A Commission to Review and Terminate Corporate Subsidies

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I want to thank the committee for the opportunity to testifytoday on S. 207, the Corporate Subsidy Reform Commission Act of1997. I want to start by saying that the Cato Institute receives nofunding from the federal government.

Eliminating the billions of dollars worth of corporate spendingsubsidies in the federal budget is an important objective. However,ideally there would be no need for a corporate subsidy reformcommission. Congress and the President would simply take theresponsibility to eliminate these indefensible programs themselvesthrough the annual budget process. Unfortunately, the evidence ofthe last two years indicates that is not likely to occur. Settingup an independent commission may regrettably be the only way to ridthe taxpayer of the multi-billion dollar burden of the corporatewelfare state.

My colleague Stephen Moore and I at the Cato Institute estimatethat the annual federal budget contains roughly $60 billion ofcorporate welfare, which we define as spending programs that in one way or another provideunique benefits or advantages to specific companies orindustries.

To put the cost of those spending subsidies in perspective, ifthey were all eliminated today, the budget deficit could be cutroughly in half or the capital gains tax and the federal estate taxcould be completely eliminated. Reducing the deficit or eliminatingthose anti-growth taxes would do far more to benefit Americanindustry and U.S. global competitiveness than does asking thegovernment to pick industrial winners and losers.

I want to reemphasize that our $60 billion estimate for theannual price tag of corporate welfare refers only to spending programs, not corporate tax breaks. Targetedcorporate tax loopholes allow certain politically-favored companiesor industries to receive favorable treatment in the tax code. Suchloopholes run counter to the notion that all taxpayers should betreated the same, and they create inefficiencies and distortions inthe 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 oftheir own earnings.

If corporate tax loopholes are to be closed, corporate tax ratesshould be reduced proportionately. Otherwise, by definition, theresult would be a tax hike on business. Businesses are certainlyoversubsidized, but they are also overregulated and overtaxed. Thefight against corporate welfare should not mean higher taxes.Increasing taxes on businesses would make U.S. industry less, notmore competitive.

Virtually everyone is opposed to corporate welfare, except whenit comes to their particular pet programs. That is why attackingcorporate welfare programs one at a time has not been a successfulstrategy. For instance we found that in the first year of the 104thCongress, total spending on 35 of the worst corporate welfareprograms was reduced by only about 15 percent. That is not aninconsequential reduction. It is certainly a larger reduction thanin past Congresses, and it compares favorably to the slightincrease that President Clinton hadproposed. Nevertheless, despite a lot of encouraging rhetoric, thereality is that the vast majority of the corporate welfare stateremained intact.

Last year, in the second year of the 104th Congress, the picturegot even worse. In our subsequent analysis of 55 of the mostegregious corporate welfare spending programs--which I would liketo include for the record--we found that the President hadrequested a 3.6 percent increase for FY 1997. When all was said anddone, Congress enacted a 1.3 percent increase. It is true that thatis a smaller increase than the President proposed, but it is stillan increase. The corporate welfare state actually expanded lastyear.

Clearly, the strategy of going after corporate welfare programsone at a time has not been successful. That is why I think thecorporate welfare commission idea may be necessary. An independentcommission that was modeled after the military base closingcommission would produce a list of recommended corporate welfareterminations that would be voted on as a package with no amendmentsby Congress. Such a commission would stand a better chance ofsuccess at eliminating these programs because it would lumpeveryone's pet programs together in one package. Therefore, memberswould have less reason to fear being criticized for cutting off thegravy train to their own district. Everyone's ox would be gored andthe taxpayers would all benefit.

I would like to point out that this could be achieved without the assistance of an outsidecommission. In fact, Rep. John Kasich recently introduced in theHouse a bipartisan dirty-dozen list of corporate welfare spendingprograms that a broad spectrum of groups, from environmentalists totaxpayer activists, agreed should be terminated.

I would recommend that a corporate welfare terminationcommission have the following qualities:

  1. It should produce one list of recommended spending programterminations that Congress would vote on as a package with noamendments within 60 days of the Commission's final report.
  2. It should be focused only on spending programs, not taxloopholes.
  3. It should be instructed that allspending programs are on the table.

Unfortunately, while S. 207 is no doubt intended to rid thebudget of corporate welfare, it has none of the three qualitiesdescribed above. Under S. 207, the Commission's report will indeedbe amendable. The Commission will be authorized to recommend taxloophole closings but not allowed to recommend corresponding ratereductions. By definition, closing loopholes without reducing ratesresults in a tax increase. And, the Commission is instructed not toinclude programs with one or more of the followingcharacteristics:

  • Programs that "would result in a return or benefit,quantifiable or nonquantifiable, to the public at least as great asthe payment." Every program makes this claim.
  • Programs for "research and development in the broad publicinterest."
  • Programs that "primarily benefit public health, safety, theenvironment, or education."
  • Programs "certified by the U.S. Trade Representative asspecifically intended and as substantially needed to protect theforeign trade interests of the U.S."

I think the commission will be hard pressed to find anycorporate welfare programs that someone does not argue fits atleast one of the above definitions.

To make the commission as closely resemble the successfulmilitary base closing commission as possible, I would recommend thefollowing changes:

  1. Remove all restrictions on what programs canbe considered. The commission should be able to include anyspending program that provides a unique benefit or advantage tospecific companies or industries.
  2. Make the package unamendable. The whole point of an independentcommission is to remove politics from the process. AllowingCongress to amend the commission's recommendations defeats thatpurpose.
  3. Take tax loopholes off the table. Eliminating corporate welfareshould not result in higher taxes. If for political reasons, it isdetermined that tax loopholes must be included, I would suggest twofairly straightforward changes:
    1. Instruct the commission that their recommendationsmust be revenue neutral. That is, all revenue increases from taxloophole closings must be offset by tax reductions of equalsize.
    2. Instruct the commission to produce two separatelists, 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 describedabove would prevent the commission's efforts to eliminate corporatewelfare from resulting in a tax hike. Therefore, those two changeswould increase the likelihood that individuals and groups with freemarket, taxpayer, and fiscal conservative perspectives wouldsupport your proposed commission. Certainly some of them would notsupport your commission as currently constructed, because doing soimplicitly supports tax hikes.

Further, these changes should not diminish the support of thosewho feel strongly that tax loopholes constitute corporate welfare.Tax loophole closings would still indeed be on the table. Theywould just have to be offset by reductions in taxes elsewhere, andthey would have to be voted upon on their own, separate from thespending program terminations.

Appointing a commission to relieve the taxpayers of themulti-billion dollar burden of corporate welfare should not benecessary. Congress and the President should terminate theseprograms on their own. However, recent evidence indicates that isunlikely to occur. Therefore, while it is not the ideal solution,an independent commission, modeled after the successful militarybase closing commission, may be necessary if we are ever going tobe able to end corporate welfare as we know it.

Also submitted for the record: FEDERAL AIDTO DEPENDENT CORPORATIONS: Clinton and Congress Fail to EliminateBusiness Subsidies.

Dean Stansel

Committee on Governmental Affairs
United States Senate