I want to thank the committee for the opportunity to testify today on S. 207, the Corporate Subsidy Reform Commission Act of 1997. I want to start by saying that the Cato Institute receives no funding from the federal government.
Eliminating the billions of dollars worth of corporate spending subsidies in the federal budget is an important objective. However, ideally there would be no need for a corporate subsidy reform commission. Congress and the President would simply take the responsibility to eliminate these indefensible programs themselves through the annual budget process. Unfortunately, the evidence of the last two years indicates that is not likely to occur. Setting up an independent commission may regrettably be the only way to rid the taxpayer of the multi-billion dollar burden of the corporate welfare state.
My colleague Stephen Moore and I at the Cato Institute estimate that the annual federal budget contains roughly $60 billion of corporate welfare, which we define as spending programs that in one way or another provide unique benefits or advantages to specific companies or industries.
To put the cost of those spending subsidies in perspective, if they were all eliminated today, the budget deficit could be cut roughly in half or the capital gains tax and the federal estate tax could be completely eliminated. Reducing the deficit or eliminating those anti-growth taxes would do far more to benefit American industry and U.S. global competitiveness than does asking the government to pick industrial winners and losers.
I want to reemphasize that our $60 billion estimate for the annual price tag of corporate welfare refers only to spending programs, not corporate tax breaks. Targeted corporate tax loopholes allow certain politically-favored companies or industries to receive favorable treatment in the tax code. Such loopholes run counter to the notion that all taxpayers should be treated the same, and they create inefficiencies and distortions in the marketplace. They are bad policy, but we do not consider them to be a form of corporate welfare. After all, they merely allow private businesses to keep more of their own earnings.
If corporate tax loopholes are to be closed, corporate tax rates should be reduced proportionately. Otherwise, by definition, the result would be a tax hike on business. Businesses are certainly oversubsidized, but they are also overregulated and overtaxed. The fight against corporate welfare should not mean higher taxes. Increasing taxes on businesses would make U.S. industry less, not more competitive.
Virtually everyone is opposed to corporate welfare, except when it comes to their particular pet programs. That is why attacking corporate welfare programs one at a time has not been a successful strategy. For instance we found that in the first year of the 104th Congress, total spending on 35 of the worst corporate welfare programs was reduced by only about 15 percent. That is not an inconsequential reduction. It is certainly a larger reduction than in past Congresses, and it compares favorably to the slight increase that President Clinton had proposed. Nevertheless, despite a lot of encouraging rhetoric, the reality is that the vast majority of the corporate welfare state remained intact.
Last year, in the second year of the 104th Congress, the picture got even worse. In our subsequent analysis of 55 of the most egregious corporate welfare spending programs—which I would like to include for the record—we found that the President had requested a 3.6 percent increase for FY 1997. When all was said and done, Congress enacted a 1.3 percent increase. It is true that that is a smaller increase than the President proposed, but it is still an increase. The corporate welfare state actually expanded last year.
Clearly, the strategy of going after corporate welfare programs one at a time has not been successful. That is why I think the corporate welfare commission idea may be necessary. An independent commission that was modeled after the military base closing commission would produce a list of recommended corporate welfare terminations that would be voted on as a package with no amendments by Congress. Such a commission would stand a better chance of success at eliminating these programs because it would lump everyone’s pet programs together in one package. Therefore, members would have less reason to fear being criticized for cutting off the gravy train to their own district. Everyone’s ox would be gored and the taxpayers would all benefit.
I would like to point out that this could be achieved without the assistance of an outside commission. In fact, Rep. John Kasich recently introduced in the House a bipartisan dirty-dozen list of corporate welfare spending programs that a broad spectrum of groups, from environmentalists to taxpayer activists, agreed should be terminated.
I would recommend that a corporate welfare termination commission have the following qualities:
- It should produce one list of recommended spending program terminations that Congress would vote on as a package with no amendments within 60 days of the Commission’s final report.
- It should be focused only on spending programs, not tax loopholes.
- It should be instructed that all spending programs are on the table.
Unfortunately, while S. 207 is no doubt intended to rid the budget of corporate welfare, it has none of the three qualities described above. Under S. 207, the Commission’s report will indeed be amendable. The Commission will be authorized to recommend tax loophole closings but not allowed to recommend corresponding rate reductions. By definition, closing loopholes without reducing rates results in a tax increase. And, the Commission is instructed not to include programs with one or more of the following characteristics:
- Programs that “would result in a return or benefit, quantifiable or nonquantifiable, to the public at least as great as the payment.” Every program makes this claim.
- Programs for “research and development in the broad public interest.”
- Programs that “primarily benefit public health, safety, the environment, or education.”
- Programs “certified by the U.S. Trade Representative as specifically intended and as substantially needed to protect the foreign trade interests of the U.S.”
I think the commission will be hard pressed to find any corporate welfare programs that someone does not argue fits at least one of the above definitions.
To make the commission as closely resemble the successful military base closing commission as possible, I would recommend the following changes:
- Remove all restrictions on what programs can be considered. The commission should be able to include any spending program that provides a unique benefit or advantage to specific companies or industries.
- Make the package unamendable. The whole point of an independent commission is to remove politics from the process. Allowing Congress to amend the commission’s recommendations defeats that purpose.
- Take tax loopholes off the table. Eliminating corporate welfare should not result in higher taxes. If for political reasons, it is determined that tax loopholes must be included, I would suggest two fairly straightforward changes:
- Instruct the commission that their recommendations must be revenue neutral. That is, all revenue increases from tax loophole closings must be offset by tax reductions of equal size.
- Instruct the commission to produce two separate lists, one for spending programs and one for tax loopholes.
Allowing the commission to include tax loopholes is a bad idea. But if it must be done, each of the two simple changes described above would prevent the commission’s efforts to eliminate corporate welfare from resulting in a tax hike. Therefore, those two changes would increase the likelihood that individuals and groups with free market, taxpayer, and fiscal conservative perspectives would support your proposed commission. Certainly some of them would not support your commission as currently constructed, because doing so implicitly supports tax hikes.
Further, these changes should not diminish the support of those who feel strongly that tax loopholes constitute corporate welfare. Tax loophole closings would still indeed be on the table. They would just have to be offset by reductions in taxes elsewhere, and they would have to be voted upon on their own, separate from the spending program terminations.
Appointing a commission to relieve the taxpayers of the multi-billion dollar burden of corporate welfare should not be necessary. Congress and the President should terminate these programs on their own. However, recent evidence indicates that is unlikely to occur. Therefore, while it is not the ideal solution, an independent commission, modeled after the successful military base closing commission, may be necessary if we are ever going to be able to end corporate welfare as we know it.
Also submitted for the record: FEDERAL AID TO DEPENDENT CORPORATIONS: Clinton and Congress Fail to Eliminate Business Subsidies.