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The End Of Corporate Welfare As We Know It?


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THE END OF CORPORATE WELFARE AS WE KNOW IT?

San Diego businesswoman Susan Corrales-Diaz is a Republican who abhors farm subsidies and wasteful federal spending. But when it comes to federal loan guarantees, she has two words for GOP budget hawks: Hands off. As president of Systems Integration Inc., which makes automated controls for power plants, Corrales-Diaz depends on the U.S. Export-Import Bank and Small Business Administration to guarantee private-bank loans that finance labor and material for overseas sales. The loans are crucial because it takes up to two years for Systems Integrated to receive payments on foreign orders, which account for 30% of its business. "If anything happens to those programs, I won't be able to export," she frets.

Corrales-Diaz is right to worry about the fate of such programs. Suddenly, business is in the budgeteers' crosshairs, as the White House and Congress begin squeezing federal spending to make good on their pledge to balance the budget by 2002. Cherished business programs--from Ex-Im to energy research--are marked for extinction. For at least a decade, some Democrats and Republicans have tried to kill "corporate welfare" only to get steamrollered by business lobbyists and their powerful allies on Capitol Hill. But this year, new economic and political pressures will make it tough for lawmakers to avert significant cuts in corporate subsidies.

SLICING PORK. The campaign against industry giveaways is already forging alliances between the right and the left. On Jan. 28, House Budget Committee Chairman John R. Kasich (R-Ohio), flanked by Representative Edward Royce (R-Calif.), consumer advocate Ralph Nader, and conservative guru Grover G. Norquist, unveiled a hit list of 12 government programs that benefit business. Among the targets: a huge irrigation project in Colorado, loans to rural electric utilities, and U.S. contributions to the International Monetary Fund. Eliminating all 12 would save taxpayers $11.5 billion over five years, Kasich says.

The same day, Senator John McCain (R-Ariz.) introduced legislation to create a federal commission to slice corporate pork. The panel would be modeled on the military base-closing commission, which successfully eliminated unneeded defense facilities that had been politically untouchable. Backers include Democratic Senators Edward M. Kennedy and John F. Kerry of Massachusetts. Next up: a bill aimed at closing corporate tax loopholes that is sponsored by Senator Tom Harkin (D-Iowa) and Representative Lane Evans (D-Ill.).

Members of this odd alliance have different motivations and wish lists. For example, Democrats such as Harkin want to eliminate dozens of corporate tax breaks, such as so-called transfer-pricing plans that let multinationals shelter profits. But many Republicans are ideologically opposed to any approach that increases taxes on business or individuals. Everyone finds common ground, however, in one harsh reality: Massive savings will be needed to eliminate the deficit. That means just about everything is on the table, including pork for pinstripes. "The dynamics have changed with the pressure to balance the budget by 2002," says McCain.

Corporations are quick to counter that their subsidies generate jobs and revenue. Still, their bennies make a tempting target because they're costly and don't win much sympathy from the average voter. Just how much is in the pot is a matter of debate, though. The libertarian Cato Institute estimates that federal largesse for business amounts to $75 billion annually in direct spending alone. Industry-specific tax breaks cost the government around $60 billion more. While spending on defense, welfare, and education has been slashed, business aid has survived largely intact. In the past five years, less than 4% of industry subsidies have been phased out, says economist Robert J. Shapiro of the Progressive Policy Institute, a centrist Democratic think tank.

Although small companies that export have a stake in the fight, most of these programs benefit big business. And that constituency is currently warring with some Hill Republicans. The GOP, dominated by a new breed of populist reformers, is eager to shed its image as the party of uncaring country clubbers. "We've reformed welfare for those who don't have money or powerful Washington lobbyists," says Kasich. "Now it is time we did the same for those corporate welfare programs that aid the rich and powerful."

SUBTLE MESAGE? One of Kasich's pet targets is the Overseas Private Investment Corp., which offers loans, guarantees, and political risk insurance to U.S. ventures in emerging markets. It narrowly survived a bipartisan attack in 1996. Critics say OPIC distorts private investment decisions, wastes capital, and saddles taxpayers with financial risk. But the self-financing agency actually paid $209 million back to the Treasury last year. Supporters say that as long as America's major trading partners are in the investment-credit business, the U.S. must be, too. Besides, they add, OPIC helps spread capitalism to places in which it otherwise might not flourish.

Some executives suspect that Republicans are gunning for business partly to send a not-so-subtle message to big corporations that contributed to Democratic coffers in the last election. "The GOP strategy is to look for someone who has a bad program and who is on the wrong team," says a business lobbyist. One likely target: a provision that grants a 54-cent per gallon excise tax exemption to ethanol. The subsidy is a boon mainly for Archer Daniels Midland Co., which produces more than half the ethanol made in the U.S. In the 1996 campaign, ADM's political action committee gave $113,000 to Democrats and $90,476 to Republicans.

Still, there are plenty of other sacred cows. For example, broadcasters last year handily killed a plan to force them to pay for additional spectrum that would allow them to beam new digital programming. While he was Senate Majority Leader, former GOP Presidential contender Bob Dole of Kansas had pushed for broadcasters to pay for the new channel space in an auction that would have raised up to $70 billion for the government, according to some estimates. Also considered safe: subsidies to sugar growers that cost American consumers more than $1 billion a year in inflated prices.

With corporate lobbyists girding for battle and lawmakers divided over which subsidies should be scuttled and which are essential, the assault on corporate welfare could fizzle again. Odds are, though, that business will finally have to ante up. "The budget noose is tightening," says Stephen Moore of Cato. "And that makes everything vulnerable." Business breaks included.By Amy Borrus in Washington, with Greg Burns in Chicago and bureau reportsReturn to top


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