[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE CORPORATE WELFARE REFORM COMMISSION ACT
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 8, 2000
__________
Serial No. 106-11
Printed for the use of the Committee on the Budget
----------
U.S. GOVERNMENT PRINTING OFFICE
64-901cc WASHINGTON : 2000
COMMITTEE ON THE BUDGET
JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia, JOHN M. SPRATT, Jr., South
Speaker's Designee Carolina,
CHRISTOPHER SHAYS, Connecticut Ranking Minority Member
WALLY HERGER, California JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey Leadership Designee
NICK SMITH, Michigan LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas BOB CLEMENT, Tennessee
JIM RYUN, Kansas JAMES P. MORAN, Virginia
MAC COLLINS, Georgia DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee KEN LUCAS, Kentucky
MARK GREEN, Wisconsin RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky JOSEPH M. HOEFFEL III,
GARY MILLER, California Pennsylvania
PAUL RYAN, Wisconsin TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
Professional Staff
Wayne T. Struble, Staff Director
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, June 8, 2000..................... 1
Statement of:
Hon. Edward R. Royce, a Representative in Congress from the
State of California........................................ 2
Jill Lancelot, Cofounder, Taxpayers for Common Sense......... 6
Thomas A. Schatz, President, Citizens Against Government
Waste...................................................... 10
Peter Sperry, Fellow, Federal Budgetary Affairs, Heritage
Foundation................................................. 14
Stephen Moore, Adjunct Fellow, Cato Institute................ 18
Prepared statement of:
Congressman Royce............................................ 4
Ms. Lancelot................................................. 8
Mr. Schatz................................................... 12
Mr. Sperry................................................... 17
Mr. Moore.................................................... 20
Hon. Robert E. Andrews, a Representative in Congress From the
State of New Jersey........................................ 29
THE CORPORATE WELFARE REFORM COMMISSION ACT
----------
THURSDAY, JUNE 8, 2000
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 12 noon in room
210, Cannon House Office Building, Hon. John R. Kasich
(chairman of the committee) presiding.
Members present: Representatives Kasich, Gutknecht, Sununu,
Knollenberg, Ryan of Wisconsin, Collins, McDermott, Rivers,
Bentsen, Lucas, Holt, and Hoeffel.
Chairman Kasich. The committee will come to order.
Today, we are just going to hear from a couple of
witnesses, and I think a panel on the issue of corporate
welfare defined, at least by me, as a program that benefits a
special interest without accruing to benefit the general
public. We are lucky today to have Ed Royce, Mr. Sanders; and
then there will be a second panel that we can get to later.
Mr. Hoeffel actually asked me whether we could have a
hearing, because he has a bill on creating a commission and
asked whether we could do a hearing. I said we could, and,
voila, here it is. So if the gentleman would like to make a
couple of comments, that is fine, but I think we want to get
going, because we are going to have votes here, and I would
like Mr. Royce to be able to get his testimony in, if he can.
Mr. Hoeffel, you are recognized.
Mr. Hoeffel. Thank you, Mr. Chairman, and thank you for
holding this hearing, keeping your word to do so, and thank you
for 20 years of leading the charge to try to eliminate
corporate welfare.
The legislation that the chairman has cosponsored with 28
other members, my bill, H.R. 3221, would create a commission to
study corporate welfare, to make recommendations to the House
and Senate, and would require--after the ability to amend by
the members on the floor of the House and Senate, would require
a vote by the Congress on such recommendations.
As we talked yesterday, Mr. Chairman, one man's corporate
welfare is another man's desperately needed government program,
and--I guess we are being summoned right now.
Chairman Kasich. Why don't you go ahead?
Mr. Hoeffel. The reality is these direct frontal assaults
that we have made in the past on individual programs are
worthy. I want to join the Chair in pursuing some of those
amendments on the appropriations bills this year, but I think
we also need a mechanism for dealing with these problems.
In fact, in 1998, the budget resolution contained a
recommendation that a commission be formed to create a fast-
track process to consider recommendations to eliminate
corporate welfare. I think that it is time to do that.
I welcome the chairman's interest in this. I think it is
time, if Congress can reform welfare, which we have done, that
we also ought to be willing to reform corporate subsidies that
are wasteful, that allow unfair competitive advantages or
financial windfalls, and cost more to the taxpayer than any
public benefit that results.
So I look forward to hearing the testimony of the witness.
Thank you, Mr. Chairman.
Chairman Kasich. I want to recognize Mr. Royce. Ed, how
long is your statement?
Mr. Royce. I am going to be brief enough that you can make
this vote.
Chairman Kasich. OK. I want to recognize Mr. Royce, who has
been a leader in the effort to try to rein in some of the
subsidies, particularly the Overseas Private Investment
Corporation. Ed, you are recognized for whatever statement you
may make.
STATEMENT OF THE HON. EDWARD R. ROYCE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Royce. Thank you for your leadership on this issue, as
well. Let me just make a couple of observations.
One is that the Federal Government spends about $65 billion
each year on programs that provide subsidies basically to
private businesses, and this is a huge drain on the Federal
Treasury at a time when the impending Social Security crisis
looms closer.
Our current national debt problem pales by comparison to
the some $19.8 trillion in unfunded liabilities already
committed to current and future Social Security recipients, and
if these subsidies, really corporate welfare, were eliminated
entirely over the next 5 years, we could save over $300
billion. That would provide some of the resources necessary to
find a long-term solution to our Social Security crisis.
In addition, government has no business favoring certain
companies with tax breaks and with subsidies at the expense of
others. The free market is there to allocate resources in the
most efficient way possible. Federal involvement only serves to
distort the marketplace. By giving selected businesses special
advantages, corporate subsidies put other businesses that are
less politically well-connected at a disadvantage.
Corporate welfare has led to the creation of what some have
termed the ``statist businessman'' who has been converted from
capitalist to capital lobbyist. Furthermore, corporate welfare
is anticonsumer. For example, the sugar subsidy costs Americans
billions of dollars a year in higher prices.
The sugar program is an affront to the American consumer
whose tax dollars are diverted to prop up a select group of
producers through an ill-conceived government policy. Price
controls and import quotas are used to keep the price of sugar
artificially high, thereby doing great harm to American
consumers and much of the domestic sugar industry. The sugar
program unfairly guarantees sugar producers a minimum price for
their product. The U.S. Department of Agriculture secures loans
for processors using sugar as collateral. This allows producers
to simply forfeit their sugar rather than repay the loan.
Therefore, it is in the USDA's interest to keep the price floor
for sugar as high as possible to allow producers to profit.
Otherwise, processors will opt for forfeiture, leaving the USDA
with unprocessed sugar.
Unfortunately, for consumers, this means keeping the price
for sugar well above the open market price. Is that what our
constituents back home sent us to Washington to do?
As you may know, in 1997, I joined a coalition of members
and citizens groups from across the political spectrum to
target ``corporate welfare'' programs for elimination. The
coalition is called the Stop Corporate Welfare Coalition. It
features Members of Congress, including you, Mr. Chairman, and
taxpayer groups like Americans for Tax Reform, and ``watchdog''
organizations like Citizens Against Government Waste, as well
as environmental and consumer groups.
The programs we target provide businesses, usually big and
politically well-connected ones, with subsidies, financial
underwriting and other support. Each program has a constituency
and each has powerful interests supporting it.
I endorse and support companies, by the way, in their
efforts to expand and compete globally. I have always worked to
lessen the burden of regulation and taxation on American
businesses. I just believe private businesses should earn money
through the marketplace, not through taxpayer subsidies.
Every year, Congress must approve 13 appropriations bills
which fund the government and every corporate welfare program.
I, along with Chairman Kasich and others have been working to
end corporate welfare programs. The Stop Corporate Welfare
Coalition has had some legislative successes. We have cut
timber roads funding, the International Monetary Fund New
Agreements to Borrow requested by President Clinton were
denied, and we have also reduced fossil fuel subsidies.
The Coalition has also brought the country's attention to
the process of using taxpayer money for private gain. But more
needs to be done.
Mr. Hoeffel's bill will create a Corporate Welfare
Commission, an independent body that would focus our priorities
and raise public awareness on this issue. In the last Congress
I introduced a bill to establish a government waste commission,
and I am currently working on a bill for this Congress. So I
recognize the need and the value of a commission to provide for
increased accountability and rein in wasteful government
spending.
As T.J. Rogers said in testimony before the Senate a few
years ago--and I want to submit that testimony for the record;
he has also testified before the House before. It is one of the
most cogent and well-thought-out programs that I have read, it
is called Declaration of Independence, end corporate welfare.
T.J. Rogers, as you might know, is CEO of Cypress Semiconductor
Corporation. As he says, ``The best way to shut down corporate
welfare is to have a yes or no vote on a package of corporate
subsidies identified for elimination by an independent
commission, as we did in the military downsizing. CEO's would
support a fair package proposal to cut corporate subsidies.''
He did this work in tandem with many CEO's from the Silicon
Valley, who have a history of knowing how to create real wealth
in the economy.
So I really urge every member attending today to please get
a copy of what we will submit, but most importantly, this
oversight of government management by T.J. Rogers, his
``declaration of independence'' to end corporate welfare.
The best thing the government can do to promote economic
growth is to get out of the way. Let entrepreneurs and the
mechanisms of the marketplace determine how the economy's
resources will be directed. Terminating corporate welfare
programs and reforming the Tax Code are necessary to level the
playing field and reduce government interference.
In conclusion, private industry can flourish without
corporate welfare. Just as Congress has weaned many families
off of welfare, it can do the same for corporations. We can
stop subsidizing corporations and focus our efforts on real
needs and on the things that we in Congress need to be planning
for the long term.
Chairman Kasich, more than anybody else, I want to thank
you for leading the effort to do exactly that.
[The prepared statement of Mr. Royce follows:]
Prepared Statement of Hon. Edward R. Royce, a Representative in
Congress From the State of California
Thank you, Mr. Chairman, for giving me the opportunity to speak
here today.
The Federal Government spends about $65 billion each year on
programs that provide subsidies to private businesses. This is a huge
drain on the Federal treasury at a time when the impending Social
Security crisis looms closer. Our current national debt problem pales
in comparison to the $19.8 trillion in unfunded liabilities already
committed to current and future Social Security recipients. If these
tax subsidies, really corporate welfare, were eliminated entirely, over
the next 5 years we could save over $300 billion. This would provide
some of the resources necessary to find a long-term solution to our
Social Security crisis.
In addition, government has no business favoring certain companies
with tax breaks and subsidies. The free market is there to allocate
resources in the most efficient way possible. Federal involvement only
serves to distort the marketplace. By giving selected businesses
special advantages, corporate subsidies put other businesses that are
less politically well-connected at a disadvantage. Corporate welfare
has led to the creation of what some have termed the ``statist
businessman,'' who has been converted from capitalist to Capitol
lobbyist.
Furthermore, corporate welfare is anti-consumer. For example, the
sugar subsidy costs Americans billions of dollars a year in higher
prices. The sugar program is an affront to the American consumer, whose
tax dollars are diverted to prop up a select group of producers through
an ill-conceived government policy. Price controls and import quotas
are used to keep the price of sugar artificially high, thereby doing
great harm to American consumers and much of the domestic sugar
industry.
The sugar program unfairly guarantees sugar producers a minimum
price for their product. The U.S. Department of Agriculture secures
loans for processors using sugar as collateral. This allows producers
to simply forfeit their sugar rather than repay the loan. Therefore, it
is in the USDA's interest to keep the price floor for sugar as high as
possible to allow producers to recoup their costs. Otherwise processors
will opt for forfeiture, leaving the USDA with unprocessed sugar.
Unfortunately, for consumers, this means keeping the price for
sugar well above the open market price. Is this what our constituents
back home sent us here to Washington to do?
Corporate welfare is also unconstitutional. Our Founding Fathers
envisioned a limited government. The Constitution was written to
enumerate specific powers for a reason. Corporate subsidies are outside
Congress's limited spending authority under the Constitution. Nowhere
in this document does it grant Congress the authority to subsidize
industry.
As you may know, in 1997, I joined a coalition of members and
citizens groups from across the political spectrum to target
``corporate welfare'' programs for elimination.
The coalition is called the Stop Corporate Welfare Coalition and it
features Members of Congress, including you Chairman Kasich, taxpayer
groups like Americans for Tax Reform, and ``watch-dog'' organizations
like Citizens Against Government Waste. The programs we target provide
businesses--usually big and politically well-connected ones--with
subsidies, financial underwriting, and other supports. Each program has
a constituency and each has powerful interests supporting it.
Don't get me wrong. I endorse and support companies in their
efforts to expand and compete globally. I have always worked to lessen
the burden of regulation and taxation on American business. I just
believe that private businesses should earn money through the
marketplace, not through taxpayer subsidies.
Every year, Congress must approve 13 appropriation bills, which
fund the government and every corporate welfare program. I, along with
Chairman Kasich and others, have been working to end corporate welfare
programs.
The Stop Corporate Welfare Coalition has had some legislative
successes. We have cut timber roads funding, the International Monetary
Fund New Agreements to Borrow that were requested by President Clinton
were denied, and we have also reduced fossil fuel subsidies. The
Coalition has also brought to the country's attention to the practice
of using taxpayer money for private gain. But more needs to be done.
Mr. Hoeffel's bill would create a Corporate Welfare Commission, an
independent body that would focus our priorities and raise public
awareness on this issue.
The best thing government can do to promote economic growth is get
out of the way. Let entrepreneurs and the mechanisms of the marketplace
determine how the economy's resources will be directed. Terminating
corporate welfare programs and reforming the tax code are necessary to
level the playing field and reduce government interference.
The business world can flourish without corporate welfare. Just as
Congress has weaned many families off welfare, it can do the same
for corporations. We can stop subsidizing corporations and focus our
efforts on real needs.
Thank you.
Chairman Kasich. Thank you. Questions for Mr. Royce?
Mr. Hoeffel. Congressman Royce, one question: You spoke
favorably of a commission approach that would have a series of
recommendations with a take-it-or-leave-it, single up-or-down
vote. Senator McCain had a similar proposal in the Senate.
My version is a little different. It would still allow
members to amend the recommendations on the floor.
Can you comment briefly on the two versions?
Mr. Royce. Having talked with Dick Armey about this as we
were attempting to craft legislation on it, one of the most
important elements, in his view, of the Base Closure Commission
was the fact that it was a sole package.
In terms of the CEO's in Silicon Valley that sat down with
T.J. Rogers to prepare his analysis, they felt the same thing,
that in point of fact we needed to take an approach where we
combined all of the corporate welfare programs and offered them
up at one time. Otherwise, there was too much incentive to
basically logroll and trade off votes, to eliminate one program
in exchange for somebody else eliminating another program
that--basically to present before the public one complete set
of work that would give the maximum potential; and I will let
you read his analysis. But for members to vote up or down on
corporate welfare per se, that would focus the attention on one
vote and would focus the pressure.
As people like to say, when they feel the heat, they will
see the light, and this is the way to bring the heat, one vote.
Chairman Kasich. I want to thank you for your testimony,
Mr. Royce.
What we are going to do is break for a vote, come back and
get our panel. So if the gentlelady and the two people that I
see that are here for the panel will just be patient, we will
be back very soon.
And thank you for your testimony, Mr. Royce.
[Recess.]
Mr. Ryan of Wisconsin [presiding]. The committee will come
to order. We are going to get started; we have a quorum.
We will first announce Panel II: Jill Lancelot, Cofounder
of Taxpayers for Common Sense; Steve Moore--I believe Steve is
on his way over here, is an Adjunct Fellow for the CATO
Institute; Tom Schatz, President of Citizens Against Government
Waste--good to see you, Tom. And Peter Sperry, Fellow, Federal
Budgetary Affairs, Heritage Foundation, will be joining us on
this panel.
STATEMENTS OF JILL LANCELOT, COFOUNDER, TAXPAYERS FOR COMMON
SENSE; THOMAS A. SCHATZ, PRESIDENT, CITIZENS AGAINST GOVERNMENT
WASTE; PETER SPERRY, FELLOW, FEDERAL BUDGETARY AFFAIRS,
HERITAGE FOUNDATION; AND STEPHEN MOORE, ADJUNCT FELLOW, CATO
INSTITUTE
Ms. Rivers. Is it good to see all of the panel?
Mr. Ryan of Wisconsin. It is good to see every one of the
panelists.
Jill, it is especially good to see you. I guess we will
slot Steve Moore in when he gets here.
We will start with you, Jill, and go through, and when
Steve comes, we will put him in on the end. Please enlighten
us, Jill. We look forward to your testimony.
STATEMENT OF JILL LANCELOT
Ms. Lancelot. Thank you very much, Mr. Congressman, Mr.
Chairman. My name is Jill Lancelot, and I am Cofounder and
Legislative Director of Taxpayers for Common Sense. We are a
nonprofit, nonpartisan advocate for the American taxpayer. We
are dedicated to cutting wasteful spending and subsidies in
order to achieve a responsible and efficient government that
lives within its means.
Again, we thank you for inviting us to testify once again
and to present our views on corporate welfare to this
committee. Today we are also here to comment on H.R. 3221, the
Corporate Welfare Commission Act of 1999, which has been
introduced by Representative Hoeffel.
Since the establishment of the lofty principles of
representative governance for ensuring the Nation's common
welfare, citizens have had to stand vigilant in preventing
abuses of the system for the private gain of special interests.
There always has been and, sadly, always will be the temptation
to cater to special interests that are able to influence the
system for their own welfare at the expense of taxpayers. Such
is the case with corporate welfare.
In recent decades we have witnessed an extraordinary
giveaway of billions of taxpayers' hard-earned dollars through
what can only be termed ``corporate welfare.'' simply defined,
corporate welfare is having the tab for normal business
expenses picked up by the Nation's taxpayers. While it is
common business practice to use other people's money to grow an
enterprise, this should occur only in the marketplace where the
risks of gains or losses help investors determine the
worthiness of a venture. It is not the role of government to
bypass the rigors of the marketplace. Neither elected officials
nor agency personnel are adept, let alone more insightful, in
selecting market preferences or technology winners.
It is instructive to see what has happened in the past 30
years. Who could have imagined that within 30 years since the
defining of the Fortune 500, 238 firms on the list have
disappeared, with another 143 firms disappearing just 5 years
later? In every industry in which the market has been the basis
of competition, dramatic change has taken place. In short,
picking and choosing winners should be left to the market.
The practice of subsidizing an industry often props up that
industry in incidences when it cannot sometimes compete on its
own. Let's look at the nuclear industry.
Forty-three years ago the government stepped in with the
Price-Anderson Indemnity Act, removing the rigors of the
marketplace because the commercial nuclear industry said the
risk of commercializing nuclear power was too high; $47 billion
later and with no reactor orders since 1974, the government
continues to subsidize the industry. In fact, just a year after
the new program was funded, even though the year before the
Science Committee declined to authorize that program, the
industry stepped up its pressure, and today we have the Nuclear
Energy Research Initiative, NERI. The NERI program is funded
today with almost $50 million, a program that is actually
already being carried out by the Nuclear Regulatory Commission.
As an industry that has revenues in excess of $140 billion,
does it really need the Nation's taxpayers paying for their
duplicative research?
Taxpayers for Common Sense thinks not. In fact, we think
the $35 million requested by the President this year is ripe
for the Energy and Water Appropriation Budget Axe.
Let's look at the mining industry. We have all heard many
times how the anachronistic mining law allows the hard rock
mining industry to take precious metals, like gold and silver,
absolutely free when they mine on taxpayer-owned land. However,
taxpayers get shafted again. The industry leaves the taxpayer
holding the bag for the toxic mess that they leave.
There are over half a million hard rock mines that have
been abandoned that will cost taxpayers anywhere up to $72
billion to clean up. Moreover, reclamation bonding, which is
the mechanism designed to address waste from currently
operating mines, is woefully inadequate. The potentially
unfettered liability of all operating mines in western States
presently exceeds over $1 billion because current rules allow
bonds to fall short of the full cost of cleanup.
Then there is the advanced technology program that I think
I will leave others to talk about. I know that Citizens Against
Government Waste will be addressing that program today. We too
agree it is a program that should be eliminated.
So it is, I think, quite apparent that corporate welfare is
alive and kicking, but fortunately, Representative Hoeffel and
the chairman of this committee aim to do something about it,
and we applaud that.
Representative Hoeffel has offered an innovative piece of
legislation that could actually put an end to business as
usual. Mr. Hoeffel's legislation creates a Corporate Welfare
Commission that will examine and recommend to Congress a list
of programs that would fall under the category of corporate
welfare.
Taxpayers for Common Sense is pleased that Representative
Hoeffel remains committed to eliminating corporate welfare as
we know it and has fashioned a bill that provides a mechanism
that will implement reform responsibly and quickly. We applaud
Representative Kasich and this committee for once again
tackling this issue of corporate welfare that so often is swept
under the rug. We believe that this hearing and the legislation
introduced by Representative Hoeffel will refocus the spotlight
on this issue.
Thank you.
Mr. Ryan of Wisconsin. Thank you, Jill. I appreciate it.
[The prepared statement of Ms. Lancelot follows:]
Prepared Statement of Jill Lancelot, Legislative Director, Taxpayers
for Common Sense
My name is Jill Lancelot. I am cofounder and Legislative Director
of Taxpayers for Common Sense (TCS). Taxpayers for Common Sense is a
nonpartisan advocate for American taxpayers. We are dedicated to
cutting wasteful spending and subsidies in order to achieve a
responsible and efficient government that lives within its means.
Thank you, Mr. Chairman for inviting Taxpayers for Common Sense
(TCS) to once again present our views on corporate welfare. Today we
are also here to comment on H.R. 3221, the Corporate Welfare Commission
Act of 1999, which has been introduced by Representative Hoeffel.
Since the establishment of the lofty principles of representative
governance for ensuring the nation's common welfare, citizens have had
to stand vigilant in preventing abuses of the system for the private
gain of special interests. There always has been and, sadly, always
will be the temptation to cater to special interests that are able to
influence the system for their own welfare, at the expense of
taxpayers. Such is the case with corporate welfare. In recent decades
we have witnessed an extraordinary giveaway of billions of taxpayers'
hard-earned dollars to corporate welfare.
Corporate welfare, simply defined, is having the tab for normal
business expenses picked up by the nation's taxpayers. The free handout
bypasses the rigors of the marketplace in determining the full risks
and real worth of the business endeavor. While it is common business
practice to use other people's money to grow an enterprise, this should
only occur in the marketplace where the risks of gains or losses help
investors determine the worthiness of a venture.
However, it is not the role of government to bypass the rigors of
the marketplace. Neither elected officials nor agency personnel are
adept, let alone more insightful, in selecting market preferences or
technology winners. The market operates at a completely different pace,
scale and complexity than government. It's instructive to see what has
happened in the past thirty years. For example, who would or could have
imagined that within 30 years since the defining of the Fortune 500,
238 firms on the list had disappeared, with another 143 firms
disappearing just 5 years later! In every industry in which the market
has been the basis of competition dramatic change has taken place.
Fifty percent of the firms trying to compete in traditional modes have
declined dramatically or disappeared within a decade. Of the 43
companies identified by Tom Peters and Robert Waterman as models for
the new business age in their 1984 book, In Search of Excellence, only
12 remain in good shape; some have been disasters. Only 6 of the top 20
discount chains in 1980 were still in business in 1990. Clearly,
picking and choosing winners is best left to the market.
Using Federal taxpayer dollars to subsidize private industry is not
only unfair, but it distorts the market, reducing economic efficiency.
The practice of subsidizing an industry often props up that industry in
incidences when it cannot compete on its own.
nuclear industry
Beginning in the late 1950's, when the nuclear industry testified
that the risk of commercializing nuclear power was too high, the
government removed the rigors of the market with the passage of the
Price-Anderson Nuclear Indemnity Act that subsidized the risk of major
accidents. That legislation prematurely pushed the nuclear power
industry into the market place.
Forty-three years and $47 billion dollars later and with no reactor
orders since 1974, the government continues to subsidize this industry.
And in fiscal year 1998, an historical event occurred in the
appropriations process when Congress did not fund any direct subsidies
for the industry. This was quickly reversed in fiscal year 1999 when
Congress provided $19 million for the Nuclear Energy Research
Initiative (NERI). Not only is this program duplicative of research
already being conducted by the government's Nuclear Regulatory
Commission, but with revenues in excess of $141 billion, this mature
industry hardly requires hard-earned taxpayer dollars going to improve
its profit margin.
mining industry
The granddaddy of all subsidies is the 1872 Mining Law that
entitles the hard-rock mining industry to take, free of charge, gold,
silver, platinum and other precious metal found on public lands. In
addition, the law allows these often multi-national corporations to
take full title to mineral-rich lands for no more than $5.00 an acre.
Furthermore, mining companies all too often leave the American
taxpayer to pay to clean up the waste created from mining operations.
There are currently over a half million hardrock mines that have been
abandoned that will cost taxpayers anywhere from $32 billion to $72
billion to clean up. Moreover, reclamation bonding--the mechanism
designed to address waste from currently operating mines--is woefully
inadequate. The potentially unfunded liability of all operating mines
in western States presently exceeds over a billion dollars because
current rules allow bonds that fall short of the full costs of cleanup.
For example, in Nevada 29 mine sites have been left unreclaimed by
mining companies that have declared bankruptcy. According to the
Department of the Interior it will cost $60-100 million to clean up
just one of those sites. In Montana, a company walked away from a gold
mine and although it left the State with a $60 million reclamation
bond, it is far short of the $180 million cost estimate of cleanup.
the advanced technology program
The Advanced Technology Program (ATP) was created in 1988 with the
objective of ushering in new technological advancements by awarding
support grants for research and development to various corporations and
joint ventures. Though the program may have had a worthy objective,
there is no proof that ATP subsidies are essential for encouraging
investment in research and development. According to a March 1997
report by the Congressional Budget Office (CBO), almost half of ATP
grants near-winners ``continued their research and development projects
despite a lack of ATP funding.'' And according to an April 2000,
General Accounting Office report, three completed ATP-funded projects,
which were approved for funding in 1990 and 1992, addressed similar
research goals to those already funded by the private sector. Some of
the recipients of these funds have been major corporations such as
General Electric, Xerox, Dupont, Caterpiller, and United Airlines.
Surely these wealthy companies do not need any hard-earned taxpayer
dollars.
inland waterways system
According to the Congressional Budget Office, inland navigation is
the most highly subsidized mode of transportation in the United States.
The benefits of this subsidized system go primarily to six corporate
agribusinesses, who combined own more than 50 percent of U.S. barges.
Funded by a 20-cent per gallon tax on barge fuel, the Inland
Waterways Trust Fund is supposed to pay 50 percent of new construction
and major rehabilitation projects. However, the fund contributes
nothing to projects authorized prior to 1986 and numerous other
projects Congress exempts from normal cost-sharing rules. Despite the
existence of a trust fund, the Federal Government collects less than
$100 million per year in fuel taxes on barges, but pays out more than
$800 million each year to expand and maintain the nation's sprawling
waterways system.
Even with projects the navigation industry does contribute funds
towards, fiscal accountability in project selection and project design
are regularly absent. For example, the Port of New Orleans continues to
push a $641 million dollar project to replace a single lock on the
Industrial Canal. Project proponents state a new lock is required to
accommodate large increases expected in barge traffic and reduce delay
times. However, Army Corps of Engineers statistics show a 30 percent
decrease in traffic since 1988. At the same time, barge delays have
also declined. Much of this nation's senseless spending and subsidies
are found in the inland navigation industry.
These are but a few examples of special interest, corporate welfare
programs. Although Congress at various times has addressed the
unfairness of corporate welfare, unfortunately very little has been
done to correct these abuses. As Congress begins to tackle the annual
appropriation bills it is an apt time to bring the grievances of
corporate welfare to the forefront.
corporate welfare reform commission act of 1999
Representative Hoeffel has offered an innovative piece of
legislation that could actually put an end to business as usual. Mr.
Hoeffel's legislation creates a Corporate Welfare Commission that would
establish a Congressional advisory commission to examine and recommend
to Congress a list of programs that would fall under the category of
corporate welfare. Although TCS has concerns that often times a
commission can create the illusion of reform and give Congress
something to hide behind, certainly the Base Realignment and Closure
Commission (BRAC) was a good idea and could be viewed as a model. It is
important that the commission maintain its integrity with the least
amount of political influence possible throughout a cradle-to-grave
operation.
TCS is pleased that Representative Hoeffel remains committed to
eliminating corporate welfare as we know it and has fashioned a bill
that provides a mechanism that will implement reform responsibly and
quickly.
We applaud Representative Kasich and this Committee for once again
tackling this issue of corporate welfare that so often is swept under
the rug. We hope that this hearing and the legislation introduced by
Representative Hoeffel will refocus the spotlight on this issue.
Mr. Ryan of Wisconsin. Mr. Schatz.
STATEMENT OF THOMAS A. SCHATZ
Mr. Schatz. Thank you very much, Mr. Chairman. I am Tom
Schatz, the President of Citizens Against Government Waste. I
am happy to be here this morning to once again speak about
corporate welfare.
There has been some progress, certainly, over the years. We
have rated through our lobbying operation, the Council for
Citizens Against Government Waste, a number of votes on the
floor of the House and Senate; and of course, last year the
House Appropriations Committee saw fit to zero out funding for
the Advanced Technology Program. We certainly hope that they
will do the same this year, and that the Senate will follow
suit.
While that is one of the major topics of my discussion
today, I do want to point out that the preamble of our
Constitution outlines the foundation of our government by
stating its purpose to promote the general welfare. This is
quite different than distributing selective benefits for the
specific welfare of selected companies, organizations and
individuals.
Thomas Jefferson noted that the policy of the American
government is to leave their citizens free, neither restraining
them nor aiding them in their pursuits. Jefferson's words have
never been more true than when looking at special interest
business subsidies or, as many call it, corporate welfare. The
government takes our tax dollars and redistributes a portion of
it to those who can find money elsewhere or who often don't
need it at all.
There are many agencies that house these business subsidy
programs, but the most notorious is the Department of Commerce.
It has been described by its own Inspector General as a loose
collection of more than 100 programs delivering services to
about 1,000 customer bases. The General Accounting Office says
the Department has the most complex web of divided authorities
and shares missions with at least 71 Federal departments and
agencies.
More than $609 million was spent last year by three of the
Department's many subsidy programs: the Advanced Technology
Program, the Economic Development Administration, and the
Manufacturing Extension Partnership. These funds and similar
government handouts penalize successful companies by forcing
them to subsidize their competition.
For example, a few years ago, a company had developed video
compression technology after years of its own investment and
research and development. This new technology promises to
reshape picture transmission for television, computers and the
Internet. Once the technology began to take off and the company
started to make a profit, the Department of Commerce funded one
of the company's competitors through the Advanced Technology
Program in order to develop the exact same technology.
Defenders of these subsidies claim that they are necessary
because the programs that they fund are not adequately pursued
by private investors due to their high degree of risk. T.J.
Rogers, who was quoted by Congressman Royce earlier, said that
the high risk argument used by the Department of Commerce is
usually justification to subsidize poor investments. He
emphasizes that the important evaluation is the return on
investment, not risk. Investments with a reasonable or low risk
and a good return are enthusiastically supported by private
investors because they are seen as a wise use of money. But
investments with high risk and ordinary or low return are often
given government subsidies.
High definition TV is a clear example of the failure of
government technology handouts. Japan and France each spent
more than $1 billion to develop this technology in the late
1980's, and they sought to use existing analog technology. Here
in the United States, $1.2 billion in government subsidies was
denied. In the absence of government handouts, American
companies went on to develop an alternative technology with
their own money. In the end, the Japanese and French adopted
U.S. technology, which was done without any government help.
The $609 billion for ATP and the other Commerce Department
programs is a lot of money, but it pales in comparison to
investment in R&D in the private sector. According to the
National Venture Capital Association, more than $38 billion was
invested in high technology in 1999, so government subsidies
amounted to slightly more than 1 percent of this amount.
Clearly, the private sector is truly driving research and
development in technology.
The appropriate way to enhance the competitiveness and
productivity of American industry is to minimize government
interference and to substantially reduce tax rates and
regulatory burdens. The Silicon Valley venture capitalist, Tim
Draper, said ``Government subsidies, winners and losers
selected by nonmarket forces, simply distort the market. It is
not a waste; it is plain wrong. The government's job should be
to let the market do its job.''
Last year, when the House Appropriations Committee
eliminated ATP, it said after many years in existence, the
program has not produced a body of evidence to overcome these
fundamental questions about whether the program should have
existed in the first place. The report said, given the
tremendous financial constraints under which the committee is
operating, the question becomes whether it is worthwhile to
continue to fund a program of questionable value, particularly
when it costs over $200 million a year. The General Accounting
Office has also weighed in on ATP with a report this past
March.
Let me conclude by emphasizing Citizens Against Government
Waste is not antibusiness. Industrialist J. Peter Grace, who
founded CAGW, understood the importance of the private sector's
leading role in the economy. CAGW supports a strong and vibrant
economy based on the skills and sweat of entrepreneurs, not the
arbitrary system of picking winners and losers by the Federal
Government through special interest business subsidies.
Thank you for the opportunity to appear here today. I
certainly look forward to answering any questions you may have.
[The prepared statement of Mr. Schatz follows:]
Prepared Statement of Thomas A. Schatz, President, Citizens Against
Government Waste
Mr. Chairman, members of the committee, thank you for the
opportunity to testify today. In particular, I would also like to thank
Mr. Hoeffel for addressing the issue of corporate welfare with H.R.
3221. My name is Tom Schatz. I am the president of Citizens Against
Government Waste (CAGW), a 600,000 member nonprofit organization
dedicated to eliminating waste, fraud and abuse in government. Citizens
Against Government Waste has never received any Federal grants and we
do not wish to receive them at any time in the future.
CAGW was created 16 years ago after Peter Grace presented to
President Ronald Reagan 2,478 findings and recommendations of the Grace
Commission (formally known as the President's Private Sector Survey on
Cost Control). These recommendations provided a blueprint for a more
efficient, effective and smaller government.
Since 1984, the implementation of Grace Commission recommendations
has helped save taxpayers more than $625.4 billion. CAGW has been
working tirelessly to carry out the Grace Commission's mission to
eliminate government waste.
The preamble of the Constitution outlines the foundation of our
government by stating its purpose to ``promote the general welfare.''
This is quite different than distributing selected benefits for the
specific welfare of selected companies, organizations and individuals.
Thomas Jefferson articulated the premise of the Constitution and
the genius of our political and economic system by noting that: ``The
policy of the American government is to leave their citizens free,
neither restraining nor aiding them in their pursuits.''
Jefferson recognized all things do not flow from a central
government, nor does every conceivable human endeavor need a department
to manage its activity or guarantee its continued vitality. Not only is
it unnecessary, it's harmful.
Jefferson's words have never been more true than when looking at
special interest business subsidies, or as it is more commonly known,
corporate welfare. American taxpayers earn a living by creating wealth.
The government then takes some of the wealth in the form of taxes and
redistributes a portion of it to those who can find money elsewhere or
who don't need it at all.
There are many agencies that house these business subsidies, but
the most notorious is The Department of Commerce. The Department of
Commerce is a classic example of a rudderless, ever-expanding
bureaucracy. According to its own Inspector General, the department has
evolved into ``a loose collection of more than 100 programs delivering
services to about 1,000 customer bases.'' The General Accounting Office
says the Department has ``the most complex web of divided
authorities,'' and ``shares missions with at least 71 Federal
departments, agencies, and offices.'' Former Commerce Secretary Robert
Mosbacher said the Department is ``nothing more than a hall closet
where you throw everything that you don't know what to do with.''
More than $609 million was spent last year by just three of the
Department's many subsidy programs: the Advanced Technology Program,
the Economic Development Administration and the Manufacturing Extension
Partnership. Those who support using taxpayer money to fund benefits to
the politically favored will assuredly claim that this is a small
percentage of the Federal budget and isn't much money. Any taxpayer
will tell you that the $609 million is quite real.
This $609 million is being siphoned away from the taxpayer so that
Washington can dole out favors. Every dollar taken in taxes so that
Washington can determine who gets subsidized is one less dollar that
can be invested in the private sector.
Government handouts also penalize successful companies by forcing
them to subsidize their competition. Promising technology and companies
are well funded by private investors. Poor investments and less-
promising companies can't attract private investment, so they seek
government subsidies instead. This forces the successful companies who
have paid their dues, taken risks and incurred losses for many years to
subsidize their competition with their tax burden.
For example, a few years ago, a company had developed video-
compression technology after years of investment in R&D. This new
technology promises to reshape picture transmission for television,
computers and the internet. Once the technology began to take off and
the company started making a profit, the Department of Commerce funded
one of their competitors through the Advanced Technology Program to
develop the same technology.
Defenders of these subsidies claim that they are necessary because
the programs that they fund aren't adequately pursued by private
investors due to their high degree of risk.
T.J. Rogers, founder of Cypress Semiconductor, notes that the
``high-risk'' argument used by the Department of Commerce is usually
justification to subsidize poor investments. He emphasizes that the
important evaluation is the return on investment (ROI), not risk.
Investments with a reasonable or low risk and a good return are
enthusiastically supported by private investors because they are seen
as a wise use of their money. Investments with high risk and ordinary
or low return are those that are given government subsidies.
High-definition TV is one of the clearest failures of government
technology handouts. Japanese businesses, with subsidies that totaled
$1 billion in the late 1980's, sought to develop HDTV using existing
analog technology. The French did the same.
In the United States, $1.2 billion in government subsidies
requested to compete with these foreign rivals was denied. In the
absence of government handouts, American companies went on to develop
an alternative technology with their own money.
In Japan, HDTV was transmitted by satellite. The picture quality
was only marginally better than their standard signal, and special
televisions were required to receive HDTV. The Japanese people
responded to this massively subsidized technology by doing nothing:
they refused to purchase the televisions required to receive the
signal.
Alternatively, the digital technology developed by the American
companies made the Japanese analog system obsolete. As a result, the
Japanese announced plans to adopt the American system. The Japanese and
European taxpayers lost $2 billion because their governments handed out
subsidies. The U.S. relied on the market, and the results proved that
the market works.
Defenders of centralized technology policy will claim that ATP and
other high-technology handouts are essential to maintain our nation's
research and development. Hogwash. While the $609 million distributed
last year by Washington is a lot of money, it pales in comparison to
actual investments made by the private sector. According to the
National Venture Capital Association, more than $38 billion was
invested in high technology in 1999. Government subsidies amounted to
slightly more than 1 percent of this amount. Clearly, the private
sector is driving R&D.
Economic growth and technical innovations are not a result of
selective government subsidies; they are the result of the genius and
insight of the American people operating in the free market.
High taxes and large subsidies fuel each other's growth. In 1993,
the largest tax increase in history was enacted. In 1994, the Advanced
Technology Program was funded at its highest level ever. Increasing the
tax burden on American families and industry so that bureaucrats can
give some of it back to the politically powerful is not right, nor is
it economically beneficial (except, of course, to those receiving the
subsidy).
The appropriate way to enhance the competitiveness and productivity
of American industry is to minimize government interference in the
marketplace and substantially reduce tax rates and regulatory burdens.
Tim Draper, a Silicon Valley venture capitalist, flatly states that
``government subsidies * * * winners and losers selected by non-market
forces * * * simply distort the market. This is not just a waste; it is
just plain wrong. The government's job should be to let the market do
its job. The best thing bureaucrats and politicians can do is leave us
alone.''
Agencies like the Department of Commerce and programs such as ATP
distort and harm the relationship between business and government. Last
year the House Appropriations Committee called for the elimination of
ATP, stating: ``After many years in existence, the program has not
produced a body of evidence to overcome those fundamental questions
about whether the program should exist in the first place.'' The report
continued, ``Given the tremendous financial constraints under which the
Committee is operating, the question becomes whether it is worthwhile
to continue to fund a program of questionable value, particularly one
that costs over $200,000,000 a year.''
The General Accounting Office (GAO) weighed in on ATP in March of
this year. GAO identified three completed ATP projects that addressed
goals similar to those already funded by the private sector: an on-line
handwriting recognition system, a system to increase the capacity of
existing fiber optic cables, and a process for turning collagen into
fibers for human prostheses.
The Department of Commerce set up a peer review process to study
distribution of ATP funds to ensure prudent spending. Unfortunately,
this process is flawed. According to GAO, ATP's conflict-of-interest
provision limits its ability to identify similar research. Federal
Government employees, who are general experts in the particular field,
are utilized to review grant applications. The problem is that these
reviewers are not directly involved with the proposed research area,
limiting their ability to identify similar research. The second problem
identified by GAO was that information regarding research by other
companies was not available because it was proprietary. Early release
of any information could damage a firm's ability to get to the
marketplace first.
GAO understands these concerns and suggests that these two peer-
review safeguards remain in place to ensure that private sector
research is protected.
If these precautions cannot guarantee a wise expenditure of funds,
there should be no expenditure of funds. The Federal Government cannot
award grants without compromising the secrets of the private sector. In
other words, ATP simply can never function effectively, and the
government should bring an end to this unsuccessful intervention into
the high tech marketplace.
Let me conclude by emphasizing that Citizens Against Government
Waste is not antibusiness. Industrialist Peter Grace, who founded CAGW,
understood the importance of the private sector's leading role in the
economy. CAGW supports a strong vibrant economy based on the skills and
sweat of entrepreneurs, not the arbitrary system of picking winners and
losers by the Federal Government through special business subsidies.
Thank you for the opportunity to appear today before the Committee.
I will be happy to answer any questions you may have.
Mr. Ryan of Wisconsin. Thank you, Tom, and thank you for
all the work you and CAGW have done. And you, as well, Jill.
I might add, the ATP program was zeroed out in last year's
appropriations process, only to be leveraged back in at the
insistence of the administration in the end of the year wrap-up
appropriations bill. So Congress has acted on this already.
I hope we will act similarly on this new appropriations
cycle, but we have to hope the administration would share the
viewpoints that you two have expressed here. We will go to
Peter Sperry, and then, Steve, we will go to you after Peter.
STATEMENT OF PETER SPERRY
Mr. Sperry. Mr. Chairman, I thank you for inviting me here
today to discuss corporate welfare. It should be noted the
following testimony is my own view and does not necessarily
reflect that of the Heritage Foundation.
I too would like to focus on the Advanced Technology
Program as a singular example of corporate welfare that
benefits no one except the corporations receiving government
funding and, quite honestly, not them very much.
ATP is a competitive cost-sharing program that since 1990
has funded 486 projects at a cost of about $1.5 billion in
Federal matching funds. According to ATP's Web site, the
Advanced technology program bridges the gap between the
research lab and the marketplace stimulating prosperity through
innovation. Through partnerships in the private sector, ATP's
early-stage investment is accelerating the development of
innovative technologies that promise significant commercial
payoffs and widespread benefits for the Nation--at least that
is what their Web page says.
The Omnibus Trade and Competitiveness Act of 1988, which
established the ATP program, states that the ATP should not
fund existing or even planned research that would be conducted
in the same period in the absence of ATP financial assistance.
The clear intent of Congress is that ATP funding should be
provided only to private sector partners who have the technical
capability to develop beneficial new technologies but lack
either financing or motivation. Nevertheless, the roster of ATP
grant recipients reads like a Who's Who of Corporate America,
including 3M Company, AT&T, Bell Labs, Advanced Micro Devices,
Alcoa, Amoco, British Petroleum, IBM, and Sun Microsystems, to
name just a few.
The financial ability of these corporations is
unquestioned. IBM alone spends over $5 billion per year in
research and development, three times the amount that ATP has
spent in a decade; they hardly stand in need of financial
assistance from the taxpayer. Nor do ATP's grant recipients
need Federal funding to motivate their interest in research
projects.
According to their Web site, the single largest ATP grant
has been $31 million for Miniature Integrated Nucleic Acid
Diagnostic Development, or MIND, a project sponsored by
Affymetrix, Incorporated, of Santa Clara, California. MIND is
essentially a DNA-based diagnostic device. Affymetrix's Web
site reveals that the company was founded and exists to develop
and market DNA-based diagnostic devices. In fact, that is the
company's only business, a reasonably compelling motivation to
conduct research, with or without government assistance.
Furthermore, 22 percent of their stock is owned by Glaxo
Wellcome, a leading pharmaceutical corporation, providing
Affymetrix with both ready access to venture capital for
research products and additional motivation to develop and
expand their product line.
The second largest project funded by ATP, at $28 million,
is to develop the critical technologies needed to enable
production and delivery of high definition television. The
project is being conducted by Sarnoff Corporation, a research
affiliate of RCA, which has both strong corporate motivation to
develop HDTV on its own and more than enough financial
capability to do so. Additional partners in this venture
include IBM, MCI, NBC, and Sun Microsystems. Any single company
in this group could easily finance the entire project, and each
of them has a vested interest in the outcome.
As early as 1996, the General Accounting Office examined
whether research projects would have been funded by the private
sector if they had not received funds from ATP, and concluded
that many of these projects would have been funded with or
without ATP participation. The GAO also noted most applicants
did not even look for funding from other sources before
applying to ATP.
Many ATP projects would be comical if they did not
represent such a misuse of tax revenues. Between March 1995 and
August 1998, ATP provided the Koop Foundation, Inc., $14
million for a health informatics initiative. Dr. Koop, the
former Surgeon General, according to press remarks, made about
$14 million when Drkoop.com went public last year; and
investors, according to more recent reports, may have lost
nearly as much when they ran out of cash early last month.
IBM is listed as the lead sponsor on a project to develop a
product-based family framework for computer-integrated
manufacturing. ATP is contributing about $1.8 million to the
project, about 0.04 of 1 percent of what Big Blue spends each
year on research and development, and less than what they spend
on a single 30-second commercial during the Super Bowl.
ATP lists 23 projects it has funded with over $10 million
and 63 funded at over $5 million, but the bulk of its grants
have been under $5 million, an amount which any serious
technology company with an attractive proposition should have
no problem raising in the private sector if they are willing to
make the effort.
Mr. Chairman, the Advanced Technology Program does not
expand the resources available for applied research and
development. It merely serves as a convenient source of petty
cash for technology companies. The projects that have real
value would be funded with or without Federal funding. In many
ways, the ATP is like a take-a-penny, leave-a-penny-tray found
in convenience stores. We could all reach into our pockets and
find some spare change, but if the pennies are free, we are all
the more than willing to use them and we generally take more
pennies than we leave.
I would like also to extend the example of the ATP program
to other forms of corporate welfare, relating them to the
proposed Commission. Corporate research and development
programs are rarely dependent on government funding. The same
is true of many other programs. Last year Kevin McNew,
Assistant Professor in the Department of Agriculture and
Resource Economics at the University of Maryland, examined
agriculture subsidies and pointed out, not all farmers are
created equal. The average 500-acre Illinois grain farmer
actually is barely breaking even under agriculture subsidies,
while the 1,500-acre farm enjoys a $68,000 profit. Again, they
are subsidizing the competition.
Corporate farmers make their decisions based on their
contracts with Cargill, ADM, Monsanto and General Mills. Most
corporations will strive also to gain or hold a place in the
world market with or without the market access program. A BRAC-
like commission examining corporate welfare should approach
this issue with the recognition that this interest is broad,
but not necessarily very deep.
Almost every industry qualifies for some form of government
assistance; very few of them are dependent on it. Corporate
lobbyists, farmers, small businessmen, labor unions and other
special interests will bombard the Commission, but in the end,
they will live without the subsidies.
Mr. Ryan of Wisconsin. Thank you, Mr. Sperry.
[The prepared statement of Mr. Sperry follows:]
Prepared Statement of Peter Sperry, Fellow, Federal Budgetary Affairs,
Heritage Foundation
Mr. Chairman, thank you for inviting me here today to discuss
corporate welfare. It should be noted that the following testimony is
my own view and does not necessarily reflect that of The Heritage
Foundation. I would like to focus on the Advanced Technology program as
a singular example of corporate welfare that benefits no one, except
the corporations receiving government funding. ATP is a competitive
cost-sharing program that since 1990 has funded 486 projects at a cost
of about $1.5 billion in Federal matching funds.
According to ATP's Web site:
``The Advanced Technology Program (ATP) bridges the gap between the
research lab and the market place, stimulating prosperity through
innovation. Through partnerships with the private sector, ATP's early
stage investment is accelerating the development of innovative
technologies that promise significant commercial payoffs and widespread
benefits for the nation.''
The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418),
which established the ATP program, states that the ATP should not fund
existing or even planned research that would be conducted in the same
time period in the absence of ATP financial assistance.
The clear intent of Congress is that ATP funding should only be
provided to private-sector partners who have the technical capability
to develop beneficial new technologies but lack either financing or
motivation.
Nevertheless, the roster of ATP grant recipients reads like a who's
who of corporate America including 3M Company, AT&T Bell Laboratories,
Advanced Micro Devices, Alcoa, Amoco, British Petroleum, IBM, and Sun
Microsystems, to name just a few. The financial ability of these
corporations is unquestioned. IBM alone spends over $5 billion per year
in research and development, three times the amount that the ATP has
spent in a decade. They hardly stand in need of financial assistance
from the taxpayer.
Nor do ATP's grant recipients need Federal funding to motivate
their interest in research projects. According to their Web site, the
single largest ATP grant has been $31,478,000.00 for Miniature
Integrated Nucleic Acid Diagnostic Development (MIND), a project
sponsored by Affymetrix, Inc., of Santa Clara, California. MIND is
essentially a DNA-based diagnostic device. Affymetrix's Web site
reveals that the company was founded and exists to develop and market
DNA-based diagnostic devices. In fact, that is the company's only
business, a reasonably compelling motivation to conduct research with
or without government assistance. Furthermore, 22 percent of their
stock is owned by Glaxo Wellcome, a leading pharmaceutical corporation,
providing Affymetrix with both ready access to venture capital for
research projects and additional motivation to develop and expand their
product line.
The second largest project ($28,421,489) funded by the ATP is to
develop the critical technologies needed to enable production and
delivery of high-definition television (HDTV). This project is being
conducted by Sarnoff Corporation, a research arm of RCA which has both
a strong corporate motivation to develop HDTV on its own and more than
enough financial capability to do so. Additional partners in this
venture include IBM, MCI, NBC, and Sun Microsystems. Any single company
in this group could easily finance the entire project, and each of them
has a vested interest in the outcome.
As early as 1996, the General Accounting Office examined whether
research projects would have been funded by the private sector if they
had not received funds from ATP and concluded that many of these
projects would have been funded with or without ATP participation. The
GAO also noted that:
``Most applicants did not look for funding from other sources
before applying to ATP; 63 percent of applicants (77 of 123) said they
had not.''
IBM is listed as the lead sponsor on a project to develop a
Product-Family-Based Framework for Computer Integrated Manufacturing.
The ATP is contributing $1,864,000.00 to this project, about 0.04
percent of what Big Blue spends each year on research and development
and less than what they spend on a single 30 second commercial during
the Super Bowl.
The ATP lists 23 projects it has funded with over $10 million and
63 funded at over $5 million, but the bulk of its grants have been
under $5 million, an amount which any serious technology company with
an attractive proposition should have no problem raising in the private
sector if they were willing to make the effort.
Mr. Chairman, the Advanced Technology Program does not expand the
resources available for applied research and development. It merely
serves as a convenient source of petty cash for technology companies.
The projects that have real value would be funded with or without
Federal funding. In many ways the ATP is like the ``take a penny/leave
a penny'' tray found in convenience stores. We could all reach into our
pockets and find some spare change; but if the pennies are free, we are
all more than willing to use them, and we generally take more pennies
than we leave.
I would like to close by extending the example of the ATP program
to other forms of corporate welfare and relating them to the proposed
commission. Corporate research and development programs are rarely
dependent on government funding. The same is true of many other
programs. Last year, Kevin McNew, Assistant Professor in the Department
of Agricultural and Resource Economics at the University of Maryland,
examined agriculture subsidies and pointed out that:
``* * * not all farmers are equal when it comes to production
costs. A 1996 University of Illinois study illustrates this fact. It
finds that the average 1,500-acre Illinois grain farmer enjoys 15
percent lower production costs than a 500-acre Illinois farmer. In real
terms, this means that a $2.30 corn price would result in a $7,000 loss
for a 500-acre farm, but at that same price, the 1,500-acre farm would
enjoy a $68,000 profit.''
Government policy has failed to recognize this fact, however, when
designing farm program payments. Farm program payments are made in
terms of prices, not the measures of a farm's profitability. Thus, a
farm program payment of 20 cents per bushel would mean a $15,000
payment for a 500-acre farm, thereby turning a marginally unprofitable
farm into a marginally profitable one. In contrast, that same subsidy
to a 1,500-acre farm would be a $45,000 payment, creating an extremely
profitable situation. On the aggregate level, there is significant
evidence that larger farmers enjoy most of the farm program benefits.
For example, farms that have annual sales of $100,000 or more receive
70 percent of farm program payments, and their net-worth averages
nearly $1 million per farm.
Corporate farmers, like their technology counterparts, will base
their investment decisions on private-sector forces such as their
contracts with Cargill, ADM, Monsanto, or General Mills. Those who are
providing value to the market will prosper with or without government
funding; but if free money is available, they are not going to turn it
down.
Similarly, most U.S. corporations will strive to gain and hold a
place in the world market. Those with quality products and services
will succeed regardless of the activities of the Market Access Program;
but, again, if MAP can throw some marketing dollars in their direction,
they'll take them.
A BRAC-like commission examining corporate welfare must approach
this issue with the recognition that corporate interest is broad but
not deep. Almost every industry or corporation in America qualifies for
some form of government assistance. Very few of them are dependent on
it. Corporate lobbyists, farmers, small businessmen, labor unions, and
other special interests will bombard the commission with subsidy
success stories, examples of market failure, dire predictions of
economic hardship, and promises of electoral revenge if their pet
program is eliminated. Two year after the program is gone, they will
find they are better off without it. Just ask Portsmouth, New
Hampshire, which used all of these arguments in an unsuccessful attempt
to save Pease Air Force Base and now enjoys an industrial campus which
employs more people at high wages.
Corporate welfare benefits no one; it merely distorts the market
and drains taxpayer resources.
Mr. Ryan of Wisconsin. Mr. Moore.
STATEMENT OF STEPHEN MOORE
Mr. Moore. Thank you, Mr. Chairman. I want to give special
thanks to Chairman Kasich and to Congressman Hoeffel for their
leadership on this issue throughout the years.
Before I begin my testimony, I will state for the record in
accordance with the Truth in Testimony requirement that neither
I nor the Cato Institute receives any government funding nor do
we seek any.
Let me give you just a quick review of where we are with
our project on corporate welfare. This has been one of our
biggest fiscal projects that we have undertaken ever at Cato,
and I thought what might be most helpful for you is to just
give you an overview of what we are finding in our studies.
First, we estimate today that if you include tax subsidies
and the spending subsidies in the Tax Code and the Federal
budget, and if you were to eliminate those, you could save
about $100 billion a year. So we are talking about a fairly
sizeable element in the budget. Most of that is in direct
spending subsidies, but Congressman Hoeffel is right, there are
a number of loopholes in the Tax Code that should be abolished
as well.
I thought I would give you some examples of programs that
we think are real prominent examples of corporate welfare.
These include the Export-Import Bank, Economic Development
Administration, the Small Business Administration, and the
International Monetary Fund. I wanted to mention two other
programs that may not be on your radar screen that you ought to
look at with respect to corporate welfare, and those are Fannie
Mae and Freddie Mac, the government-sponsored enterprises which
are receiving, according to the Congressional Budget Office,
billions of dollars of subsidies to the shareholders of those
companies. I hope that would be included in any Corporate
Welfare Commission.
We estimate there are about 125 separate programs that
provide direct business subsidies. We looked at the last
budgets, the 1999 and 2000 budgets, to try to find out whether
these programs are going up or down in the budget. What we
found is that Congress appropriated about a 3 percent increase
in these programs in the last fiscal year, despite the rhetoric
about attacking corporate welfare. We also found that President
Clinton's budget recommended about a 10 percent increase in
these programs.
In terms of what we might be able to do in terms of trade-
offs, if we were to get rid of corporate welfare, just to give
you an estimate of how big these numbers are, with the $100
billion we could save by getting rid of corporate welfare, we
could do a 10 percent across-the-board income tax cut, we could
virtually entirely eliminate the capital gains tax, or we could
entirely eliminate the death tax. I would make the case to all
of you today, if we were to get rid of either of those last two
taxes or cut income taxes across the board by 10 percent, that
would do much more for our economic competitiveness than by
giving out favors to special industries.
So what is to be done? How do we attack this giant problem
in the budget? I am a proud member as I think everyone at this
table is, of John Kasich's Stop Corporate Welfare Coalition.
What is it? For about 3 or 4 years now we have been trying to
attack corporate welfare through the appropriations process,
and we have had, at best, mixed success.
It is for this reason that although I have had some
reservations about the idea of a Corporate Welfare Elimination
Commission, I think I am becoming much more open-minded to it,
because we have failed in other direct types of ways of getting
rid of corporate welfare. So I kind of reluctantly endorse this
legislation, and I think ultimately that it can do real good in
terms of getting rid of a lot of these programs.
Let me just suggest a few things you might want to
consider, Mr. Hoeffel, in terms of things that should be
included in your bill. First, I think we ought to eliminate
double-dipping so that corporations cannot receive more than
one form of corporate welfare.
Second, I really like the idea of enacting time limits on
corporate welfare. We did this with social welfare legislation.
We said, what, 3 years and off? We ought to do that with
corporate welfare subsidies as well, with programs like the
Small Business Administration.
Third, we should require firms to report to Congress all of
the Federal money they receive each year and from what programs
and agencies they receive money. One of our frustrations we
have had in trying to tackle this monster is just getting a
sense of how much money is going to corporations. It is very
difficult to track all of the various grant agencies and to
figure out who is getting what. I think it would be a real
advance if we had better data on what corporations are getting
money from what sources.
Fourth, we ought to look at what the proper congressional
oversight of the GSE's is, as I mentioned before. This should
fall under the area of corporate welfare. I hope you will
include the GSE's in your legislation.
In conclusion, I would just like to congratulate Mr.
Hoeffel for taking on this bill. This issue--I know you don't
make a lot of friends when you take on the corporate welfare
state, but you are doing exactly the right thing and I hope we
can help.
Mr. Ryan of Wisconsin. Thank you, Mr. Moore.
[The prepared statement of Mr. Moore follows:]
Prepared Statement of Stephen Moore, Adjunct Fellow, Cato Institute
Thank you Chairman Kasich for the opportunity to testify before the
Budget Committee on Congressman Hoeffel's proposal to create a national
commission to eliminate corporate welfare in the Federal budget. I want
to congratulate both of you for your leadership on this issue.
Before I begin my testimony, I will state for the record in
accordance with the Truth in Testimony requirement that neither I, nor
the Cato Institute, receive any government funding.
Corporate welfare in the tax code and in the Federal budget costs
in excess of $100 billion a year, according to latest estimates by the
Cato Institute. Most of these subsidies are direct outlays to Fortune
500 companies. Prominent examples of corporate welfare include: the
Export-Import Bank, the Economic Development Administration, the Small
Business Administration, farm subsidies, public housing construction
programs, and the International Monetary Fund. I believe that the
Government Sponsored Enterprises, most notably Fannie Mae and Freddie
Mac, are also multibillion dollar forms of Federal assistance to
corporate shareholders.
In all, there are about 125 business subsidy programs in the
Federal budget and they can be found in virtually every cabinet agency
of the government--including the Defense Department.
Our latest survey of corporate welfare indicates that for Fiscal
Year 1999, corporate welfare subsidies increased by roughly 3 percent.
President Clinton recommended a gigantic 10 percent hike in corporate
welfare spending for FY2000. The attached table identifies the budget
totals for FY1999 for what we regard as 30 of the most egregious
examples of business subsidies. The total budgets for these programs
exceeds $25 billion.
We have also found that many Fortune 500 companies are double and
triple dippers. In our analysis of the 1996 grants awarded to
corporations, we found that in 1996 General Electric Co. won 15 grants
for $20.1 million. Rockwell International received 39 grants for $25.4
million. Westinghouse Electric Corp. received 14 grants for $26.1
million. Yet each of these companies had profits of at least half a
billion dollars that year.
If Congress got serious about eliminating unwarranted business
grants and subsidies, the savings could be used to finance large and
meaningful tax relief. With $100 billion a year, we could eliminate the
death tax or the capital gains tax entirely. Alternatively we could
reduce income tax rates by 10 percent across the board. These supply
side tax reduction policies would have very substantial positive
impacts on the U.S. economy.
The members of this Committee should recognize that corporate
welfare reduction would be a major step toward campaign finance reform.
With $100 billion of special corporate favors for sale in Washington,
the wonder is not that corporate America spends so much, but so little
to chase down this Niagara Falls of benefits. We could also eliminate
the incentive for corruption of our political process if corporate
welfare programs were terminated. Our studies indicate that the
corporations that receive corporate grants also tend to be large money
pipelines for both hard and soft campaign dollars.
Although it is said that corporate subsidies are necessary so that
U.S. firms can compete with their subsidized rivals in other nations,
more than 90 percent of American businesses manage to stay in business
without ever receiving government grants, loan guarantees, insurance,
or airplane seats on Commerce Department trade missions around the
globe. But they pay higher taxes, which lowers their competitiveness,
to support those businesses that do. Agricultural price supports are a
case in point. Farm programs are alleged to be critical to the survival
of American farmers. The truth is that of the 400 classified farm
commodities, about two dozen receive more than 90 percent of the
assistance funds. Over 80 percent of the subsidies enrich farmers with
a net worth of more than half a million dollars.
This brings me to the question of how we tame the corporate welfare
beast? I have said before to this committee that I wish a commission
were not necessary. The Republican party is said to be for free markets
and against European industrial policy interventions. Yet, what Germany
and France have found to be a spectacular failure on a grand scale, is
now experimented with on a smaller scale in the U.S. By funding
corporations with tax dollars the GOP only has reinforced the public's
suspicion that this is the party of the rich, the privileged, and the
well-connected. The discredited mercantilist policies of the Commerce
and Agriculture Departments are the antithesis of the free market
policies Republicans say they espouse.
Meanwhile the Democrats have been equally, if not more, reluctant
to shut down Federal corporate welfare programs. Yet, corporate welfare
exacerbates the disparities in wealth between the rich and the poor.
The Progressive Policy Institute has shown that corporate subsidies are
regressive: most of the benefits go to wealthy and well-connected
businesses and shareholders. Where is the ``fairness'' in that?
One last point. Most of the corporate subsidies that Congress
appropriates each year are outside the proper spending powers of the
Congress as designated in the Constitution. The enumerate spending
powers as laid out in Article 1, Section 8 of the Constitution say
nothing about creating business hand-outs to help some groups at the
expense of others. The founding fathers would be aghast to see Congress
passing out dollars to favored business interests each year
So what is to be done? I am a proud member of Chairman Kasich's
Stop Corporate Welfare Coalition. We have elevated this issue in
Federal budget deliberations and have created a sense of outrage among
voters. But our victories have been disappointingly few and far
between.
Congressman Hoeffel's idea of a bipartisan corporate welfare
elimination commission may have merit. It is a shame that we may need
an unelected commission to do what Congress should have the courage to
do itself. But clearly Congress lacks that courage. A military-base-
closings type of Commission, where Congress has to vote up or down on
an entire package of corporate welfare spending cuts, might be the most
promising tactic. Congress should require that the bipartisan
Commission recommend at least $20 billion (per year) in corporate
welfare spending cuts. The Commission should report its findings to
Congress by July 1, 2000. Congress should be required to vote up or
down on this package within 60 days of its report.
As far as tax subsidies are concerned, my preference would be to
have an entirely separate commission to look at the special interest
provisions in the IRS code. There are thousands. This Commission should
identify economically inefficient tax breaks--such as the Ethanol
subsidy--and then calculate how much we could reduce the payroll tax,
the income tax, or the corporate tax if we eliminated all of these
loopholes. The basis of a good tax system is a broad tax base with low
rates.
I like this particular feature of the Hoeffel bill. Mr. Hoeffel
proposes that every dollar raised through loophole closings would be
used to cut unproductive high tax rates. This is the essence of good
tax policy. We want a broad base, and low rates. I believe that we
could lower the corporate income tax rate to 20-25 percent (from 35
percent today) if all unwarranted tax loopholes were closed.
I would hope that the Corporate Welfare Elimination Commission
would advise Congress to adopt guidelines with respect to business
subsidies. These should include:
1. Eliminate double-dipping. Enact a law that says that companies
are not entitled to more than one corporate welfare grant per year.
Sorry, GE and GM. One per customer.
2. Enact time limits on corporate welfare. With AFDC the Congress
enacted ``two years and off.'' We should have a similar time limit on
corporate pork with companies.
3. Require firms to report to Congress all of the Federal money
they receive each year and from what programs and agencies. Currently
it is virtually impossible to keep an inventory of what companies are
getting how much from how many agencies. The records simply do not
exist. How much total money does AT&T receive every year from
taxpayers? The answer is we don't know. But we should.
4. What is the proper Congressional oversight of the GSEs. These
are among the most egregious forms of corporate welfare. The GSEs are
growing rapidly. But no one in Congress pays much attention. The GSEs
are proper targets of any commission.
Congratulations to Mr. Hoeffel for his courageous proposal to take
on the corporate special interests. His bill is not perfect. But I
believe that we will only prevail on this issue when fiscally
conservative Democrats link together with Republican budget hawks to
expose the massive fleecing of taxpayers that goes on every year in
business handouts provided by Congress. We need to regularly review the
wisdom of these corporate welfare policies. It makes no sense for the
Federal Government to be breaking up fabulously successful companies
like Microsoft at the same time we are spoon feeding tax subsidies to
the losers. That is a recipe for economic decline and inefficiency.
In 1996 Congress passed welfare reform which has been a major
policy success with massive reductions in welfare dependency. The
tragedy of the Republican Congress is that over the past 6 years
corporate welfare dependency has risen. Mr. Hoeffel's bill is far from
perfect. But it may be our last, best opportunity on the table to get
corporate America off the dole.
TABLE 1.--HOW SOME OF THE WORST CORPORATE WELFARE PROGRAMS FARED
[Millions of dollars)
------------------------------------------------------------------------
1999
Agency/Program Outlays
------------------------------------------------------------------------
AGRICULTURE DEPARTMENT:
Agricultural Credit Insurance Fund..................... $353.0
Agricultural Marketing Service......................... 43.0
Agricultural Research Service.......................... 761.0
Commodity Credit Corporation Export Loans Program...... 449.0
Conservation Reserve Program........................... 1,576
Cooperative State Research, Education, and Extension 919.0
Service...............................................
Economic Research Service.............................. 58.0
Export Enhancement Program............................. 550.0
Federal Crop Insurance Corporation..................... 1,303.0
Foreign Agricultural Service........................... 136.2
Market Access Program.................................. 89.0
National Agricultural Statistics Service............... 102.0
Public Law 480 Grants.................................. 1,058
Rural Community Advancement Program.................... 723.0
Rural Business-Cooperative Service (RBCS).............. 57.0
COMMERCE DEPARTMENT:
Economic Development Administration.................... 381.0
Advanced Technology Program............................ 190.0
Manufacturing Extension Partnership.................... 128.0
International Trade Administration..................... 286.0
Minority Business Development Agency................... 31.0
National Oceanic and Atmospheric Administration: 1,087.0
nonweather activities.................................
DEFENSE DEPARTMENT:
Army Corps of Engineers................................ 4,209.0
Research, Development, Test, and Evaluations:
applied R&D program:
Advanced Electronics Technologies R&D \1\...... 264.6
Commercial Technology Insertion Program........ 0.0
Computing Systems and Communications Technology 331.3
R&D \1\.......................................
Dual Use Applications Programs \1\............. 36.0
Electric Vehicles \1\.......................... 9.0
Materials and Electronics Technology R&D \1\... 278.0
Next Generation Internet \1\................... 50.0
Energy Department:
Energy Conservation Programs........................... 560.0
Energy Information Administration...................... 70.0
Energy Supply Research Programs........................ 883.0
Fossil Energy Research and Development................. 370.0
Science Programs....................................... 2,534.0
Power Marketing Administrations........................ 185.0
INTERIOR DEPARTMENT:
Bureau of Reclamation.................................. 1,143.0
TRANSPORTATION DEPARTMENT:
Commercial Space Transportation Office................. 6.0
Federal Highway Admin.: earmarked demonstration 450.0
projects..............................................
Grants-in-Aid for Airports............................. 1,565.0
Maritime Administration: Guaranteed Loan Program....... 60.0
Maritime Administration: Operating-Differential 19.0
Subsidies.............................................
Maritime Administration: Ocean Freight Differential.... 24.0
Maritime Security Program.............................. 98.0
Essential Air Service Program (Payments to Air 50.0
Carriers).............................................
INDEPENDENT AGENCIES AND OTHER:
Appalachian Regional Commission........................ 151.0
Export-Import Bank..................................... 799.0
NASA/Aeronautical Research and Technology activities... 786.0
National Science Foundation: High Performance Computing 301.0
and Communications....................................
Overseas Private Investment Corporation................ 127.0
Partnership for a new Generation of Vehicles........... 235.0
Small Business Administration.......................... 12.0
Tennessee Valley Authority-Area and Regional 53.0
Development...........................................
Trade and Development Agency........................... 60.0
------------
Total........................................ $25,999.1
------------------------------------------------------------------------
Source: Cato Institute analysis based on the Budget of the U.S.
Government, FY 2000.
\1\ Numbers are from the respective appropriations bills.
Mr. Ryan of Wisconsin. Thank you to all the panelists.
We will start with a round of questions. I will begin by
asking each of the panelists, in this debate and in this bill,
you have the issue of tax expenditures and direct spending
subsidies. There is always an ongoing debate whether or not a
tax expenditure is corporate welfare or not. I would like to
hear your opinions.
Steve, I just heard you endorse the idea of closing tax
loopholes in an effort to close corporate welfare. If we could
start with you, Jill, and go down the line. Do you believe that
tax expenditures are a form of corporate welfare and spending,
and if not or if so, why?
Ms. Lancelot. We do believe that tax expenditures are a
form of subsidies and corporate welfare, and there are many
loopholes that we believe can be closed. So we would like to
see that included, yes.
Mr. Moore. I am glad you asked this question, Mr. Ryan,
because I meant to clarify my position on this. This is an
opportunity to do that.
I think you and I and Mr. Hoeffel have had discussion on
this in the past. I think the original version of your bill I
was much more lukewarm on than this version. My opinion,
Congressman, is that if we were to eliminate corporate
loopholes but use that money to lower tax rates, for example, I
mean, that is the essence of good tax policy.
You know, the essence of good tax policy is a broad base
and low rates. So once Mr. Hoeffel put this provision in his
bill that said, look, if we do eliminate some of these
corporate loophole closings, then we are going to use that
money for other tax cuts in other places, I am on board with
that. I think that is really good tax policy. I am not in the
business to want to raise taxes on corporations, but I think
this bill gets around that problem.
Mr. Ryan of Wisconsin. Thank you for that answer, Mr.
Moore. I think that clarification is very important, because
personally I believe tax expenditures are based upon a flawed
premise, and it is a flawed premise that essentially assumes
this is the government's money unless they extend it back to
the private citizen or private corporation.
Personally, I think that is backwards. It is a private
citizen's money until they send it to the government, not the
other way around. So I think that, personally, from a
standpoint that tax expenditures and the closure of those
things ought to be done in conjunction with a decrease in
revenues or tax cuts associated with it, because if we do close
these loopholes, the way this place seems to be working, as a
new guy, it gets spent. So I hope this is done in conjunction
with offsetting tax cuts.
Mr. Schatz.
Mr. Schatz. I would certainly agree with the idea that
there are bad policies made in picking and winners and losers
with the Tax Code as there are on the side of spending, so it
is certainly something that should be included in this
Commission. It is the definition that will really make the
difference and, of course, the ability to amend those items
when they come back through the Ways and Means Committee or
other committees and we can talk more about what we feel about
that particular aspect of the Commission.
But there is no question that unless that money is walled
off from being reused then it will not achieve its purpose. In
fact, of course, we have supported a Social Security lockbox
where this money is set aside. And the idea that over the years
a lot of programs that we and others here have worked on have
been eliminated, yet the money has gone and has been spent
elsewhere, has not been the best way to eliminate these
programs. Something else pops up in its place. So it is a very
critical revision of any kind of examination of that side of
the corporate welfare ledger.
Mr. Sperry. I would certainly agree that any tax
expenditure that benefits a single corporation or a narrowly
defined business interest could be considered corporate
welfare. I am a little bit concerned, however, that some people
define the ability to deduct legitimate costs of business and
legitimate costs of production as a tax expenditure and carried
to the extreme corporations could be taxed on 100 percent of
their revenue rather than on their profit. I think you need to
draw a very bright line between tax expenditures that are
targeted and that are only for certain special interests and
those legitimate tax deductions which are a result of normal
business practices.
Mr. Ryan of Wisconsin. Hearing these answers, it brings an
idea of a solution to your bill, maybe, Mr. Hoeffel, that if
the savings from this Commission were dedicated and forced to
be dedicated toward debt reduction, say, or tax reduction,
meaning you put a credit on a pay-go scorecard to force this to
happen, you would have a real winner there.
Ms. Rivers. If the gentleman will yield, I am confused as I
listen to the panel. Because what I hear you saying is
corporate welfare is defined not by the context in which it
operates but what is going to be done with the money and that a
tax expenditure should only be closed if the savings are to be
used for tax cuts rather than because it is unfair to treat
some taxpayers differently than others.
Mr. Ryan of Wisconsin. Or debt reduction.
Ms. Rivers. No, it strikes me it either is or isn't unfair
and should be eliminated. But to say, well, definitionally, it
is really not corporate welfare, it is really not unfair if you
are going to give the money--capture the money for a particular
use. It strikes me it just either is or isn't. I don't
understand the difference.
Mr. Ryan of Wisconsin. Reclaiming my time, I think there is
a very valid debate about whether it is or is not corporate
welfare. That is the question I posed to the witnesses. Seeing
that there are differences of opinion among the witnesses, it
seems like you might have some consensus among all of the
groups pushing for corporate welfare closure that you could
capture all of these efforts, you could then make sure that the
savings from these efforts are not dedicated toward not new
spending. If you believe corporate tax loophole closure is
corporate welfare, then you are fine with that. But if the
savings then goes toward debt reduction or tax reduction and
not new spending, then I think you have a winner. That is what
I was getting at.
Ms. Rivers. But what you are really saying is the
definition is a secondary one. The definition of whether or not
you should proceed is based on what you are going to do with
the money captured, not the basic unfairness of the situation
or the inefficacy of the favored tax cut.
Mr. Ryan of Wisconsin. Reclaiming my time, I think there is
a clear philosophical debate at the heart of this issue on the
tax expenditure side whereby some believe it is not corporate
welfare; some believe it is corporate welfare.
Ms. Rivers. And there can't be a clear definition that
guides us in policy making?
Mr. Ryan of Wisconsin. I think there should be, and I think
that is what this debate is about.
Mr. Moore, I just wanted to ask one quick question. I am on
the Banking Committee, and we are dealing with this issue on
the GSEs, Fannie Mae and Freddie Mac, and I would like to ask
you to expound a little further on what you see as corporate
welfare with respects to these government-sponsored
enterprises.
Mr. Moore. Well, you know, Congressman Ryan, these GSEs
have become gigantic enterprises, yet no one in Congress is
really paying much attention. I just spoke at a conference at
the American Enterprise Institute on this, and I noted that
although you are all applauding yourself quite rightly for
reducing debts over the last few years, how many of you are
aware that virtually for every dollar of debt we have reduced
in terms of the national debt, the GSEs are taking on an
additional dollar of debt? We are treading water when it comes
to debt reduction because of these gigantic GSEs.
Fannie Mae and Freddie Mac have tripled in size. The
Congressional Budget Office has indicated, Congressman Ryan,
that about one-third of the subsidies we provide to these GSEs,
the benefits do not confer to the homeowners but the
shareholders and the people that own Fannie and Freddie. So I
believe this is a legitimate area to look at, and I hope
Congressman Hoeffel would consider at least adding this under
the purview of any commission.
Mr. Bentsen. Mr. Chairman, with respect to that debt
question, is that GSE debt full faith and credit debt of the
United States Government or not?
Mr. Moore. That is a very good question, Congressman. The
markets sure act as if it is full faith and credit. It is
interesting, because what is happening with the debt markets
right now, as I am sure you are aware, as we are retiring
Treasury bills, Wall Street is very worried they are not going
to have risk-free notes out there to trade, and Fannie and
Freddie have said we wanted to jump in and take the place of
the Treasury note as the risk-free credit instrument out there.
So certainly there is an impression out there on Wall Street
that this debt does carry with it the full faith and credit of
the United States Government. It is a very worrisome situation,
Congressman, because right now they have nearly $1 trillion of
debt.
Mr. Bentsen. If the Chairman will yield, I will wait for my
time, I will am eager to discuss that with you, because I think
that is somewhat of a broad statement. And we have looked at
this pretty closely, and I think there is a fairly significant
rate differential between Treasury debt and GSE debts and a
number of other factors. I wanted to clarify that.
Mr. Ryan of Wisconsin. Mr. Hoeffel.
Mr. Hoeffel. Thank you, Mr. Ryan. I want to thank the panel
for being here and for your testimony. You have all made some
very good suggestions that I am very happy to consider as part
of the bill.
It seems to me, regarding the earlier discussion that the
definition--I agree with Mrs. Rivers that the definition is
really the key to this process and that we ought to be looking
at whether it is tax preferences or spending subsidies or below
market rate use of Federal resources, that we should not be
rewarding activity with these benefits that will happen anyway.
One standard we can use is to try to eliminate that where we
can find it and encourage such benefits that have a broad
public benefit that get good things to happen because of the
Federal benefit.
It is still difficult to nail down in all cases, but I
think that needs to be part of the general approach.
I want to thank Ms. Lancelot and Mr. Moore for your support
of the bill. And let me risk a bad answer by asking Mr. Schatz
and Mr. Sperry whether you endorse the bill or the process or
mechanism that the bill is suggesting to come up with a
commission, with a set of recommendations for Congress to then
deal with?
Mr. Sperry. Well, Heritage as a 501(c)(3) is limited in
endorsing specific legislation, but the concept I think is a
good one, and I think that it could repeat the success of the
BRAC commission. Particularly many of the most ardent foes of
base closure found within 2 years after the bases were closed
that they were so much better off without them, that their
economy was better, there were more people employed, et cetera.
When I look at the actual small percentage that this is
contributing to corporations, I think that a commission where
everybody's ox got gored equally, if you will, would leave them
better off, because, if for no other reason, they would not
have to come to Washington periodically to rattle a tin cup in
order to get spare change from the Federal Government.
Mr. Hoeffel. Mr. Schatz, if it is easier for any of you to
testify individually, rather than on behalf of your
organization?
Mr. Schatz. We have a 501(c)(3) and 501(c)(4), so I can
wear another hat, right. We have, of course, through the
Council for Citizens Against Government Waste, our 501(c)(4),
rated many votes on these subjects over the years, the Advanced
Technology Program, Market Access Program, peanut and sugar
subsidies, a long list. We have had some success, and, of
course, in others we have gone year after year after the same
issues.
The change in the funding for advanced technology is a big
success for everyone here and the people that have pushed to
eliminate funding for that program. Of course, we would like to
see it eventually accepted by the White House, if not this one,
maybe another one. But the fact is you do need to go on two
tracks. We think your bill makes a lot of sense. We would
certainly support it and endorse it through this committee and
through the floor and on into the Senate.
I think the only question is, dealing again with the tax
expenditures, clearly that will be an ongoing debate. Also, the
idea of amending the bill when it comes back to the House,
because the success of the base closure commission which arose
out of a Grace Commission recommendation via Mr. Armey, who
finally got it through, was the fact that there was an up-or-
down vote. We talked briefly about the fact that some of these
amendments haven't gone through and some have, and you would be
repeating that same scenario on the floor of the House and the
Senate if it were not an up-or-down vote. That would be the
major change we would recommend for the bill.
Mr. Hoeffel. Thank you. That was going to be my final
question to all four of you.
Senator McCain put a corporate welfare commission bill in
the Senate that was a single up-or-down vote like the BRAC
approach, and this version allows amendment on the floor of the
House and the Senate.
Mr. Schatz, I think you have just testified to your
preference. I would be interested in the comments of the other
three. Which version, if either, do you think is better for the
process and more likely to be successful?
Ms. Lancelot. I would like to say what our views are on
this. We do support the notion of your bill. We have a little
bit of a reservation that a commission allows Congress to hide
behind it and say we have done it, and we do believe, though,
the way you have set up this Commission, I think you are
sensitive to that, and I believe that you have tried to set
this Commission up in a way that it will move forward and it
will get something done, so we appreciate that.
I do believe again one of our concerns is the same as
Tom's, which is corporate welfare is subject to great amounts
of political pressure. That is what corporate welfare is really
all about. Sometimes it is an unhealthy relationship between
elected officials and large corporations. So there needs to be
a way to insulate this Commission from that kind of pressure.
Mr. Moore. Just for point of clarification, to play it
safe, I should note I was endorsing this idea as an individual,
not through CATO, because we are in the same boat as Heritage.
I guess my inclination would be that I would prefer the
Senate version where there is no amendment to these, because I
do think that you run into some of the problems that Tom was
talking about with respect to the base closings, that once you
start allowing amendments, the whole thing just crumbles. My
preference would be a straight up-and-down vote and let
Congress decide whether they want the Commission's
recommendations or not.
Mr. Sperry. I think a straight up-or-down vote would
accomplish a great deal and have a greater potential of
passing. I think that the Commission report that was subject to
amendment would create a feeding frenzy on K Street that would
be disgusting.
Mr. Hoeffel. Thank you. I just have a comment, then I will
yield my time.
The problem with the BRAC approach, the single up-or-down
vote, is it doesn't look like Congress is ever going to do it
again. It worked, and it caused some pain in certain areas, but
it worked, but it doesn't look like we can ever muster the
courage to do it again.
The idea behind allowing an up or down--I am sorry,
individual amendments on the floor of the House and Senate,
frankly, was designed to make the process more attractive to
Members, to make the bill's passage more likely. But we may
then have a trade-off of making it harder to actually eliminate
the corporate welfare. But I am afraid we will never do another
BRAC and because of the difficulty with the single up-or-down
vote.
Mr. Schatz. Congressman, the problem with BRAC was not
necessarily the up-or-down vote, it was the politicization of
some of the closings by the White House that led Congress to
distrust any future commission. So it was not necessarily the
process, it was how it was handled after the fact, even after
Congress approved it, that there were some promises made that
really went against what Congress had actually--and the
President had--signed into law. So this might be a different
area, it might be a different approach, and I think it may be
worth having a further discussion about whether this subject
matter would be subject to the same kind of pressures that the
base closing commission ended up in.
Mr. Hoeffel. Thank you all very much. Mr. Chairman, thank
you.
Mr. Moore. May I add one more thing to the point Mr.
Hoeffel is making?
One of the things I find attractive--and I understand the
political restraints you are under, but one of the things
attractive about the straight up-or-down vote idea is if you
had a bipartisan commission, 12 or 15 members, of people well
respected and there was a near unanimous agreement on this
Commission that these 20 programs or whatever it might be are
corporate welfare that are unjustified subsidies, then this
would be a tough vote for Congress to make.
How are you going to vote up or down on this bill?
Everybody knows what the bill is about. You are either for or
against corporate welfare. And that is important. Because my
frustration on working on this issue now for about 8 years is
every single one of your colleagues says they are against
corporate welfare, every single one of them. But we never win a
vote. We never win a vote, virtually, right? The reason is they
always say this isn't corporate welfare, or that isn't. So the
real attractive thing about your bill and your concept is
everybody knows this is corporate welfare. Now it is time to
stand up and be counted.
Mr. Ryan of Wisconsin. Mrs. Lancelot.
Ms. Lancelot. I would like to make a comment as well.
What makes a difference? There are two things in my
opinion--press and public opinion. Let's get this out to the
public and let's make this a campaign so that folks understand
when they are voting what it means to vote yes or no on this
kind of issue. The polls out there all say that the public
hates corporate welfare. Taxpayers certainly don't want their
hard-earned dollars wasted. Let's let them have their say.
Let's figure out a way to bring this campaign to the public so
that their voices can come back here and be heard.
Mr. Ryan of Wisconsin. Again, I would like to make one
quick clarification. I just reviewed the bill, and I noticed
that it does have a credit on the pay-go scorecard from tax
loophole closures. I commend the gentleman for including that,
meaning it could go toward tax reduction or debt reduction.
That is a very positive step in the right direction in this
bill.
I would like to ask unanimous consent at this time that a
statement by Congressman Rob Andrews from New Jersey be
inserted in the record. Without objection, that shall be.
[The prepared statement of Mr. Andrews follows:]
Prepared Statement of Hon. Robert E. Andrews, a Representative in
Congress From the State of New Jersey
I oppose corporate welfare. We have required poor families who
receive welfare benefits to support themselves if they are able to
work--now it is time to tell major companies receiving taxpayer funds
to fend for themselves as well.
Corporate welfare programs use tax dollars to subsidize the profits
of large corporations. It is time to stop this waste of taxpayer funds.
We should not use taxpayer dollars to subsidize a $145 million
insurance policy that allows General Electric to manufacture light
bulbs in Hungary. We should not use taxpayer dollars to loan McDonalds
$14 million to build 16 fast-food restaurants in Brazil. We should not
use taxpayer dollars to build roads through our nations forests for
profitable timber companies.
In order to end corporate welfare as we know it, I have worked with
my colleagues to create the ``Stop Corporate Welfare'' coalition. This
diverse union of many citizen organizations with different viewpoints
has one common goal: to eliminate government spending on wasteful
corporate subsidies. This coalition will begin the fight to stop the
government handouts to companies which can afford to fend for
themselves, by mobilizing a broad spectrum of consumer, taxpayer, and
environmental organizations to support this initial attack on corporate
welfare.
Furthermore, I have written my own legislation (H.R. 332) to
eliminate one specific egregious example of corporate welfare: The
Overseas Private Investment Corporation. OPIC was created as a semi-
private government agency that encourages U.S. companies to expand into
developing nations. I believe that U.S. taxpayers should not be paying
to subsidize the creation of jobs in other nations; domestic job
creation must be our top priority, not exporting jobs overseas.
OPIC has placed at high risk over $12 billion of taxpayer money to
subsidize many highly-profitable, Fortune 500 companies. At a time when
we are reducing welfare for the poor, we should not be increasing
welfare for rich companies.
OPIC hurts American workers by encouraging American corporations to
invest abroad rather than reinvesting in America and creating jobs here
at home. Some of the companies receiving OPIC subsidies have been cited
by the U.S. Labor Department for overseas trade adversely affecting
their U.S. workers--yet these companies continue to receive OPIC loans
and insurance.
I will continue the fight to eliminate OPIC as a Federal agency.
The government should not give loans to companies for their overseas
operations, and taxpayers should not shoulder the burden of risky
investments in unstable countries. I hope that Congress will vote for
my bill, which would privatize OPIC once and for all.
Mr. Ryan of Wisconsin. Mr. Knollenberg.
Mr. Knollenberg. Mr. Chairman, thank you very much.
Panel, welcome. I want to thank you for your oversight from
the outside. I think it is important we have that. I want to
thank the Chairman, obviously, and Mr. Hoeffel for his work in
bringing this to this point.
I really wanted to go down a route with a different track,
because while I appreciate everything you are doing and I
appreciate what is being done here today, there are some things
about the goals we have I think that we ought to look at very,
very carefully.
For example, we all can identify in our own minds examples
of waste, fraud, and abuse, and your job is to identify those
things and bring it to our attention. Our job is to take that
information and all the research that you can supply along with
that to come up with a solution. We have got to resolve it. All
you have to do is send us your thoughts, complaints, views, and
observations to us.
Once you have identified them, I think what we have to do--
and this is where I would like to have your help on a couple of
points--we have to further identify, put it all under the
microscope, so what we are doing is helping a broad group of
Americans and not necessarily just a couple of corporate
giants, or maybe several corporate giants.
I have found defining corporate welfare to be very
difficult. When I first came here 8 years ago, I thought it was
easy because I bought into everything I heard about corporate
welfare. Since I have gotten here, though, I find that what
some people will define as corporate welfare is really perhaps,
if you smooth it out, it is not.
Now, I will give you an example. We have an energy policy.
Actually, we don't. For the record, I would like to suggest
that we don't have one. To that extent, I would like to
identify where our energy comes from very briefly, and perhaps
you can respond.
I don't want to take all my time. How much time do I have,
Mr. Chairman? As much as I want?
Mr. Ryan of Wisconsin. Yes.
Mr. Knollenberg. I won't take that much.
I don't believe we have an energy policy. I know, Ms.
Lancelot, you referred to nuclear, the subsidy there. What I
would like to call to your attention is this; that when you
look at the energy mix of what we do have, whether it is coal,
where over 50 percent of our electricity comes from--I sit on
the Energy and Water Subcommittee and have been wading through
this for 6 years. I am not against unbalancing the various
categories of energy, but coal is over 50 percent. Nuclear is
over 22 percent. It is growing. Yes, there hasn't been a plant
built since '74, but it is growing. Gas is about 10 percent,
hydro is about 10 percent, and the balance, it gets pretty--if
you are catching up on the numbers, there is not much left.
It might interest you to know, and this is where I want
your help, when it comes to the subsidy that Congress grants
per megawatt hour for coal, it is 5 cents. By the way, coal is
our largest resource when it comes to energy supply, over 90
percent is coal. There is a clean coal technology which might
be, in your view, something that is corporate welfare. I don't
know, but frankly, it is energy too. It is only 5 cents.
Nuclear is 5 cents. Gas is 41 cents.
I am talking about a megawatt hour. This is all constant,
so we are not changing anything.
Oil is 51 cents, wind is $4,600. And guess where solar is?
$17,000 per megawatt hour. I am not saying we should not have
solar or wind or biomass, but you know where all the energy
source is? It is in those first items.
Maybe you can help us. How do we go about strategizing to
really do the job right and put--if we are going to subsidies
and there is a collection of people in this Congress that feel
we should, shouldn't there be some balance to that? Shouldn't
there be some way that we actually work with that which is
commercially viable? Maybe there is something that we can
change on it to make it cleaner.
Incidently, nuclear has no emissions at all. Coal has
emissions and contributes to the environmental problems.
So is there perhaps something you can brainstorm here for a
moment and tell me--I am only focusing on this one area at the
moment--what we might be able to do to illustrate that there is
an imbalance in how Congress subsidizes just in the energy
arena?
I could talk about ATP. I happen to think you are right on
target with that. You are right on target with a great number
of things. I have a problem with you on OPIC, but we can work
that out.
We can start, Ms. Lancelot, with you. Is there something
that you might comment on relative to this energy matter which
would help us maybe in a whole lot of ways and not just in
budget matters but in policy for the future?
Ms. Lancelot. Well, I have a simple answer that probably in
today's world is not going to happen, but in the future
hopefully it will, and that is that no energy source should be
subsidized at all. The marketplace should----
Mr. Knollenberg. Zero.
Ms. Lancelot. Yes.
Mr. Moore. It is hard for me to improve on that.
Mr. Schatz. Three zeros.
Mr. Sperry. Four zeros. But I would add that full and
complete energy deregulation so that the consumers can get
power from the most economical source would then pick winners
better than the government would, and privatization or sale of
the power marketing administrations such that everybody is
competing on a level playing field and you do not have private
sector utilities trying to compete against public sector
utilities which have tax deductions, they don't pay taxes, they
have access--more ready access, to hydropower, et cetera.
If you complete the deregulation process so that the
consumer can make a choice, then I think you will see the
dollars flow to the most economical energy source very quickly,
and the others will either compete or die.
Mr. Moore. I didn't want to seem overly cavalier in my
answer.
Mr. Knollenberg. The answers are appreciated.
Mr. Moore. I just wanted to add that one of the
frustrations in dealing with this issue, and I was thinking
about this when you were speaking, is a lot of the issues we
all at this table have been working on, to eliminate a subsidy,
the businessman that gets that subsidy says what about that guy
over there? He is getting a subsidy, too. It is very
frustrating, because it is like taxing the guy behind the tree,
not me.
One of the things I like about the Hoeffel idea is to de-
escalate so we bring the subsidies down. You talk to the coal
people, they say they are getting a dollar subsidy, we are
getting 5 cents, bring us up to a dollar. We are saying bring
them down, not up.
Mr. Knollenberg. What about two other things? One is the
PNGV----
My time has expired? You said I had unlimited. I need a new
chairman. I will be very quick. Just a minute.
PNGV, the Partnership for New Generation of Vehicles, what
is your feeling on that? I think I know your answer.
Ms. Lancelot. Let's get rid of it.
Mr. Moore. Ditto.
Mr. Schatz. I think if you look at the R&D done by the
companies and the percentage that comes out of the government,
they would do this on their own. It goes again to marketplace
and consumer demand. If someone wants to buy a 80 mile per
gallon car, someone will figure out how to make it. There are a
lot of hybrid cars and fuel cells coming out already that are
not subsidized, that the companies are doing it. The government
is not subsidizing it.
Mr. Knollenberg. Do you support that?
Mr. Schatz. Whatever the companies want to do, if they
think it will sell in the marketplace, that is fine.
Mr. Knollenberg. I think I have one last comment. Would you
buy one of those vehicles, any one of you? Would you buy one?
Would you purchase one of those vehicles, the ones that Mr.
Schatz talked about, for example?
Mr. Schatz. If the price of gas goes up another 10 bucks.
Mr. Knollenberg. It may have since we have been talking.
Mr. Sperry. A, I wouldn't buy one of those vehicles right
now. B, I don't think the Federal Government should subsidize
the research in that area. But, C, neither do I think that
government at either the Federal or State level should require
automakers to manufacture those vehicles.
Mr. Knollenberg. Thank you.
Ms. Lancelot. I would like to add--this is not from my
organization nor from any expertise at all--but I do think--
isn't it Toyota or Honda, or maybe both, that already have them
in the marketplace, and they didn't get a dime, as far as I
know.
Mr. Knollenberg. A hybrid vehicle.
Ms. Lancelot. A hybrid vehicle, yes. No, they didn't get
any money.
Mr. Knollenberg. Battery powered combined with the other.
Mr. Chairman, you have been kind.
Mr. Ryan of Wisconsin. I am sorry, Mr. Knollenberg. I do
want to give the other members a chance to ask questions.
Ms. Rivers.
Ms. Rivers. Just to follow up that last comment, my
understanding is, is the Japanese subsidizes the Prius at about
$18,000 a copy. So in fact their government did underwrite the
development of the technology and the distribution of the first
few cars.
But I want to go back to something that I started a few
minutes ago. One of you mentioned you are either for or against
corporate welfare. I agree, which is why I have some difficulty
with the definitional of vagueness we got into when we were
talking about tax expenditures. What I want to hear from each
of you is, some clarity on the policy each of you believes
should drive review of the treatment of corporate welfare in
the Tax Code.
What I am really interested in, because of the conversation
that went on before, is whether or not the elimination of
favored tax status, corporate welfare in the Tax Code should be
predicated on the ultimate utilization of the proceeds from the
changes or whether it should be used to address inequity,
wasteful and anachronistic problems with that favored tax
treatment. In other words, I am asking you whether the value is
in the identification and elimination of corporate welfare on
both sides of the budget structure or whether it is only
important on the tax side when you determine how you are going
to use the proceeds.
Ms. Lancelot. Should I go first?
Well, first of all, we think that corporate welfare is a
misuse of taxpayer dollars. Our definition of corporate welfare
is Federal subsidies to business through direct Federal
payments as well as tax breaks. We believe corporate welfare is
unfair, whether it is Federal direct handouts or through the
Tax Code and tax breaks.
Having said that, I have to say that--and this is very
separate, very separate from corporate welfare as the entity of
corporate welfare, which is wasting taxpayer dollars through
direct subsidies and direct Federal handouts and tax breaks--
but trying to plug into the other discussion about where that
money should go, that certainly should not drive the definition
or trying to get rid of corporate welfare. But we do believe--
Taxpayers for Common Sense believes--we tend to ``forget''
about the $5 trillion debt, so we are very interested in paying
down that debt.
Ms. Rivers. As am I.
Ms. Lancelot. I think it is not a bad idea to connect it in
legislation, as Mr. Hoeffel did, where we identify these tax
breaks and these direct subsidies, we actually like the idea of
a lockbox where. It actually can go back to the Treasury.
Ms. Rivers. The reason I am asking this is because I
thought I heard some people saying if you are not going to save
the money then you should let the inequity go on. You shouldn't
address it. I want to understand exactly if that is what people
meant.
Ms. Lancelot. Let me just clarify for my organization. Let
me clarify that is not what we are saying.
Mr. Moore. I endorse the provision of the Hoeffel bill that
says that if we raise tax revenues through loophole closings
then we ought to use that revenue for tax reductions elsewhere.
The Federal Government has more money than it needs right now.
We have got $200 billion in surplus tax revenues this year. We
should not be in the game of raising taxes at this point of our
fiscal history.
Ms. Rivers. Excuse me, do you mean then that closing a
corporate loophole, no matter how inequitable, constitutes
raising taxes on the organization that enjoyed the favored tax
treatment?
Mr. Moore. I believe so.
What we ought to do--Congresswoman, I am not sure what your
first year here in Congress was, but in 1986 we passed what I
think was an excellent piece of tax legislation when we passed
the Tax Reform Act, and we did in 1986 clean out a lot of the
corporate stuff. If you think the Tax Code is bad today, you
should have seen it pre-1986. You could get tax credits for
bull sperm and windmills and ridiculous things. I would like to
see that model used again, because a lot of things that I think
you and I both view as being inequitable, it is a good model
for getting rid of these, but also making the tax system work
better and fairer for everybody.
Ms. Rivers. Just so I am clear, if the money was going to
be redirected to another use, you would not support the closing
of the loopholes?
Mr. Moore. That is right.
Ms. Rivers. Mr. Schatz.
Mr. Schatz. I think I agree with Mr. Moore. Of course, our
focus has always been on the spending cited, so the tax side,
while the very obvious examples of wasteful tax breaks have
been out there, the overall process is not something we have
studied closely. So I am interested in looking at this further
and maybe answering in further detail at a later date.
However, there is a point to be made when you are looking
at only the tax side that a tax expenditure is less revenue to
the government and when you close it you do get more money in.
So you can look at it strictly from that basis.
You can also look at it from where you are talking about,
the definition itself, and that is one of the things this
Commission would probably struggle with more than on the
spending side. Because the R&D tax credit I don't think anyone
would consider as corporate welfare, because anyone can use it.
But if you are talking about advanced technology where you are
getting R&D money for specific projects being carried on
already in the private sector, that is pretty close to a clear
definition of corporate welfare.
Ms. Rivers. Do you think if the company loses its favored
tax status, no matter how inequitable that was, that that
constitutes raising taxes on that company?
Mr. Moore. They will have to pay more taxes, because they
are not getting the break. So, by definition, it is a tax
increase.
Ms. Rivers. Mr. Sperry.
Mr. Sperry. I think the question of how any savings from
closing corporate welfare loopholes is used, rather than for
paying down the national debt or for reducing taxes, is an
important but separate issue. It may motivate some individual
members to support the bill or oppose it.
The important question to look at in tax expenditures is,
is this a loophole which is only available to a small number of
corporations, or is this a legitimate cost of doing business? I
think the research and development tax deduction was a very
good example. Everybody can use it. It is a legitimate cost of
doing business.
A specific tax deduction for, say, the dairy industry, that
would be a corporate welfare.
I would hope that once they got the savings that, yes, they
would use them for tax cuts, but that is a separate question.
Ms. Rivers. Thank you, Mr. Chair.
Mr. Gutknecht [presiding]. My turn. I apologize. I wasn't
here for most of the testimony. I had another hearing.
I want to, first of all, thank all of you for what you do
every day. When I came to Congress in the 1994 election, I came
here committed to eliminating corporate welfare, and then I
found out how difficult that is. I will tell you that part of
the reason I was interested in that--I want to get to a
question, but, first of all, I want to compliment you for what
you do.
I think it is important that we continue to put pressure on
this, because the pressure from a lot of people who spend a lot
of time up here on Capitol Hill is to expand loopholes. We all
have different terms, but they see it as protecting their
interests or advancing a particular cause, whatever the
rationale. There are lots of rationales, and we have an amazing
ability around this place to rationalize. So I thank you for
what you do, and I thank you for your testimony here today.
I do want to get to another issue, because really back in
the State of Minnesota--and this is something affecting every
State, and it strikes me as something perhaps we should
address, and I would like to have you at least explore this and
maybe talk about it today and think about what we might be able
to do at the Federal level--and that is where literally--and I
say this because I am also an auctioneer. In fact, I am a
little hoarse today because I did an auction last night for
Ducks Unlimited. But what auctioneers do is they pit one
against the other, and they bid things up.
A classic example of that happened several years ago when
Saturn was in the process of looking at different places they
were going to locate their new facility. It literally almost
became an auction between various States and local governments
in terms of how many different benefits they would provide.
This has escalated, and it depends on the company now. With
unemployment at virtually zero right now, that whole discussion
has slowed down somewhat, but it is still out there, where
States are pitted against each other.
Another example is with sports franchises. It really is
almost sinful what some of these sports franchises are now
doing, essentially extorting communities and States, saying
unless you build me another $400 million arena or stadium or
baseball field or whatever, we are going to pick up stakes and
move somewhere else.
It really strikes me there should be something we can do at
the Federal level to at least restrict the ability of these
entrepreneurs or auctioneers, if you will, from being able to
pit one State against the other with various tax benefits or
other programs not available to anybody else.
I do agree with your assessment of the R&D tax credit, that
if it is available to everybody, I think that is one kettle of
fish. But when specific incentives are created for one entity
that no one else in the world could take advantage of, it seems
to me there ought to be a way that the Federal Government could
at least--and my point of all of this is I think it would be a
benefit to the State governments, because then they could say,
hey, we can't do that. We are now restricted.
I just throw that out as an idea, and perhaps you would
want to respond to that and think about that.
Mr. Moore. I agreed with everything you said until the end.
You are exactly right in your analysis of what is going on with
these bidding wars, but I think that Congress should stay out
of this. I think this is a real federalism issue.
I am a big believer to allow States to do stupid things if
they want to, and that is what they are doing, stupid things.
But with all due respect, I wish Congress would not stick their
nose in this, because this is really an issue that the States
are going to have to resolve themselves.
When I met with your Governor--what does he call himself,
the mind or the body now--Governor Ventura, I said, look, if
you want to attract businesses to your State, cut your
corporate income tax. That is the single best way to get
businesses to come here. These bidding wars are economically
foolish, I think the evidence proves that, but I would be very
opposed if the Federal Government got involved.
Mr. Gutknecht. Thank you.
Mr. Sperry. I would second that, Mr. Chairman. Not all
problems in the world can be solved by government, and even
fewer problems can be solved by the Federal Government.
Mr. Gutknecht. I want to be sure I write that down. That is
a great line.
Mr. Sperry. A certain point you just have to back off and
let the citizens take it up with their State capital.
Mr. Gutknecht. Thank you. Seriously, I have had more than a
few disagreements with our Governor, but I think on this issue
I am in strong agreement.
He made a comment about our baseball stadium--and
personally I don't like indoor baseball, never have, but that
is what we have. It is only 18 years old. He said, how many
people would seriously talk about knocking down a school
building that was only 18 years old and replacing it,
especially at this enormous cost? For better or for worse, he
and the legislature and I think the people of the State have
said, hey, if you don't want to play baseball or football in
this stadium, you will have to move.
When States and cities begin to say no, I guess I do agree
with you, perhaps Federal Government should stay out of this.
But it is frustrating, and particularly having been in the
State legislature, to watch this being pitted against another
State or another city.
In any event, I just want to say I have no further
questions, but I appreciate what you are doing. Continue to
keep the pressure on. We will continue to peck away and
hopefully not make matters worse. I think if anything in this
whole area, if I can take any credit, I think I can say since
we have been here we have not made things a whole lot worse as
it relates to corporate welfare. We haven't made it much
better, though, either. But, again, thank you.
I would entertain another round. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Chairman, I have to say, being from Texas, I am a
little reticent with this panel. I have to deal with the
reproductive capabilities of bulls, the price of gasoline, and
now talking about new baseball stadiums, being from Houston, I
feel like I have had the trifecta here.
But I do have a few questions for the panel. I will try and
avoid those.
If I could, though, ask a few broad questions and then some
specific questions. We have had a recent run-up earlier this
year in the price of oil and subsequently gasoline prices. Do
you believe that is a result of subsidies in the Tax Code or
research in fossil fuels, or do you think that is a market
fluctuation that is occurring?
Mr. Moore. I think it is market fluctuation. I think there
are clearly subsidies in fossil fuels and all other areas of
nuclear and non-nuclear research that I would like to see you
get rid of, but I think the recent spike in prices is a result
of OPEC and not a result of Federal subsidies.
Mr. Bentsen. Would you consider things like the oil
depletion allowance to be a corporate welfare, or is that just
a provision in the Tax Code?
Mr. Moore. I am not an expert on this, so I probably--my
belief is this should be an allowable expense, just as when you
are able to write off capital purchases. But, again, I am not
an expert at this.
Mr. Schatz. Mr. Bentsen, I think the answer would be if it
is available to the entire industry and not, say, Shell or
Mobil or one specific company, it would be less likely to fall
within the definition of corporate welfare based on Mr.
Hoeffel's Commission or anything else. Then I think people at
the table would be examining----
Mr. Sperry. I think in the case of the oil depletion
allowance that it is the type of tax break which is not
available to, say, gold miners, copper miners, coal miners.
Other people who extract mineral wealth from the ground do not
enjoy a similar benefit, so I think the Commission may have a
tendency to look at it as a specifically targeted tax break.
In answer to your earlier question about the run-up in the
gas prices, I think that there certainly has been some market
fluctuation, but I think you do have an example there of where
Federal gas taxes are extracted from the driving public, and
then we have reached the point where much of our highway
program is a subsidy for the highway construction industry.
A number of years ago, I was in a committee hearing where
they were talking about, well, we have completed the Eisenhower
highway system, we have got everything going north and south,
odd numbers going north-south, even numbers going east-west,
but we don't have any good diagonal arterials across the
country. At a certain point I think we need to stop laying
pavement and cut the gas tax and let some of the drivers keep
their money.
Mr. Bentsen. Let me follow up on this, and so you know, I
voted against the highway bill. There might have been 81 of us
that did in the House, not the Senate. But I did so on
budgetary reasons. I thought for some reason we decided to
exempt highway programs out of that. Even though I come from a
donor State, I thought we should have reallocated between donor
and donee States, but instead we decided to reenlarge the pie.
But we do dedicate the vast majority--and now all--at that
time, the vast majority of the gas tax, and now we allocate all
the gas tax to highway construction.
But you are arguing that that--would the panel believe that
is not a function of the Federal Government in building the
Federal highway system, interstate highway system, that that is
just purely a subsidy of highway contractors and real estate
developers to build roads where they see fit, as opposed to
building a means of transportation for the general public?
Mr. Sperry. Building the necessary transportation
infrastructure is probably a legitimate function of government.
Building extraneous transportation infrastructure when we have
reached the point where we have all we need and more, it
becomes questionable.
I think right now, when you look at the highway program in
particular, it varies from State to State, but, quite honestly,
those are, again, local issues. I would like to see Virginia
spend money. I would like to see the Federal Government spend
less.
Mr. Bentsen. Well, a lot of this is there is reallocation
of tax dollars back to the State where they are collected. They
are collected at the Federal level. I guess what you would
advocate is for us just to get out of the Federal highway
system and turn this back to the States and let each State
determine what they want to do in terms of building highways,
including interstate highways, and then just have interstate
compacts with respect to how highway 95 connects between
Virginia and North Carolina, or I-10 connects between Texas and
New Mexico, or 35 between Texas and Oklahoma? Would that be it?
Mr. Sperry. The original intent when it was passed under
the Eisenhower administration was the Federal Government would
build it and the States would maintain it, and I think it was a
very wise division of expenditure at that time. I think it is
still a wise division of expenditure. I think we have reached
the point where we can legitimately say that the Federal
Government has completed its task within this agreement.
Mr. Bentsen. Well, I would just add--and I hope we have
another round because I have some other questions, I would just
add that the country is somewhat larger or somewhat more
populated today than it was back in 1952, would you agree?
Mr. Sperry. Oh, yes.
Mr. Bentsen. As a result, the demand on the highway system
has presumably increased some since 1952. Would you agree with
that?
Mr. Sperry. I would agree with that. I would not say that
there is absolutely no role for continued highway construction,
but I do think that, as we have seen with many of these highway
bills, we have gone beyond what is really necessary, and we are
spending more than is necessary, and we are taxing the driving
public in order to do so.
Mr. Bentsen. Mr. Chairman, I don't want to take up more
time. If there is going to be another round, I have a few
questions.
Ms. Lancelot. Could I just add one comment?
I agree with what Peter just said about the burgeoning of
new highway construction. I think we have to remember or just
be mindful that the existing infrastructure is in bad repair
and there is not enough money going to the maintenance of what
we already have. There is always a terrible story about the
bridge that fell into the river, et cetera. So I think some of
that money needs to be spent on maintaining what we already
have.
Let me also be clear about my organization. That is really
a personal viewpoint. My organization is narrowly focused on
looking at wasteful spending. We don't go beyond that and talk
about how money should be spent. We believe in government. We
believe in good government. We believe in the wise use of tax
dollars. But we also believe that there are many organizations
around the country that have their views of how money should be
spent, and we allow them to be part of that debate. We simply
just look and stop at the waste.
Mr. Bentsen. Your viewpoint is not all of the highway
program is--I mean, I grant you there are some add-ons on there
that are highly questionable as to whether or not they meet in
the national transportation program, but is it 2 percent, is it
5 percent, or is it 100 percent? Mr. Sperry seems to indicate
maybe 100 percent, if I understand, or let the States just
decide.
Mr. Sperry. I would not say it is 100 percent. I would say,
though, that we are reaching the point where it is probably
over 50 percent. I think also that when you look at this you do
have to ask at what point does a contract become a subsidy? I
think maybe this was, you know, an area where some disagreement
could be there. But if you are letting out a contract for a
project which is unnecessary, is that a subsidy?
Mr. Bentsen. Thank you.
Mr. Chairman, I will yield back to you and wait for another
round.
Mr. Ryan of Wisconsin. Mr. Hoeffel and I have no further
questions, so we can just do a second round for you to go
ahead.
Mr. Bentsen. That is an interesting question. I am not
going to go into that. I think maybe in the economics
department maybe you can do that.
I have to say, some of you do remind me of a graduate
school professor of mine who said he wanted to be a Fed
Governor because all he would do is go in in the morning, check
in, pick up his Wall Street Journal and then play tennis for
the rest of the day, and I think some of you all fit in that
mold. He was a strict monetarist. I don't think there are any
at the Fed right now. But you don't have to answer that
question.
I do have a question with respect to Fannie Mae and Freddie
Mac. I think there is a subsidy. I think the subsidy occurs by
an implicit guarantee. However, I think that is pretty well
determined. However, the debate has been over how much of that
subsidy is passed on to the intended beneficiary, in this case
American home buyers, above the level where there is a direct
government subsidy or indirect government subsidy through the
Federal housing administration program.
In both instances, neither of the programs, neither the GSE
program nor the FHA program, single-family program at least,
result in any direct Federal dollars subsidizing.
How does that type--if that is corporate welfare, if you
are defining that as corporate welfare, how does that comport
with a direct Federal appropriation? Is it a distortion of the
marketplace that is your concern? And if in fact the program is
working to provide a subsidy to home buyers, why should we be
against that? Should we rather live in the perfect world where
you are at the whim of the market and constant fluctuations in
price, constant fluctuations in interest rate costs, and what
good necessarily is that for the market?
Finally, I just have to say, because I have sat through
hours of hearings on the House Banking Committee on this issue,
I really think that this idea of--Mr. Ryan, I don't want to
speak for Mr. Ryan; he can have his own opinion on this--but I
think really this idea of trying to compare GSE debtor Fannie
and Freddie debt to Treasury debt is misguided. I think it is
really apples and oranges. Because you have different levels of
leverage, you have different assets than you do to other types
of corporate debt. It is clear on the face that it is not full
faith and credit debt, although I will grant you that the
market views the implicit guarantee as something that the
Federal Government is not necessarily going to walk away. But I
also think the reason why you are seeing the market look at GSE
debt is they are looking for some stability as an indicator of
how to set rates.
I don't know that that is all that bad, and I don't think--
I think the argument that those who see a problem here are
trying to make is that this will result in excessively cheap
money going to the GSEs, which, in turn, will seek more risky
returns with that cheap money, ultimately to the detriment of
the taxpayer. I am not sure that nexus exists there, because
they do have a fairly narrow definition of where they can put
their money, and there is a limitation on the mortgage market,
both legislatively as well as what will be there.
But to my original question, is a subsidy in that effect
bad if it doesn't involve dollars?
Mr. Moore. I would love to have lunch with you sometime and
really thrash this thing out, because I think it is a very
important issue, and there are a lot of complexities here. It
is not a simple issue. And you are quite right, this isn't like
a subsidy that is a direct appropriation.
You asked about, for example, who gets the benefit.
Certainly some portion of this benefit does go to the
homeowners in terms of lower interest rates than otherwise
would be charged. The Congressional Budget Office and the
General Accounting Office have called this a spongy conduit by
which they mean that this is--I described this as sort of a
trickle-down housing policy, that it takes for every dollar you
are putting into this only, you know, maybe 50 cents is
actually trickling down to the actual homeowner.
I do believe that this is a form of corporate welfare, even
though it is not a direct appropriation, you are quite right. I
am very worried, and I think Congress should be very worried,
about the incredible expansion of debt that is being taken on
at the GSEs. You are right, they are not exactly comparable to
Treasury debt. But these have tripled in the last 10 years
without anyone taking much notice of it.
There is very solid evidence, Congressman, and I would love
again to sit down and talk with you more about this, that this
is a real danger to our financial markets. As long as things go
swimmingly, we are fine. If there were some problems in the
housing market, you would see, I don't think--I know you are
the one here asking questions, but I would sort of pose a
question to you, and that is imagine what would happen if
Fannie Mae and Freddie Mac did come under financial trouble?
Certainly you would agree, I would think, the Federal
Government would step in and bail them out. They have done that
in the past.
So that is why I am nervous about it. You are right, it is
not exactly comparable to the national debt, but it is
something we should worry about. I think it also does fall
under the purview of some of this benefit going to the
shareholders. That is why I consider it a form of corporate
welfare.
Mr. Bentsen. That is a legitimate question, and no one has
defined what those numbers are yet. But we are talking about
asset-backed debt. This is not equity, this is not even
Treasury debt that is backed by the assets of all of us here,
but it is asset-backed debt. We have had fluctuations in the
housing market, we went through the 1980's in Texas, for
instance, and the early '90's in California and New England
where there were troubles. But, arguably, Congress has also
responded to that with the 1992 act in creating OFHEO, which
was charged with creating sort of a rating standard, rating
criteria to look at the portfolios behind them. But it is a
tough question. But I don't think it is as simplistic as that.
Mr. Ryan of Wisconsin. If I might just interject something,
Mr. Bentsen, since you invoked my name, I agree with you. I
don't think GSE debt is the same as Treasury debt, and I think
it would be wrong for us to make that assumption as Members of
Congress, because I would hate to make an implicit guarantee,
an explicit one, through our comments.
But I think a valid concern to look into is the excess debt
that the GSEs are piling on top of their mission-critical debt.
I think it is important to note their debt will increase as the
housing market increases, as the secondary mortgage market
increases, which is their mission. Obviously, that debt is
going to increase.
My concern is when you look at other things the GSEs are
doing, such as repurchasing mortgage-backed securities, piling
on excess debts on top of that, does that debt go toward
putting somebody into a home or go toward shareholders? I
really don't know the answer to that question, but you think
that is a very valid question to ask. I do not think it is the
same debt as Treasury debt. You are right. It is asset-backed.
Mr. Bentsen. If the gentleman would yield, or whoever's
time it may be, the question is whether or not the repurchase
of secondary--the repurchase of asset-backed debts in the
secondary market enhances the liquidity in the secondary market
and thus transcends a better rate to the primary market, which
one would argue, and also whether or not that fits within the
function of the GSE. So it is a complicated question. But I
don't think you can just argue that supporting the secondary
market through the repurchase of asset-backed debt is
necessarily outside the mission of the GSEs, and it is asset-
backed debts.
Mr. Ryan of Wisconsin. That is a very good point. Given the
fact we believe, all of us, that this implicit guarantee exists
and therefore a bailout would occur, as has happened in the
past, it is a new form of risk. It is an interest rate risk on
the books, a prepayment risk which does pose an additional risk
to the taxpayer should interest rate fluctuations occur that
weren't anticipated, if they are not hedged properly. So those
raise new questions. I think that Mr. Moore's comment is valid
probably in that context. But I don't think we would equate GSE
debt to Treasury debt.
Were there any questions?
Mr. Schatz. I just have a quick comment.
First of all, I will be testifying on Fannie Mae-Freddie
Mac next week, so I could do it here, but clearly we have run
out of time.
Second, I think the fact that it has been brought up shows
there are very legitimate questions about this as it relates to
the budget, as it relates to their mission, as it relates to
the future of what the benchmark would be. These are all things
that should be explored.
So that was my comment. I appreciate your interest very
much, Congressman.
Mr. Sperry. I think the GSEs are obviously a very complex
issue, and determining whether or not they were specifically
corporate welfare would be the work of a Ph.D. dissertation, as
it would be to determine whether excess contracts are indeed
corporate welfare. But I think in the terms of this Commission
that is being proposed under the legislation being considered
that they probably would not--you would probably not want to
include either of those subjects simply because it would
quickly end up dominating the commission and you would never--
its work would never be completed. The Commission should
probably be more focused on the traditional forms of corporate
welfare, subsidy, tax breaks. That will be more than enough to
keep them occupied throughout the life of the Commission.
Mr. Ryan of Wisconsin. With no further questions----
Mr. Hoeffel. No questions. Thank you, Mr. Chairman.
Thank you, panelists, for being here. You have given us
over 2 hours, and we have all learned from you. I thank you for
that.
Mr. Chairman, thank you for your cooperation.
I think Ms. Lancelot said this needs to be a two-pronged
attack. We need a commission or some kind of a mechanism, but
we need to keep going after these projects in the
appropriations process. I certainly will pledge my support to
temporary Chairman Ryan and permanent Chairman Kasich to
cooperate on that during this year. Thank you all very much.
Mr. Ryan of Wisconsin. If there are no more questions, I
would like to thank the witnesses for your thoughtful testimony
and spending the time with us today.
This hearing is adjourned.
[Whereupon, at 2:05 p.m., the committee was adjourned.]