to tank the effort," says Susan Tanaka of the Committee for a Responsible Federal Budget. "The question is whether businesses can hold their immediate self-interests aside for an overall package."

Already, there are signs that many can't. Hospital groups, for instance, are lobbying heavily against $250 billion to $300 billion in proposed Medicare savings over seven years. "We're not obstructionist, but the number is too massive. It's too much too soon," moans Thomas A. Scully, president of the Federation of American Health Systems. Scully says his group, which represents for-profit hospitals, would accept $170 billion in cuts. But that would still leave a $100 billion budget deficit.

Big exporters are preparing for battle, too. Archer-Daniels-Midland Co. is lobbying hard to protect export subsidies, as are manufacturers such as Caterpillar Inc. "Don't fire your [government] salesmen," argues Cat's CFO, Douglas R. Oberhelman.

Other companies are struggling to preserve tax breaks from persistent Democratic attacks on "corporate welfare." They have the support of House Ways & Means Committee Chairman Bill Archer (R-Tex.), who will resist most efforts to close loopholes. But they may be angering House Speaker Newt Gingrich (R-Ga.). Says spokesman Tony Blankley: "It's a bit swinish to focus on tax loopholes when a balanced budget could mean lower interest rates."

THE BREAKS. In the end, some tax subsidies could be closed. Some of the biggest, such as the mortgage interest deduction, are off the table for now. But others are more vulnerable. Among them: special breaks for production and use of alternative fuels, a deduction for dividends companies receive for owning stock in another corporation, and a special credit for farmers who use diesel fuel in their trucks.

Giving up such bennies is what makes it tough for many business interests to support a balanced budget. For instance, members of the American Electronics Assn. would lose Commerce Dept. aid for high-tech research (table). The AEA would give that up for deficit reduction. But it will be less willing to abandon other subsidies, such as the $1.2 billion High-Performance Computing & Communications Initiative, a government research effort to promote development of advanced computers and networks. Contractors also face tradeoffs: They may lose work as government construction is cut back, but could win repeal of the despised Davis-Bacon Act, which fixes wages at high levels.

GOP leaders aren't taking any chances with wavering business backers. The House GOP leadership is assembling a coalition of business and conservative social groups, such as the Christian Coalition, to lean on wavering lawmakers. And the GOP has lined up most of Washington's broadbased business lobbies--including the U.S. Chamber of Commerce, the National Federation of Independent Business, the National Association of Manufacturers, and the American Business Conference--behind a balanced budget. "Any of us that sit here and say, `This is all terrific but...' ought to be taken out and shot," gripes Barry Rogstad, president of the ABC, which represents growth companies.

Will all this be enough to make deficit reduction a winner? Main Street is already behind the concept. For instance, in Ronald Reagan's hometown of Dixon, Ill., businesses are far more hawkish than their favorite son ever was. Says Donald R. Lovett, chairman of AmCore Bank in Rock River Valley, Ill.: "I'd like to see taxes reduced less and the emphasis placed on spending reductions." And while farmers could lose 40% of their crop subsidies, many seem willing to absorb their share, too. Robert B. Johnson, who raises corn, soybeans, and hogs in DeKalb, Ill., says: "We all win if we do things according to market signals." Besides, he adds, "If we can reduce our cost to borrow funds, that's worth a lot more than our government checks."

"STAND-UP TIME." Business has plenty of other reasons to back deficit reduction. It's getting tort reform and massive regulatory relief from Congress. And companies have done fairly well in the deficit wars. Many vulnerable programs, such as the Small Business Administration, avoided deep cuts. Plus, tens of billions of special tax breaks--more important to most companies than direct spending--have been left largely untouched. And while most of the House tax cuts will die, a capital-gains tax cut may survive. "To tell you the truth, we've gotten so much from them, it's been almost embarrassing," says one Washington rep. "Now, it's stand-up time."

The challenge for congressional Republicans is to keep a business coalition together, at least until overall spending targets are locked in. Once congressional committees start translating them into actual cuts in specific programs, the coalition may splinter. But by then, the war over how much to cut spending will be settled. And the budget will be on its way to being balanced.

Targeting Corporate Welfare

The GOP has backed off plans to eliminate some $200 billion in tax breaks to Corporate America. But business still could lose billions in subsidies:

AGRICULTURAL SUBSIDIES With all price supports on the block, farmers may take a $14 billion hit. Some farm groups warn that, as a result, Americans won't be able to compete against subsidized foreign farmers.

EXPORT SUPPORTS Nearly $1 billion in export subsidies could be trimmed by 2002. Much of the aid goes to big companies such as Boeing and General Electric to promote sales of planes, power plants, and other products. But smaller companies gripe that they don't enjoy such largesse.

ADVANCED TECHNOLOGY PROMOTION This $445 million Commerce Dept. program funds research that could lead to new high-tech products. Companies that have benefited range from giant General Motors to tiny Nonvolatile Electronics, a memory chipmaker.

ANDY SACKS/TONY STONEBy Howard Gleckman, with Mike McNamee in Washington, Greg Burns in Chicago, and Kevin Kelly in Dixon, Ill.


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