Clinton and Congress Fail to Eliminate Corporate Welfare

Two years ago both Congress and the Clinton administration pledged to attack corporate welfare — programs in the federal budget that provide spending subsidies to businesses. Those promises have been largely unfulfilled. There has been a lot of talk about ending corporate welfare, but very little action.

In its first year the 104th Congress reduced corporate welfare spending by just under 15 percent. That was a substantial accomplishment, a larger reduction than made by any previous Congress, but it still left 85 percent of the corporate welfare state intact.

As the lessons of the Reagan years taught us, reducing programs’ budgets is not the answer. Under the Bush and Clinton administrations, many of the programs that faced substantial budget cuts under Reagan have grown back. Programs must be torn out by their roots and thrown on the scrap pile. Despite the overall 15 percent reduction in fiscal year 1996, only a handful of programs was eliminated entirely.

Furthermore, the second year of the 104th Congress was far less successful. Last year Congress increased spending on 55 of the least defensible corporate welfare programs by about $500 million. That was a 1.3 percent increase from the 1996 level.

For example:

* The Commerce Department’s Manufacturing Extension Partnership and the Transportation Department’s Payments to Air Carriers program and Maritime Security Program received budget increases of more than 10 percent.

* The Small Business Administration and the Agriculture Department’s National Agricultural Statistics Service and Federal Crop Insurance Corporation saw their budgets go up by more than 20 percent.

As bad as Congress’s performance has been, the Clinton administration’s has been even worse. The president proposed a slight increase in corporate welfare spending in FY96, compared to the 15 percent reduction that was eventually enacted by Congress. The president called for a 3.6 percent increase in FY97, which was later scaled back to 1.3 percent by Congress.

Now, the president’s FY98 budget proposal has called for further increases in spending on corporate welfare programs. As the accompanying table indicates, 16 programs would receive an increase of 10 percent or more. Eight would see their budgets go up by 20 percent or more.

* Spending would go up by 20 percent or more for the National Agricultural Statistics Service, the Advanced Technology Program, the Dual Use Applications program and Solar and renewable energy R&D.

* The Manufacturing Extension Partnership, USDA’s National Research Initiative, the Maritime Security Program and the Payments to Air Carriers program all would see their budgets increased by more than 35 percent.

Instead of cutting corporate welfare spending, the Clinton administration has proposed closing corporate tax loopholes. Such targeted tax breaks allow certain politically favored companies or industries to receive favorable treatment in the tax code. Those loopholes run counter to the notion that all taxpayers should be treated the same, and they create inefficiencies and distortions in the marketplace.

Loopholes are bad policy, but they are not a form of corporate welfare. After all, tax loopholes merely allow businesses to keep more of their own earnings. Corporate welfare spending programs take someone else’s earnings and hand them over to private corporations.

If corporate tax loopholes are to be closed, which they should be, corporate tax rates should be reduced proportionately. Otherwise, by definition, the result would be a tax increase. Businesses are certainly oversubsidized, but they are also overregulated and overtaxed. The fight against corporate welfare should not result in higher taxes. Increasing taxes on businesses would make U.S. industry less competitive, not more competitive.

The Clinton administration’s 1998 budget calls for closing $34 billion worth of corporate tax loopholes (over five years) without any reductions in corporate tax rates. They call that an attack on corporate welfare. In one sense, they are right. It represents a serious attack on the well being of private industry. Putting billions of additional dollars into the hands of the federal government, as the proposed loophole closings would do, is the wrong approach.

Reducing the deficit — and balancing the budget by 2002 —will be difficult, if not impossible, to achieve without dramatic reductions in the corporate safety net. Last year Congress passed reforms in social welfare intended to save $55 billion over six years. Now, Congress should aim to save at least that much in corporate welfare as well. The 20 programs listed in the table provide a good place to start.