Cutting Corporate Welfare

by Ralph Nader

Seven Stories Press, 2000

Introduction

Corporate welfare-the enormous and myriad subsidies, bailouts, giveaways, tax loopholes, debt revocations, loan guarantees, discounted insurance and other benefits conferred by government on business-is a function of political corruption. Corporate welfare programs siphon funds from appropriate public investments, subsidize companies ripping minerals from federal lands, enable pharmaceutical companies to gouge consumers, perpetuate anti-competitive oligopolistic markets, injure our national security, and weaken our democracy.

At a time when the national GDP is soaring, one in five children lives in deep poverty, one might expect that a public effort to curtail welfare would focus on cutting big handouts to rich corporations, not small supports for poor individuals. But somehow the invocations of the need for stand-on-your-own-two-feet responsibility do not apply to large corporations.

At a time when even growing federal budget surpluses do not persuade our nation's political leaders to devote public resources to repairing and enhancing the built elements of our commonwealth-such as the nation's schools, bridges, clinics, roads, drinking water systems, courthouses, public transportation systems, and water treatment facilities-one might expect to see calls to divert taxpayer monies from flowing into private corporate hands and instead direct them to crying public needs. But somehow the cramped federal budget-as well as similarly situated state and local budgets-always has room for another corporate welfare program.

This is a deeply rooted problem, one which cuts across party lines. Democrats and Republicans are both culpable for the proliferation of corporate welfare spending. Indeed the leading Congressional crusader against corporate welfare has long been outgoing House Budget Committee Chair John Kasich, R-Ohio, and efforts to forge bipartisan coalitions to take on corporate welfare founder more on lack of Democratic support than Republican.

Patching the corporate drain on public resources will require an informed and mobilized citizenry that both forces changes in our systems of campaign finance, lobbying and political influence, and demands careful and critical scrutiny by the media, Congressional committees and ultimately the citizens who lose out from government transfers of resources, privileges, and immunities to corporations...

THE POLITICAL ORIGINS OF CORPORATE WELFARE

It is raw political power that creates and perpetuates most corporate welfare programs. There is no serious public policy argument for why television broadcasters should be given control of the digital television spectrum-a $70 billion asset-for free. The endless tax loopholes that riddle the tax code-such as an accelerated depreciation schedule that's worth billions to oil companies-cannot be explained by any exotic theory of fair taxation. Local taxpayers rather than billionaire team owners pay for the new sports stadiums and arenas that dot the American landscape because of the political leverage sports teams and their allies gain through corporate cash and the threat to move elsewhere.

An examination of corporate welfare is, therefore, at one important level, an examination of the state of our political democracy. Unfortunately, the burgeoning corporate welfare state does not speak well for the state of democratic affairs. The following examples, discussed in more detail later in this pamphlet, illustrate how political payoffs-what former Member of Congress Cecil Heftel, D-Hawaii, calls "legalized bribery"-distort decision-making so that the public commonwealth is corporatized to enrich the already-rich.

The savings and loan debacle

Perhaps still the largest corporate welfare expenditure of all time-ultimately set to cost taxpayers $500 billion in principal and interest-the S&L bailout is in large part a story of political corruption, the handiwork of the industry's legion of lobbyists and political payoffs to campaign contributors. The well-connected S&L industry successfully lobbied Congress for a deregulatory bill in the early 1980s, which freed the industry from historic constraints and paved the way for the speculative and corrupt failures that came soon after. Then more industry campaign contributions and lobbying led the Congress to delay addressing the problem - resulting in more S&L failures and skyrocketing costs for corrective measures. When Congress finally did address the problem, it put the bailout burden-totaling hundreds of billions of dollars-on the backs of taxpayers, rather than on the financial industry.

The costs of S&L deregulation and the subsequent bailout were, and remain, severe both in monetary terms and in the mutation and eventual destruction of an industry that contributed to broader home ownership among all Americans. "In the end," writes economics commentator William Greider, "the goal of housing was thrown over the side and the government's regulatory system was perversely diverted to a different purpose- "socializing" the losses accumulated by freewheeling bankers and developers by making every taxpayer pay for them." Congress even refused in the bailout legislation to include measures to empower consumers to band together into financial consumer associations-a modest quid pro quo that would have imposed zero financial cost on taxpayers or financial institutions and that would have enabled consumers to act on their own to prevent future S&L-style crises and bailouts.

Of the many factors contributing to the S&L debacle, which festered throughout the 1980s and into the early l990s, none was more important than industry lobbying money and campaign cash. "Leaving aside the financial and economic complexities," writes economics commentator William Greider, "the savings and loan bailout is most disturbing as a story of politics-a grotesque case study of how representative democracy has been deformed."

"At every turn, any effort to rein in the thrifts' powers and accountability has been shackled," Representative Jim Leach, R-Iowa, then a House Banking Committee member and now the Committee chair, told the Los Angeles Times in 1989. "If there ever has been a case for campaign finance reform, this is it."

The giveaway of the digital television spectrum

In 1996, Congress quietly handed over to existing broadcasters the rights to broadcast digital television on the public airwaves-a conveyance worth $70 billion-in exchange for... nothing.

Although the public owns the airwaves, the broadcasters have never paid for the rights to use them. New digital technologies now make possible the broadcast of digital television programming, (the equivalent of the switch from analog records to digitized compact disks), and the broadcasters sought rights to new portions of the airwaves. In recent years, the Federal Communications Commission has, properly, begun to recognize the large monetary value of the licenses it conveys to use the public airwaves-including for cell phones, beepers, and similar uses-and typically auctions licenses. The 1996 Telecommunications Act, however, prohibited such an auction for distribution of digital television licenses, the most valuable of public airwave properties, and mandated that they be given to existing broadcasters.

How to explain this giveaway, especially when other industries, such as data transmission companies, were eager to bid for the right to use the spectrum.

Look no further than the National Association of Broadcasters (NAB)

The broadcasters are huge political donors, donating about $3 million in the 1995-1996 election cycle. They have close ties to key political figures, most notably Senate Majority Leader Trent Lott, R-Mississippi; NAB head Eddie Fritts is Lott's college friend. Lott took good care of his buddy, threatening the FCC in no uncertain terms if it failed to promptly oversee the transfer of the licenses to the broadcasters.

Above all, the broadcasters are able to leverage their control over the most important media into influence over politicians. Not surprisingly, the nightly news was silent on this giant giveaway. Few if any Members of Congress were willing to challenge the giveaway. Most feared that bucking the industry would result in slanted news coverage in the next election. Those few who feel secure in their position figure it is not worth taking on the broadcasters-given the fealty of their fellow Members to the industry; they conclude, why bother.

And again, the giveaway not only represents the failure of our working democracy, but an additional erosion. Congress and the FCC failed to include provisions in the legislative and regulatory allocation of the spectrum to force the broadcasters to serve the public interest in concrete ways-for example, by providing free air time for political candidates, or by ceding partial control of the airwaves to citizen groups to air civic programming. (A vague public interest obligation imposed on the broadcasters remains without concrete definition, but preliminary efforts to specify those obligations are underwhelming.)

The 1872 Mining Act

This nearly 130-year-old relic of efforts to settle the West allows mining companies to claim federal lands for $5 an acre or less and then take gold, silver, lead or other hard-rock minerals with no royalty payments to the public treasury. Thanks to the anachronistic 1872 Mining Act, mining companies-including foreign companies-extract billions of dollars worth of minerals a year from federal lands, royalty free.

Legislative efforts to repeal or reform the mining giveaway regularly fail, blocked by senators from western states. These senators are not standing up for their states' best economic interests; the giveaway mines create few jobs and massive environmental problems with high economic costs in foregone tourist and recreational revenues and uses. The senators are standing up for the mine companies, which pour millions in campaign contributions into the Congress.

From 1987 to 1994, the mining companies gave $17 million in campaign contributions to congressional candidates-a small price to pay to preserve their right to extract $26 billion worth of minerals, royalty free, during the same period. More recently, in the 1997-1998 election cycle, the industry-led by the National Mining Association, Cyprus Amax Minerals, Drummond, Phelps Dodge and Peabody Coal-rained more than $2 million in contributions on congressional candidates.

Those campaign donations are concentrated on a relatively small number of key members who go to bat for the industry-including Senators Larry Craig, R-Idaho, and Pete Domenici, R-New Mexico, and Representatives J.D. Hayworth, R-Arizona, and Don Young, D-Alaska. Because of the way the Congress, especially the Senate, functions, it is much easier to block changes in the status quo than to enact changes. The industry's focused contributions ensures it has enough heavyweights and devotees on call in the Congress to block the perennial efforts to reform the 1872 Mining Act.

The mining industry, along with other resource extractive industries, has helped create and fund a front group, People for the West!, that claims to represent the interests of western state citizens but somehow always manages to lobby for corporate positions-such as maintenance of the Mining Act.

Tax loopholes and subsidies

If anyone needs convincing about the need for campaign finance and political reform they need look no further than the Internal Revenue Code

The Code is riddled with calculated loopholes exemptions, credits, accelerated depreciation schedules, deductions and targeted exceptions-many of unfathomable consequence even to trained experts-that are carefully crafted to benefit one or a handful of companies and exist solely because well-paid lobbyists representing fat cat campaign contributors managed to convince a legislator to insert a special provision in long, complicated tax bills.

The origin of many of the corporate tax loopholes is the stuff of Washington legend. It represents one of the worst distortions of our political democracy. Well-heeled lobbyists, who spin through the revolving door between government and K Street and represent high-donor corporate interests, facilitate backroom deals that save their clients millions (or billions). The taxpayers, of course, lose commensurate amounts.

To take one recent egregious example, a conference committee, reportedly acting in response to instructions from then-Speaker Newt Gingrich and Senate Majority Leader Trent Lott, inserted a tax break-not included in the previous House or Senate versions-in the 1997 tax bill that provided special benefits for Amway Corporation and a few others. The tax break came a few months after Amway founder Richard De Vos and his wife Helen De Vos each gave half million dollar soft money contributions to the Republican National Committee. The revision to Internal Revenue Code Section 1123 applies to two Amway affiliates and four other companies, and will cost taxpayers $19 million over 10 years, according to the Joint Committee on Taxation.

Another extraordinary example occurred the same year. In July 1997, the House and Senate Republican leadership, with the apparent awareness of the Clinton White House, slipped a one-sentence provision into the tax bill that would have saved the tobacco industry $50 billion on the money it was expected to pay as part of a federally approved settlement of the state's lawsuits against the industry. Once the provision was publicly disclosed, many Members of Congress claimed not to have known it was included in the complicated tax bill. Revealed in the light of day, this massive tax favor for an industry falling rapidly out of political favor quickly withered. Both Congressional chambers soon voted to repeal the tobacco industry tax credit-a sign that, despite the fundamental flaws in the political system, news coverage and public outrage can still thwart corporate efforts to loot the treasury.

Pentagon merger subsidies

No government agency is cozier with industry than the Department of Defense, and corporate welfare is pervasive at the agency famous for cost-overruns, waste, fraud, and abuse. Among the most galling of Defense Department corporate welfare handouts is the Pentagon's merger subsidy program, which pays defense contractors to merge, lessening competition for government bids and increasing the lobbying power of newly combined defense megafirms.

The Pentagon subsidy plan began in the early and mid l990s, when it decided to encourage consolidation in the defense sector. The industry asked for and won encouragement in the form of payments to cover the costs of consolidation-including extravagant "golden parachute', bonuses to executives of acquired companies.

When Lockheed merged with Martin Marietta, taxpayers paid for $30 million in bonuses for company executives-an outrage that Representative Bernie Sanders, the independent from Vermont, finally ended with a legislative amendment barring future "payoffs for layoffs."

Levels of industry concentration in the defense sector are now so high that the antitrust authorities are beginning to intervene to block some new mergers among primary contractors. But other defense mergers continue to proceed-with the help of the U.S. taxpayer.

Hijacking local democracy

Perhaps nothing illustrates the ruthlessness and shameless power plays of the corporate welfare kings than their extortionate demands for state and local subsidies on threat of picking up and moving elsewhere.

And no case illustrates the hijacking of democratic procedures more clearly than billionaire Paul Allen's buying of an especially-made-for-Allen Washington state referendum to approve $300 million in public subsidies to build a football stadium for his Seattle Seahawks. Mega-billionaire Allen, co-founder of Microsoft with Bill Gates and one of the richest men in the world, bought the referendum both literally and figuratively.

In a stunningly brazen maneuver, he paid the state of Washington for the costs of running the special referendum election in June 1997. Although later challenged as a violation of the state's constitution, the state Supreme Court upheld the private financing of the election. But even the Supreme Court majority which upheld the constitutionality of the election purchase blanched at its political ramifications. "Troubling questions may arise, such as whether any wealthy entity could persuade the legislature to place a measure on the ballot provided the costs of the election were paid," wrote Justice Barbara Madsen for the majority.

Having paid for the issue to get on the ballot, Allen then waged a $6.3 million campaign-the most expensive in Washington state history-to convince voters to support the $300 million public subsidy to the stadium. He devoted $2.3 million to radio and TV ads. In total, Allen outspent opponents of the referendum by a 42-to-1 margin.

Allen's investment proved just enough: Washington voters, initially opposed by overwhelming numbers to the idea of public funding for the stadium, approved the referendum with a 51 percent majority.

DOUBLE STANDARDS FOR THE POOR AND THE POWERFUL

Simply to acknowledge the existence of corporate welfare is to point to the enormous discrepancies in influence and allocation of resources in our country.

While President Clinton and the Congress have gutted the welfare system for poor people-fulfilling a pledge to "end welfare as we know it"-no such top-down agenda has emerged for corporate welfare recipients. The savage demagoguery directed against imaginary "welfare queens" has never been matched with parallel denunciations of gluttonous corporate welfare kings-the DuPonts, General Motors and Bristol-Myers-Squibbs that embellish their palaces with riches taken from the public purse.

While the minimal government benefits still afforded the poor are provided only to the most impoverished, no such "means testing" is applied to corporate welfare beneficiaries. By and large, the bigger the company, the more it extracts in government supports. The many government programs to benefit small business-some merited, some not-do not come close to the subsidies lavished on large multinational corporations. When Daimler-Chrysler threatens to move a factory expansion out of the city of Toledo unless the city effectively evicts an entire neighborhood, turns the land over to the automaker, and arranges hundreds of millions in federal, state and local tax benefits and other subsidies, Toledo rushes to comply. If "Joe's Garage" were to make such demands the city would laugh. {In fact, in Toledo's desperate rush to please Daimler-Chrysler, the city has undertaken what appears to be a campaign of harassment and intimidation designed to push a local auto body repair shop-Kim's Auto Body-out of business, and out of the way of Daimler Chrysler's plans to expand its grounds. Note the word choice: those are plans to expand the grounds, not the factory. Kim's and the surrounding neighborhood is located not where factory construction will take place, but where Chrysler would like to place shrubbery.)

The new welfare law sets strict time limits for how long poor people can receive government supports, but no such time limitations attach to government handouts to big business. When it comes to the myriad federal government subsidies, even the names of the beneficiaries are often unknown and almost never centrally compiled for the public, the media, or even government officials. Tax loopholes and tax subsidies generally renew themselves automatically, meaning corporations can take advantage of them into perpetuity (or at least until there is a periodic revamping of the entire tax code, and even such revisions of the tax code usually leave key loopholes in place), without the loophole ever being reexamined. While there are detailed reporting requirements for what remains of welfare for the poor, when it comes to corporate welfare, there are few organized, regular, and current reporting requirements and data compilations, easily accessible by the public.

The welfare law denies benefits even to legal immigrants in this country; corporate welfare, by contrast, is far more non-discriminating-Uncle Sam subsidizes foreign corporations as well as domestic businesses. Can you imagine the Congress deciding to extend the welfare for people program to cover poor Canadians? Maybe not, but the federal government provides millions of dollars in subsidies to Canadian mining companies every year. Tax loopholes enable foreign multinationals doing business in the United States to pay proportionally less than their U.S. counterparts. Chrysler has become Daimler-Chrysler, with its headquarters, top executives and annual shareholder meetings in Germany, yet there is no abatement in Uncle Sam's corporate welfare payments to the company that in 1979 was saved from bankruptcy and collapse by a U.S. taxpayer bailout.

SOCIAL NEEDS SHUNTED ASIDE FOR CORPORATE GREED

Implicit in the juxtaposition of corporate welfare and welfare for poor people is the opportunity cost of subsidies for big business: government money wasted on Ford Chevron, and Con Ed is not available to meet pressing national needs.

To focus on one critical area, at no time in recent history have we more needed a program to construct rebuild, or repair crumbling bridges, schools, drinking water facilities, sewer lines, docks, parks, mass transit systems, libraries, clinics, courthouses, and other public amenities and infrastructure. Too many of our roads and bridges are decrepit, school roofs across the nation are leaking or falling in, the public water system does not deliver safe drinking water for millions, the reach of public transportation systems is dwindling, even the great national park system is decaying.

Consider the following sampling:

* A prerequisite to any serious effort to educate the country's children to be creative, inventive, and dynamic workers, entrepreneurs, consumers, and citizens is providing them with functioning physical facilities, but one in three schools across the United States is "in need of extensive repair or replacement, " according to a 1995 General Accounting Office report. Fixing the schools, the GAO estimates, will cost $113 billion over three years.

* The Centers for Disease Control estimates one million people become sick every year from bad water, with about 900 deaths occurring. The EPA estimates nearly $140 billion will be needed over the next 20 years for water system investments to install, upgrade, or replace failing drinking water infrastructure.

* Maintaining the public transit system at current levels, the Department of Transportation estimates, will cost $9.7 billion a year. Improving the infrastructure to a condition of "good" would require upping annual expenditures to $14.2 billion a year. However, maintaining or slightly upgrading the public transit is not nearly enough. We need to restore the many large urban public transit systems that were bought and dismantled by a GM-led conspiracy (resulting in a 1949 federal antitrust conviction) earlier this century, and then move beyond. Bold new investments are needed to create a modern mass transit system conducive to livable cities, one which brings community residents closer together, combats the momentum towards sprawl, guarantees lower-income groups the ability to travel efficiently in metropolitan areas, abates air pollution, and improves transportation safety.

* As a society we have failed to respect the foresight of Theodore Roosevelt, John Muir, and the other conservationist founders of the national park system, neglecting to invest sufficient resources to maintain, let alone properly expand, the parks. A Park Service-estimated funding gap of nearly $9 billion has left animal populations at risk, park amenities in substandard or unusable conditions and many national historical artifacts in danger of being lost to posterity.

The hideous disparities between taxpayer subsidies showered on corporate behemoths and unmet social needs are highlighted most clearly in state and local cases, where the revenue and expenditure pools are less complicated than at the federal level.

Consider the case of Cleveland, Ohio. The city has earned renown for a downtown featuring two new publicly financed stadiums, a publicly financed sports arena, a taxpayer-supported rock-n-roll hall of fame, and glittering new buildings receiving millions in tax abatements that come directly out of the school system's revenue stream. At the same time as the city has doled out millions to developers, almost a quarter of the city's schools are so shoddy they should be replaced rather than repaired, according to an architectural and engineering report commissioned by the city school board. Decaying sewers led to a massive downtown flood in January 2000 after a sewer pipe burst. In 1991, one day after the city approved $300 million in financing for a new baseball stadium and basketball arena, the Cleveland school district announced it was phasing-out scholastic athletics for lack of money to equip students and pay coaches and referees.

What is the conceivable rationale for a corporate welfare profligacy that spends hundreds of millions on luxury-box-equipped, amenity-filled stadiums designed for the comfort of the wealthy spectators while fiscal constraints force the shut down of participatory high school sports activities.

THE CORPORATE WELFARE MENTALITY

Yet another indicator of the perversion of sensible thinking engendered by the corporate welfare lobby is the degree to which corporate welfare has been normalized inside the Beltway in Washington, D.C., in state capitols and in city halls across the country.

Consider the Partnership for a New Generation of Vehicles (PNGV). PNGV is a federal government subsidy program ostensibly designed to speed auto industry production of more fuel efficient cars. Its real-world effect, however, has been to forestall any toughening of federal fuel efficiency standards. It has also vectored research investments to a dirty technology, diesel, and permitted the major U.S. automakers (now including Daimler-Chrysler) to collude on do-nothing "research"-suppressing the competition that might result in genuine innovation and, most importantly, deployment of new technologies.

For the entirety of the Clinton administration, the Big Three automakers have hoodwinked Congress and the executive branch with this program that has not even achieved a functioning prototype. Now, with growing concerns over global warming and rising gas prices, it would seem that patience with the industry scam might run out.

No way. Instead, Vice President Gore has bragged about his involvement with PNGV as a sign of his commitment to the environment. Well-intentioned, environmentally-minded members of Congress are loathe to criticize the program, because the Capitol Hill mindset now conceives a subsidy program to the Big Three as an aggressive environmental program-never mind how the industry has used the program to thwart meaningful regulation of fuel efficiency-and they have trouble imagining alternatives.

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