The Heritage Foundation

Backgrounder Update #253

June 21, 1995

June 21, 1995 | Backgrounder Update on

Congress, Not Clinton, Supports the End of Corporate Welfare

(Archived document, may contain errors)

6/21/95 253


(Updating Rolling Back Govemment: A Budget Plan to Rebuild America, May 1995.) Despite much talk in the Clinton Administration about ending "corporate welfare," the Administration actually has flinched from offering concrete proposals. When President Clinton released his first Fiscal Year 1996 budget in February, there were only a handful of proposals to end corporate subsidies. And when -the President unveiled his revised budget blueprint last week, he reconuriended only a $25 billion re- duction in unspecified corporate subsidies-and took pride in drawing attention to his plans to boost spend- ing on two high-technology pork programs slated for termination by Congress. I The President's weak attack on corporate welfare contrasts sharply with the way in which Washington policy groups and the new Congress responded to the Administration's call to trim unnecessary business subsidies. The Heritage Foundation, along with many other research organizations such as the Cato Insti- tute and the Progressive Policy Institute, have reviewed the federal budget and identified dozens of corpo- rate welfare programs that should be eliminated.2 In Rolling Back Government. A Budget Plan to Rebuild America, The Heritage Foundation identified more than three dozen spending subsidy programs as corpo- rate welfare that should be reduced or eliminated, producing more than $100 billion in savings over the next five years. 3As the attached table illustrates, many programs were included in the House and Senate budget proposals, but not in either one of the President's two budget proposals. For decades; -the federal government has been providing American businesses with billions of dollars in spending subsidies. These have been justified by proponents as necessary to enhance U.S. competitiveness in the world economy, encourage the development of high technology products and research, maintain a strong national defense, or assist socially disadvantaged groups. Most of these spending subsidies are con- centrated in three industry groups-agribusiness, transportation, and energy and natural resources-to support research, advertising, and other costs of doing business that achieve these goals.

ISee The President's Economic Plan: A Balanced Budget That Puts People First, June 13, 1995. 2Examples of the reports issued by these groups include Stephen Moore and Dean Stansel, Ending Corporate Weffiare As We Know It (Washington, D.C.: Ile Cato Institute, May 12, 1995); Robert J. Shapiro, Cut-and-Invest: A Budget Strategyfor the New Economy (Washington, D.C.: Progressive Policy Institute, March 1995); Janice Shields, Ph.D., Aidfor Dependent Corporations (AFDC) 1995 (Washington, D.C.: Essential Information, 1995); Citizens United to Terminate Subsidies, The Green Scissors Report: Cutting Wasteful and Environmentally Harmful Spending and Subsidies (Washington, D.C., January 1995). 3 See Scott A. Hodge, ed., Rolling Back Government: A Budget Plan to Rebuild America (Washington, D.C.: The Heritage Foundation, 1995).

Experience indicates that most spending subsidies for business do not achieve their goals and are not in America's economic interest. These subsidies can be expensive and actually hurt the economy. Subsidizing one business or industry rather than another distorts private investment decisions, taking resources from more efficient uses. Over the last ten years, for example, the federal government has spent, on average, about $14 billion annually subsidizing production of wheat, com, cotton, rice, and other commodities. More than half of farm payments flow to farmers with gross farm sales in excess of $ 100,000 annually. This has led to crops being planted and harvested at great-but subsidized-cost in places where produc- tion is uneconomic. Allowing farmers to make their production decisions based on market forces rather than government subsidies would result in a far more efficient farm economy.4 Some subsidies are just a waste of money, providing little economic benefit. The U.S. Small Business Administration (SBA) is an excellent example. SBA is supposed to aid the development and expansion of small businesses through direct and guaranteed low-interest loans worth more than $11 billion annually. However, SBA's loan loss rate is greater than that of private lenders, and the U.S. General Accounting Of- fice (GAO) has questioned whether the SBA's assistance actually helps stimulate small business develop- ment at all.5Other examples of waste include: monies from the $4.6 billion Community Development Block Grant program to pay for swimming pools, carousel renovations, and other forms of local pork, and the $17 million spent each year by the U.S. Travel and Tourism Administration to help the $55 billion tour- ism industry promote tourism in the United States. Rather than end corporate welfare, Clinton's budget actually would add the high technology and inform- ation services sectors to the list of heavily subsidized industries. The nation's economy has been shifting from manufacturing to a high technology and information services base. This has been occurring without government help. But the Clinton Administration wants Congress to enact generous subsidies to promote high technology products and research. For example, the President increase, "by almost $500 million a year!7 2002," the Advanced Technology Program (ATP) and the Manufacturing Extension Part- nership (MEP). In Ending Corporate Welfare As We Know It, the Cato Institute points out that in 1994 ATP money went to a number of Fortune 500 firms, such as AT&T, Shell Petroleum, Inc., Boeing, Inc., and Chevron Corporation. 7 At the same time the President is proposing to increase such subsidies, he also is proposing to increase taxes to end corporate welfare by eliminating a set of still undefined "corporate loopholes" and "special interest tax breaks."8 Spending subsidies too often either enrich those who have already detected good profit opportunities or direct private capital into less efficient investments. An example of the latter is the Administration's sup- port. for high-speed rail systems. The GAO reported that, without federal support, such systems are unlikely to be built because the private sector does not consider them to be financially viable.9The costs of laying one mile of track for a high speed system can run between $10 million and $20 million. Nevertheless, the Administration has supported spending as much as $1.3 billion over five years, even though the American taxpayers might never see one mile of high speed track. 10

4 For further information, see John Frydenlund, Freeing America's Farmers: The Heritage Plan for Rural Prosperity (Washington, D.C.: The Heritage Foundation, 1995). 5 U.S. General Accounting Office, Transition Series, Housing and Community Development Issues (GAO/OCG-93-22TR), December 1992, p. 21. 6 The President's Economic Plan: A Balanced Budget That Puts People First. See section entitled "Strengthening Our Commitment to Science and Technology." 7 Moore and Stansel, Ending Corporate Weyare As We Know 11, pp. 7-8. 8 The President's Economic Plan: A Balanced Budget That Puts People First, p. 2. 9 U.S. General Accounting Office, "High Speed Ground Transportation: Issues Affecting Development in the United States" (GAO/RCED-94-29). November 1993, p. 5. 10 Ibid., p. 46. Taxpayers may recall that programs like this have been proposed and funded more than once before, only to turn into expensive white elephants. In the late 1960s, the federal government spent nearly $1 bil- lion on the Supersonic Transport, which went bankrupt and never flew a single passenger. In the late 1970s, the federal government spent more than $2 billion on the Synthetic Fuels Corporation to produce new forms of energy, but it was shut down without producing a single kilowatt of power. I I Only when spending subsidies clearly provide a benefit in the national interest, such as a strong defense, should they be preserved. Because it is a legitimate function of the federal government to provide a na- tional defense, "uneconomic" investments in the research and development of new defense technology are justifiable. For example, R&D investments within the Department of Defense are critical to preserving the nation's security and cannot be considered corporate welfare-even though they should be scrutinized care- fully for waste. On the other hand, the part of NASA's budget spent on aeronautical research and develop- ment programs that subsidize R&D for the commercial aircraft industry should be eliminated. As the House and Senate work on a final budget resolution, lawmakers must resist the last-minute pres- sure of corporate special interests, take a far bolder step than the Clinton Administration, and adopt the deep cuts in corporate welfare. If Congress does not adopt the House proposals in the final budget bill, it will show a lack of will to make even the most basic cuts in spending subsidies, the true "corporate wel- fare." If so, Congress will be guilty of the same hypocrisy as the Clinton Administration, which has ignored its own call to end corporate welfare. Congress must demonstrate evenhandedness in ending wasteful, un- necessary programs and start making significant cuts in corporate welfare in the FY 1996 budget. Angela Antonelli Deputy Director for Economic Policy Studies

I I nese two examples are drawn from Moore and Stansel, Ending Corporate Weffiare As We Know It, p. 6.

Comparing Congress & Clinton"s Proposed Cuts In Corporate Welfare to the Heritage Plan

Specified Cut Contained in:3 Heritage Plan 5 year savings Clinton Clinton Senate House Heritage Heritage Proposal in millions' June 2 February Resolution Resolution Plan (15 1) Terminate Titles I and III of the P.L. 480 $1,510 International Assistance Program. (155) Phase out Ex-Irn Bank and OPIC over 5 $2,299 years. (27 1) Terminate DOE energy supply research $8,751 and privatize labs. (27 1) Eliminate funding for the Clean Coal $864 Technology Program (27 1) Close down the Rural Utilides Service, $174 which incorporates the Rural Electrification 1( Administration. (27 1) Privatize the Power Marketing $3,372 Administrations. .... - I/ *f (271) Privatize the U.S. Uranium Enrichment $1,499 Corporation. (272) Terminate all Department of Energy $2,148 conservation and efficiency research. (30 1) Privatize Bureau of Reclamation and $8,813 Army Corps of Engineers hydroelectric dams; Terminate Army Corps of Engineers inland waterway responsibilities. (302) Close down the Natural Resource $3,502 Conservation Service. (302) Conservation Reserve Program $6,359 Vf (306) Close down the Bureau of Mines. $676

(306) Close down the U.S. Geological Service. $1,648

(35 1) Phase-out farm income subsidies and $16,324 price support programs including all dairy subsidies. (35 1) Terminate the Market Promotion $434 Program. (35 1) Terminate export subsidy programs such S4,190 as the Export Enhancement Program and the Foreign Agriculture Service. (352) Terminate commercial agriculture $3,537 research programs. I I if 1 1 (352/37 1) Close down the Farmers Home $3,811 Administration (FmHA). I I f I

1 The figures in this table are the total outlay savings that would be realized by eliminating the programs. The numbers in parentheses refer to the relevant budget function numbers in the federal budget. For more information see the Heritage Foundation's Rolling Back Government: A Budget Plan to RebuddAmerica. 2Facts relevant to President Clinton's June budget are based solely on information released as of June 13, 1995. 3A check mark if indicates that the respective budget addresses the program. An +up-arrow indicates that the respective budget would increase spending for the program.

Heritage Proposal Heritage Plan Clinton Clinton Senate House Heritage 5-year Savings June February Res. Res. Plan in Millions (376) Close down the Small Business $4,063 Administration. (376) Close down the U.S. Travel and Tourism $169 Administration. I/ v (376) Close down the Minority Business $183 Development Agency. Vf 4f (376) Terminate the Manufacturing Extension $1,871 Partnership and the Advanced Technology Program. (376) Close down the National $212 Telecommunications and Information Administration. (376) Close down the Bureau of Export $183 Administration. (376) Close down the International Trade $1,145 Administration. (40 1) Terminate federal subsidies to Amtrak. $3,930

(40 1) Close down the Federal Transit $10,815 Administration. (402) Terminate NASA -commercial aeronautic $1,701 research and development. (402) Close down the Essential Air Service $177 program. (402) Halt funding for the Next Generation $1,227 High-Speed Rail program; the Intelligent Transportation Systems Program; and the Pennsylvania Station Redevelopment Project. (403) Terminate the Maritime Administration $753 and end such subsidies as Operating- Differential Subsidies and the Ocean Freight Differential program. (452) Close down the Appalachian Regional $797 Commission. (452) Eliminate the Economic Development $1,248 Administration (452) Eliminate the current system of $7,600 Community Development Block Grants (452) Terminate federal funding for the $634 Tennessee Valley Authority. (452) Close down the Pennsylvania Avenue $26 Development Corporation. ef (503) Terminate federal support for the $1,543 Corporation for Public Broadcasting. if if I/ (552) Terminate the Health Education $81 Assistance Loans (HEAL) program. Total Corporate Welfare Cuts $108,269

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