U.S. GOVERNMENT PRINTING OFFICE

57–748cc WASHINGTON : 1999

UNNECESSARY BUSINESS SUBSIDIES

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 30, 1999

Serial No. 106–5

(

Printed for the use of the Committee on the Budget

(II)

COMMITTEE ON THE BUDGET

JOHN R. KASICH, Ohio, Chairman

SAXBY CHAMBLISS, Georgia,

Speaker’s Designee

CHRISTOPHER SHAYS, Connecticut

WALLY HERGER, California

BOB FRANKS, New Jersey

NICK SMITH, Michigan

JIM NUSSLE, Iowa

PETER HOEKSTRA, Michigan

GEORGE P. RADANOVICH, California

CHARLES F. BASS, New Hampshire

GIL GUTKNECHT, Minnesota

VAN HILLEARY, Tennessee

JOHN E. SUNUNU, New Hampshire

JOSEPH PITTS, Pennsylvania

JOE KNOLLENBERG, Michigan

MAC THORNBERRY, Texas

JIM RYUN, Kansas

MAC COLLINS, Georgia

ZACH WAMP, Tennessee

MARK GREEN, Wisconsin

ERNIE FLETCHER, Kentucky

GARY MILLER, California

PAUL RYAN, Wisconsin

PAT TOOMEY, Pennsylvania

JOHN M. SPRATT, Jr., South Carolina,

Ranking Minority Member

JIM MCDERMOTT, Washington,

Leadership Designee

LYNN N. RIVERS, Michigan

BENNIE G. THOMPSON, Mississippi

DAVID MINGE, Minnesota

KEN BENTSEN, Texas

JIM DAVIS, Florida

ROBERT A. WEYGAND, Rhode Island

EVA M. CLAYTON, North Carolina

DAVID E. PRICE, North Carolina

EDWARD J. MARKEY, Massachusetts

GERALD D. KLECZKA, Wisconsin

BOB CLEMENT, Tennessee

JAMES P. MORAN, Virginia

DARLENE HOOLEY, Oregon

KEN LUCAS, Kentucky

RUSH D. HOLT, New Jersey

JOSEPH M. HOEFFEL III, Pennsylvania

TAMMY BALDWIN, Wisconsin

PROFESSIONAL STAFF

WAYNE T. STRUBLE, Staff Director

THOMAS S. KAHN, Minority Staff Director and Chief Counsel

(III)

C O N T E N T S

Page

Hearing held in Washington, DC, June 30, 1999 ................................................. 1

Statement of:

Ralph Nader, consumer advocate .................................................................... 6

Hon. Dan Miller, a Representative in Congress from the State of Florida . 213

Hon. John B. Shadegg, a Representative in Congress from the State

of Arizona ...................................................................................................... 218

Hon. John E. Sununu, a Representative in Congress from the State

of New Hampshire ........................................................................................ 227

Hon. David Minge, a Representative in Congress from the State of Minnesota ............................................................................................................. 272

Hon. Robert Shamansky, a former Representative in Congress from the

State of Ohio .................................................................................................. 279

Hon. Joseph M. Hoeffel, a Representative in Congress from the State

of Pennsylvania ............................................................................................. 289

Jill Lancelot, Legislative Director, Taxpayers for Common Sense ............... 295

Thomas Schatz, President, Citizens Against Government Waste ................ 301

Robert McIntyre, Director, Citizens for Tax Justice ...................................... 306

Stephen Moore, Director of Fiscal Policy Studies, the Cato Institute .......... 317

Grover Norquist, President, Americans for Tax Reform ............................... 330

Prepared statement of:

Mr. Nader (attachments) ................................................................................. 8

Mr. Nader (prepared statement) ..................................................................... 168

Mr. Miller .......................................................................................................... 215

Mr. Shadegg ...................................................................................................... 221

Hon. Edward R. Royce, a Representative in Congress from the State

of California ................................................................................................... 229

T.J. Rodgers, President and CEO, Cypress Semiconductor Corp. ................ 231

Mr. Minge .......................................................................................................... 274

Mr. Shamansky ................................................................................................. 286

Mr. Hoeffel ........................................................................................................ 291

Ms. Lancelot ...................................................................................................... 298

Mr. Schatz ......................................................................................................... 303

Mr. McIntyre ..................................................................................................... 308

Mr. Moore .......................................................................................................... 320

Mr. Norquist ..................................................................................................... 332

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UNNECESSARY BUSINESS SUBSIDIES

WEDNESDAY, JUNE 30, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON THE BUDGET,

Washington, DC.

The committee met, pursuant to call, at 10:10 a.m. in room 210,

Cannon House Office Building, Hon. John R. Kasich (chairman of

the committee) presiding.

Members present: Representatives Kasich, Chambliss, Herger,

Franks, Smith, Hilleary, Sununu, Collins, Wamp, Green, Fletcher,

Miller, Ryan, Toomey, Spratt, Rivers, Minge, Price, Hoeffel, and

Moran.

Chairman KASICH. The committee will come to order. We will get

started, Mr. Nader, and get you up there. I want to thank everybody who is going to be testifying today, and I think everybody has

heard of Ralph Nader, especially if you ever drove a Corvair. Of

course, Ralph, most of the people in this room don’t even know

what a Corvair is. That shows that you and I both are getting

older, doesn’t it?

We are also going to have a panel of Members, former members,

and experts who are going to examine corporate subsidies and the

way in which they might be curtailed. We had a State representative from Pennsylvania who couldn’t make it; and T.G. Rodgers, the

president of Cypress Semiconductor, wanted to be here, but he had

problems with a conflict.

There are a number of people who are going to submit written

testimony which I think we will find interesting, and we are here

today really to examine the proper role of the Federal Government

in regards to our free market and our free enterprise system.

Ralph, I think as you know, and John, as you know, I have been

subject to some criticism by people in the business community because I have decided that it was necessary to try to clean up this

subject area that I call corporate welfare.

I believe very strongly in free enterprise and believe very strongly in free markets. I believe that free enterprise and free markets

can only occur when there are limits on government, and I am a

passionate supporter and believer in this capitalist system because

what it allows us to do is to take ideas way from the back of our

heads and be able to translate those ideas into products that, in

fact, can make improvements for every individual on the face of the

earth, and I think during the course of my lifetime there was a

long argument about which economic system is the most humane,

and we tried all kinds of systems around the world.

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Most of them top down, capitalist system being one that stresses

the individual, and I fundamentally believe is a bottom up system,

and I think what we know as the greatest threat to our free enterprise system is growing government, government that gets in the

middle by excessive regulation or, for that matter, that creates a

program of subsidies that tries to pick winners and losers.

So if, in fact, you are a strong supporter of free enterprise and

of free markets and if you believe in capitalism, then you ought to

be working aggressively on Capitol Hill to end these special subsidies that businesses get that distort the marketplace and result

in the government of the United States picking winners and losers.

And it is interesting that those persons who tend to be the strongest supporters of free enterprise and free market often tend to believe these subsidies are appropriate; I have got to call attention

to the fact that there is a great, great inconsistency.

I am particularly against the government subsidies that accrue

to some but not to all companies in the United States, and I am

against the special deals that are provided to many businesses

from government. The problem is many times the special deals, ladies and gentlemen, go to the largest companies in America. A

small businessman living on main Street can’t get the same kind

of benefits that some of the very largest multinational corporations

can get inside of this country.

Steve Moore, who, Ralph, would be a strange ally of yours, is

going to testify here today, and he has noted in the past, quote,

there are hundreds of thousands, millions of small businesses that

pay taxes that do not participate in these special programs. And so

to me, it really is matter of fairness, and it really is a matter of

the proper role of a limited government.

I argued back in 1995 that if we were going to reform welfare

for poor people in America, which we have done, then we need to

reform welfare for rich people in America because America is about

a sense of fairness. What is good for the goose is good for the gander, and we have been vigilant in trying to maintain this welfare

reform that we put in place and have made some slight progress

in the area of tailoring subsidies to business.

And I have got to go all the way back to 1995 and a number of

the provisions that were reformed, Mr. Nader, in this Congress

that for example closed the loophole on the largest pharmaceutical

firms in Puerto Rico that had a special advantage.

Most of my lifetime I heard people yell and scream and shout,

many liberals, against and rail against these particular subsidies,

but yet never saw anything done; and I want to pay particular tribute to Bill Archer and many members of the republican party who

actually stood up and closed some of these loopholes.

Now, I know that your view would be it is just the tip of the iceberg, but you have got to get started when you are in an effort to

try to reign in this area of corporate welfare.

I think there is a whole collection of programs that we can talk

about today, programs that I believe should be eliminated because

of unnecessary subsidies, and we will have a list displayed sometime of the top 10 items that many of these other groups and panels think should be high on our list. There are programs like the

Overseas Private Investment Corporation, which provides subVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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sidized loans and insurance for companies to invest in some of the

world’s riskiest overseas markets.

It is interesting to note that these programs are used by some

of our largest corporations, including, for example, McDonalds,

which gets advantages on insurance programs and loan programs

to operate in various parts of the world; and I want to them operate in various parts of the world, but I don’t understand why the

government ought to be providing them some kind of an insurance

program that the lady out in my own hometown who makes cookies

can’t get for her operation.

If you want to go overseas, God bless you, go. There is plenty of

money to be made, but don’t ask the taxpayers to try to foot the

bill to give you certain advantages to go overseas, particularly

when you are large and you have had a great history of success.

Then there is the sugar program. Now, I don’t know where you

are on sugar, Ralph. I think you are probably off the mark on this

one, I am not sure; but, you know, we limit the importation of

sugar in the United States which drives up the cost of sugar for

every American family to twice the price of what it should be, and

at the same time I think, as we all know, there has been significant environmental damage as a result of sugar production in this

country. And the fact is, it makes no sense in America today to not

permit an open and free market in regard to a commodity like

sugar.

Then there is the advanced technology program whereby we give

grants to some of the largest and most profitable companies. We

have an $8 trillion economy. We also have an R&D tax credit, a

research and development tax credit, that I happen to support. I

know there will be a witness here today that hates the research

and development tax credit, but I think it is a program that encourages the kind of research that we need to develop the products

that we need but to have on top of it a grant program in this $8

trillion economy that passes out grants. In fact GAO interviewed

grant winners.

They concluded that half of the recipients would have conducted

the research even without government funding and that government funding goes to some of the largest corporations in the United

States. They don’t need that kind of money. It is picking winners

and losers, something that I know many in my party rail about all

the time.

Then we have got the power marketing administration which is

located within the Department of Energy, which provides subsidized electricity to many parts of the country paid for by the people who sit in this room; and the fact is we have entered an era

of electric deregulation where we are trying to take utilities and we

are trying to put them more in tune with the market that we think

will provide huge advantages to consumers, and yet here we still

maintain the power of marketing administrations.

Secretary Robert Mosbacher, the former Secretary of Commerce,

said the Department of Commerce is nothing more than a hall closet where you throw in everything that you don’t know what to do

with. That is the department that contains the advanced technology program.

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I found it a little bit different than that. I think it is a place

where you put your kid when he worked on a presidential campaign and he couldn’t get a job in the White House so you stick him

in the Commerce Department. By the way, it was the commerce department that participated in the granting of licenses to companies

that have sold sensitive technologies to other countries, particularly the Chinese.

So I have got to tell you that when you look at the department

of energy or you look at the Department of Commerce, as you

know, I have been in favor of eliminating both of them.

I not only think we would have saved money; but, frankly, I

think our nation would have been more secure had we been able

to consolidate many of the programs, rid ourselves of many of the

unnecessary programs, professionalize the remaining functions so

we not only were to save money, eliminated some corporate welfare; but at the same time I believe made ourselves more secure.

When you take a look at the Department of Energy and the fact

that we have not been able to professionalize or consolidate any of

those laboratories, when bureaucracy gets too big, it is unresponsive and even today that we make directives to the Department of

Energy, and it appears the people in there just ignore the directives.

I think this is going to be a long process. Somebody asked me

have you given up on this battle of corporate welfare, and I said

I have not because it is a matter of fairness; but Mr. Nader, I have

to tell you that it has been very difficult here to even get groups

who are interested in doing away with unnecessary subsidies to be

able to come together, sit at a table together and come up with a

simple list of 10 items that they can all agree upon ought to go.

This is going to be, I think, a 10-year battle to start to do away

with some of these subsidies, but we started this battle a couple

of years ago.

We have had some significant, yet still small, victories, including

the area of timber. We have made some progress but it is going to

be a long, long process to try to eliminate these special benefits

that people get in this country that don’t accrue to most folks on

Main Street.

I know you have been working on this since about 1975, I think,

is when you wrote your first piece, and what I am pleased about

is both the liberals and conservatives—you hate to use those terms

today—but liberals and conservatives, people on all sides of the political spectrum, see the need to eliminate these subsidies, to restore a sense of limited government, to restore a sense of fairness

in terms of the role of the Federal Government.

And so, Mr. Nader, I am prepared to march on and keep the battle going and hopefully be joined by some business interests. There

are some that share our concern about these unnecessary subsidies.

Go out to the Silicon Valley and you talk to them about the advanced technology program, they laugh at you. Bill Gates, along

with his cohorts, didn’t need an advanced technology program to

develop this magical invention called the computer. In fact, had we

had a lot of government programs, he probably would have never

developed it.

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As I like to say, people didn’t know—people in Washington didn’t

know anybody who lived in San Jose and then when they found

they lived out there, they didn’t know what they did, and to prove

that to you, we thought Y2K could be fixed with one little switch,

only to find out that it is far more complicated than that.

I appreciate your being here today, Mr. Nader, but I also want

to pay tribute to Bob Shamansky, former Member of Congress who

is a friend of mine. He is a very passionate man who also has some

areas that he is going to discuss with us today. He is here in attendance and will appear later, plus a whole panel of people. This

will take about all day to get through all of this testimony, but I

just think it is important we shed light on this matter and I think

in the process rally the support of the American people out of a

sense of fairness that we can restore the proper role of government

as it relates to this free enterprise, free market system.

Mr. Spratt is recognized.

Mr. SPRATT. Thank you, Mr. Chairman. I think this is what this

committee ought to be doing. We have a certain detachment and

disinterest that other committees don’t have. Appropriations, for

example, spends money; Ways and Means looks for different ways

to use the tax code creatively.

We have a special detachment and disinterest that allows us to

give an unflinching examination to targeted tax breaks, special interest spending, subsidies, things that have been in the budget for

a long time and served a purpose at one time but may not serve

a purpose anymore. We need to scrub it, scrub the whole budget

periodically. I am glad we are doing it.

As I look through the materials before us, though, I see a lot of

old targets that have been resurrected that have been taken on before and they survived. A lot of these have survived not because

they serve some special interest that happens to make big PAC

contributions or have friends in the right places. They survived because when they were challenged in committee and on the House

floor, Members of the House have trooped to the floor, scores of

Members, who testified to their utility. A good example is the Economic Development Administration.

The reason it has survived is not because it has been overlooked.

Goodness sake, it has been a frequent target; but time and again,

when it is targeted, Members on both sides of the aisle stand up

and say, I have seen what EDA did in my district. It was the

grantor of last resort when we needed money for a sewer line or

a water line and this was the linchpin in bringing in new industry

to an underdeveloped area and to a high unemployment area. EDA

was there when nobody else was there. It served a useful purpose.

I dare say the same is true of the Commerce Department. You

can abolish the Commerce Department, but you have got all the

component parts of it. All you would do is chop off the head of it.

If you kill the secretariat, somebody, I hope, will still watch the

weather; somebody, I hope, will still take the census and all of its

functions, most of its functions. The vast majority of these will be

accomplished somewhere else.

So I think we need to bear that in mind, and as we go through

this day-long hearing, try to develop some sort of rubric, some sort

of logic for what we are doing. We are looking at special interests,

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deciding whether or not these interests ought to be served. We are

looking at government subsidies, deciding whether or not they still

serve a worthy purpose. In some cases I think they may.

We are looking for programs that have been lost in the thicket

of the tax code. It ought to be pulled back up, the thicket of government spending, a trillion seven, to see if they can still pass muster.

It is a good thing for us to be doing and I appreciate it; but as we

do it, let us bear in mind that sometimes sweeping claims that

have been made in the past about certain of these programs, EDA

is an example, haven’t stood scrutiny and won’t stand scrutiny

today. Good example.

I am getting ready to go over to the Armed Services Committee,

and I will be back shortly, Mr. Chairman, but I want to go hear

about what the B-2 did in the recent war in the Balkans. There

have been members—I won’t mention names—who have challenged

the B-2 before, on the grounds that it was excessively expensive,

that the technology really wasn’t worth what we were paying for

it. It looks like the B-2 came through in this latest war, and so all

of the old shibboleths need to be reconsidered from time to time.

That is one of them. There will be many more that will be brought

up today, and I think we ought to approach all of it with a fresh

mind and an unbiased attitude.

Thanks for calling the hearing, Mr. Chairman.

Chairman KASICH. Boy, I would love to start another B-2 debate

right here, Ralph, right now. Let us go at it. OK. I want to tell you

that I want to thank Mr. Nader. He has been on this issue and on

me personally to make sure that we would go forward with the

hearing, and I want to thank him for his commitment to this, and

Ralph, the floor is yours

STATEMENT OF RALPH NADER, CONSUMER ADVOCATE

Mr. NADER. Thank you very much, Mr. Chairman and members

of the House Budget Committee. Thanks for the opportunity to testify on the very vast subject of corporate welfare. Today’s hearing

is long overdue. There has never been a congressional hearing, to

our knowledge, on the subject of corporate welfare, and so in a

sense this is a historic occasion, and I hope it will stimulate further

inquiry by the House Budget Committee and by other budget committees as well, because you have to stay the course in this area

in order to get anything done.

Mr. Chairman, you deserve major credit for issuing a clarion call

for congressional attention to corporate welfare. At a time when

profiles of courage are very rare indeed, it is quite clear that as you

are running for President and having to raise funds under our

present political system, you are also holding these very important

hearings that might tweak the beak of some of these varied business interests, which is why I want to especially commend you. We

need more of that kind of activity here on Capitol Hill.

We have been working on corporate welfare issues for many

years. One of my articles focused on a huge subsidy to the railroads

which didn’t do the railroads any good in 1972. In 1983 we put out

a report called Aid for Dependent Corporations, AFDC, a study of

the fiscal 1984 corporate welfare budget, and in 1985 a similar one

and together with my entire testimony and these attachments and

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a few others which I will cite, I ask your permission to put them

in the printed hearing record.

[The attachments referred to follow:]

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Chairman KASICH. Without objection.

Mr. NADER. The subject of corporate welfare is one that raises

many, many questions of market distortions, of elementary fairness, of misallocation of public budgets, of environmental damage,

and of the suppression of the rights of small business compared to

large corporations that are more adept at feeding at the trough

here in Washington.

The looting of Uncle Sam, namely, the taxpayers, Mr. Chairman,

is an ever-growing big business. And it is a big business that is

largely secret, without procedural due process, without the usual

safeguards that any ordinary business would establish for itself.

If we are to take a working definition of corporate welfare, the

concept of programs involving the government giving more to private companies than it gets back, that is, where it is engaging in

a transaction that cannot be justified as a fair market value exchange, then the goal is not necessarily to eliminate all corporate

welfare programs, although many certainly need elimination, but

to subject them to procedural, substantive, and regular review safeguards.

What are we talking about here in terms of corporate welfare?

Well, I have here in my testimony a number of categories which

will illustrate part but not the entire field because it is so vast.

Even 20 years ago, Mr. Chairman, there was a report from the

Congress that indicated over 120 Federal subsidy programs alone,

and since then there has been a burgeoning both in degree and

kind of these corporate welfare projects and programs.

The first category deals with giveaways, and these are, of course,

completely antithetical to the way any prudent operation would use

its assets. No business gives away its assets. No trade union gives

away its assets. No agricultural cooperative gives away its assets.

But the U.S. Government is in the practice of giving away taxpayer

assets, natural resource assets, research and development assets

and many other assets such as the public airways without getting

anything in return, without requiring any conditions for the transfer of these valuable assets.

I might add that the estimates of corporate welfare at the local,

State and Federal Government arenas is hundreds of billions of

dollars year—that is with a B—hundreds of billions of dollars a

year.

The government retains its property in such things as oil and

mineral riches, forests, thousands of buildings and plants, public

works, the public airways over which television and radio stations

transmit their programs. The government retains its property as

the sheer commonwealth of the people of the United States, and

when a reasoned decision is made to distribute some of this wealth

to private companies, the government should explore whether it

can distribute these public assets in a nonexclusive public-purpose

way or in a way that promotes competition.

When public assets are going to be distributed to private interests, there should be a strong presumption that the government

should receive a market rate purchase or lease price.

Now, let us look at an example. There is a recent digital spectrum giveaway. The Federal Communications Commission estimates its value is up to $70 billion, a figure that Bob Dole has used

156

when he criticized this giveaway. The National Association of

Broadcasters has trumped its critics, including its competitors, in

getting this to its members free of charge. The broadcasters pay

nothing to the public for the right to air programming over the

public airways.

The public is the landlord and the broadcasters are the tenant,

and the tenant pays no rent and keeps the public off its own property for 24 hours a day in radio and television stations all over the

country. There is no audience network. There are no cable channels

for civic activity or for labor or students or anything like that.

At the same time the broadcasters use the influence they gain

over political representatives from their use of these public resources to extort still greater subsidies. And all the while, they

don’t allow this subject to be covered on their news programs. Has

anybody seen the evening news of the networks talk about the

great digital spectrum giveaway? No way.

The opportunity reemerges in an effort to define the broadcasters’ public interest obligation, and that is what we have to consider. Should the public airways be leased for a fair market exchange or should they be given away? And should the owners of

the public airways have some of the time for their own broadcasting rights? As the Supreme Court put it in the Red Lion case,

the first amendment rights of the audience of radio and TV stations are superior to the first amendment rights of the broadcasters, something we often are allowed to forget.

Another giveaway is the 1872 Mining Act. This is a notoriously

obsolete law that allows any company, domestic or foreign, to go on

public lands should they discover hard rock minerals, like gold or

molybdenum. They can go to the Department of Interior and for $5

an acre or less buy the land above the mine, mine the mine to exhaustion, keep all the revenues, with no royalties back to the U.S.

Government, and little care for the environment.

As a matter of fact, we checked some Third World countries, Mr.

Chairman. They drive a harder bargain for their raw materials

with U.S. corporations than our own government does. An example

of this is that a Canadian gold mining company discovered $9 billion of gold in Nevada on Federal lands a few years ago, marked

it out, went to the Department of Interior and bought the entire

area covering that mine for $30,000. $30,000 investment, $9 billion

in gold, no royalties back to the government. There is no business

in its right mind that would operate in that fashion.

There are also the Internet giveaways which are increasingly

visible today. A giveaway of public assets involves the management

of the U.S. Government’s Internet assets. The current contract goes

to Network Solutions. NSI turned a tiny initial investment into a

firm with a market capitalization of $2.5 billion thanks to the control of the power to sell the public the right to use their own domain names. It is just a clerical situation. It is as if the U.S. Trademark office was transferred to a private company to operate for private purposes.

A domain name now costs $18 for 2 years. We have been advised

by other companies they could do it for 50 cents and still make a

significant profit.

157

Government research and development is a little more complex

issue, Mr. Chairman. It is clear that without government research

and development, the telecommunications industry today, the aerospace industry, the agribusiness industry, the computer industry,

the biotech industry, the pesticide industry, the pharmaceutical industry, the atomic power industry, the satellite industry and some

of the construction housing industry would not be the same as they

are today.

Indeed, many of these government research and development dollars were invested in activities that the companies themselves did

not choose to risk their capital in investing. Instead, they launched

a variety of programs from the Pentagon, from NASA, from the National Institutes of Health, et cetera, and it is important when

these companies tout their enterprise initiative that we also say

that a good deal of their success is due to taxpayers’ initiatives or

taxpayers’ enterprise under these government R&D programs.

But since the early 1980’s especially, the government has routinely given away the fruits of the research it sponsors, granting

private corporations exclusive royalty-free rights to commercialize

government-financed inventions, while failing to include or enforce

any reasonable pricing requirements and the like.

Now, when it comes to an anticancer drug like Taxol, Mr. Chairman, the National Cancer Institute said a few years ago that $31

million of taxpayer money went into the synthesis of the yew tree

out of Oregon and Washington State all the way through the

human clinical trials to develop this important drug. Under government policy, the government, in effect, gave monopoly marketing

power to Bristol-Myers Squibb to sell this drug.

Selling an anticancer drug does not require great marketing genius, by the way. Bristol-Myers Squibb is earning revenues from

Taxol of $1 billion a year. There are no royalties back to NIH to

recycle into more research and development in the health sciences,

and there is no reasonable pricing.

A few months ago, a woman with ovarian cancer wrote us. She

had to leave her $19,000-a-year job. She went to the doctor. He

said this was a very serious case. All he could recommend was

Taxol, and it was $2,000 a shot from Bristol-Myers, basically close

to $14,000 for the series of treatments that she needed out of a

drug that the taxpayer developed right through the human clinical

trial.

I don’t think that is fair. I don’t think that is right for the patient, for the taxpayer. If she has to go on Medicaid to pay for this

drug, the taxpayer pays from the other end as well.

In a little known activity in the Department of Defense over at

Walter Reed Army Institute of Research, there is what the generals

and the admirals call the government’s little drug company. The

government’s little drug company has been engaging in first-class

science with incredible efficiencies in developing antimalarial drugs

and other drugs that the pharmaceutical industry doesn’t want to

put any money into because they don’t see much profits in it. Malaria kills 2.5 million people a year, including 1 million children in

Africa; and there is very little private medical research investment.

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Walter Reed has a policy, after they develop the drugs—which by

the way cost about $5 million a year a drug, not counting salaries—they give it away to a company.

Recently, the government scientists developed a hepatitis drug,

and in a ceremony, the happy company that received the exclusive

rights gave the military officials there a plaque in appreciation. A

plaque! So whether it is only 1 percent royalties or a plaque, that

is about all the return the taxpayer gets, not to mention the

gouging prices for consumers.

The Partnership for a New Generation of Vehicles needs to be

given some attention. This is Mr. Gore and Mr. Clinton’s initiative

started in August 1993. They joined with GM, Ford, and Chrysler

to produce what is allegedly going to be a clean-engine car. Six

years later, there is almost nothing to show for this. Why is the

U.S. Government using a billion dollars of tax money to subsidize

three companies that have been reporting record profits year after

year and should be investing in this technology on their own? And

it isn’t just the waste of taxpayer money, Mr. Chairman. It is a de

facto exemption from the antitrust laws that seems especially unwise given the history of the auto companies colluding, to restrain

the development and marketing of pollution control systems. A Justice Department case on this matter resulted in a consent decree

under the Nixon administration, and I wish to introduce the material in the record to substantiate that.

Given that record, do we really want to impede competition for

this kind of innovation? It is interesting as the Washington Times

reported on Saturday—and I submit that article for the record—

that the two companies that are going to come forward next year

with the most fuel-efficient cars by far are Toyota and Honda. They

are not part of this joint government-business partnership for a

clean car. They are part of a more competitive arena which is why

they are ahead of the domestic U.S. industry, unfortunately.

We come now to bailouts. Everybody in Congress is familiar with

the periodic demand by industry for bailouts, the largest one being

the S&L bailout due to speculation, outright criminal behavior or

mismanagement in the late 1980’s and early 1990’s. It will cost the

taxpayer over the next 20, 30 years, $500 billion in principal and

interest.

Bailouts are different from other corporate welfare categories in

that they are ad hoc and unplanned. There is no ongoing government bailout program to be canceled or reformed, but there are lessons to be learned, and first is the issue of payback.

The question is simple. Once the S&Ls got on their feet after the

bailout and they started making money, why shouldn’t they pay

the taxpayer back for the bailout? And in addition, why shouldn’t

systems be in place so that there is never again this kind of rampant speculation which is caught only too late by lackadaisical government agencies at the State and Federal level—which in turn

has to lead to a huge bailout and a distortion of both market and

budgetary priorities?

The danger of creating too-big-to-fail institutions should make

corporate welfare opponents advocates of a strong antitrust policy

and supporters of existing restraints on the concentration of economic power. H.R. 10, which is about to come before the House of

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Representatives, is a bill that is going to facilitate the combinations

of giant banks, giant insurance companies, and giant brokerage

houses; and this means that there are going to be more of these

joint firms on the too-big-to-fail list of the U.S. Government, and

that means the U.S. taxpayer. And yet the Federal Deposit Insurance Corporation has stopped assessing these profitable banks for

the rainy days ahead. It only has $32 billion on hand to cover all

contingencies for 9,000 commercial banks with nearly $3 trillion in

deposits.

Now Citicorp itself has assets of over $350 billion, and we know

big banks can get into big trouble indeed. So, why is the Federal

Government in effect saying to the banks, ‘‘Well, you don’t have to

be assessed anymore for your insurance fund because the taxpayer

is always going to be ready to bail you out once this relatively trivial amount of FDIC resources is exhausted should there be one or

two major bank failures?’’

There is also corporate tax expenditures. Now, this is where

there is some debate between opponents of corporate welfare; but

in our view, Federal corporate tax expenditures are the back door

to corporate welfare. They are very invisible. Once they get installed, they don’t have to be annually reviewed by the Appropriations Committees of Congress. They just go on and on and on.

These corporate tax expenditures are not uniform tax cuts. They

are selective tax preferences for particular business interests, usually large businesses, not small businesses, as you pointed out in

your introductory statement. The crusade against corporate welfare

cannot exclude corporate tax expenditures anymore than it can exclude direct government subsidies to corporations.

As many scholars have pointed out, the tax expenditure is equivalent to a Treasury check to the preferred corporation or industry.

Here is how it works: In the late 1970’s in a very obscure provision

in one of the tax bills, $10 billion of taxes on deferred export earnings by McDonald Douglas, Boeing, General Electric and others

was wiped off the book. I suppose a lot of small taxpayers would

like their debt wiped off the book to Uncle Sam, but they are not

big enough to have that kind of influence.

Imagine about $10 billion, this is a so-called ‘‘DISC’’ program,

wiped off the book with almost no public attention because of the

obscure way it was done. Corporate debt cancellation buried in 500-

or 600-page bills is a routine performance on Capitol Hill.

In 1986, there was another tax preference in one of the giant

1,500-page bills. Almost nobody understood it. It took the Washington Post months to discover it. That gave Ford and General Motors $1.5 billion tax break, and more recently, eight billion out of

$11 billion that the electric utilities owe to Uncle Sam was removed

and canceled as well. I am sure a lot of small businesses would like

to have that kind of power on Capitol Hill, but they don’t.

OMB should be required to compile a list of the top 50 beneficiaries of each corporate tax expenditure. And to ensure these expenditures are disclosed and receive congressional scrutiny in some

setting, these and other disclosures that are recommended in my

testimony should all be put on the Internet.

By the way, Mr. Chairman, do you know who invented the Internet? It wasn’t Al Gore. It was the Pentagon. The Pentagon inVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00162 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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vented the Internet to communicate on military research between

universities, contractors and itself. Once again, we see the taxpayer

risk often is in advance of the market willing to take risks to develop these kinds of breakthroughs.

Insurance schemes. The International Monetary Fund and the

Enhanced Stabilization Fund in the Treasury are typical examples

of corporate welfare, albeit indirect. Corporate globalization leads

to interdependence. Nobody denies that. But it also leads to Uncle

Sam being the global guarantor of some of the worst regimes and

their mismanaged economic policies and the speculation in these

countries.

It started with Mexico. It extended to countries in East Asia. It

has moved to Brazil. It went to Russia where billions of IMF dollars disappeared without a trace as that country wallows in the

criminal capitalism which replaced its criminal communism.

The IMF and the ESF infuse money into debtor country economies which then goes right back out to pay foreign creditors, often

our own large banks and other money centers in the U.S. What is

interesting about the IMF and the ESF—and this is extremely important for Congress—is that these decisions are made without

congressional authority often. They are made without congressional

hearings. They are made without congressional review. They are

made by executive branch officials with unbridled discretion and

with the utmost secrecy.

If you ask yourselves procedurally how was the $50 million bailout made to Mexico, it was not made with anything that Congress

was involved in. It is one of the most egregious upsetting of the

separation of powers and the balance of powers in our Federal system.

I should also mention the nuclear insurance.

Chairman KASICH. So I would put you down as opposed to that?

Mr. NADER. Yes. In fact, this is an area that might be called

meta-law. When you consider that a package of that size could be

developed by the Treasury Department, the Federal Reserve, and

the IMF, and Congress is completely kept out of it, I think that is

an example of why procedural safeguards need to be right up at

the top of the list in any analysis in Congress of corporate welfare.

These procedural safeguards are constitutional safeguards.

The nuclear industry could never pass the private insurance

market test. Whenever an industry has a product that cannot meet

a private insurance market test, the yellow flags go up. Why

doesn’t the insurance company want to insure this product or this

industry? And so the Price Anderson Act was passed by Congress

in the 1950’s, in effect, to subsidize in a huge way the nuclear

power industry and to cap the liability of the industry at a ridiculous tiny fraction of the level of what a nuclear accident would

damage around a nuclear facility.

In fact, the Atomic Energy Commission put out an estimate in

the early 1960’s that said that if there’s a nuclear power accident,

a class nine accident, it would contaminate an area the size of

Pennsylvania. This was a regulatory agency, you know, that was

the big booster of the nuclear industry.

If an industry which has benefited, as the nuclear industry has,

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sidies for more than 4 decades and which creates staggering environmental waste disposal programs yet to be resolved, as well as

other risks, if it cannot survive without government support, then

it should not survive.

The over $100 billion that has gone into the nuclear industry,

and some estimates are triple that, over the years could have been

put into energy efficiency technology. This would have been a much

more rational, economic decision for millions of consumers and taxpayers who are now burdened by the nuclear power risk situation.

Government-sponsored enterprises. These are GSEs, and it is interesting that many people in Congress who are against government involvement in business never speak out against Fannie Mae,

Freddie Mac and others. In fact, they are terrified of Fannie Mae.

I mentioned recently to the CEO of Fannie Mae, I don’t know any

other company that produces such fear as Fannie Mae on Capitol

Hill. Perhaps it is because they hire so many former government

officials and put them on their payroll to influence the situation.

According to the Congressional Budget Office, for every $2 delivered to homeowners due to the government subsidies of the GSEs

(which was $6.5 billion in 1995, according to CBO), Fannie and

Freddie Mac, take $1 of that subsidy for themselves. That is for executive salaries, for their shareholders, et cetera.

There has been very little review or oversight of Fannie Mae and

Freddie Mac, and there are some companies who believe that they

represent unfair competition to other companies who think they

can do as good or better a job.

Now, there are some people who say they are not going to be able

to do as good or better job in the housing finance area, but we will

never know unless they are able to try on a level playing field. The

questions for Congress: Could GSEs improve access to mortgages

by home buyers without a government subsidy? Could private corporations without government corporate welfare perform the same

function?

The executive compensation issue is also pretty egregious. Let

me ask you this. You are working for the Federal Government as

Members of Congress. They pay you about $136,000 plus benefits,

et cetera. Jamie Gorelick worked for the Justice Department. She

got about $125,000 as a high Justice Department official.

She leaves the government, and in 1997 moves over to Fannie

Mae as vice-chair with no experience in housing finance. She is

paid $1,850,000 in salary, bonuses and stock options during the

last 8 months of that year. Now, should a government subsidize a

corporation that pays its executives at those stratospheric levels,

including a former CEO of Fannie Mae who went away with a $20

million severance package, not to mention the $5 million that the

more recently resigned CEO Jim Johnson received in 1 year? That

is something that is quite important to pay attention to.

I want to devote a few comments to State and local corporate

welfare. And right in your home State, Mr. Chairman, there is a

perfect example of what you are pointing out today in your prefatory remarks, and it is in Toledo, Ohio. Chrysler has been in Toledo

for many years. The workers are very productive. The Jeep is produced there and sold at a good profit. Chrysler decided to expand

the Jeep plant.

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They went to Toledo’s city government, which is financially

strapped, and arranged with the city government for a $300 million

Federal, State, and local subsidy package. Part of that involves taking over land where there are 85 homes in a stable neighborhood

and several small businesses. We have been out to Toledo several

times, Mr. Chairman, and we have seen the maps; and for the 300-

acre parcel for that plant, the only use for that devastated neighborhood, which is being plowed under now by bulldozers and paid

for by Toledo taxpayers to the homeowners, is going to be landscaping. The top area of that parcel is more than large enough for

the new truck plant and for the staging areas for the trucks.

There is a small business with 70 employees, roof repair business, that is going to be displaced by that plant. Chrysler is given

a tax holiday in property taxes. The Toledo city government absorbs all environmental risks. The Toledo city government, which

is very seriously strapped, has to pay for the clearing of the land

and preparing of the land for this private corporation. This small

business which is going to be displaced has to pay its property

taxes, has to pay its dues, but the giant Daimler Chrysler corporation with $20 billion in cash does not have to pay its property taxes

to the city of Toledo.

When I called up the general counsel of Chrysler, Lewis Goldfarb, and I said tell me——

Chairman KASICH. I bet he was excited to get your call.

Mr. NADER. Yes. Why does a company with $20 billion in cash

bring the city of Toledo to its knees and refuse to do what any

homeowner in Toledo and what any small business in Toledo has

to do, pay their dues, pay their taxes, pay for their own land purchasing? Why? And his answer was because we are putting a billion dollars investment in this plant. I said, well, small business

puts money in their stores and their plants. It is all proportional.

Are you saying that because you are big enough, you can get away

with being a property tax escapee, even though you are burdening

the city services, the schools, the police, the fire departments?

Basically, they have the power to do it, Mr. Chairman, and they

are going to do it. The cities are terrified that these companies will

leave, so the companies pit one State against another. The cities

and states crumble just like Detroit crumbled when GM put up its

plant in the Poletown neighborhood with another $300 million-plus

package of Federal, state and local subsidies. And I might add, 400

homes, 12 churches, a hospital, and dozens of small businesses

were leveled for this plant, which ended up producing half the jobs

it promised and only used a small portion of the 400 acres from

which the Poletown community was evicted.

Intel corporation is another example. They build billion dollar

plants in small towns in the West, and they cut very, very harsh

deals with these towns, including escaping $50 million per plant in

property and other local taxes, notwithstanding that they have burdened the schools, the police, the service, sewage, water, et cetera,

and other services. I asked Intel CEO, Andy Grove, how can you

as a relative statesman among corporate executives allow this to

happen? He gave me a pained look and he said, you know, these

communities just throw themselves at you, and we have an obligaVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00165 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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tion to our shareholders. But not an obligation to support the community, apparently.

It gets even worse. There are now corporate subsidies to gambling casinos. Thirty years ago, if you asked any Member of Congress, do you think that there would ever be corporate subsidies to

gambling casinos, they would have thought you were off your rocker. Yet Governor Whitman of New Jersey has taken $200 million

to build a 1-mile or so tunnel into a new gambling casino that gambling mogul Steve Wynn is going to build in Atlantic City. Never

mind that the schools in New Jersey are crumbling. Never mind

that the public works in New Jersey are crumbling. $200 million

for a tunnel into the land of hope and illusion. And that is not all.

There are gambling casinos going up in Detroit where a whole

series of small business are being taken, and displaced, and where

taxpayers are funding gambling casinos. Imagine: Detroit used to

be the hub of the greatest manufacturing center in the world. People worked for the future instead of bet on the future. Now they

are going to rely on gambling casinos for economic development

when gambling takes it out of the hide of lower-income people more

than any other strata of our society.

To end local and state corporate welfare and other Federal corporate welfare, I would recommend congressional hearings—with

the presence of some of the corporate welfare kings. Wouldn’t it be

nice to have some of the corporate welfare kings lined up here answering questions about why they are feeding at the public trough

when they are producing huge profits, huge executive compensation? I think they should be asked to explain why they are blackmailing cities, counties and States, often just to build stadiums or

arenas, while other, desperately needed public works are starved of

the money.

Congressional hearings should also probe whether the provision

of tax subsidies and similar incentives distort economic decisionmaking concerning the location of business activity, therefore, constitute an unconstitutional infringement on Congress’s power to

regulate interstate commerce.

This is an analysis done on this matter in great detail in the December 1996 Harvard Law Review in an article by law professor

Peter Enrich, which is cited in my testimony. I suspect there is

going to be a lawsuit filed evoking that commerce clause concept

very shortly in Federal court.

Second, the States need to be authorized and encouraged to enter

into compacts in which they refuse to enter a race to the bottom

against each other in terms of special tax breaks and related benefits. That will probably require congressional legislation to authorize these kinds of interstate compacts.

And as you will hear shortly, Representative David Minge has a

bill here in the House that would authorize the Federal Government to levy a surtax on companies receiving state and local tax

breaks, at the very least treating the value of the tax breaks as income upon which Federal taxes should be paid. That is another

way of generating a more level playing field.

Senator Mark Hatfield, Oregon Republican in the Senate, made

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ment. He didn’t like it for a number of reasons, one of which was

that it was a misuse of tax money. Second, it often supported dictators who repressed their own people. Third, some of the weapons

were even used against U.S. military personnel. The amount of annual subsidy there is in the billions of dollars. He would give estimates around 6 to $7 billion.

And then, of course, there is the highway pork which you have

rendered some judgments on. You will hear later from a group that

will detail some of the unnecessary highways and misdirected highways that are being——

Chairman KASICH. Mr. Nader, would you just suspend for a second. I don’t want you to gloss over an issue you just mentioned,

which is an issue called recoupment which I have been involved

with. It is a very obscure issue, but it is one that really encourages

the transfer of many—of weapons technologies, something that I

know we have been concerned about in light of the transfer of technology recently. It is a very interesting program, and I did make

an effort to take it out. It came out for about a nanosecond and

then went back in, but it is a very interesting program in and of

itself, just to underscore the issue of recoupment.

Mr. NADER. There is also the issue of offsets.

Chairman KASICH. The offsets.

Mr. NADER. These are where countries who received these weapons exports cut deals and say, well, we want two-thirds of them to

be built or we want something in return, and eventually, the technology is transferred to countries like China and other nations.

Yes, I do mention that in my complete testimony.

More recently, the Department of Defense Inspector General reported on spare parts provided to the Pentagon by Allied Signal

Corporation that were sold at a 57-percent markup over commercial price. You know, when it comes to corporate issues, there isn’t

all that much difference between the two parties. How is this for

an example? The Republicans never thought of doing this one. The

Clinton administration is now having the Pentagon mergers by

prime defense contractors subsidize. The argument is that there is

a surplus of capacity in the defense industry, there should be mergers, and it is up to the Pentagon to facilitate these mergers with

sweetened tax dollars.

Our answer is, if there is overcapacity, let them cut their capacity the way it is done in the market system. Let them change over

into doing something else. But Martin Marietta-Lockheed didn’t

need a billion and a half taxpayer dollars to get married. Then $30

million was reserved for executive bonuses until Bernie Sanders

and the rest of the House of Representatives stopped that. And so

now we have routinely companies merging and getting Pentagon

subsidies as a result. This was something that the Clinton administration has innovated.

Agricultural subsidies, you will hear probably a lot about that

later, but the original purpose of farm supports, Mr. Chairman,

was to support family farmers, not giant agribusiness and to enhance stability in agricultural markets. It is doubtful whether

these programs still fill this function. At the same time, it is important to examine whether the 1996 farm bill had the unintended effect of promoting agribusiness consolidation and increased power

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for grain traders at the expense of small farm viability, whether

that is happening at an accelerating pace which suggests the need

for a serious and open-minded reassessment of these farm programs.

I think it is important, Mr. Chairman, to develop this analytic

framework to give the corporate welfare examination process the

proper stamina and intensiveness. There are some simple questions

that you can ask for any corporate welfare program. Does it serve

some broad public purpose? That suggests it has merits beyond the

benefits it confers upon a particular corporation. If not, the program should be canceled.

If it does serve some public interest, can the government achieve

the same ends or, more important, public goals by retaining an interest in an asset being given away or doing a service in-house?

Third, does the program involve functions that should be properly left to the marketplace?

Fourth, if the government is going to distribute assets or contracts or tax breaks to selected private parties, can it do so in a

nonexclusive way so that competition is promoted? This business of

giving away taxpayer assets to exclusive monopoly recipients is

antithetical to everything the competitive market should stand for.

Admiral Rickover had a simple idea. He said, look, open it up to

competitive bidding if you want to give away a drug that the government develops like Taxol or a particular piece of hardware innovation. If you are going to transfer it, open it up to nonexclusive

competitive bidding for 6 months. If it doesn’t get a nibble, then

you can negotiate maybe a sole source transfer. That was Admiral

Rickover’s approach, and as you know he had enormous experience

in government-corporate contracting details.

Five, if the government is going to provide corporations with

services or give away its assets, is there any reason it shouldn’t

charge a market rate? Should it charge a below-market rate like

with timber sales? There were years, for example, when 150-foot

spruce trees in the Tongas Forest in Alaska was sold for the price

of a hamburger in Alaska. It is not much more than the price of

a hamburger now, maybe a double cheeseburger. That is ridiculous

when you consider a 200-year-old tree of that magnificence being

given away to both domestic and foreign-owned corporations up

there in the Tongas National Forest.

Six, are there any nonmonetary reciprocal obligations that

should be demanded of special interests that receive government

benefits? For example, if we are going to give $50 billion bailouts

in 1989 and $50 billion in 1990 to the S&L crooks and speculators,

why don’t we require the S&Ls to put in their monthly bank statement an insert—at no expense to themselves and paid for by consumers—that would invite consumers to form their own financial

consumer association and monitor their own banks on the corner

of Elm Street and Main Street in Columbus, Ohio, or some other

place so that this never happens again?

In short, if the government’s going to bail out an industry due

to the industry’s culpability, negligence, overreaching corruption,

speculation, it should empower the customers of that industry, like

utility consumers or bank consumers, with a simple insert that

costs the taxpayer nothing, is voluntary for the consumers to join,

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so they can form their own private watchdog group with their own

annual dues and their own operated organization.

You might be interested to know that this proposal was made to

the House Banking Committee in 1989 and 1990, each year that

it had a bill subsidizing the bailout. We got six votes out of over

40 or so in the House Banking Committee for this concept, something that cost the taxpayer nothing, is voluntary to consumers and

would clearly deter any repeat of this horrible commercial boondoggle that cost the taxpayers billions of dollars all the way to the

year 2020.

And then finally is there an institutional means of periodic review of the program to ensure that subsidy programs, if they are

going to be allowed to continue, continue to serve their broader

public purpose? Does the program require reauthorization by Congress or will it have automatic renewal?

The central question to ask is what are the procedural and substantive avenues for citizen challenge of the program, whatever

subsidy program, to restrain unauthorized, unbridled government

misbehavior in these areas?

This is a classic series by Time Magazine late last year on what

corporate welfare costs the average American by Donald Bartlett

and James Steele. I am told that this is one of the most sought

after issues of Time Magazine on the stands, and it got enormous

letters of approval by people who read this series, and I will submit

this for the record as well.

I might also note, Mr. Chairman, that the area of remedies here

in my testimony are detailed, and they are put there for discussion.

They are put there for discussion, debate, and I would just like to

quickly summarize them.

One would be a bill to eliminate all corporate welfare and make

them start all over again. Remember zero-based budgeting? You

just eliminate all corporate welfare and say to the mining companies, come to Congress, mining companies, and tell us why you

should get hard rock minerals on the Federal lands free of charge

from the U.S. Government, which is the trustee for taxpayers for

these minerals.

Then there should be citizen standing to sue, to challenge corporate welfare abuse. How many people realize that the citizens

are completely shut out from using the courts to challenge executive branch abuses in corporate welfare, including alleged illegal

positions by the government or looting of the U.S. Government,

say, by oil companies who year after year underpay their royalties

on the Federal lands where oil is being explored?

How about small funding for town meetings on corporate welfare

all over the country to inform the public of this vast area of power

play allocation of their tax dollars? What about sunsetting corporate welfare and basically giving them a term of office. You

know, $300 a month welfare mothers are now under a 5-years-andyou-are-out requirement, but corporate welfare kings don’t have to

adhere to any 5-years-and-out requirement.

What about annual agency reports on corporate welfare? Make

these agencies list every program so Congress can have data and

information on which to proceed with its analysis. Why not list

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minished threshold and publish this on the Internet? By the way,

Mr. Chairman, the Internet needs to be much more focused on by

the Congress. All the voting records of Members of Congress should

be on the Internet, and unfortunately, that is not the case.

What about a Securities and Exchange Commission requirement

for corporate welfare disclosure? The SEC law could be amended to

require publicly traded companies to list the subsidies both by type

and amount they receive from governmental bodies and to publish

this information on the Internet.

What about limits on multimillion dollar annual executive compensation in government subsidized or sponsored corporations?

What about prohibiting government subsidies to criminal corporations, corporations which are adjudicated to engage in criminal

price fixing, like Archer-Daniels-Midland has been on the lysine

scandal?

What about reciprocal obligations, where the government gets

something in return from the corporate welfare beneficiaries?

What about government properties, real or intangible, that

should be presumptively sold, leased, or rented at market rates?

What about promoting competition in the allocation government

resources?

What about competitive bidding for exclusive rights to taxpayer

assets where exclusivity has been determined to be appropriate?

What about reasonable pricing provisions for that Taxol drug and

for that woman with ovarian cancer and for the taxpayers who

have to pay at both ends to develop the drug and to pay for Medicaid?

What about ending fossil fuel and nuclear power research and

development subsidies and letting energy conversation and renewable energy operate on a level playing field?

What about a presumption against discount insurance which

often gets to market risky technology?

What about paybacks for bailouts?

What about preventing foreseeable financial bailouts with

amendment to H.R. 10, which I might add Senator D’Amato asked

us to submit when we testified on that legislation. This is an

amendment, which I included in my testimony on the back page,

that would prevent any bailouts of these giant financial conglomerates that H.R. 10 would facilitate. We drafted this with great

specificity, Mr. Chairman, and then it fell on deaf ears in the Senate.

What about eliminating all corporate tax expenditures or requiring regional and national compacts, et cetera?

Mr. Chairman, the time is now for you and other courageous

Members of Congress, who truly believe in ending corporate welfare as we know it, to launch a series of General Accounting Office,

Congressional Research Service and Congressional Budget Office

studies and conduct extensive hearings in Washington, DC, and

across the country to introduce and vigorously push for corporate

welfare legislation and, by your leadership, to force this issue with

such broad appeal to many liberals and conservatives, to small taxpayers and small businesses all over the country on to the front

pages and the nation’s television screens.

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There is a nascent, national consumer-taxpayer-environmentalworker-small business coalition waiting to be consolidated on this

issue. It is an issue that sometimes divides progressives from liberals and conservatives from corporatists. But it is an issue which

unites many people who have never been united before to form a

powerful political force that can help rescue our political democracy

from the narrow interests that now dominate.

Given its breadth, this testimony necessarily paints in broad

strokes. It has unassailable rhetoric, as well as deep and

irrebuttable evidence, but it is important to reiterate that we do

not oppose all corporate welfare. It is important that even good corporate welfare programs operate with safeguards in place to ensure

procedural fairness, full disclosure of beneficiaries, frequent congressional review, citizen standing to challenge in the courts and

reciprocal payments, as well as nonmonetary commitments from recipients.

You know, during the energy crisis, we didn’t want to be dependent on foreign oil. It may have been valid to have corporate welfare

programs to facilitate energy efficiency or solar energy.

This hearing, Mr. Chairman, is an important and historic beginning, but if it is not followed up by more hearings and a sustained

effort that involves more and more Members of Congress and citizen organizations, it will be of modest consequence. It is our obligation, Mr. Chairman, to support your courageous position here

and those of your colleagues and to support it day after day; and

to help expand the opportunity presented by this public hearing,

where Congress is at its best in educating the people about very

important issues that are not just economic or not just taxpayer,

but deal in many areas from the environmental to the level playing

fields we would like our economy to adhere to.

So bring on the corporate welfare kings to testify before your

committee, and the excitement will be such that it may even make

the Geraldo Show and other television shows that thus far have

somehow, in their sadomasochist proclivities, ignored the subject of

corporate welfare.

Thank you, Mr. Chairman.

[The prepared statement of Ralph Nader follows:]

PREPARED STATEMENT OF RALPH NADER, CONSUMER ADVOCATE

Chairman Kasich and members of the House Budget Committee, thank you for

the opportunity to testify today on the vast subject of corporate welfare.

Today’s hearing is long overdue. A significant percentage of the business of Washington, DC, revolves around corporate welfare—with lobbyists, trade associations

and business executives lobbying to obtain or protect special, favorable treatment

from the Federal Government—but curiously, notwithstanding our efforts since

1970, there has never been a Congressional hearing devoted to a comprehensive assessment of the issue. Government agencies and research offices have conducted

only a handful of Joint Economic Committee-type studies in recent decades which

tried just to inventory the long list of mechanisms by which the government distributes tax revenues and other public assets to private business.

Mr. Chairman, you deserve major credit for issuing a clarion call for Congressional attention to corporate welfare, and for leading various legislative efforts over

the years to end egregious corporate welfare programs that benefit narrow business

interests at the expense of the taxpayer, and often, one should add, at the expense

of other important concerns, such as environmental protection, economic competition, fair consumer prices, national security, job creation and a well-functioning democracy.

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As you know well, Mr. Chairman, the myriad of corporate welfare programs gen- erally do not persist on the merits. Rather, they remain entrenched and continue

to grow because strong and well-organized business interests, with huge monetary

concerns at stake, aggressively work to defend and expand them—often hand in

hand with powerful Members of Congress with whom they maintain mutually advantageous relationships. Cleaning the corporate welfare slate will not be easy. There is only one change that will counteract the entrenched interests which cre- ate, shield and rationalize corporate welfare programs: an informed and mobilized

citizenry. Absent organized and focused public outrage, legislative efforts will yield

minimal success as compared to the overall scale of the corporate welfare budget.

To make this claim is not to belittle such efforts. Legislative initiatives directed toward particular programs and abuses can achieve reforms that are important in

their own right, and legislative proposals can and should be part of the very process

of generating citizen interest and focused attention.

But innovative legislative proposals will not, by themselves, be sufficient to create

an informed public opinion that translates into the action needed to create a countervailing force to the business lobby for corporate entitlements.

Many steps will be needed to create that countervailing force, but one very important step will be a series of high-profile Congressional hearings that shine the light

on egregious corporate welfare abuses, develop an analytic framework to assess corporate welfare programs, develop procedures and hone proposals to eliminate or control corporate welfare programs, bring the Corporate Welfare Kings (beneficiary

CEOs) before Congressional committees to justify their dependence on the public

dole, generate news media stories and investigations, and elevate the visibility of

the issue in policy debates within the Beltway and around the country in town hall

meetings. This hearing should begin that process. We hope it will be followed in

coming months and years by more detailed inquiries.

In this testimony, after preliminary remarks on the evolution of corporate welfare

and on defining corporate welfare, I will offer a rudimentary corporate welfare classification scheme and highlight particular examples of each category. (The categories offered: government giveaways; government-funded research and development; bailouts; tax expenditures; government-sponsored enterprises; loans and loan

guarantees; state and local corporate welfare; export and overseas marketing assistance; defense, transportation and other pork; loans and loan guarantees; and grants

and direct subsidies.) In addition to fleshing out the typology, the discussion of examples will be intended to offer insights into the following questions:

• What rationales do private interests use to secure subsidies from the government, and then to shield them from challenge, from either the legislative and judicial branches?

• How do corporate welfare programs become entrenched and immune to cessation or reform?

• To what extent do foreign corporations benefit from the expenditure of U.S. taxpayer dollars on corporate welfare?

• How can fair pricing mechanisms be used to allow beneficial programs to be

preserved, while eliminating welfare subsidy components?

• What criteria should be used to determine when corporate welfare programs

should simply be cancelled, and when they should be restructured to extract public

benefits, pay-backs or investment returns from the government-supported enterprise?

• What administrative due process should apply to corporate welfare? How can

taxpayers be given standing and procedural rights under the Administrative Procedures Act and other relevant statutes to challenge arbitrary agency action in the

corporate welfare area?

• How do economic subsidies disadvantage nonsubsidized competing businesses,

who pay their dues, and foster undesirable market outcomes?

At the conclusion of my testimony, I will suggest, for discussion purposes, reforms

to rein in the proliferation of corporate welfare programs. These will not be in the

form of a target list of programs that should be cancelled (though there are certainly

many of these, and several highlighted here). Rather the proposals are overarching

approaches, elements of a comprehensive approach to corporate welfare.

DEFINING AND SCRUTINIZING CORPORATE WELFARE

‘‘Corporate welfare’’ is a general term in need of definition before it can become

the basis of legislative action.

Many have offered a working definition that looks to the benefits conferred and

costs incurred by a particular program, subsidy or loophole. In these definitions, if

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efits. Others have asked whether the private, corporate benefit outweighs the overall public benefit. These are important questions—questions which should be asked

of any corporate welfare program—but they are too narrow to serve as the basis for

defining corporate welfare. Defining corporate welfare in this fashion also immediately orients the debate about any particular program into a contest over the program’s merits, with defenders of the program inevitably explaining how it creates

jobs and therefore is worthy of taxpayer support.

A more robust definition of corporate welfare looks not to the benefits conferred

on the public, but to the benefits conferred on corporations as compared to any corporate payment, or goods or services provided, to the government. If a program involves the government giving more to private companies than it gets back—that is,

where it is engaging in a transaction that cannot be justified as a fair market value

exchange—then it should be considered corporate welfare. No definition of corporate

welfare will be all-inclusive—some element of know-it-when-I-see-it will have to remain, including for pork-laden contracts for unnecessary goods or services—but applied flexibly, this definition should serve well.

The advantage of this definition is that it suggests analytic inquiries other than

whether a program is ‘‘good’’ or ‘‘bad.’’ It allows for the possibility of ‘‘good’’ corporate

welfare—programs that confer subsidies on business but are merited because of the

overall public gain. (As I will reiterate, I believe there are cases of ‘‘good’’ corporate

welfare—but these too should be subjected to proper procedural and substantive

checks.)

In deferring the debate over a program’s merits, this definition of corporate welfare channels discussion so that a series of inquisitive screens can be applied to the

program, including but not limited to whether the program should be cancelled.

Among the screens that should be applied:

1. Does the program serve some broad public purpose that suggests it has merits

beyond the benefits it confers on particular companies? If not, the program should

be cancelled.

2. If it does serve some public interest, can the government achieve the same ends

or more important public goals by retaining an interest in an asset being given

away or doing a service in-house?

3. Does the program involve functions that should properly be left to the market?

4. If the government is going to distribute assets or contracts or tax breaks to private parties, can and should it do so in a nonexclusive way so that competition is

promoted?

5. If the government is going to provide corporations with services, or give away

its assets, is there any reason it should not charge, or should charge below-market

rates?

6. Are there nonmonetary reciprocal obligations that should be demanded of special interests that receive government benefits? These might include, but not be limited to, reasonable pricing of government-subsidized goods and services sold to consumers.

7. Is the program subject to constitutional or other judicial challenge as a waste

of taxpayer assets, or use of taxpayer assets for corporate welfare, rather than the

general welfare? Does the program exceed the implementing agency’s statutory authority? What are the procedural and substantive avenues for citizen challenge of

the program to restrain unauthorized agency action?

8. Is there an institutional means of periodic review of the program to ensure it

continues to serve its broader public purposes? Are criteria delineated by which the

program should be evaluated? Does the program require reauthorization or will it

have automatic renewal?

These queries should be applied in public and Congressional debate, but they

should also adopted in comprehensive legislation, as suggested in the suggested discussion of proposals at the end of this testimony.

THE EVOLUTION OF CORPORATE WELFARE

Corporate welfare is probably as old as the corporate form, and runs through all

U.S. history. The Crown Corporations such as the Jamestown Company and the

Massachusetts Bay Company that colonized America were given exclusive rights to

exploit designated territories.

While a vigorous tradition of skepticism of corporate power characterized early

America, corporations were frequently able to translate political power into economic benefits from the states. In Ohio, for example, the state legislature passed

the Ohio Loan Law in 1837—disparaged by citizens as the Plunder Law—which required the State to give tax revenues to private canal, turnpike and railroad corVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00173 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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porations while permitting them also to charge tolls. Ohio, like other states, passed

‘‘special legislation’’ to confer benefits on particular companies. Government land giveaways without what we would now call fair-pricing require- ments helped the railroads gain a monopolistic stranglehold over farmers in the

West, spurring the Populist Movement. Special deals between the Federal Government and J.P. Morgan and a coterie of financiers conferred huge profits on Wall Street interest at the turn of the century. Through corruption and the exercise of political power, utilities and trolley sys- tems extracted subsidies and special deals from local and state governments in numerous forms through the first decades of this century. Following the Federal Government expansion of the New Deal and World War II eras, the enlarged Federal budget and enhanced Federal authority offered new opportunities for giveaways and corporate handouts. Defense and nuclear power companies, perhaps more than any others, latched on to the corporate welfare bandwagon and never let go. Other corporate interests found opportunities in the urban

renewal efforts of the 1950’s and 1960’s, which often benefited developers and construction interests at the expense of low-income communities. And elaborate tax

dodges came into vogue. The bailouts of Lockheed and Chrysler in the 1970’s narrowed still further the separation between government and business, and paved the way for the sharp upsurge in corporate welfare of the last two decades. The Reagan-Bush years perhaps marked the beginning of what could be called the corporate state, characterized by an expanding array of welfare benefits for big business as well as a host of other privileges and immunities. That condition continues

to prevail today. The public is widely disenchanted with the corporate welfare budget, especially in the era following the sharp limitations placed on welfare for poor people in 1995.

Now is a time when the corporate welfare tide can be turned, if Members of Congress are prepared to focus the spotlight on corporate welfare programs and beneficiaries, to call the Corporate Welfare Kings to account, and to rally around the

public around a pro-taxpayer, pro-competition, pro-environment, pro-consumer, proworker, anti-corporate welfare agenda.

GIVEAWAYS

The U.S. Federal Government is quite probably the richest property owner on earth. The government owns vast tracts of land, including oil and mineral riches,

forests, thousands of buildings and plants, the public airwaves and much more. Because they often do not appear as budgetary debit items, government giveaways too frequently escape the corporate welfare stigma. Giveaways are in fact one of the

purest forms of corporate welfare—a something-for-nothing, or something-for-too-little, proposition. The level of public outrage would be high if the government wrote

a $70 billion check to the broadcast industry—but that is effectively what happened

when the Federal Communications Commission, pursuant to the Telecommunications Act of 1996, handed over the digital television spectrum to existing broadcasters.

The government retains its property as the shared commonwealth of the people of the United States, and there should be a strong presumption against giving it

away. Where a reasoned decision is made to distribute some of that wealth to private parties, the government should explore whether it can distribute the public assets in a nonexclusive, public-purpose way, or in a fashion that promotes competition. When public assets are going to be distributed to private parties, there should

be a strong presumption that the government should receive a market-rate purchase

or lease price; and where taxpayer assets are to be distributed to a narrow class

of beneficiaries, below-market purchase or rental rates should be accepted only in

the most compelling of circumstances. Finally, prior to transfer or government property to private parties, the government should consider whether there are nonmonetary reciprocal obligations that should be demanded of recipients—these may include everything ranging from binding promises to adhere to higher environmental

standards to contributing equipment to support noncommercial television. With stealth government giveaways of public assets, such as the internet naming rights discussed below, accelerating, there is an urgent need for the adoption of procedural and substantive protections to prevent the looting of the commonwealth.

DIGITAL SPECTRUM GIVEAWAY

In one of the single biggest giveaways in U.S. corporate welfare history, the Federal Communications Commission (FCC) on April 7, 1997 donated broadcast licenses

for digital television to existing broadcasters.

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Under the terms of the giveaway, the broadcasters will pay nothing for the exclu- sive right to use the public airwaves, even though the FCC itself estimated the

value of the digital licenses to be worth $11 billion to $70 billion. The giveaway was mandated, in part, by the 1996 Telecommunications Act, which prohibited, under demands by the broadcaster lobby, the FCC from auctioning off

the airwaves. The Telecommunications Act also required the FCC, if it decided to

allocate the licenses, to give them only to incumbent broadcasters. The licenses will permit the broadcasters to air programs through digital signals, which offer higher picture quality than currently used analog broadcasting. FCC

rules will require broadcasters in the largest cities to air digital programs in the

next few years. All of the broadcasters will continue to air analog versions of their

programs, at least during a dozen-year transition period. The new licenses are for the spectrum equivalent of five or six digital television channels. The broadcasters will be able to use the extra channels to air multiple

simultaneous programs or, more likely, for other purposes, potentially including

data transfer, subscription video, interactive materials, audio signals and other notyet-developed innovations. In these enterprises, they will compete at advantage with

noncorporate-welfare receiving companies. The original theory behind granting the broadcasters such wide spectrum space was to permit them to air high-definition television (HDTV). But many broadcasters

may choose not to air HDTV, and instead will receive the extra spectrum channel

space as a super-windfall-yielding a no-license-fee revenue stream from nonbroadcasting uses of the spectrum, in addition to revenues from no-license fee airing of

digital television broadcasts. As former Senate Majority Leader Bob Dole has recognized, there is no conceiv- able reason why the incumbent broadcasters should have been given exclusive

rights to use the airwaves. Other possible television broadcasters should have been

given the right to bid for portions of the digital spectrum, and so should have other

potential users, such as data transmission companies.

These competing business interests’ protestations were completely trumped by the power of the National Association of Broadcasters (NAB), however.

This is the quintessential perversion of democracy: the broadcasters pay nothing to the public for the right to air programming over the public airwaves; then they

use the influence they gain over politicians from their use of these public resources

to extort still greater subsidies; and all the while they do not allow this subject to

be covered on their news programs. Only a few weeks after consummating their tremendous coup at the FCC, the broadcasters expressed sudden concern with the fate of viewers who would be

forced, in 12 years time, to buy new televisions if the broadcasters forfeit their analog stations, as currently scheduled. This would indeed be an extraordinary consumer shakedown, but not one that the broadcasters are positioned to challenge in

good faith. They are now lobbying to maintain their analog stations—another public

resource which they exploit free of charge. The FCC estimates the value of the analog spectrum at as high as $132 billion.

Lost in the giveaway was the opportunity to set aside portions of the broadcast

spectrum for public access, educational and public interest programming.

However, a new opportunity is presented by the as-yet-unspecified public interest

obligations of the broadcasters, which could be defined to include public interest and

public access programming. As part of their public interest obligations, the broadcasters should be required to allocate a substantial portion of their new spectrum

space and time to public access programming, and to fund quality programming.

Specially chartered, democratically governed citizen television networks could develop programming, or moderately funded programming opportunities could be allocated to qualifying civic organizations. Such a modest dose of media democracy can

only be good for our nation’s democracy.

Others have suggested additional requirements that should be imposed on the

broadcasters as public interest obligations. People for Better TV, a national coalition

including the American Academy of Pediatrics, the Civil Rights Forum on Communications Policy, the Communications Workers of America, the Consumer Federation

of America, the league of United Latin American Citizens, the NAACP, the National

Council of Churches and the National Organization for Women, is calling for a debate over and analysis of serious proposals to ensure that broadcasters devote meaningful coverage to public affairs, that the broadcasters respect and nurture rather

than exploit children, and that measures are taken to promote racial, ethnic and

gender diversity in television programming.

However, as People for Better TV points out, the Gore Commission which was

charged with considering how to define the broadcasters’ public interest obligations—remember, again, these obligations are the only payment the broadcasters

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will make for controlling now $200 billion in taxpayer airwaves assets—failed to rise

to the occasion. (The Los Angeles Times derided the report as a ’anational scandal.’’)

Moreover, although the print media devoted some attention to the issue, as People

for Better TV notes, ‘‘Television stations, perhaps fearing regulation, kept the issue

off the local and national news. The discussion about how TV stations will (or will

not) serve their community is taking place in the same back-room, deal-making,

back-slapping environment that always preoccupies official Washington.’’ ‘‘The spectrum giveaway and the secrecy surrounding this important debate are travesties of American democracy,’’ the coalition rightly concludes.

THE 1872 MINING ACT

No discussion of government giveaways can fail to take note of the absurd Mining Act of 1872. The Act—which recently celebrated its 125th giveaway anniversary!—

is the subject of regular reform efforts. The reason is simple: the Act allows companies to purchase Federal land for $5 an acre or less and to mine valuable minerals

from Federal land without paying a cent in royalties. Whatever the merits of the

Act at the time of passage, when it was intended to help settle the West, it has long

been clear that the Act serves an unjustifiable giveaway to narrow corporate interests, including foreign corporations. As Carl Mayer and George Riley note in their

history of the 1872 Mining Act, ‘‘Many of the deficiencies noted three of 4 years after

the law’s passage have been cited repeatedly by committees and legislators during

the last century. The critics have focused on four problems: the failure of the law

to return appropriate revenue to the Treasury; the inability of the Federal Government to halt fraudulent acquisition of mineral land; the loss of government control

of patented land which passes out of public ownership; and the elevation of mining

to the highest use of the land.’’ But reform efforts regularly fail, thanks to mining

lobby interests—a lobby with power vastly disproportionate to its economic contributions, which are estimated at about one-tenth of 1 percent of the West’s total income. Many of the mines on Federal or patented land are literally billion-dollar give- aways—often to foreign companies. In 1994, American Barrick Corporation, a Canadian company, patented nearly 2,000 acres of public land in Nevada that contained

over $10 billion in recoverable gold reserves. Taxpayers received less than $10,000.

In 1995, a Danish company patented land in Idaho containing more than $1 billion

in minerals for a price of $275.

The Mineral Policy Center estimates that mining companies extract $2 billion to $3 billion in minerals from public lands every year—royalty free. From 1872 to

1993, mining companies took more than $230 billion out of the Federal lands, royalty free, according to the Mineral Policy Center. In 1994, Congress imposed a moratorium on patenting, but already filed patents continue to be filed, and mining companies continue to work already claimed lands. Third World countries routinely strike better deals with mining companies than does the most powerful government on the planet. A mere 8 percent royalty on existing mines would bring $200 million a year into the Federal coffers. The subsidized mines interfere with other economic and noneconomic uses and

values of public lands. University of Montana Professor Thomas Power has developed cogent arguments that the destruction of the natural environment associated

with mining on Federal lands imposes real economic costs, absorbed both by the

tourism industry and residents whose land values and basic decisions to live in the

West are based in part on the high quality living environment of the region. The

Mineral Policy Center estimates direct cleanup costs for the more than half million

abandoned mines on Federal lands in the $30 billion to $70 billion range. In March 1999, the Clinton administration ruled that it would enforce environmental laws that limit the ability of mining companies to dump waste on public

lands, and thereby limit the extent to which hardrock mining can be done. The mining industry has set fast to work to repeal this ruling, through a rider to the Interior Appropriations bill or other mechanisms. Congressional enactment of a repeal

would be a wholly unjustified degradation of the environment and environmental

law. For well over a century, Congress has been more than generous enough to the

mining industry.

INTERNET GIVEAWAYS

An evolving giveaway of public assets involves the management of the U.S. government’s internet assets. The Federal Government currently contracts with Network Solutions, Inc. (NSI), to manage certain domain name registrations. After entering into the contract in 1993, NSI was later acquired by SAIC for $3.9 million,

and subsequently was permitted to charge U.S. consumers wildly excessive fees for

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registering internet domain names. NSI’s monopoly on the .com and other valuable

domain names has turned a tiny initial investment into a firm with a market capitalization of $2.5 billion—thanks to control of the power to sell the public the right

to use their own domain names. At no time did the government seek any competitive bids to determine the prices that consumers and business should pay for domain name registrations. As public resentment over the high prices and poor service

have grown, the government is now trying to find ways to introduce competition.

But NSI is using its monopoly profits to lobby the Congress and the executive

branch to maintain its monopoly.

As the Administration seeks to replace the current NSI monopoly with something

new, it is using its earlier mistakes as a rationale for a new government giveaway

that could create an entirely new set of governance problems for the public. Currently the Administration is negotiating a transfer of the ‘‘A DNS root server’’ to

ICANN, a private nonprofit organization. The new nonprofit organization seeks the

authority to impose fees on all internet domain names, to set international policy

on trademarks and other issues, and to launch an undefined set of policy initiatives

that it will fund from fees assessed on domain registrations. This new initiative

raises a number of questions regarding its lack of accountability, and it is justified

largely on the basis that the NSI monopoly needs to be ‘‘fixed.’’ But it is hard to

see how the creation of a new unaccountable body constitutes a ‘‘fix.’’

GOVERNMENT RESEARCH AND DEVELOPMENT

The Federal Government invests tens of billions of dollars annually in research

and development (R&D), most prominently through the Department of Defense, the

Department of Energy and the Department of Health and Human Services. These

investments lead to new inventions and the award of thousands of patents—publicly

financed, and frequently publicly owned intellectual property.

Since the early 1980’s, the government has routinely given away the fruits of the

research it sponsors, granting private corporations exclusive, royalty-free rights to

commercialize government-financed inventions while failing to include and/or enforce reasonable pricing requirements in the licenses. The result: a corporate welfare

bonanza for biotech, computer, aerospace, pharmaceutical and other firms.

In the critical area of pharmaceuticals, for example, this research giveaway policy

leads to superprofiteering by giant drug manufacturers, who charge unconscionably

high prices for important medicines—costing consumers, and often resulting in the

denial of treatments to consumers who are unable to pay high prices. In an irony

that must keep the staff of the Pharmaceutical Researchers and Manufacturers Association in stiches, perhaps the largest ripped-off consumer is the Federal Government—the same Federal Government that paid for the drugs’ invention—which

must pay extravagant fees through the Veterans’ Administration and Medicaid (although the government-brokered prices are lower than those paid by individuals).

It wasn’t always so. Following the creation of a major Federal role in research

sponsorship in World War II, the Justice Department concluded in 1947 that ‘‘where

patentable inventions are made in the course of performing a Government-financed

contract for research and development, the public interest requires that all rights

to such inventions be assigned to the Government and not left to the private ownership of the contactor.’’ The Justice Department recommended also that ‘‘as a basic

policy all Government-owned inventions should be made fully, freely and unconditionally available to the public without charge, by public dedication or by royaltyfree, nonexclusive licensing.’’

The Justice Department offered what remains a compelling case for nonexclusive

licensing: ‘‘Public control will assure free and equal availability of the inventions to

American industry and science; will eliminate any competitive advantage to the contractor chosen to perform the research work; will avoid undue concentration of economic power in the hands of a few large corporations; will tend to increase and diversify available research facilities within the United States to the advantage of the

Government and of the national economy; and will thus strengthen our American

system of free, competitive enterprise.’’

Even in 1947, the Justice Department position was not the uniform standpoint

of the Federal Government. The Defense Department consistently maintained a policy of allowing contractors to gain title to government-sponsored inventions, so long

as the Pentagon was able to maintain a royalty-free right to use the invention.

In the ensuing decades, government policy evolved unevenly between different

agencies, with some gradual increase in exclusive rights transfers to private parties.

The various agency policies favoring exclusive licensing were done without Congressional authorization. Seven Members of Congress and Public Citizen filed suit in

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1974 against the disposition of government property without Congressional authorization, but the case was dismissed procedurally on lack of standing grounds. Beginning in the mid-1970’s, however, big business, in collaboration with partners at major research universities, began lobbying for a major transformation in government patent policy. Based on highly questionable evidence, the business-university

alliance argued that exclusive licensing was necessary to spur private sector innovation and development of government-funded inventions. The concerted business-university campaign succeeded in 1980 with passage of the Bayh-Dole Act, which transferred exclusive control over many government-sponsored inventions to universities and small business contractors. Universities were in

turn permitted to exclusively license to private corporations, including big businesses.

It is important to note that the Bayh-Dole Act was contentious at the time of passage. Other alternatives proposed at the time included a suggestion by Admiral

Hyman Rickover that government inventions be licensed nonexclusively for a period

of 6 months; and that if no party had indicated an interest in commercialization,

that the patent then be open to competitive bidding for an exclusive license. A proposal by President Carter, which passed the House of Representatives prior to passage of the Bayh-Dole Act, would have limited the exclusive license granted by government to designated ‘‘fields of use.’’ But presented with the Bayh-Dole Act, President Carter signed it.

In 1983, President Reagan issued a Presidential Memorandum which instructed

executive agencies to grant exclusive inventions to contractors of all sizes. Again,

another critical phase in the path of wholesale giveaway of government inventions

occurred as the result of unilateral executive action, without Congressional authorization.

In 1986, Congress passed the Federal Technology Transfer Act, which authorized

Federal laboratories to enter into exclusive contracts with corporations to develop

and market inventions originating in the Federal labs. The Federal labs have enormous discretion in working out exclusive licensing arrangements and, without even

the universities’ interest in earning some reasonable royalty, the labs have effectively given away hugely profitable taxpayer-financed inventions with no public return either in the form of royalties or, more importantly, meaningful restraints on

company pricing.

THE TAXOL CASE

Consider the case of taxol, a leading anti-cancer drug. In January 1991, the National Cancer Institute licensed taxol to Bristol-Myers Squibb. In the Cooperative

Research and Development Agreement (CRADA), NCI agreed to abandon its model

‘‘reasonable pricing’’ language. Instead, it used the following:

‘‘NCI has a concern that there be a reasonable relationship between the pricing

of Taxol, the public investment in Taxol research and development, and the health

and safety needs of the public. Bristol-Myers Squibb acknowledges that concern, and

agrees that these factors will be taken into account in establishing a fair market

price for Taxol.’’ This exhortatory phrasing did not exactly place NCI in a position

to discipline Bristol-Myers Squibb’s pricing of the drug.

Following a bizarre negotiation to set a reasonable price, Bristol-Myers Squibb

markets Taxol at a wholesale price that is nearly 20 times its manufacturing cost.

A single injection of Taxol can cost patients considerably more than $2,000—and

treatment requires multiple injections.

That the contractual language was so weak is all the more remarkable because

of the extraordinarily minor contribution that the company made to the development of the drug, although BMS would of course claim it has done important collateral research. NCI discovered, manufactured and tested Taxol in humans. BMS’s

only contribution to the New Drug Application (NDA) to the Food and Drug Administration was to provide 17 kilograms of Taxol to NCI and to process paperwork.

The value of the 17 kilograms was probably less than $5 million. Bristol-Myers did

not pay any fee to NCI in entering into the CRADA, and it does not pay royalties

to the U.S. government on its billion dollar annual sales revenue from Taxol.

Bristol-Myers Squibb maintains exclusive rights over Taxol due to its control over

the health registration data (clinical trial data used for regulatory approval of pharmaceutical drugs), which it gained as a result of the CRADA. The company does not

have a patent on the drug, because it was invented by Federal researchers. BristolMyers Squibb is now leading a major effort—in the United States and around the

world—to extend the period during which it maintains exclusive control over the

data submitted to receive FDA approval. A National Economic Research Associates

study found the consumer cost of an additional 2 years of Bristol-Myers market exVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00178 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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clusivity for Taxol will be $1.27 billion, including $288 million paid by Medicare.

Some of those without insurance are simply unable to afford the drug. The cost of

preventing generic competition throughout much of the rest of the world is to deny

most patients access to the medicine altogether. Though particularly stark, the Taxol case is not unique. Because the Federal Gov- ernment is responsible for the resources leading to the invention of a very high percentage of the most important new drugs, especially anti-cancer drugs, the problem

of government licensing is frequently posed. This is a consumer issue of the highest

order of significance. Where the government hands an annual billion-dollar revenue earner to a private company for a pittance, is it too much to ask the relevant Federal agency to enforce

reasonable pricing requirements? Might an avenue of citizen challenge to the terms

of the NIH-Bristol-Myers Squibb deal have changed the terms of the contract, saving consumers millions of dollars and perhaps saving lives?

THE PARTNERSHIP FOR A NEW GENERATION OF VEHICLES (PNGV)

The Partnership for a New Generation of Vehicles (PNGV) is a public/private

partnership between seven Federal agencies and 20 Federal laboratories, and the

big three automakers—General Motors, Ford and what is now Daimler Chrysler. According to the Department of Commerce, the PNGV ‘‘aims to strengthen America’s

competitiveness by developing technologies for a new generation of vehicles.’’ The

program was announced on September 29, 1993 by President Clinton, Vice President Gore and the CEOs of the domestic auto makers.

PNGV’s main long term goal is to develop a ‘‘Supercar,’’ which is described as ‘‘an

environmentally friendly car with up to triple the fuel efficiency of today’s midsize

cars—without sacrificing affordability, performance, or safety.’’ This could also be

described as an effort to coordinate the transfer of property rights for federally funded research and development to the automotive industry. The agencies involved include NIST, DOD (US Army Tank Automotive Research, Development, and Engineering Center and the Advanced Research Projects Agency), DOE (various national

laboratories), DOT (NHTSA, the Research and Special Projects Administration, FHA

and Federal Transit Administration), EPA (the National Vehicle and Fuel Emissions

Laboratory), NASA and NSF.

It is hard to imagine an industry less in need of government support for research

than the highly capitalized auto industry, which is reporting record profits year

after year. The government is supporting research that the industry would or should

do on its own in response to market demands, or could easily be required to do in

order to meet tougher environmental standards.

The program also poses the issue of the terms under which patents and other taxpayer-funded intellectual property are transferred to Ford, Chrysler, General Motors

and other large firms. This poses the same problems of monopolistic or oligopolistic

control over government-funded research as the biomedical research example, and,

if any part of the program is deemed worthy of preservation, similar calls for remedies of nonexclusive licenses. The PNGV program is clouded by secrecy, with negotiations over these and other important issues undertaken in secret, with no public

comment.

The structure of the PNGV program creates special anti-competitive problems.

The program gives participants an effective exemption from antitrust laws, even

though competition in research and development is more likely to yield innovation

than bureaucratized collaborative arrangements such as the PNGV initiative.

History provides a clear warning against such arrangements. In the 1960’s, the

Justice Department filed suit against the automakers for product fixing—for refusing to introduce air quality enhancing technologies. It is instructive to review excerpts from the complaint in the case. It alleged that the U.S. automakers and their

trade association had conspired ‘‘(a) to eliminate all competition among themselves

in the research, development, manufacture and installation of motor vehicle air pollution control equipment; and (b) to eliminate competition in the purchase of patents

and patent rights from other parties covering motor vehicle air pollution control

equipment.’’ The auto companies subsequently signed a consent decree that stipulated they would not engage in collusive behavior among themselves and their trade

association. The Reagan administration released the car makers from the consent

decree; and now the Clinton administration, acting as if the collusive history never

occurred and was not known, has waived antitrust laws and assisted the automakers in resuming noncompetitive research and development.

Today, the PNGV initiative is serving as a smokescreen behind which the automakers hide to protect themselves from more stringent air quality standards. (Exacerbating the problem, the Green Scissors Coalition points out, is the fact that the

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Department of Energy’s expenditures on diesel vehicles directs funding into a highly

polluting technology.) Deployment of existing technologies could dramatically enhance auto fuel efficiency and reduce greenhouse gas emissions, but the automakers

choose not to make these technologies widely available. Notably, the PNGV program

itself does not require the deployment in mass production of the technologies it

seeks to develop. The leading innovators in fuel efficiency have been Toyota and

Honda, which notably do not participate in the PNGV program. Progress from the

PNGV participants only seems to come in response to new announcements from

nonparticipants—again illustrating the importance of competition.

Why should the government waive antitrust laws and pay the highly profitable

auto industry to collude on research that it could and should undertake on its own?

What is the rationale for failing to extract guarantees that newly developed technologies will be deployed? Where are the procedural mechanisms to allow citizens

to challenge this government-authorized and -funded corporate-welfare collusion?

What are the paybacks to taxpayers for this program? Six years have gone into the

program, and there is nothing to show for such taxpayer largesse.

SOLUTIONS

The PNGV is not the only example of a Federal research program that should be

eliminated. Research and development programs in areas like fossil fuel (among

them the clean coal technology program, and the Department of Energy’s coal and

petroleum R&D programs) and nuclear power (the Nuclear Energy Research Initiative) invest funds in support of highly capitalized industries to promote undesirable

nonrenewable technologies. Such programs are not defensible.

More interesting questions arise in areas where the government is legitimately involved in the research and development sphere, such as in biomedical research.

There are several potential ways to resolve the giveaway problem embedded in current policy.

One is to revitalize the Rickover proposal of immediate nonexclusive licensing, followed by the possibility of exclusive licensing if no party accepts a nonexclusive license. This arrangement would guarantee competition and keep prices down. If exclusive licensing proves necessary, in a Rickover-style scheme or otherwise, the license should be granted on the basis of an auction. The auction should consider factors such as: the strongest guarantees of low price marketing of the final product,

buyer commitment to invest profits in research and development, and royalties to

the government. The weight attached to these factors should perhaps vary according

to the type of invention. For example, in the case of pharmaceuticals, reasonable

pricing should take priority over royalty returns to the government.

Federal agencies should be able to adopt these policies on their own, but the recent history of cozy relationships between manufacturers, universities and Federal

laboratories has led Federal agencies and universities alike to cut sweetheart deals

that boost corporate profits while punishing consumers and failing to recoup government investments. Congressional action is needed, and citizens should be guaranteed procedural opportunities to challenge sweetheart arrangements that do not

comport with statutory requirements.

BAILOUTS

The modern corporate bailout period began with the 1974 Lockheed bailout, escalated with the 1979 Chrysler bailout and soared with the gigantic savings-and-loan

bailouts of the late 1980’s and early 1990’s.

These bailouts, of course, are generally doled out to large corporations and industries. When a family-owned restaurant fails, no government intervenes to stop it

from going belly up. If a small factory can’t pay its bills, it goes out of business.

The bailout, a premier form of corporate welfare, is typically yet another market distortion against the interests of small and medium-sized businesses.

Bailouts are different from other corporate welfare categories in that they are ad

hoc and unplanned. There is no ongoing government bailout program to be cancelled

or reformed.

But there are lessons to draw from recent bailout experience that should inform

Congressional action now and in the future.

First is the issue of payback. In the case of the Chrysler bailout, the Federal Government received warrants and ultimately earned a profit on its loans. In the case

of the S&Ls, a special levy was assessed against the industry to pay some of the

costs—although the overwhelming majority of the cost was borne by the taxpayers.

If Congress determines in any particular case that a company or industry bailout

is necessary, it should prioritize the issue of payback—assuring that, after the comVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00180 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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pany or industry is nursed back to health, our government is paid in full, or as close

to full as possible.

Second, monetary payback is not enough. Remember, by definition in a bailout context, the government is stepping in because private financial markets are not

willing to invest in or make loans to the troubled corporate entity or entities. That

is why the government is stepping in. And especially because the government is

doing more than making a market-justified loan, it has a right to make additional

nonmonetary demands, particularly demands designed to prevent the need for future bailouts.

In the case of the S&L bailout, consumer groups repeatedly urged Congress to re- quire depository institutions, as a condition of the bailout, to carry notices in their

monthly balance statements. These notices would have invited consumers to join

democratically run, nonprofit, nonpartisan consumer groups that would advocate for

their interests and provide an institutionalized scrutiny of S&Ls, banks and other

depository institutions. These organizations would have been privately funded, voluntary and statewide. They would have operated at no cost to the taxpayer or to

corporations, because their mail inserts (paid for by the consumer group) would

have used the ‘‘extra’’ portion of the billing envelope, adding no postage costs to the

S&Ls. These financial consumer groups would have functioned as an institutionalized early warning system, ringing alarm bells over emerging problems before they

reached crisis phase. They remain a vital proposal for depository institutions, as

does the proposal more generally for other industries and companies. At minimum,

some variant of this proposal should be attached to every bailout, and where applicable, as in the case of the digital TV spectrum, to giveaways also. Third, the S&L crisis was triggered in large part by industry deregulation, specifi- cally the Reagan administration’s decision to permit S&Ls to raise interest rates

and to leave their area of competence (lending for housing) and venture into other

uncharted, riskier waters. And it was caused, to some considerable extent, by S&L

criminal activity. This experience should be an important cautionary note for corporate welfare opponents: deregulation, underregulation and nonregulation pave the

way for bailouts, especially in the financial sector. Thus Congressional corporate

welfare opponents should be looking very carefully, for example, at the nonregulated

world of hedge funds, and not be satisfied with Treasury-proposed disclosure regulations. The perceived need for Federal Reserve intervention in the case of Long-Term

Capital Management, and the possibility that losses to the firm could have been

much more severe, highlights the potentially serious bailout possibilities that might

be faced in the near future, absent newly imposed regulations. Finally, the danger of creating too-big-to-fail institutions should make corporate welfare opponents advocates of strong antitrust policy (and a significantly enlarged

budget for antitrust enforcement agencies), and supporters of existing restraints on

the concentration of economic power. Thus, corporate welfare opponents should be

leading opponents of HR 10, that would erase the line, established by the GlassSteagall Act and the Bank Holding Company Act, which prevents common ownership of banks, insurance companies and securities firms. If HR 10 or some variant

is enacted, the subsequent mergers in the financial industry will exacerbate the toobig-to-fail syndrome. The concern would be that permitting, say, an insurance company to fail would endanger the health of its conglomerate parent, which would in

turn threaten a crisis of the entire financial sector, including taxpayer-insured

banks. HR 10 would also function to effectively extend the Federal safety net to

nonbank affiliates of federally insured banks. If a bank with a failing insurance affiliate makes bad loans in order bail out the insurance company, and then itself

faces financial trouble as a result, Federal deposit insurance will be there to back

up the bank.

That insurance comes cheap. In 1995, the Federal Deposit Insurance Corporation

(FDIC) stopped collecting deposit insurance premiums from banks. Today, all banks,

except for a handful of the most risk-prone, receive free insurance from the Federal

Government. As a result, the bank insurance fund at FDIC has only about $32 billion on hand to cover all contingencies for 8,983 commercial banks with nearly $3

trillion of deposits. And should FDIC come up short when banks fail in an economic

downturn, it can turn to the U.S. treasury. In 1991, with the bank insurance fund

in the red, Congress voted to establish a $30 billion contingency fund at the Treasury Department to be used in the event that FDIC ran out of deposit insurance

money.

An additional, urgent note on the S&L looters: they’re back. A Federal judge in

California has ruled that Congress broke the government’s contract with Glendale

Federal Bank when capital based on goodwill was outlawed in the 1989 savings and

loan reform legislation. The court awarded the corporations $908.9 million. There

are some 125 suits pending with claims similar to those of Glendale. If the Glendale

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case is a precedent, the government could lose another $30 billion on top of the

nearly $500 billion in principal and interest that has already been obligated in the

S&L bailout, with some of the new corporate welfare benefits conferred, as the New

York Times has pointed out, on some of the more notorious figures in the savings

and loan debacle, including some who are serving prison terms. The 1989 reform

legislation properly insisted that failed institutions be closed and that remaining

S&Ls have adequate capital—actual capital, not the fake capital represented by

something as vague as goodwill (albeit the ethereal capital which the bank regulators had agreed to recognize).

The Glendale case presents two problems. One is how vigorously the Clinton administration Justice Department is contesting the Glendale line of cases. This question is a matter for Congressional investigation, and I have asked Banking Committee Chairman Leach to hold hearings on this and related issues. The second

issue is how the Glendale claims will be paid, if in fact courts hold that they must

be. The New York Times reports that a provision was inserted into last fall’s omnibus appropriations bill—without hearings or open debate, in yet another example

of how corporate welfare giveaways are bound up with anti-democratic procedures—

that was designed to allay fears of lobbyists that the Treasury Department might

refuse to pay or that the industry might end up being saddled with the costs

through a special assessment. This provision must be repealed, and it should be

promptly replaced with legislation that assesses the special fee the industry opposes. The 1989 reform effort, including the implementation of strict capital rules

and the elimination of worthless imitation capital like goodwill restored confidence

in the savings and loan industry, and this has been a sizeable government benefit,

courtesy of the taxpayers, to the entire financial industry and its shareholders, and

particularly to the thrift sector. It would be wrong for the taxpayers, who have

borne the brunt of the savings and loan bailout, to now be required to pay the judgments of these goodwill suits.

A final note on bailouts: The normal course for a company that cannot pay its

bills is not to turn to the government, but to enter into Chapter 11, temporary bankruptcy. Since the 1979 reforms to the bankruptcy laws, large corporations have increasingly used bankruptcy as a refuge from large civil liability claims. A.H. Robins,

Johns Manville, Union Carbide and Dow Corning are among the companies which

have followed this route, and Big Tobacco has waved the threat of bankruptcy to

strengthen its bargaining position in lawsuits and in the legislative process. These

companies have manipulated the bankruptcy code to force victims of dangerous

products or dangerous production processes to absorb some substantial portion of

the costs of their injuries and to separate future income streams from liability. This

manipulation is particularly outrageous because it involves not financial creditors

who misassessed the viability of a bankrupt company’s operation, but innocent victims of corporate violence. There is, in the process, no government transfer to private corporations, but it is the law which permits these companies to victimize consumers twice, first by injuring them and secondly by denying them adequate compensation through the bankruptcy ploy. As this Congress debates bankruptcy law

revisions to crack down on the largely illusory problem of citizens abusing the bankruptcy process, it should instead direct its attention to corporate bankruptcy abuse,

and reform the bankruptcy laws to eliminate this callous form of corporate welfare.

The recent U.S. Supreme Court decision in Fibreboard should work to diminish corporations’ ability to abuse bankruptcy procedures, but legislative revisions are needed as well.

CORPORATE TAX EXPENDITURES

Federal corporate tax expenditures—special exclusions, exemptions, deductions,

credits, deferrals or tax rates—totaled more than $76 billion in fiscal year 1999, according to conservative estimates by the Office of Management and Budget. For the

5-year period 2000-2004, the government will spend more than $394 billion on corporate tax subsidies.

The notion of tax ‘‘expenditure’’ expresses the idea that revenue losses due to preferential tax provisions such as special exclusions, exemptions, deductions, credits,

deferrals or tax rates have the same budgetary implication as a giveaway of government resources. When the government does not collect certain taxes due to tax expenditures, it is spending money. And when the government fails to collect taxes

from corporations due to various legal preferences, it is subsidizing those companies

as surely as if it were making direct payments to them. The issue here is not tax

rates, but tax preferences for particular categories of corporations or corporate behavior.

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The crusade against corporate welfare cannot exclude corporate tax expenditures any more than it can exclude direct government subsidies to corporations. The special insidiousness of corporate tax expenditures is that they are hidden subsidies. They do not appear as budget expenditures, and because they represent

money not collected (rather than payments doled out) they do not generate even the

felt-outrage of off-budget giveaways. Generally, once they have been included in the

Internal Revenue Code, corporate tax expenditures remain on the books unless Congress affirmatively acts to remove them. This situation contrasts to on-budget programs, which require continuing Congressional approval and authorizations to continue, and therefore are automatically subject to ongoing Congressional review, if

not action.

The 1974 Budget Act requires that a list of tax expenditures, corporate and indi- vidual, be included in the budget. This budgetary requirement at least makes it possible to identify the cost of most corporate tax expenditures, and it is a model for

what should be done in other corporate welfare areas, a point to which I return

later.

Many of the corporate tax breaks merit special attention because they actually en- courage undesirable activity, including environmentally destructive activity. The oil

and gas industry, for example, wins major subsidies through the tax code. When the

need to encourage a transition to renewable fuels is clear, why does the Internal

Revenue Code encourage more aggressive oil drilling, with its associated environmental harms, than even market demand would induce? What rationale is there for

artificially biasing the market against conservation and efficiency? Tax escapes and

credits to the oil and gas industry take more than $500 million from taxpayers annually. Similarly, several tax rules encourage wanton mining, beyond that which is justi- fied even on market terms, by providing tax incentives for mining operations. The

effect is to bias the market against recycling interests. The percentage depletion allowance for mining allows mining companies to deduct a certain percentage from

their gross income that exceed the actual loss of value. (These vary by mineral, with

sulphur, uranium and lead given the high percentage of 22 percent.) Rules that

allow immediate expensing of exploration and development, rather than a write-off

as mines are depleted, plus other mining tax escapes, cost the Treasury an estimated $300 million a year. The origin of many of the corporate tax loopholes is the stuff of Washington leg- end. It represents one of the worst distortions of our political democracy. Wellheeled lobbyists, who spin through the revolving door between government and K

Street and represent high-donor corporate interests, facilitate backroom deals that

save their clients millions (or billions). The taxpayers, of course, lose commensurate

amounts.

To take one recent egregious example, a conference committee, reportedly acting

in response to instructions from then-Speaker Newt Gingrich and Senate Majority

Leader Trent Lott, inserted a tax break—not included in the previous House or Senate versions—in the 1997 tax bill that provided special benefits for Amway Corporation and a few others. The tax break came a few months after Amway founder Richard De Vos and his wife Helen De Vos each gave half million dollar soft money contributions to the Republican National Committee. The revision to Internal Revenue

Code Section 1123 applies to two Amway affiliates and four other companies, and

will cost taxpayers $19 million over 10 years, according to the Joint Committee on

Taxation.

Because the Section 1123 revision was so narrowly targeted, it is possible to infer

the strong likelihood of the cause-and-effect relationship between the contributions

and the tax benefit. It is also possible to directly identify one of the main beneficiaries.

The Amway case is typical in the shady fashion in which it transpired. It is somewhat unusual to be able to identify key beneficiaries.

This example highlights why, as important as the reporting requirement of the

1974 Budget Act is, much more disclosure is required in the area of corporate tax

expenditures.

One critical issue is: which companies are benefiting from corporate tax expenditures? OMB should be required to compile a list of the top 50 beneficiaries of each

corporate tax expenditure.

A second critical issue involves the intended effect of each tax expenditure. Aside

from serving as payoffs to politically well-connected companies, tax expenditures are

designed to encouraged specific kinds of behavior. Do they do so? For example, the

Work Opportunity Tax Credit is designed to encourage firms to hire certain groups

of people (such as recent welfare or food stamp recipients) for low-skilled jobs. The

FY 1999 cost of this corporate tax expenditure is $285 million. But it may be that

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the tax credit also provides an incentive for churning of these employees, so that

employers can repeatedly recoup the tax incentive. (Employers can claim a credit

of up to $2,400 for the first $6,000 of a workers earnings; workers must be employed

for at least 400 hours for the credit to be claimed.) The tax credit may also provide

an incentive for employers to replace existing employees with new employees from

the targeted groups. Determining whether or not these unintended and undesirable

outcomes occur requires more data gathering and close Congressional scrutiny. And

because of the nature of tax expenditures—they are effectively ‘‘administered’’ by

the IRS rather than agencies with expertise in the relevant field-scrutiny will come

from Congress, or not at all. One way to facilitate that scrutiny is to have sunset provisions for corporate tax

expenditures (as for other corporate welfare programs), which would require Congressional renewal of tax breaks. The Work Opportunity Tax Credit is indeed scheduled to be phased out by 2004, but an unproven tax expenditure of this sort should

have a shorter first life, say 2 years. At the least, a short initial period for tax expenditures would allow testing and review of whether they achieved their desired

effects, and whether they had any harmful consequences. Generally, and without regard to the Work Opportunity Tax Credit, such a standard seems particularly appropriate given the harsh time limitations applied to welfare for poor people in the

1996 ‘‘welfare reforms.’a

Another area deserving of immediate and priority Congressional investigation is

the apparent underpayment of Federal income tax by foreign corporations. A recent

GAO report concluded that foreign-controlled corporations doing business in the

United States pay approximately half the taxes that U.S. companies pay. The report

found that the approximately 15,000 large U.S. companies paid an average of $8.1

million in Federal income taxes in 1995. The approximately 2,700 large foreign-controlled in the United States paid an average of $4.2 million in 1995. Foreign-controlled companies paid taxes as a percentage of sales at just over half the rate of

U.S. companies. Senator Byron Dorgan and Citizens for Tax Justice attribute the

differential payments in large part to manipulative transfer pricing by foreign multinationals—this practice of dubious legality involves paying too little or charging

too much in paper transactions between U.S. and foreign affiliates, so that the income of the U.S. affiliate is artificially lowered. Citizens for Tax Justice points out

that the growing number of foreign corporate takeovers of U.S. companies

(Daimler’s purchase of Chrysler, Deutche Bank’s takeover of Bankers Trust and

BP’s buyout of Amoco and possibly Arco prominent among them) may accentuate

the tax avoidance problem. If a legal form of tax avoidance, transfer pricing constitutes a form of corporate welfare. If an illegal tax evasion, then it constitutes a

form of corporate wrongdoing outside of the welfare arena, still in need of elimination.

A second, growing source of multinational tax avoidance, according to Citizens for

Tax Justice, involves financial transactions. In one, newly invented shell game, companies pay interest to nontaxable offshore subsidiaries and deduct the interest payments against their worldwide taxable income. But they claim an exemption from

U.S. anti-tax haven laws by contending that, for U.S. tax purposes, the interest

earned by the offshore subsidiaries does not exist. The Treasury Department has

tried to clamp down on this tax-avoidance scheme, but has been blocked by Congress.

Because so many corporate tax expenditures have been identified in official administration and congressional publications, this is a large area in which it would

be easy for Congress to act to eliminate a huge category of corporate welfare in one

fell swoop. Congress should take prompt action in this regard. But because it is almost inevitable that corporate tax expenditures would return to the Code, it is vital

also that Congress enact procedural reforms to control future corporate tax expenditures, with reporting of top beneficiaries and sunset provisions atop the list.

INSURANCE SCHEMES, FORMAL AND DE FACTO

One of the overriding trends in corporate welfare in recent decades has been the

socialization of risk. In making risky investments—some socially desirable, some

not—and sometimes undertaking reckless activities, investors are attracted to the

prospect of high returns on investment. But corporations are increasingly brazen

about foisting the risk of failure—the very reason for high returns—on taxpayers

and consumers.

The drive to socialize risk while privatizing profit is evident in the corporate drive

for tort deform, the tobacco companies’ effort in recent years to limit their civil liability, and in the vital importance that business attaches to government insurance

schemes, formal and de facto. Among these are: the International Monetary Fund,

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the Exchange Stabilization Fund (ESF) and the insurance scheme of the Price Anderson Act.

Given the existence of a thriving private insurance market, there should be some skepticism attached to claims of necessity of any public insurance scheme. Certainly, there are cases where public insurance programs, voluntary or involuntary,

may be merited. Where there is a public interest in guaranteeing industry survival

and stability, for example, public insurance schemes may be sound public policy, especially where there is a likelihood of government bailout in the event of major industry liability or failure. But even in these cases, there should be a strong presumption of full-cost recovery and the imposition of reciprocal obligations from the

insured, upon whom significant benefits (e.g., public confidence) are conferred by

public insurance.

Where there is a viable alternative private market, and no clear public interest

in industry protection, hard questions should be asked about the appropriateness of

public insurance: What is the need for a public insurance alternative in such situations? Does the government do more than provide a subsidized service? Does the

government serve as an insurer of last resort—and if so, is this a beneficial public

policy or one that merely provides an additional welfare support to other insurers?

What public interest is served by government involvement in this area of insurance

provision? Does it encourage imprudent investments and actions? Why should the

government charge less than market rates for the insurance it provides? Is it a lead

in to later government bailouts, as has been the case with banks?

THE IMF AND THE ESF

The IMF is an international financial agency, located in Washington, DC, that

helps debtor countries overcome balance of payments deficits. It makes loans to

countries, conditioned on those countries adopting a policy package known as ‘‘structural adjustment.’’ In recent years, the IMF has expanded its traditional function

to function as a de facto insurer of the global financial system, making massive

loans to countries that suffer from sudden withdrawals of international capital.

The Exchange Stabilization Fund is an off-budget account controlled by the Secretary of Treasury. Congress established it to enable the Secretary to defend the dollar in the event it lost an excessive amount of its value relative to other leading

currencies. In recent years, the Secretary has made very large draws on the ESF

to fund U.S. participation in bailouts of countries that are suffering from financial

meltdowns.

The vast shifts in international financial capital which have characterized the

global financial markets in the last decade have resulted in episodic crises when

currency traders, operating in herd-like fashion, suddenly act to pull money out of

an economy. These are typically national economies in which there has been a recent, prior infusion of foreign capital in a speculative frenzy. In the last 5 years,

the most severe of these crises have occurred in Mexico, South Korea, Thailand, Indonesia and Russia.

In simple terms, the selloff of a country’s currency forces its devaluation, making

it relatively more expensive to pay debts owed in foreign currencies, and leaving the

country with massive debt payment obligations that it is unable to meet.

When individuals are unable to pay their debts, of course, typically the debtor and

the creditor share the pain. Through bankruptcy or otherwise, a process of workout occurs, with the creditors receiving less than full repayment. This equitably distributes responsibility for overborrowing to the debtor and to the creditor for imprudent lending.

No such thing happens in international financial markets. When countries are

suddenly unable to meet their payment obligations, the IMF rushes in. It provides

money to the borrower, often in packages which include large contributions from the

ESF. This money is used to repay creditors, letting them off the hook. The pain is

borne exclusively by the borrowing country, which must accept recessionary austerity conditions (including tax increases, harsh budget cuts and government layoffs)

from the IMF as a condition for the bailout of its private creditors.

Of course, the story varies from bailout to bailout, but this is the essential process.

In 1995, the Clinton administration orchestrated a nearly $50 billion bailout of

the Wall Street interests which stood to lose billions with the Mexican peso devaluation. The centerpiece of the bailout was $20 billion in currency swaps, loans and

loan guarantees from the ESF. The IMF (in which the U.S. maintains an 18 percent

share) contributed almost $18 billion to the bailout. Not all of the $50 billion was

used, and what was used was paid back, but that does not affect the character of

the administration’s action as providing after-the-fact insurance.

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The peso devaluation was necessitated by Mexico’s chronic balance of payments deficit, but the severity of the devaluation and subsequent crisis stemmed from the

Mexican government’s long maintenance of an overvalued peso. Fully aware of the

peso’s overvaluation, foreign lenders and short-term investors continued to flock to

the Mexican market because of its high, 18 percent interest rates. When the inevitable devaluation occurred, investors pulled out en masse. Rather than letting Wall

Street accept responsibility for irresponsible lending, the Clinton administration,

with the help of the IMF, orchestrated the bailout.

This massive commitment of taxpayer funds, it should be noted, came without Congressional approval. Instead, to forestall Congressional objections, the administration sought and received the acquiescence of then-Speaker Newt Gingrich and

then-Majority Leader Dole. The Mexico crisis repeated itself in Asia in 1997. Foreign investors and lenders poured money into the Asian tigers to take advantage of very high interest rates

and returns, and then withdrew in herdlike fashion when the bubble burst. With

South Korea, Thailand, the Philippines, Malaysia and Indonesia unable to pay back

foreign loans (which suddenly appeared more expensive following devaluation), the

IMF took the lead role in organizing bailouts of creditors and investors. IMF loans injected money into the Asian economies to enable them to pay back their foreign debts. The amounts at stake were not insignificant: U.S. banks’ exposure in South Korea was estimated to total more than $10 billion.

BankAmerica alone reportedly had more than $3 billion in outstanding loans to

South Korean firms, and Citicorp more than $2 billion. The other major U.S. banks

with outstanding loans to South Korea included J.P. Morgan, Bankers Trust, the

Bank of New York and Chase Manhattan. Instead of eating their losses, the banks

which made bad loans in South Korea and elsewhere in Asia received the money

owed them, in some cases over modestly extended repayment periods. The IMF/ESF money goes in and goes out. The banks get their money, the coun- tries contract new debts to the IMF and get stuck with the IMF austerity demands.

These recessionary structural adjustment demands have had tragic consequences

throughout Asia. In South Korea, the unemployment rate has skyrocketed from

under 3 percent to approaching 10 percent. In Indonesia, economic contraction has

eradicated the income growth of the last three decades, with poverty rates soaring

from 11 to 40 percent.

There is still more. Among the conditions imposed by the IMF and Rubin on the Asian countries are requirements that they open up their economies further to foreign investors. (These demands relate to foreign ‘‘direct investment’’ in factories, agriculture and service operations ranging from tourism to banks, not just ‘‘portfolio’’

investment in stocks, bonds and currency.) Treasury Secretary Robert Rubin specifically and successfully pressured South Korea to open up its financial sector. As a result, the very U.S. banks which contributed to South Korea’s crisis and

received a U.S. taxpayer bailout now stand to buy up lucrative sectors of the South

Korean economy. Similar demands have successfully been made in other troubled

Asian countries.

History repeated itself a few months later, this time as farce, in Russia. Despite

a widespread understanding that Russia had fallen into the grips of an unmitigated

criminal capitalism, foreign capital poured into the country, at some points seeking

to take advantage of interest rates that hit 100 percent. No one could have doubted

the risk of lending to Russia. But when the inevitable collapse came, the IMF—

prodded by the Clinton administration—was there with a bailout package. In July,

the IMF signed off on a $22 billion bailout. The IMF released $4 billion dollars into

the country immediately. That money went to pay back domestic and foreign creditors; with the rest apparently stolen. It served absolutely no purpose but to subsidize the wealthy in and outside of Russia, all of whom had gambled with their

investments in an effort to take advantage of the extraordinary interest offered. In

August, Russian defaulted on its loans, and the IMF suspended the bailout.

Not only is the double subsidy to the Big Banks unjust, it helps perpetuate the

very problem it is designed to remedy. When the IMF and the Treasury Department

bail out the banks—in effect providing free insurance—it sends a message: ‘‘Don’t

worry about the downside of your international loans. As long as enough banks get

in too deep, we’ll rescue you at the end of the day.’’ That encourages more reckless

bank lending, since the banks can earn high interest on high risk loans without

having to absorb losses. While consumers don’t benefit from the higher bank profits,

they frequently find themselves hit with higher charges when banks suffer losses

from reckless lending that are not fully bailed out.

IMF policy, and even U.S. administration policy at and to the Fund, is virtually

immune to Congressional influence. With strong prodding from the Treasury Department, the IMF has appropriated for itself the role of a public, no-charge insurer

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of international currency markets. At the same time, a power grab by the Treasury

Department has converted the ESF into a similar no-charge insurer for Wall Street,

with ESF monies used for bailout purposes that exceed its legislated purpose. These are the regulators of the global financial system, operating without account- ability, bailing out financial interests, wreaking havoc on the economies of much of

the world’s population. Where is the ‘‘market discipline’’ that the IMF so desires to

see enforced against poor countries? If investors and lenders make high-return investments knowing the high interest rates represent a risk premium, when the risk

is realized, why should they then be able to collect on their investments, care of the

IMF and ESF?

Working out a sensible system of international financial regulation, which avoids

Wall Street bailouts and the unfairly punishing of debtor countries is a complicated

matter. It is clear, however, that the IMF and the ESF have to be reined in. Indeed,

even the Wall Street Journal and Wall Street conservatives such as George Schultz,

William Simon and Walter Wriston have suggested the IMF’s powers should be restricted or the Fund abolished altogether.

That should mean, first, ensuring that the IMF receives no new funding. Having

received $90 billion from all nations last year ($18 billion from the United States),

the Fund is now seeking funding for its Extended Structural Adjustment Facility

(ESAF) and other initiatives, either through an appropriation or through Congressional authorization of IMF gold sales. Congress should deny this funding, instead

insisting that IMF gold sales be used only to provide immediate and direct debt cancellation for poor countries. This will provide real relief for poor countries, rather

than expand the IMF’s power.

Second, Congressional authorization should be required for ESF expenditures of

larger than $100 million. Representative Bernard Sanders has introduced legislation

to require a Congressional vote prior to ESF expenditures over a specified amount.

NUCLEAR INSURANCE: THE PRICE-ANDERSON ACT

The nuclear industry may be the most subsidized in U.S. history. It is completely

a product of U.S. government research and development. Having emerged from massive government investments, the nuclear industry has never cut its umbilical cord

tie to the government.

One critical, ongoing support for the industry is the Price-Anderson Indemnity

Act, which limits the liability of the nuclear industry (both plant operators, and suppliers and vendors) in the event of a major nuclear accident. Under Price-Anderson,

each utility is required to maintain $200 million in liability insurance per reactor.

If claims following an accident exceed that amount, all other nuclear operators are

required to pay up to $83.9 million for each reactor they operate. Under the terms

of Price-Anderson, neither the owner of a unit which has a major accident nor the

entire utility can be held liable for more than these sums. As of August 1998, this

system capped insurance coverage for any accident at $9.43 billion.

When the Price-Anderson Act was adopted in 1957, at the dawn of the commercial

nuclear industry, ‘‘the Act was intended to overcome reluctance to participate [in the

transition to private nuclear industry] by the nascent industry worried by the possibility of catastrophic, uninsured claims resulting from a large nuclear accident.’’

Leaving aside for the moment the ecological and economic risks which should disqualify continuation of, let alone support for, the nuclear industry, assume that such

a rationale was defensible at the time, as the government tried to promote development of an energy source which many believed would be safe, cheap and abundant.

But watch how the rationalization perpetuates itself. ‘‘By 1965,’’ the NRC reports,

‘‘when the first 10-year extension of the Act was being considered, a handful of nuclear power reactors was coming into operation, and the nuclear industry considered

itself on the verge of expanding into large-scale nuclear power generation. Thus, the

need for continued operation of the Price-Anderson system for the forthcoming 10

years was believed to be critical for the unrestricted development of nuclear power.’’

A decade later, when another extension of the Act was being considered, the industry was more buoyantly optimistic than it ever had been or would be again.

‘‘With dozens of plants in operation or under construction and with hundreds more

being contemplated to be in operation by the end of the century,’’ the industry urged

that the Act be extended rapidly so that ‘‘any uncertainty about extension would not

disrupt nuclear power development,’’ says the NRC.

Now the industry is in decline. There have been no new orders for nuclear plants

for the past 25 years, and aging plants are beginning to be shuttered. The original

rationale for the Act is no longer plausible. But nothing has changed with respect

to Price Anderson. Indeed, the NRC argues, ‘‘Given industry perception of the continuing need for Price-Anderson, and in view of the lack of new orders in plants,

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the situation is in some respects similar to what it was when Congress saw the need

for enactment of the original Price-Anderson Act.’’

(In one way, things are worse than they were in 1957: with nuclear plants closing

due to aging, safety concerns, inefficiency and license expiration, the Price-Anderson

liability cap will progressively decline in future years. If the upper end of nuclear

plant closing projections occurs, available insurance funds could shrink to $4.5 billion in 2013. )

The industry has gone through a full life cycle, but somehow it never outgrew the

need for a Federal insurance scheme and liability cap. The result has been a massive subsidy to nuclear power companies. Using the NRC’s conservative numbers for

the upper limit on a worst-case scenario accident and on the probability of such an

accident occurring, Professors Jeffrey Dubin and Geoffrey Rothwell estimated the

cumulative Price-Anderson subsidy to the nuclear industry through 1988 to be $111

billion in 1985 dollars. This estimate is based on NRC data on the cost of worstcase accidents—data which is conservative because it does not include health effects.

If, again, we leave aside the demerits of nuclear power, there could be justification

for a Federal scheme to promote risk sharing in a context which poses a (hypothetically) very small chance of an extremely large loss. (It should be emphasized,

however, that this is exactly the situation for which the private insurance and reinsurance markets are designed.) But there is no justification for combining such a

scheme with an overall liability cap.

The $9.4 billion liability is nowhere near sufficient to pay for the human health

and property damages that could result from a nuclear meltdown. Nuclear Regulatory Commission studies have estimated costs in a worst-case scenario at more

than $300 billion for a single catastrophe.

The nuclear industry’s real insurance program is not the $9.4 billion scheme of

Price-Anderson, but the free insurance provided by the public. In the event of a catastrophic accident, after the $9.4 billion was spent, it is the Federal Government

that would inevitably cover the costs—with some costs probably absorbed by victims

who have their injuries compounded by inadequate compensation.

Price-Anderson is a textbook example of the hybrid insurance-liability cap program that should be prohibited per se.

‘‘Many nuclear suppliers express the view that without Price-Anderson coverage,

they would not participate in the nuclear industry,’’ reports the NRC. If an industry

which has benefited from massive government research and development and other

subsidies for more than four decades, and which creates staggering, environmentally

dangerous waste disposal problems and poses enormous risks to human health, cannot survive without government support, then it should not survive. The nuclear industry cannot meet the market insurance test and, with substitute energy sources

available, it is not needed. The Price Anderson Act expires in 2002. If it is not repealed before then, it should not be renewed. If nuclear facilities close as a result,

well, occasionally at least, corporate America should be subjected to its widely touted rigors of a free market.

GOVERNMENT SPONSORED ENTERPRISES

Government sponsored enterprises (GSEs) are stealth recipients of corporate welfare. Instead of cash or Federal tax subsidies, GSEs like Fannie Mae and Freddie

Mac receive their government largesse in the less obvious form of credit enhancements.

Thanks to their extensive links to the Federal Government, Fannie and Freddie

borrow money in the markets at almost the same rate as the U.S. Treasury, something that no competitor can come close to matching.

Like other GSEs, much of the risk of these housing finance enterprises remains

with the Federal Government while the profits flow to private shareholders.

It is true that the secondary market operations of these GSEs provide an important service by improving access to mortgage credit by home buyers and stabilizing

the mortgage market. The GSEs obtain funds from the bond markets and acquire

mortgages from local lenders. The process ensures that home buyers can tap into

the nation’s savings pool for mortgage financing.

Could these functions be carried out without government subsidy? Could private

corporations—without links to the government and without corporate welfare—perform the same functions? These are questions meriting close Congressional scrutiny.

The key to Fannie and Freddie’s phenomenal profits and soaring stock values is

the financial market’s perception that there is an implicit government guarantee behind the obligations of these corporations.

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There are good reasons for the financial market’s belief that the U.S. Treasury

and the taxpayers would be the fall guys in the event of a default. Here are some

of the GSEs links to the Federal Government:

• Fannie and Freddie each have a contingency fund of $2.25 billion that can be

drawn from the U. S. Treasury.

• Their securities are government securities for the purposes of the Securities Exchange Act of 1934.

• Their securities serve as eligible collateral for Federal Reserve banks’ discount

loans.

• The securities are exempt from registration under the Securities Act of 1933.

• The Secretary of the Treasury approves the issues.

• The Federal Reserve is the fiscal agent for the issues.

• Their obligations are eligible for unlimited investments by national banks and

state bank members of the Federal Reserve as well as by federally insured thrifts.

Both Fannie and Freddie are exempt from local and state taxes—another benefit

that clearly falls under the rubric of corporate welfare. (Even when the District of

Columbia was struggling on the edge of bankruptcy, Fannie Mae refused to cough

up a dollar in lieu of local income taxes)

There are varying opinions about how much these links, and resulting savings on

borrowings, mean to Fannie and Freddie. Fannie Mae Chairman and CEO Franklin

Raines concedes there are ‘‘benefits’’ (he prefers the word ‘‘benefits’’ to ‘‘subsidies’’),

but does not assign a dollar figure to the government ties.

However, the Congressional Budget Office (CBO) conducted an extensive study of

Fannie and Freddie entitled ‘‘Assessing the Public Costs and Benefits of Fannie Mae

and Freddie Mac.’’ CBO estimated that the credit enhancement stemming from the

government links was at least $6.5 billion in 1995.

According to CBO, Fannie and Freddie pass only part of that subsidy on to home

buyers—about $4.4 billion—with the remainder of the credit enhancement subsidy

pocketed by private shareholders, the corporations’ executives and lobbyists. In

other words, for every $2 delivered to home buyers, Fannie and Freddie take $l of

the subsidy for themselves.

CBO estimates that in 1995, about 40 percent of the of the earnings of Fannie

and Freddie could be traced to the benefits of their government-sponsored status.

These corporations have prospered under their GSE status and credit enhancement subsidies. Fannie Mae’s stock appreciated 1,053 percent between 1989 and

1998. Freddie’s stock appreciation was even greater, 1,260 percent. Sixteen years

ago, Fannie Mae had a market value of $500 million. Today, the corporation is

worth $70 billion.

In the process, Fannie and Freddie have become the dominant force in the housing finance market.

It is obvious that some of the subsidy derived from their GSE status is being used,

not for home buyers, but to increase corporate power and control over all facets of

the mortgage business.

Will this growing duopoly enjoyed by Fannie and Freddie stifle competition by private companies—competition that might reduce costs and encourage innovation in

a variety of mortgage products?

Not only stockholders, but officials of Fannie Mae and Freddie Mac are enriched

by the subsidy.

In 1997, for example, Jim Johnson, Fannie Mae’s chairman, received $5,441,232

in salary, bonuses, stock options and other compensation. His predecessor walked

away with a whopping severance package worth more than $20 million. Lawrence

Small, President and CEO, received salary, bonuses and stock options of $2,948,751

in 1997. Jamie Gorelick, after leaving the Justice Department as Deputy Attorney

General in May 1997, was the recipient of $1,850,993 in salary, bonuses and stock

options as Vice Chair of Fannie Mae during the last 8 months of the year. She had

no previous experience in housing finance.

The directors and officers of Fannie and Freddie have long enjoyed lucrative stock

options. At the end of 1995, according to the CBO, executive officers and directors

of Fannie Mae owned 1.6 million shares of the corporation. In Freddie Mac’s case,

CBO said executive officers and directors owned 695,000 shares of their corporation.

In addition, the compensation agreements with officers of both corporations include

generous options on hundreds of thousands of additional shares worth millions of

dollars.

All of the Government Sponsored Enterprises are huge issuers of debt. Fannie

and Freddie along with two other GSEs—the Federal Home Loan Bank System and

the Farm Credit System—issued $1.62 trillion of debt during the first quarter of

this year.

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The Federal Home Loan Bank System has been under fire from the Treasury Department for its borrowing practices. The FHLB System has used its ability as a

GSE to borrow cheaply and engage in arbitrage by making investments in nonhousing related investments.

But the champion of the arbitrage games among the GSEs has to be Farmer Mac,

the newest addition to the rank of Government Sponsored Enterprises. The General

Accounting Office reports that Farmer Mac holds $1.18 billion of investments unrelated to its agricultural finance mission—or 61 percent of its assets.

House Banking Committee Chairman Jim Leach calls it ‘‘unconscionable’’ for a

government sponsored enterprise to have more than three-fifths of its assets in nonmission related activities.

‘‘When a governmentally privileged institution, that is established to serve farmers, abuses its status by investing disproportionately in arbitraged financial investments rather than agricultural loans, the Treasury and the Congress have an obligation to review its management practices,’’ Mr. Leach says.

Chairman Leach is right about Farmer Mac. But Farmer Mac is but one small

corner of the GSE story, particularly compared to the mammoth operations like

Fannie and Freddie. All of these GSEs enjoy a special status because of their links

to the Federal Government—they all enjoy benefits because of the market’s perception that the U. S. Treasury and the taxpayers stand behind their obligations—a

fail-safe status that leaves the Federal Government with the risk and the shareholders and the GSE executives with the profits.

The Congress should undertake a top-to-bottom review of all the Government

Sponsored Enterprises. Are these hybrid half government, half private entities needed to meet credit needs? How well do they meet their statutory missions in specific

sectors? And how much of their operations are devoted, not to their missions, but

to playing the market in outlandish and unneeded arbitrage games? How much of

their subsidy is used to benefit consumers, and how much is siphoned into shareholder profits and bloated executive compensation arrangements? Are existing capital standards adequate?

Addressing these problems will require confronting the familiar issue of corporate

welfare beneficiaries’ political influence. Some of the GSE subsidies intended to

lower costs for home buyers are being diverted to build political and lobbying power

designed to make it difficult, if not impossible, for the Congress to provide (or for

the public to demand) proper oversight or regulatory improvements which would

protect the public, increase support for affordable housing or ensure open competition in the mortgage market.

A report by the Campaign Reform Project reveals that Fannie and Freddie were

some of the largest political soft money donors—more than $900,000 in the 1997-

1998 election cycle. This is in addition to contributions by key employees.

Many of Washington’s premier law firms show up on the GSEs’ list of lobbyists

along with former Members of Congress like Senator Steve Symms, Representative

Vin Weber and Representative Tom Downey. The lobbying lists have included Ken

Duberstein, former chief of staff to President Reagan, Nicholas Calio, President

Bush’s Congressional liaison and Michael Boland, former aide to Senate Majority

Leader Trent Lott.

STATE AND LOCAL CORPORATE WELFARE

State and local corporate welfare is a problem that involves local, county and

state governments and government agencies, but it is a national problem, requiring

debate, investigation and solutions at the national, as well as state and local, level.

It is a national problem because it is predicated on large corporations pitting

states against each other in bidding contests that are structurally biased in favor

of Big Business. It is also a national problem, at least in part, by dint of the fact

that it occurs in almost every state; an attached appendix highlights state and local

corporate welfare abuses in state after state.

A Congressional initiative to highlight and address the corporate welfare system

must direct attention to state and local corporate welfare because of this problem,

and also because nothing frames the debate as well as state and local corporate welfare. Debate over Federal corporate welfare tends to focus on Federal programs,

rather than the corporate beneficiaries—and that tends to turn corporate welfare

debates into policy discussions no different than other policy controversies. Conflicts

over state and local corporate welfare inevitably focus on the corporate beneficiaries,

which draws the public’s attention. The raw character of state and local corporate

welfare—the brazen threats to move, the drain on funding for schools and essential

state and local services—rightfully raises the public’s ire.

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For strategic as well as substantive reasons, a sustained and detailed focus on

state and local corporate welfare can serve as a wedge to break open the entire national corporate welfare budget to public scrutiny and as a visceral issue around

which a citizen mobilization on corporate welfare can form.

THE TOLEDO SHAKEDOWN AND EMINENT DOMAIN ABUSE

In Toledo, DaimlerChrysler has brought a frightened and financially strapped city

to its knees. Desperate to keep a Jeep plant in the city, Toledo showered a $300

million local, state and Federal subsidy package on the multinational to support

company plant expansion plans. The package includes a property exemption for 10

years, transfer of free land, including site preparation, transfer of environmental liability from DaimlerChrysler to the city and assorted other corporate welfare handouts. All of this is offered in exchange for a Jeep facilities expansion plan that is

expected to result in a reduction of Jeep jobs from the current 5,600 to 4,900

(DaimlerChrysler’s public claim) or 4,200 (the level the company specifies it will try

to preserve in an unenforceable provision in its agreement with Toledo) or something much lower (a likely result based on United Auto Worker estimates and recent layoffs at the plant).

The Jeep agreement is remarkable, as are many of the special state and local corporate welfare deals, for being so poorly drafted from the city’s point of view, so onesided and tilted in favor of the corporate beneficiary. There is virtually no binding

reciprocal obligation on DaimlerChrysler in the agreement—to create jobs, maintain

a certain job level or to agree to set wage levels or working conditions. In exchange

for no binding commitments and no share of the profits, Toledo has agreed to put

up huge sums of money, much of it borrowed.

The most outrageous element of Toledo’s Jeep deal is that it requires the displacement of a community near the plant. As it turns out from DaimlerChrysler’s plans,

the company does not even genuinely intend to use the land that the city will transfer to it from 83 homeowners. In its public explanations, Jeep identifies the community’s parcel as a potential truck waiting area; but in its map, the area is to be used

for landscaping—a truck waiting area is designated for another parcel of land.

Nonetheless, what DaimlerChrysler wants, it is apparently eager to take.

So, threatening community residents that it would condemn the entire neighborhood, the City offered to buy their homes. Residents first learned they would be

thrown out of their homes and their neighborhood bulldozed not from city officials,

but from the Blade, Toledo’s daily newspaper. We believe the low-ball efforts violated the Federal Uniform Relocation Act, which requires compensation sufficient to

enable displaced people to buy comparable homes or establish businesses in similar

or better neighborhoods. Many Toledo residents accepted the city’s low-ball offer,

others held out for somewhat better deals. A handful have resisted.

This fiasco replicates Detroit and GM’s shameful collaboration in 1980, when the

City used eminent domain to eradicate Poletown, a stable community of 400 homeowners, twelve churches and dozens of small businesses, schools and a hospital. In

the Poletown case, GM ultimately built a Cadillac factory which created far fewer

jobs than advertised and did not require destruction of many homes.

Indeed, the Toledo-DaimlerChrysler eminent domain scheme marks what is a

growing corporate welfare trend whereby states and localities abuse their eminent

domain powers to serve private parties. These are many of the most heart-wrenching instances of corporate welfare, because they often involve the literal destruction

of longstanding homes, neighborhoods and communities. This newly emerging trend

echoes the shameful corporate welfare history of ruthless use in the 1950’s and

1960’s of condemnation powers to uproot inner city communities and transfer valuable property to commercial and real estate developers.

CORPORATE BLACKMAIL AND THE MARRIOTT-MARYLAND CASE

While the implied threat of DaimlerChrysler moving loomed in the background of

the Toledo dispute (city officials admitted fear of the company fleeing motivated

their extraordinary generosity), the threat of corporate flight was in the foreground

of Marriott’s recent, successful effort to blackmail the state of Maryland into providing a $31 million to $47 million subsidy package.

In 1997, the company announced that its Bethesda, Maryland headquarters were

no longer large enough to house its expanding workforce of 3,800. It created a

search committee to decide where the company’s new headquarters should be based.

Company CEO Bill Marriott announced that the company would be willing to locate

to a new state if compelling financial reasons justified it. Virginia leaped into the

bidding war. Virginia Governor James Gilmore III and former Governor George

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Allen both actively attempted to seduce Marriott to step across the border to take

advantage of Virginia’s lower tax rates. Faced with Virginia’s enticements, and with Marriott’s cultivated indecision, Maryland progressively augmented its offer to the company. When Marriott finally announced its intentions to remain in Maryland, state offi- cials celebrated their victory over their neighbors. ‘‘Our team is red-hot, Virginia’s

team is all shot,’’ Maryland House speaker Casper Taylor, told the Washington Post. But in the bidding war Marriott cultivated between Maryland and Virginia, the only winner was Marriott. The corporate welfare package bestowed on Marriott did

absolutely nothing to create new jobs. Marriott had already determined that it

would expand its headquarters because of its growth and profitability—and that decision was made without regard to whether it would receive tax breaks in the state

where it would base its headquarters.

After the giveaway, William Skiner, president of the Maryland Taxpayers Association, suggested that companies which receive public money should issue stock to

state residents. ‘‘They have my address. Where are my shares?’’ he asked.

Of course the answer to that entirely reasonable question is: there are none.

Nor are there similar subsidies available to small businesses. They do not have

the political clout, nor the plausible threat to move out of state, to leverage comparable corporate welfare packages. This imbalance creates a very real competitive

advantage for large corporations like Marriott, which use the same state, county

and local services as a 20-room inn or other small business, but does not pay a proportionate share of the taxes that fund these services.

After the tax subsidy deal was completed, the Baltimore Sun reported that Marriott had decided on remaining in Maryland before the state made its last, more

generous offer. According to the Sun’s report, Virginia officials were aware of the

Marriott decision, but remained silent—enabling the company to extract more

money from the state.

PLAYING FOR ALL THE MONEY: STADIUMS, GAMBLING AND CORPORATE WELFARE

Perhaps the most outrageous kind of bidding for business involves sports stadiums. The pattern is now familiar: the local sports team, owed by a

megamillionaire in virtually every case except for the publicly owned Green Bay

Packers football team, threatens to move unless the city bestows a glamorous, and

extraordinarily expensive, publicly financed new stadium on the team. Inevitably,

the stadium is required to contain luxury boxes and high-priced seats which help

fill the teams coffers, but put watching the local team out of reach for significant

portions of the town’s population. If the city refuses to capitulate to the team’s demands, the team, especially if it is a football team, typically follows through on its

threat, and moves to a new location.

That creates a lose-lose situation for the city: either lose the team, or spends hundreds of millions of dollars for a public facility that will be used entirely or primarily

to support a private sports team. Most, but not all, cities choose to subsidize the

team, even in the many cases where scholastic athletics, not to mention the schools

themselves, are massively underfunded.

In Seattle, Microsoft billionaire Paul Allen even paid for the use of Washington

state’s electoral machinery to finance a special election to fund a baseball stadium.

Pouring millions of dollars into the referendum—against a piddling amount spent

by the grassroots opponents of the stadium—Allen was able to eke out a narrow 51-

to-49 percent victory. The Allen example follows the typical pattern of stadium proponents outspending opponents in elections by an order of magnitude or more.

Other examples of cities that have capitulated to this kind of sports mogul blackmail include Baltimore, Cleveland, Denver, San Diego, Nashville, Indianapolis,

Pittsburgh, Miami, San Francisco, St. Louis and Detroit.

Now gambling casinos are looking for similar subsidies. In Detroit, after the city

decided to give three giant corporate casino companies an effective license to tax

lower-income people by running casinos, it decided to sweeten the offer further by

providing $50 million in development funding and using eminent domain to take

prime locations for the gambling houses.

In Atlantic City, the state of New Jersey is contributing more than $200 million

in taxpayer dollars for a road-tunnel project and more than 100 acres of free land

to entice Steve Wynn’s Mirage Resorts to build yet another casino in the city. Building Steve Wynn’s driveway has required the destruction of nine houses in the city’s

most prosperous African-American neighborhood.

(Such tax subsidies, incidentally, are not the only corporate welfare now granted

to increasingly politically powerful gambling interests. Public Citizen reports that

Senate Majority Leader inserted a provision into the 1998 IRS Reform Bill that perVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00192 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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mits employers and employees solely in the casino industry to receive 100 percent

tax exemptions for employer-provided meals, regardless of whether workers need to

eat on the premises to do their jobs properly. This provision is estimated to save

the industry approximately $30 million a year.)

CORPORATE WELFARE IN THE GUISE OF COMMUNITY DEVELOPMENT

There is a also an urgent need for public and Congressional scrutiny of a more

regularized and pervasive form of corporate welfare, which is commonly described

as community development and made available not on a negotiated case-by-case

basis, but to all businesses locating in certain areas or meeting certain criteria. By

providing a variety of local, state and Federal tax breaks through creative financing

mechanisms (including tax increment financing), cities, state and community development agencies seek to assist businesses locating in targeted areas. The economic

development agencies administering these programs are, in many cases, sincerely

trying to facilitate community development, especially in low-income areas. But

there is generally little reciprocal obligation placed upon the beneficiaries, either to

provide certain kinds of jobs, or jobs at a living wage, for example. There is also

serious reason to question whether some of the investments would have occurred

in the absence of the incentive, or whether the tax incentives shift some investments

from a nearby area with little net social gain.

The UCLA Center for Labor Research and Education and the Los Angeles Alliance for a New Economy recently conducted one of the most comprehensive reviews

of a local community development effort, focused on the Los Angeles Community Redevelopment Agency. This project, it would be fair to say, was favorably disposed

to such community development efforts, but was designed to help direct public expenditures to realize higher returns in terms of public benefits. Among the project’s

findings and recommendations (which apply directly only to the Los Angeles agency

but probably apply widely): large subsidies to retail operations did not pay off; there

was an underinvestment in industrial relative to retail development; small neighborhood shopping centers represented a better investment than large retail complexes; and that record keeping on the results of subsidized ventures is inadequate

and needs improvement.

ENDING LOCAL AND STATE CORPORATE WELFARE

Addressing state and local corporate welfare will obviously require state and local

initiatives. But there is an important Federal role, as well.

First, Congressional hearings that require some of the Welfare Kings to testify before a Congressional committee and to justify blackmailing cities and states may exercise some deterrent effect on the degree of their bullying.

Congressional hearings should also probe whether the provision of tax subsidies

and similar incentives distort economic decisionmaking concerning the location of

business activity and therefore constitutes an unconstitutional infringement on

Congress’s power to regulate interstate commerce, as has been suggested by Northeastern University Law Professor Peter Enrich.

Second, states need to be authorized and encouraged to enter into compacts in

which they refuse to enter a race to the bottom against each other in terms of special tax breaks and related benefits. Congressional legislation should authorize anticorporate welfare compacts.

Third, the Federal Government should levy a surtax on companies receiving state

and local tax breaks, at the very least treating the value of the tax breaks as income

upon which Federal taxes should be paid. Representative David Minge has introduced legislation toward this end.

On the stadium issue in particular, Senator Arlen Specter’s proposal to require

Major League Baseball and the National Football League to pay half the costs of

any new stadium for teams in their leagues represents a useful starting point for

determining how to ensure that the private corporate beneficiaries of stadiums pick

up at least a significant part of the tab for their construction.

Finally, Congress should conduct a review of the use of tax-exempt municipal

bonds. Their use to fund corporate welfare, private projects or public projects that

will benefit a narrow business interest (classically, a sports team) should be prohibited. (There may also be merit to considering a replacement of the tax exemption

with direct Federal transfers to state and local governments—according to Citizens

for Tax Justice, such a scheme could transfer more money to state and local governments at less Federal cost, while eliminating one kind of local and state corporate

welfare.)

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All of these proposals should be subjects of future hearings by the House Budget

Committee and other relevant Congressional committees, and should be the topic

of GAO and CRS reports.

Large corporations have become increasingly adept at using their size and mobility to blackmail cities and states. City and state governments need assistance from

the Federal Government to save them from cannibalizing their own tax bases. The

alternative is to permit large companies to extort more and more welfare subsidies

at the expense of taxpayers, small businesses and competing use of local and state

monies—such as rebuilding crumbling schools.

EXPORT AND OVERSEAS MARKETING ASSISTANCE

Various government agencies maintain an array of export assistance programs.

These programs raise the question of why overseas marketing and lending and

other export assistance should be a government rather than private sector function.

As regular beneficiaries of double standards, big business executives and lobbyists, it seems, are without a sense of irony. How do the corporate proponents of

international trade agreements designed to promote misnamed ‘‘free trade’’ explain

their simultaneous support for marketing subsidies? If it is only on the grounds that

‘‘other countries do the same thing,’’ perhaps they should turn their multinational

lobbying prowess to eliminating other countries’ export assistance programs.

The most disturbing feature of many of the export assistance programs may be

that the assisted companies export troublesome products or technologies—weapons,

or environmentally hazardous equipment, for example. Such programs, especially

the various private corporate arms exports initiatives supported by the Defense Department, should be ended.

WEAPONS EXPORTS ASSISTANCE

The United States spends billions in a panoply of programs and agencies to support corporate commercial arms exports, according to the World Policy Institute’s

William Hartung. The Pentagon maintains a large bureaucracy devoted to promoting sales of military hardware by U.S. corporations to foreign governments. The

Defense Department spends millions at military air shows to hawk the arms makers’ wares, and it spends billions of dollars on loans, grants, credits and cash payments to enable foreign governments to buy U.S. weapons. Surely there are more

efficient ways for the government to invest money if it is only concerned with creating jobs.

Of course, weapons are not innocuous products, and there are severe costs to an

arms exports policy driven by commercial impulses. Former Costa Rican President

Oscar Arias has noted that the defense industry’s weapons-pushing destabilizes

countries and regions, as with respect to the removal of the ban on the sale of hightech weapons to Latin America. The repeal of the ban was the direct result of industry lobbying. According to Arias, it ‘‘will certainly impede our efforts to break the

vicious cycle of poverty and militarism.’’

Commercial weapons exports may also undermine U.S. national security and humanitarian interests. As former Senator Mark Hatfield stated in 1995, ‘‘We can still

enumerate dozens of cases where the transfer of U.S. military hardware has resulted in the misuse of those weapons, including human rights abuses and in the

conduct of acts of aggression. Even more horrible is the fact that U.S. financed or

provided arms have been used against our own soldiers in Haiti, Somalia, Panama

and Iraq.’’

Why should the Pentagon subsidize commercial arms exports that may end up in

the hands of dictators, may end upset regional stability, or which may be used

against U.S. soldiers?

OTHER EXPORT ASSISTANCE AND OVERSEAS MARKETING PROMOTION PROGRAMS

Other government export programs have been the target of more sustained public

and Congressional outrage, which has led to some partial but still inadequate reforms.

The Department of Agriculture’s Market Access Program, once known as

McNuggets for the World for its support of McDonald’s advertising (when it was formerly the Market Promotion Program), is a $90 million-a-year program which is

now limited to support of marketing efforts by farmer cooperatives and trade associations. However the benign-sounding category of cooperatives, suggestive of small

farmer arrangements, includes such operations as Sunkist and Ocean Spray, which

are well able to afford their own advertising campaigns.

Again, the Market Access Program and similar programs raise difficult questions:

Why is export assistance a proper government function? Why does the market fail

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to provide incentives for advertising, lending or other functions? And if businesses

determine that a particular activity is not market-worthy, what public interest is

served by the government filling the vacuum? If export assistance from other nations is the primary rationale for U.S. activities, how serious are efforts to negotiate

an international agreement to curtail such programs? Finally, does the government

receive an adequate return on its investment?

DEFENSE AND HIGHWAY PORK

It is important that ‘‘pork’’—federal monies for unnecessary projects—is understood as a subset of, not a synonym for, corporate welfare. Indeed, pork is the special case that does not fit in the definition of corporate welfare offered earlier in this

testimony.

While pork is a significant drain on the Federal treasury, it is not, by and large,

a helpful analytic term. Labeling a project ‘‘pork’’ stigmatizes it as unnecessary; the

response of the project’s defenders is to say that in fact the project is necessary.

‘‘Pork’’ does not offer objective criteria by which the dispute can be resolved.

Nonetheless, while analysts may differ over whether one or another project is

pork, almost no one disputes that pork exists and is widespread. Pork is in part a

reflection of our regional and state representative system of governance, with legislators trying to return Federal dollars to their districts or states. But it is also derivative of a corrupt political system in which special interests exert an unhealthy influence.

PENTAGON PORK

The Pentagon budget is a bloated source of contractor pork. Without entering into

a discussion of U.S. national security imperatives, it is clear from many official reports by both the Congress and the Executive Branch that much of what the Pentagon procures is unnecessary; that Pentagon waste and fraud is persistent; and

that these problems reflect the political power of the military contractors.

One classic example of unnecessary procurement is the C-130 transport plane,

which is built by Lockheed Martin in Georgia, near former Speaker Newt Gingrich’s

district and in the homestate of former Senate Armed Services Committee Chairman Sam Nunn. The Air Force has requested just a small fraction of the more than

250 C-130 transport planes for which Congress has appropriated funds since 1978.

The planes cost about $75 million apiece.

Systematic corporate contractor fraud and waste have long been, and remain, too

widespread at the Pentagon. Most recently, the Department of Defense Inspector

General reported on spare parts provided to the Pentagon by Allied Signal at a 57

percent markup over commercial prices.

It is important to understand the political underpinnings for ongoing Pentagon

welfare and the failure to crack down on waste, because it illustrates the importance

of competition and economic decentralization in curbing corporate welfare, and because it presents a case where outrageous corporate welfare benefits helped consolidate the political influence of narrow business interests.

During the early years of the Clinton presidency, the Pentagon encouraged the

defense sector to consolidate, and it backed up its encouragement by subsidizing

mergers through payments to cover the costs of consolidation—including extravagant ‘‘golden parachute’’ bonuses to executives of acquired companies. No industry

knows how to respond to corporate welfare subsidies like the defense industry, in

part because they conceive and lobby for them, as did Norman Augustine, the now

retired CEO of Martin Marietta. The result of the Pentagon’s encouragement is that

military suppliers have undergone an ear-splitting consolidation that has left but

three major prime contractors: Lockheed Martin, Boeing and Raytheon. Today’s

Lockheed Martin is the product of the merger of Lockheed, Martin Marietta, Loral,

parts of General Dynamics and about two dozen other companies. Boeing leaped to

the top tier of the contractor pack with its acquisition of McDonnell Douglas.

Raytheon gobbled up Hughes.

With manufacturing facilities spread across the United States, these three companies now have enormous political influence—they can show that new military contracts will mean jobs in the districts of hundreds of Members of Congress, and in

nearly every state. For districts where they do not have facilities, they can employ

suppliers to help give them a political presence. This structural power, which is supplemented by major investments in campaign contributions and lobbyists, helps enable the contractors to preserve the cycle of wasteful spending and abuse at the

Pentagon. The tight consolidation of the industry also leaves the Pentagon much

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doers—procurement disbarment—because of the paucity of alternative prime suppliers.

HIGHWAY PORK

The Federal highway bills are another major source of pork. While important

progress has been made in directing highway monies to road and bridge repair, as

well as for modes of public transport, last year’s highway bill, the Transportation

Equity Act for the 21st Century (TEA-21) will allocate billions of dollars to new road

construction, much of it unnecessary and harmful. Instead of supporting modern

mass transportation, Congress continues to satisfy road construction interests (and

indirectly the auto companies). The harmful consequences include sprawl, air pollution and contributions to global warming.

OTHER FORMS OF CORPORATE WELFARE: LOANS AND LOAN GUARANTEES

As anyone who has been bombarded with credit card solicitations knows, there

is no credit shortage in the United States. So why does the U.S. government enter

into the business of making loans and issuing loan guarantees to large corporations?

Corporations generally want loans from the government either because the loans

are made at below-market rates, or because the loans include some sort of implicit

subsidy (including de facto government insurance). This is a form of credit allocation

that some legislators decry when applied to ordinary Americans.

Consider a loan on the verge of being approved by the World Bank, in which the

United States is the largest country shareholder with an approximate 16 percent

share. The $180 million loan package would help finance an oil pipeline that would

transgress Chad and Cameroon, in Central Africa. The three corporate beneficiaries

of the loans would be Exxon, Shell and the French company Elf. The three companies’ consortium says that it plans to use the World Bank financing as the foundation for additional private financing. In other words, private lenders will be more

willing to support the project knowing that the power of the World Bank stands behind compelling repayment. But if three of the world’s largest oil companies do not

feel comfortable financing an oil development scheme on their own, or if they are

unable to attract private financing without government or multilateral lending

agency support, perhaps that is a sign that the project should not go forward. (Critics point out that the project poses threats to rainforests, endangered-gorilla-inhabited conservation areas and drinking water; and is likely to exacerbate ethnic conflicts with consequences potentially similar to those in Nigeria’s Niger Delta or

worse—political violence, some connected to prospective oil revenues, is already rife

in Chad. )

Loans and loan guarantees are another corporate welfare category deserving a

high degree of skepticism. For healthy companies, these kinds of government supports should be unnecessary. For cases where a political decision has been made

that special circumstances merit some company or industry receiving loans or loan

guarantees, Congress should adopt legislation that establishes a presumption of full

repayment, at market rates. (For comment on bailout loans, see the remarks above.)

AGRICULTURAL SUBSIDIES

The government maintains a variety of agricultural subsidies, ranging from irrigation subsidies to crop insurance and price supports for certain commodities. Many

of these benefits accrue to corporate agribusiness, and often support environmentally harmful farm practices (such as overuse of water). The original purpose

of farm supports was to support family farmers and enhance stability in agricultural

markets, and it is doubtful whether the programs still fill this function. At the same

time, many farm supports were eliminated in the 1996 Farm Bill, with the general

effect of promoting agribusiness consolidation and increased power for grain traders.

Food prices have not declined. All of this suggests the need for a serious and openminded reassessment of farm programs, so that the public interest in protecting

family farms and sustainable agriculture is advanced, while subsidies for large agribusiness are curtailed.

CONCLUSION

With corporate welfare so pervasive at all levels of government and so deeply entrenched thanks to the political maneuvering of beneficiary corporations and allied

bureaucracies and legislators, the campaign against corporate welfare must be strategically savvy, multi-pronged and able to both create momentum and to take advantage of external events. Nurturing this kind of agility requires a broad legislaVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00196 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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tive agenda, with numerous bills introduced to accomplish different ends. After all,

the looting of Uncle Sam is an ever-growing Big Business. Corporate welfare opponents in Congress should look to introduce: simple, bold and far-reaching legislation to galvanize public support; legislation that empowers

citizens to mobilize in opposition to corporate welfare; proposals that guarantee procedural fairness in decisions to provide and continue corporate welfare benefits; legislation that requires ongoing review of corporate welfare programs; proposals that

emphasize the obligations of the corporate beneficiaries of government largesse to

pay back the taxpayers in monetary and nonmonetary terms; disclosure-oriented requirements to present taxpayers with the costs and beneficiaries of corporate subsidies; and narrow and precise bills that address particular corporate welfare abuses

and which may be valuable later as amendments or to capitalize on suddenly potent

issues.

These are matters calling for creative thinking and approaches not only from

Members of Congress, but from law schools, political scientists and economists. Unfortunately, a survey of law reviews and recent Ph.D. dissertations that we made

reveals a remarkable paucity of academic attention to the issue of corporate welfare.

And few philanthropic foundations are interested in funding research into the

issues. But more attention from Congress and the public will help jar academia

awake.

For now, here is a beginning set of overlapping proposals for discussion and reform. This list focuses on structural approaches, rather than itemizing programs

that should be eliminated. The first set of proposals applies generally to corporate

welfare, with the second oriented around the categorization of corporate welfare

benefits offered in this testimony. In the spirit of trying to spark a flexible, pluricentered campaign against corporate welfare, some of the proposals are redundant—

different approaches may appeal to different Members, and different proposals may

fit different political moments. In the same spirit, these proposals are intended to

be provocative and are certainly open to criticism and refinement. Their purpose is

to jumpstart creative thinking and debate about procedural and substantive remedies to an expanding corporate welfare claim on taxpayer monies and assets.

ACROSS-THE-BOARD APPROACHES

1. A Bill to Eliminate All Corporate Welfare. A simple bill that would wipe the

corporate welfare slate clean could provide a valuable rallying tool for citizen opponents of corporate welfare. Such legislation would not propose a permanent ban on

corporate welfare, which in any case would always be vulnerable to subsequent legislative action, but would require proponents of particular programs to mobilize support for the affirmative re-commencement of their favored subsidies under both procedural safeguards and reciprocal obligations. Then the advocates of the 1872 Mining Act could make their case for why such an abomination should be reinstated

after elimination.

The central operative language for such a bill might read:

(1) As of January 1, 2000, every Federal agency shall terminate all below-marketrate sales, leasing or rental arrangements with corporate beneficiaries, including of

real and intangible property; shall cease making any below-market-rate loans or

issuing any below-market-rate loan guarantees to corporations; shall terminate all

export assistance or marketing promotion for corporations; shall cease providing any

below-market-rate insurance; shall terminate all fossil fuel or nuclear power research and development efforts; shall eliminate all liability caps; and shall terminate any direct grant, below-market-value technology transfer or subsidy of any

kind.

(2) As of January 1, 2000, the Internal Revenue Code is amended to eliminate all

corporate tax expenditures listed in the President’s annual budget.

(3) As of January 1, 2000, the Internal Revenue Code is amended so that the

value of local, county and state tax subsidies to corporations shall be treated as income.

(4) Where contractual arrangements or promises made in law preclude any action

required by Sections (1), (2) or (3) without payment by the Federal Government to

existing beneficiaries of programs to be eliminated, Federal agencies shall take such

actions as soon as possible without incurring such payment obligations.

Because of the complexity of the corporate welfare problem, such legislation would

obviously need to incorporate considerable language amending existing statutory

language. And even this approach would leave some corporate welfare problems

unaddressed—such as the need to eliminate pork-laden or other programs in which

the government should not be engaged, or for nonmonetary commitments from corporations receiving government supports)—but it would be a very useful start.

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2. Citizen Standing to Sue to Challenge Corporate Welfare Abuses. Citizens could be empowered to mount judicial challenges to runaway agencies that reach beyond

their statutory powers to dole out corporate welfare. Legislation could give taxpayers standing to file such suits, by awarding a $1,000 ‘‘bounty’’ (plus reasonable

attorneys’ fees and court costs) for those who successfully challenge improper agency

action. Consideration should be given to creating an incentive for such suits by

awarding successful plaintiffs a percentage of the money saved through such suits,

perhaps according to a sliding scale of declining percentage returns for higher savings and with a cap set at certain amount. Just as qui tam suits under the False

Claims Act have helped curtail oil company underpayment of royalties owed the

Federal Government, so such a measure would create a structural counterbalance

to corporate influence over Federal agencies. 3. Funding for Town Meetings on Corporate Welfare. A small appropriation could fund dozens of town meetings across the country on corporate welfare and help educate the public about corporate welfare. Alternatively, the House and Senate Budget

Committees should use their committee resources to schedule a smaller number of

public hearings on corporate welfare across the country. 4. Sunsetting Corporate Welfare. The Congress should consider legislation requir- ing that every program in which the government confers below-market-value benefits on corporations, including tax expenditures, automatically phases out in 4 years

after initial adoption, and every 5 years thereafter. Under such a rule, the programs

could of course be renewed, but only with affirmative Congressional action.

Sunsetting would overcome the problem of inertia by which both bad ideas and good

ideas turned bad become entrenched corporate welfare programs protected from serious legislative review and challenge. The entrenchment problem is a particular

problem for nonbudgetary items, which are spared even the reviews accorded to appropriations.

5. Annual Agency Reports on Corporate Welfare. Every Federal agency could be required to list every program under its purview which confers below-cost or belowmarket-rate goods, services or other benefits on corporations. They could also publish a list of every corporate beneficiary of those subsidies above a certain de minimis threshold, and the dollar amount of the subsidy conferred. This measure would

spur much more news reporting on corporate welfare, and would generate public

awareness by assigning proper names to the beneficiaries. These reports should be published on the internet, as should all other corporate

welfare-related disclosures.

6. SEC Requirement for Corporate Welfare Disclosure. The Securities Exchange Act could be amended to require publicly traded corporations to list the subsidies

(both by type (program) and amount) they receive from governmental bodies, and

to publish this information on the internet. Alternatively, the SEC could mandate

such disclosure through rulemaking. This disclosure requirement is easily justifiable

as in the public interest, since corporate beneficiaries are in many ways better positioned to report on the benefits they receive from government than the government

conferors. It would serve a valuable public purpose by assembling in a single location the dollar amounts of public subsidies accorded to the nation’s largest corporations; and thereby enabling the citizenry to assess properly the extent and desirability of the subsidies. The disclosure requirement is also appropriate as a disclosure of material interest to shareholders. Government subsidies are of central importance to many of the nation’s largest corporations, and to assess fully the value

and future prospects of corporate earnings, shareholders have a right to information

on government subsidies.

7. Limits on Executive Compensation in Government-Supported Corporations.

Where the government is conferring substantial, voluntarily received benefits on

corporations, it could reasonably limit the scope of beneficiaries to those which do

not engage in particular sorts of socially undesirable behaviors. One such behavior

is excessive executive compensation, which heightens income and wealth inequalities, and tears at the nation’s social fabric. Government subsidies, including tax expenditures, could be denied to corporations whose executives receive more than a

predetermined level of compensation, say those whose ratio of executive-to-lowestpaid-employee compensation is more than a certain amount, perhaps 35-to-1.

8. Prohibition of Government Subsidies to Criminal Corporations. From convicted

felons who are persons, the Federal Government, and state and local governments,

take away fundamental rights, including the right to vote. Corporations convicted

of crimes rarely experience deprivations of anything near that scale. A small and

appropriate step might be to deny any form of corporate welfare, including tax expenditures, to any corporation convicted of a certain number of felonies and/or misdemeanors. If the government is to confer subsidies on corporations, surely they

should not go to enterprises convicted of criminal wrongdoing.

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9. Reciprocal Obligations. The government should seek nonmonetary reciprocal ob- ligations from corporate welfare beneficiaries. These must necessarily vary by category of corporate welfare program and beneficiary. But two types of obligations are

of special importance.

First is the requirement that certain subsidies be conditioned on beneficiaries enabling consumers to band together in nonpartisan, nonprofit, democratically governed organizations. This can be accomplished by allowing government-chartered

consumer organizations that are accountable to their membership to include an insert, at no cost to the company, in the corporate welfare beneficiary’s billing envelope, or publishing information on the company’s web site. The insert would invite

consumers to join the organization, which would work to contain prices, improve

product quality and service, advocate for reforms, etc. This mechanism would be

particularly appropriate for banks, thrifts and other lending institutions, insurance

companies, HMOs and utilities.

Second, allocation of rights to government lands or other natural resources could be conditioned on beneficiaries agreeing to abide by environmental regulations, or

even to uphold environmental standards that exceed those required by existing regulation.

GIVEAWAYS, INCLUDING R&D GIVEAWAYS

10. Prohibition on government giveaways. Government properties, whether real or intangible, should presumptively be sold, leased or rented to corporations for market

rates. Except in certain circumstances (such as where consumer pricing considerations are considered of more importance than taxpayer reimbursement), there is

no reason for taxpayer assets to be given away to corporations at less than market

value.

11. Promote Competition in Allocating Government Resources. Market value will vary based on the terms of the property transfer. Depending on the circumstance,

taxpayer revenues may be lower if resources are allocated on a nonexclusive basis.

But there is an overriding broad public and consumer interest in promoting economic competition, and legislation could establish a presumption that, where possible, when taxpayer assets are to be transferred to corporations they be conveyed

on a nonexclusive basis.

12. Competitive Bidding. In all cases, but especially where the government plans to transfer taxpayer assets to corporations on an exclusive basis, Congress should

consider requiring asset transfer prices to be established by auction. 13. Reasonable Pricing Provisions. Where there will be a consumer end-user from the transfer of government assets (as in the case of products brought to market utilizing government-controlled intellectual property rights), the terms of the transfer

should require the corporate beneficiary to agree to reasonable pricing provisions.

This is of primary importance for exclusive transfers, where transferees may gain

monopoly power. Because Federal agencies, especially NIH, have historically done

a poor job in enforcing reasonable pricing provisions, serious consideration needs to

be given to how such provisions should be administered and enforced. Required disclosure of private investment in product development, and correlating prices with

amount and proportion of private investment, may offer one fruitful approach. It

may also be possible to include reasonable pricing guarantees in the bidding process,

with preference given to bidders making enforceable promises of lower prices. 14. End Fossil Fuel and Nuclear Power R&D. There is no justification for Federal support for these environmentally hazardous, nonrenewable energy sources. As

study after study has demonstrated, energy efficiency and renewable energies represent the future superiorities.

INSURANCE, LOANS AND BAILOUTS

15. No Discount Insurance. The Congress should consider a legislative presump- tion against below-market insurance for corporations, requiring a special waiver for

exceptions.

16. No Liability Caps. There should be a legislated blanket prohibition on liability caps, which unjustifiably protect corporations from paying for any harms they perpetrate. Liability caps, such as those in Price Anderson, should never accompany

governmental insurance schemes. 17. No Discount Loans. The Congress should consider a legislative presumption against below-market loans or loan guarantees for corporations, requiring a special

waiver for exceptions.

18. Payback For Bailouts. Legislation could require that all bailout beneficiaries

pay back loans in full, with interest, with priority given to repayments to the government over other claimants.

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19. Preventing Foreseeable Financial Bailouts. Proposed legislation (H.R. 10) to

lift the regulatory walls between banks on the one hand and insurance and securities firms on the others would create too-big-to-fail financial holding companies,

with Federal deposit insurance likely to be de facto extended, at no charge, to other

financial affiliates. H.R. 10 should be amended to include a provision establishing,

in advance of future bailout demands, that no Federal assistance will be made available to financial holding companies or to their nonbank affiliates. Because this is

an especially timely matter, I have attached legislative language for such a provision at the end of this testimony. This language was originally prepared last year

at the request of then-Senator Alfonse D’Amato.

CORPORATE TAX EXPENDITURES

20. Eliminate All Corporate Tax Expenditures. Because corporate tax expenditures are already compiled in the President’s budget submission and by the Joint

Committee on Taxation, this step would be less logistically complicated than ending

all corporate welfare. Wiping the slate clean of corporate tax expenditures-perhaps

the most deeply entrenched type of corporate welfare-would require the tax expenditure beneficiaries and their Congressional allies to justify anew these tax supports,

and deserves Congressional consideration.

21. Require Reporting of Corporate Tax Expenditure Beneficiaries. The Internal

Revenue Service could be required to publish a list of all corporate tax expenditure

recipients over a certain de minimis level.

INDUSTRY PROMOTIONS AND EXPORT ASSISTANCE

22. End Government Market Promotion. Congress should consider prohibiting

government-run advertising and marketing schemes for private corporations.

23. End Export Assistance. Congress should debate eliminating export assistance

programs, or making them available only on a strict means-tested basis.

LOCAL, COUNTY, AND STATE CORPORATE WELFARE

24. Regional and National Compacts. Congressional legislation should authorize

anti-corporate welfare compacts between states, enabling them to enter into binding

arrangements to refuse to enter a race to the bottom against each other in terms

of using special tax breaks and related benefits or stadiums to influence business,

including sports team, location decisions.

25. Surtax on Local and State Corporate Welfare. Congress should consider requiring the IRS to treat local and state corporate welfare expenditures as income

upon which Federal taxes should be paid.

Mr. Chairman, there is a rising discontent across the country with the hijacking

of public assets to benefit narrow corporate interests. The public’s frustration with

the corporate welfare state is palpable, but it remains inchoate and unorganized.

The Green Scissors Coalition and others represented at today’s hearing have done

vital work in publicizing the issue, but it has yet to attain the visibility needed to

grab the public’s attention and focused energies.

The time is now for you and other courageous Members of Congress who truly

believe in ‘‘Ending Corporate Welfare As We Know It’’ to launch a series of GAO,

CRS and CBO studies, to conduct extensive hearings in Washington, DC, and across

the country, to introduce and vigorously push for corporate welfare legislation, and

by your leadership to force this issue with such broad appeal onto the front pages

and the nation’s television screens.

There is a nascent national consumer-taxpayer-environmentalist-worker-small

business coalition that is waiting to be consolidated on this issue. If these forces are

united, they will form a powerful political force that can help rescue our political

democracy from the narrow interests that now dominate it. Corporate welfare cuts

to the core of political self-governance, because it is perpetuated in large measure

through campaign contributions and the subversion of procedural and substantive

democracy; and because the perpetuation of corporate welfare itself misallocates

public and private resources and exacerbates the disparities of wealth, influence and

power that run counter to a functioning political system in which the people rule.

A final note before closing. Given its breadth, this testimony necessarily paints

in broad strokes. It is important to reiterate that we do not oppose all corporate welfare. But it is important that even ‘‘good’’ corporate welfare programs operate with

safeguards in place to ensure procedural fairness, full disclosure of beneficiaries, frequent review and reaffirmation, and reciprocal payments and nonmonetary commitments from recipients.

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This hearing is an important and historic beginning, Mr. Chairman. But if it is

not followed up by more hearings and a sustained effort that involves more and

more Members of Congress and citizen organizations, it will be of modest consequence. We are ready to join with you to help expand on the opportunity presented by this hearing.

Thank you.

Chairman KASICH. You can take a breath. Let me, Mr. Nader,

ask you kind of the fundamental questions. I know you feel passionately about everything you said and that reasonable people can

disagree with a number of the specifics that you laid out, but I

don’t think it is possible to reject a chunk of what you have said

in terms of the common sense results and approaches.

You said that you offered an amendment in the banking Committee where you got 40 noes and six yeses. Now, I had an experience, a couple of experiences here. One was we had a vote on the

overseas Private Investment Corporation, and we snuck up on

them, and we stopped the program for, I guess, I don’t know, we

stopped the refunding of the program for about a half a year, and

then what happened was the people who were the beneficiaries

went to their constituents, and then they had their constituents

call—the ones who had gotten the benefits of this program called

the Members of Congress, and the next time we got a vote on this

program working with a coalition of members on the Floor of Republicans and Democrats, we had our lunch handed to us.

Now, we did make some progress in the area of timber sales. In

fact, we were able to negotiate a successful agreement on timber

sales. You know, I was somebody that came to the Congress in

1989. You could get all the people that voted for my budget in a

Volkswagon, and I am never afraid to walk a lonely road in government.

You can see how much interest there is in this hearing today,

very limited interest in this hearing today in terms of Member participation. Members are busy, so they have to establish priorities.

But the difficulty is, first of all, getting Members’ interests in this

subject, and I know you believe that there is this enormous political vein out there that can be tapped into.

If there is one, I don’t know where it is because this has been

a huge struggle because when you take these issues on—and there

are a lot of young people in this room today—you don’t make any

friends, trust me. All you make are enemies; and the question is,

I don’t want to just go 40 to six every year and then we can vent

against certain programs and it sounds good, but we don’t make

any real progress.

This hearing is well covered today because it is a novelty. You

showed up on the Hill; there are going to be conservatives on the

hill who are all going to testify to essentially the same thing, and

this issue does capture a little bit of media attention.

But the question is, how are we going to win some victories? Because all—if all this is are hearings and testimony to committees

that are not very well attended, then I can tell you that you are

going to get zero, not going to win anything. So the question is,

how can we get the conservatives, the liberals, the progressives to

get behind? I used to think we could find 10. I no longer think we

can even find 10 issues where we can combine ourselves and lead

a large campaign.

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How are we able to, in your judgment, make some real accomplishments against several of the most egregious problems? I mean,

you have pointed a lot of things and you talk about, for example,

stadiums, and people on both sides of the issue can make big arguments about that issue, but I think there are some issues here, for

example, the 1872 mining Act, where you are going to still not get

unanimity but you can get an overwhelming consensus that that

needs to be reformed.

How are we going to work to build the political support to actually have some clearcut victories on the floor of the House and the

Senate and not just sit around and talk? I have been engaged in

this thing now for 4 or 5 years, and we have had, like I say, some

significant victories but few in number. So what do we do about it?

Mr. NADER. Well, first of all, Mr. Chairman, this is the first time

that the subject of corporate welfare in its amplitude has been on

C-SPAN, which means that it is going to reach at least a million

people, and we shouldn’t say that this issue is a forlorn one for courageous Members of Congress before we at least see whether the

mass media is willing to carry it to millions of people.

I know that people who watch C-SPAN get back to their Members of Congress about what they have seen. Our testimony will be

on our Web site, www.essential.org, for further access, and we invite the comments of people all over the country in their favorite

area of corporate welfare critique.

Now, where you cannot in a straight-on attack on a corporate

subsidy win and you have tried to go after these subsidies straight

on, there are angular approaches that lay the basis to build for future victories. One is to put in every time you can amendments in

appropriate legislation for disclosure, for specific disclosure of the

kind and amount and the beneficiaries of corporate welfare.

Another is to put in amendments for sunsets. Another is to put

in amendments for reciprocity. You say, OK, Bristol-Myers, you are

getting this annual billion dollar revenue Taxol drug, what are you

giving back in return? So that you collaterally attack the problems

from different ways where you cannot head-on overwhelm and defeat a particular program.

We know that information is the currency of democracy. We

know that when information is out and when it is specific by company, by program, it develops a larger audience of outrage and concern which reverberates back to Congress. So I think in some answer to your question, why don’t you try a procedural strategy in

order to lay the basis for a substantive attack on these subsidies

and programs. The procedural strategy is outlined in our testimony, but it really revolves around things like disclosure, sunset,

reciprocity, standing to challenge on the part of the taxpayer.

Notice, not a single taxpayer in this country can challenge any

of these programs. I will never forget, just before the Ford administration left office, the Commerce Department issued an announcement for a large loan guarantee to General Dynamics to guarantee

loans for the construction of liquified natural gas tankers to move

gas from Indonesia to Japan, a multibillion dollar loan guarantee,

and there was no involvement by Congress to approve it. There

was no public docket at the Department of Commerce, and no taxpayer could challenge.

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Now, this is a one-hundred-percent shut out procedurally of the

taxpayers of this country, and they are told no matter how wasteful

these subsidies are, no matter how much corruption there may be,

no matter how much documentation, you as a taxpayer can’t have

the chance to prove the case in court.

So procedural attacks are extremely effective when you don’t

have the full political support here in Congress to go after the subsidies directly.

Chairman KASICH. Well, Ralph, I think part of what you are suggesting is more lawsuits, and I frankly don’t like that idea. I have

a more fundamental question. If we know that somebody is getting

$8 or $9 billion off of a public land and they are virtually paying

no royalties for that and you are trying to tell me that you can’t

take an issue like that head on and win, that the way we have to

go is in some procedural direction. I mean, the question is, why

can’t you win? You know why I think you can’t win, because I don’t

think we have the sustained support from people who oppose these

things willing to dedicate a lot of time and a lot of energy to taking

these issues on.

Mr. NADER. But there is another reason, Mr. Chairman. Where

the executive branch is the culpable branch, let us say they are not

doing the right job and it needs to be challenged, where the legislative branch is too under the influence of big money and all the rest,

it is time to ask whether the judicial branch has a role here. I believe in the judicial branch of government. I think our forebears

bled and fought for the right to have their day in court. I think

that is an all-American right, and I think the attack on access to

the court has become too extreme and almost wild in its ferocity

by the business community.

When I say taxpayer challenge, what I mean is not a taxpayer

going to challenge a government program and make a billion dollars. The taxpayer is going to challenge a program, for example,

under injunctive relief, under mandamus relief by the courts who

tell the agencies, you are allowing the taxpayer resources to be

looted under existing law.

Now, sometimes it is good to give the taxpayer bounty, too, to facilitate that kind of incentive, but I believe in the judicial branch

of government as an essential counterweight.

Chairman KASICH. But let me tell you, it is not—you know, I

don’t think it is all the way you paint it. Let me just give an example with the Overseas Private Investment Corporation. In my own

congressional district, there were a couple, I think, businesses—I

am not even aware of them all—that benefited from OPIC.

So if the people who benefit call their representative and say,

hey, by the way, do you know that this program has been helpful

to me, and we have created 50 new jobs because of this and the

people trying to kill this are just dead wrong, when that Congressman gets no calls, absolutely no calls from any of the other folks

who are out there who are members of conservative organizations

or liberal organizations, where there truly is a grassroots support,

because presumed in your testimony is that there is, the public

wants to unleash their frustration to level the playing field, the

problem is you are not getting people to call the other way and to

say this program ought to go.

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And my view is that until the grassroots organizations that have

determined that they have a stake in eliminating some of these unnecessary programs get involved, it is not as though it is some

huge deal. It is minor groups of people who really call, but they are

the only ones that call, and I think if you had people in the conservative and liberal side saying, cut that, government, it probably

would be cut. Maybe we need to make a better effort to try and mobilize our own forces.

But let me go to Mr. Toomey, who sat through the entire testimony and recognize him for 5 minutes or whatever time he may

consume.

Mr. TOOMEY. Thank you, Mr. Chairman. Thanks for joining us

today, Mr. Nader. I wanted to pursue a slightly different direction

with you. There are often arguments made that corporate welfare

amounts to a misallocation of capital in the economy, and I tend

to agree with that. I think there is a compelling case to be made

that their very existence requires taxes to be higher than they

might otherwise be, hard to refute that. Corporate welfare is often

justifiably criticized for the inherent unfairness in singling out

some industries and companies as opposed to others, but what I

wanted to explore with you this morning was the question of the

constitutionality of this.

Could you cite for me where in the Constitution the Federal Government is authorized to pick a single company or a single industry

and blatantly subsidize that business? Do you think that is constitutional at all?

Mr. NADER. Well, the general response is that it is under the

general welfare clause of the Constitution, which seems to been an

infinitely expandable clause of the Constitution. The critique of

that is as follows: one is the belief by some legal scholars that the

definition of public purpose—which justifies the State to engage in

eminent domain, take over neighborhoods, buy out homes and

small businesses, and hand the land plus a subsidy package to a

corporation or to a parking lot or to a gambling casino—has no

boundaries in our court cases. And unless it is given constitutional

boundaries, then the answer to your question is there is no limit

to the use of the taxpayer dollar. There is zero. Let me repeat that.

Apart from building a church, apart from the State/church separation, under present Supreme Court doctrine, there is no limit as to

how the tax dollar in the United States can be used by government.

Mr. TOOMEY. Well, getting back to the general——

Mr. NADER. In a constitutional sense. Obviously they can’t use it

to bribe somebody.

Mr. TOOMEY. Right.

Mr. NADER. And the second answer to the thrust of your question

is to look to the commerce clause. The argument there is that the

commerce clause was designed to prevent the States from challenging one another, to lure business from one another and create

barriers. These may include the passive barriers that are created

such as when Virginia and Maryland wrestled over lavishing subsidies on Marriott, even though, as it turned out, the Baltimore

Sun reported Marriott was going to stay in Maryland all the while.

The passive barriers are when a State says to a corporation in anVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00204 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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other State, if you relocate in our State, we will give you a tremendous tax holiday.

In Professor Enrich’s article in the Harvard Law Review, the argument is that that is a violation of the commerce clause of the

U.S. Constitution because it effects in an indirect, in a passive way

the same kind of barrier which had been struck down between the

States.

Mr. TOOMEY. To touch sort of in reverse order here, with regard

to the commerce clause, the constitutional authority to regulate

commerce amongst the States seems clear to me was intended to

make regular commerce amongst the States and to strike down as

you pointed out the affirmative barriers, and with respect to the

general welfare clauses, to both of these put together, to those who

would defend corporate welfare and cite these clauses, it seems to

me essentially suggesting that there is no realm which is not appropriate for the Federal Government to engage in, and that clearly contradicts what the Constitution is all about, which is limiting

the power of the Federal Government to those powers enumerated

within it.

So it seems to me you have to believe—in order to believe that

these clauses justify corporate welfare, you have to believe that the

Founding Fathers clearly contradicted themselves within the Constitution and didn’t know whether they wanted a limited or unlimited Federal Government.

Mr. NADER. Well, you put it in a very succinct way. If constitutionalism means anything, it means boundaries; it means limits in

different dimensions. And when it comes to corporate welfare programs, there are no limits.

Mr. TOOMEY. Well, I appreciate your coming here today and look

forward to working with you and others to find ways to reduce this

rather egregious spending we have here at the Federal Government. Thank you.

Chairman KASICH. Gentleman from Pennsylvania, Mr. Hoeffel.

Mr. HOEFFEL. Thank you, Mr. Chairman. Mr. Nader, thank you

very much, great testimony, very thought provoking. Your lead

remedy is the proposal for a bill to eliminate all corporate welfare

under the concept, as you put it, to let them start over again,

which has a certain appeal; and you referenced with the phrase remember zero-based budgeting, the notion of obliterating all the bad

stuff and making people start over and justify their program or

their subsidy.

I do remember zero-based budgeting as a young state legislator

in Pennsylvania. When Jimmy Carter talked about it, I thought it

was wonderful. I tried to get it going in Pennsylvania, got nowhere.

Zero-based budgeting got nowhere here in Washington, and my

concern is that your lead remedy, which has a certain simplicity

and cleanness to it, simply won’t ever be passed.

So is there some other provision such as the establishment of a

commission to recommend changes to Congress, a better way of

going to try to get the ball rolling? I mean, we have got the power

now to change all these things, and we don’t change them. Is there

some more gradual legislative process we ought to consider?

Mr. NADER. Well, first of all, I wouldn’t give up on this first recommendation because even if it never gets through, it has the

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great potential to shake up the situation and give these issues

more visibility. This relates to what Chairman Kasich was saying,

that nothing is going to happen until the public is galvanized. So

as an instrument of discussion, debate, visibility, it is worth trying.

I think that was true for the advocates of zero-based budgeting.

The difference here of course is budgeting constitutionally is supposed to start in the House, but actually starts in the executive

branch. So zero-based budgeting relied on executive branch initiative more than this proposal, which would rely much more on legislative initiative.

Do you know there was a proposed commission? It never got off

the ground. Remember, Senator Kerry was on the commission.

Mr. HOEFFEL. I thought Senator McCain had a proposal for a

corporate welfare commission.

Mr. NADER. That is right, and it never got through. So you can

see even something as preliminary as that proposal is opposed by

the lobbyists. Anything’s going to be opposed by the lobbyists; but

remember, you got through the Congress a deletion of the $30 million for the bonuses for the executives at Martin Marietta because

it was put in legislation.

So this idea of an angular approach procedurally, reciprocity, disclosure, sunset, if dozens of members who share a common belief

here put these amendments in at all times they are going to break

through, and they are all going to become magnets for discussion

as well.

Chairman KASICH. Will the gentleman yield?

Mr. HOEFFEL. Yes.

Chairman KASICH. Let me ask, Mr. Nader, are you willing to

take on the challenge of picking out some of the conservatives who

are going to be here today and sitting with them personally and

trying to come up with one or two items that you would be willing

to dedicate the grassroots effort to undertake and fight both on the

House and the Senate floor?

Mr. NADER. Definitely, but I would want to do both. What you

said——

Chairman KASICH. I am just saying to you that is the way you

will stir up the public is that you say here is an outrage, and it

is a national campaign to say that we are going to show that we

can win one fight, and all the focus goes into one fight. You can

all have all the commissions you want. They are never going to

pass.

Ralph, you have got to get into the real world on this what is

going on up here. It ain’t going to work that way. If you want to

get something defeated, you and the conservatives have got to get

people stirred up in all these congressional districts who are going

to say we are going to change X and we are going to put everything

we have to win one single fight, and when you win the first fight,

guess what, it makes it easier on the second fight. And right now,

there is no support for a member who goes to the House Floor to

fight any of these subsidy programs, zippo support; and as long as

there is zippo support, you are not going to pass commissions.

What is that word you used there—it is not the head on approach,

but the angular approach—triangular approach.

Mr. NADER. Not triangular.

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Chairman KASICH. Angular approach. I mean that is fine, but

you’re not going anywhere with that. You have got to win a couple

of these fights, and you know what happened with timber because

both the conservationists, the environmentalists and the conservatives and the liberals all said yes, and there was a ready base of

support for people who would go to town hall meetings and drive

the congressmen crazy. If you are not driving congressmen crazy,

you are not going to win any votes because the other side is going

to dominate, and it is democracy. It is not an evil, wicked thing.

It is just the way it works, and we can win these, but there is no

substitute for people power. The gentleman is recognized, I am

sorry.

Mr. HOEFFEL. No. Thank you, Mr. Chairman. I appreciate the

comment. I would just close by saying that I agree with the Chair

that it would be excellent to pick out some particularly egregious

examples of corporate welfare and get a coalition to stop it. I also

think, though, there has got to be a legislative mechanism so that

we don’t have to rely on a great crusade to stop these abuses because most of them are hidden away, as you so well identify, and

we need something in addition to our annual appropriations process which has not succeeded in eliminating corporate welfare. We

need some structure, but I thank you, Mr. Nader, for being here.

Mr. NADER. I think the comments of the Chairman are well

taken. I would only add that, in addition to focusing on one or two

high profile targets in the corporate welfare area, I would I also

favor this approach, the procedural approach, sunset, disclosure,

reciprocity, all that because, you know, if you throw enough amendments in the field, you are going to divide the opposition. You are

going to get a few through, and the few through help open up the

field for the substantive assault on these boondoggles. But I think

it is important we gather together with ‘‘the other side’’ as you say

and pick one or two that can be mobilized and focused on.

Chairman KASICH. The gentleman from New Hampshire is recognized.

Mr. SUNUNU. Thank you, Mr. Chairman. Thank you very much

for your testimony, Mr. Nader. It was very helpful; nothing if not

thorough. And it didn’t leave a lot of areas for further exploration,

but I do want to highlight one area that you touched on, and that

has to do with the basic reason that these subsidies are harmful.

We heard about the capital allocation and productivity issues. It

certainly hurts the economy when we are distorting the economic

effects of investment. We heard about the high tax rates, the fact

that we are collecting more taxes than we need to in order to provide these subsidies, but you mentioned the issue of economic justice and basic fairness. The fact that a number of these subsidy

programs tend not to just distort the economy but distort the economy in a way that disproportionately hurts those that arguably

need economic assistance the most. And I think that is at the heart

of a very strong moral argument for looking at these programs,

eliminating them and either channeling the funds into programs

that really do make a difference or ultimately giving the funds

back to individuals so that they can make decisions that are in

their own best interest.

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I think the example you used was in Detroit or in the Michigan

area. There is a great irony here, though, because you have used

this moral argument for explaining why these subsidies are bad,

but oftentimes those that support the subsidies the most try to

make an economic argument on their own behalf, trying to suggest

that, no, these are actually helpful, we are creating jobs, we are

stimulating the economy, we are supporting opportunities.

That is tough, very difficult to counter that economic rhetoric unless you can cite specific examples as you did very eloquently.

Could you please elaborate on that, the example you gave earlier,

talk a little bit more about how these distortions oftentimes hurt

those who need the economic assistance the most?

Mr. NADER. Well, first of all, take the Marriott hotel chain. They

got a $38 million tax break to stay in Maryland. Now, what if you

owned a 20-room inn a mile from one of the Marriott hotels? How

would you feel? You don’t get a tax break. You have to pay your

bills. There must be a simmering of displeasure among many small

businesses who see their competitors get the breaks and the subsidies, et cetera, when they can’t. To highlight this, I often imagine

what would happen if in New York City 500 small businesses got

together, petitioned to Mayor Giuliani and said if the city does not

give them a big tax break, they will move to New Jersey. You see,

it is only if you are big enough that you get these breaks.

The other thing is I think the record shows that joint government business R&D like these partnerships with the auto industry

are the worst idea imaginable. They freeze innovation. They freeze

competition. They tell the three auto companies, hey, you don’t

have to compete with one another anymore, you are in with Uncle

Sam in enormous number of meetings producing nothing. Six years

into the program, $1 billion almost expended, there is almost nothing to show for the clean car program. In the meantime who is

coming in with a 75 mile per gallon car next year? Honda and Toyota. They are not part of this so-called clean car initiative. So it actually restrains innovation.

Now, there are some government programs that are valuable. If

you want to make one distinction, subsidies by the many for the

many—that was, until recently, the postal system for years—may

often be meritorious. Subsidies by the many for the few are very

mischievous, very unfair, and they have a lot of unintended consequences, as well as entrenching interests.

Mr. SUNUNU. I would like to hear you talk a little bit more about

the partnership for a next generation vehicle. It is a very significant investment in automotive technology, and we all recognize the

importance of the automobile to this society.

But I think there is no denying the fact that the corporations

within the automotive industry right now are enjoying very significant success. Now, there is a little irony here because you are one

that at least part of your notoriety or famous name is due in part

to your interest in automotive technology back in the 1970s. But

at the same time, you are pointing out the inefficiencies and the

market distortions associated with this particular program under

which partnership for the next generation vehicle we are spending

upwards of $200 million to develop technologies that ought to be

developed under a competitive environment nonetheless.

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I want to talk a little bit about that irony, and under what circumstances do you think that the Federal Government ought to be

subsidizing, in this case automotive technology, but any applied

technology in general.

Mr. NADER. Well, first, I objected to that program when it was

first announced in 1993. I wrote a letter to the White House giving

my reasons. One reason is that it effectively exempts the domestic

auto industry from the antitrust laws. The major auto companies

have a very notorious history of product fixing. Basically, through

their trade association, they agreed not to develop and market pollution control devices. If one went first, the others were going to

have to follow, and there is all kinds of tumult, et cetera. So they

agreed not to compete.

And I also suggested that if the government wanted to develop

a clean car and they realized that the auto industry, notwithstanding its massive profits, was not willing to put R&D money in,

was not willing to fund MIT, your alma mater, or something to develop a clean car, you know how I would do it? I would do it the

way canned food was developed.

When Napoleon, unfortunately for a very bad purpose, Napoleon

wanted canned food to take his armies to Russia because they

couldn’t rely on a steady diet, he had a contest. When the utilities

wanted to see developed an efficient refrigerator a few years ago,

they had a contest. I think Whirlpool won it.

So if the government wants to really stimulate innovation and

they can’t get the industry to do what is necessary, have a technical contest with clear specifications so that all the best ideas and

proposals come to the forefront.

Mr. SUNUNU. Thank you very much. Let me ask one final question and that has to do a little bit with the angular approach to

this problem. We have passed in this committee a budget process

reform bill. It is going to see votes on the House Floor in the coming weeks. It does include some provision for encouraging committees to perform oversight and to come up with a schedule for reauthorizing programs so that we don’t see funds continually appropriated for those that aren’t authorized. Beyond those ideas, is

there anything that comes to your mind that you would like to see

included and an overhaul of the budget process so we don’t see—

so that we minimize the likelihood of funding the corporate welfare

we have been talking about but also so that we have a process that

is as open and as efficient as possible?

Mr. NADER. Yes. In fact, the reason why we now know anything

about tax expenditures is because there is a requirement for the

Treasury to report tax expenditures, but they don’t report it by

company; they report it by category. So now there is a little bit

more fertile public discussion and debate.

The first thing I would say in response to you is to require a pattern of disclosure, so that Congress and the public knows what the

benefits cost, and who is getting what. That could be a very good

part of the budget. Another part could be a sunset provision. Another part could be an explanation by the disbursing agency as to

the effects of the corporate welfare. Citizens for Tax Justice Executive Director Robert McIntyre will testify later in the day, but a lot

of these tax breaks, say, for the energy industry, didn’t produce

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what they were designed to produce, whether it was domestic exploration instead of foreign exploration or whatever.

A lot of the investment tax credits don’t produce increased investment and productive appointment and so the question is to say

to the bureaucrats, OK, you have been doing this program now for

10, 15 years on the basis that it is going to fulfill a certain purpose.

Has it fulfilled a purpose?

Mr. SUNUNU. But to slightly distort an old adage, figures lie and

bureaucrats figure. You can always look at a program and construct some argument that, well, the funds that we disbursed

moved through the hands of eight different corporations, and their

total employment is 1.2 million jobs and to essentially take credit

for opportunity growth and activity that is already there but to

nonetheless create what looks like a strong economic argument for

these programs, and I have seen that time and again. My concern

with that would be that the quality of the information wouldn’t

necessarily be up to your standards or mine for that matter.

Mr. NADER. That is true. You can never avert that risk. However, Stanley Surrey when he was at the Treasury Department did

come out with reports saying that certain investment credits, tax

credits, et cetera, just didn’t work. There are opportunities for more

candid and trustworthy government officials to have their say.

I would also have a public docket. Under the Administrative Procedures Act, if you are dealing with regulation, say a proposed safety standard, the relevant agency has a public docket, everyone gets

their licks in, then they put out the final standard, and it is subject

to judicial review. There is no such process dealing with subsidies,

not for billion-dollar loan guarantees for liquified natural gas tankers, or for others. As a result, people who don’t like what is going

on in universities and corporations in terms of technology transfer

have no voice. There is no administrative opportunity before the

agencies and departments to have an input.

Procedural due process is probably one of the greatest contributions of the rule of law in the history of the world. We always have

to ask the questions if there is an abuse, is there a procedural due

process? Is there a public docket? Does the agency have to justify

its actions? You know that when there is some officials who dissent

from the official line—let us say there is a six-person agency or a

three-person agency, there is an opportunity for dissent. In the corporate welfare area, it is fiat, fiat, fiat, that is the way it comes

out.

Mr. SUNUNU. Thank you. Thank you very much, Mr. Chairman.

Chairman KASICH. Gentleman from North Carolina is recognized,

Mr. Price.

Mr. PRICE. Mr. Nader, I want to thank you for your appearance

here today, for your comprehensive, well-prepared, well-presented

testimony. That doesn’t surprise me. I learned a great deal from

you years ago as a Senate staffer on the staff of Senator Bob Bartlett as we were laying the groundwork for the Radiation Protection

Act, as you may remember; and we had hearings on that subject

in 1967.

You may have noticed that two of the pioneers who testified in

those hearings Merril Eisenbud and Carl Morgan both recently

passed away. But I am glad to have you here today and to have

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you open up this rather complicated subject which we do need to

attend to, and I appreciate the Chairman for scheduling these

hearings.

You began your testimony with an attempt to define corporate

welfare, made a couple of runs at it, and then came up with what

seemed to me to be well-conceived screens that might be applied.

I gather your point is not to say that anything that one might define as corporate welfare is per se—that that doesn’t automatically

argue for its elimination, but it does place a certain burden of proof

on the policy, and these screens suggest ways in which it might be

further explored.

You furnish some very clear examples, it seems. Mr. Chairman,

if we are looking for something to head the list, it seems to me that

the 1872 Mining Act surely would be a candidate where these companies are mining Federal lands basically free of charge. There are

many convincing examples.

What I want to ask you to do, though, is to deal with some cases

that might be more difficult and to help us figure out how these

screens might work. There are all kinds of groups, of course, using

this designation of corporate welfare and arguing on that basis that

subsidies or tax expenditures ought to be eliminated.

Let me just ask you about a couple of examples that seem to me

much more difficult. One screen you might have added, it seems to

me, is whether a given program, even though it fits, might actually

save greater expenditures given the alternatives. Crop insurance

might be an example. Crop insurance definitely helps our farmers,

I think, in important ways. It also happens to avert greater expenses that might come about through disaster relief, and that is

the whole rationale or one of the major rationales for crop insurance. The expenditures are significant, but the expenditures, if crop

insurance weren’t there, are surely even greater, and then obviously you also factor in the factors of public benefit.

And then also, what about policies where the corporate welfare

aspect is incidental to a larger purpose? I am not sure the screens

quite catch that either. For example, the Citizens for Tax Justice

have been very critical of tax exempt bonds for State and local governments. Well, surely the bondholders do benefit, but the much

larger purpose, of course, is to enable State and local governments

to raise revenue for public purposes.

I don’t know if those two examples trigger any thoughts that you

might want to share, but it does seem to me that while there are

some very clear and very egregious examples, we also do need to

define rather carefully at the margins what kinds of policies do and

do not fall within this rubric and what it would take to justify

them.

Mr. NADER. Well, you have made two very fine points. You know,

sometimes these business welfare programs occur because the private sector is not willing to come forth. Crop insurance is such an

example. Farmers had a great deal of difficulty getting any private

crop insurance. It was a hard thing to actuarially package, and so

the system in place now was launched. So sometimes when the

marketplace itself does not provide either any entry or a reasonably priced entry, the government moves in, and that is true for

Price Anderson. It is true for crop insurance.

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Right now, if you look to crop insurance, you would have to reevaluate it and say, number one, can the farmers through their cooperatives—and they have large cooperatives—provide their own

insurance? Two, is the private sector, now that it has seen that

crop insurance, is actuarially assessable, et cetera, able to provide

a better service than the present system? So that is part of re-evaluating something that was a very needed public service for farmers, given locusts and storms and other disasters, which as you say

would have come right back to the taxpayer in terms of even greater expenditure.

On municipal bonds—I am sure Bob McIntyre can elaborate on

this, as well as the many other good people who are coming later

in the day. It is important to raise the question, given some of the

scandals in the municipal bond area now and the lack of competition, because the market is often cornered by a few firms, can the

economic advantage to local communities of using tax exempt

bonds be directly handled rather than indirectly through some direct Federal, State and local relationship? I am not certain that

that would come out that way, but again, what might have been

a good idea 20 years ago might have led to an abuse today. Market

conditions change, more certainties are realized. Let us look at it

again. I think that is important.

There is no question that Federal subsidies programs have

launched new industries. As I mentioned, some of the most burgeoning industries in the country wouldn’t be anything like they

are today without government research and support for vital technology. The 707 came right out of a military plane. The whole

semiconductor industry and the computer industry benefited from

the infusion of government R&D. NIH has played a leading role in

developing health science industries.

Then you say, what about reciprocity? Why is it a giveaway?

What rights do the public have to public broadcasts on the public

airway? What rights do the public have to the Internet, which is

heavily subsidized and created by the public?

I think what Chairman Kasich has done in this hearing is resurrect an old-fashioned tradition at Congress, which is to take an

issue and begin looking at it with great detail and great input by

the membership. Pretty soon you will get input from around the

country because they will hear about it.

So we don’t come in with some categorical notion of everything

out, or everything in. What we do is establish a set of principles

from fairness to strict economic returns for government assets that

make this issue much more effective and workable. I mean, the

idea of billions and billions of dollars going into coal and oil and

nuclear and very little in the last 50 years going into renewable

and energy conversation by comparison is just bad economics. It is

bad environmentalism. It is a bad use of taxpayer dollars.

We could now have the biggest solar export industry in the

world. Instead, we are slipping behind Japan and five European

countries, but we have had all these boondoggles, the so-called

clean coal initiative which will be examined later, the infamous

synfuel boondoggle, billions of dollars down the drain, which came

because there is no congressional input and no public review.

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It is largely secret, and bad mistakes are made by subverting

democratic processes, subverting procedural safeguards and substantive input. As the old saying that was attributed to President

Jackson goes, ‘‘If a country’s in trouble, the solution is not less democracy, it is more democracy.’’

Mr. PRICE. Well, I appreciate that elaboration. We might in the

end agree or disagree on specific policies that would pass these

screens or would pass the test, but I think you usefully suggested

some questions we ought to be asking and some burdens of proof

we ought to be imposing. Thank you.

Chairman KASICH. We are going to have three Members up

shortly, so I would ask members to—we will move along and have

Mr. Nader kind of limit his remarks. Mr. Moran, gentleman from

Virginia, any questions?

Mr. MORAN. There was a list of 13 witnesses, but it was not balanced. I don’t see any witnesses that actually have some experience

in the use of these programs. What we have is a list of witnesses

like Mr. Nader who has done some extraordinarily good research

and is very articulate and persuasive, and we have Members who

have already made up their minds and have introduced legislation.

But I think a hearing like this is going to be more effective if we

have individuals in businesses that are directly affected by this,

using these programs and have an opportunity to justify it, and let

us decide whether they make their case or not.

I understand there was somebody that you had invited, a tech

executive, but they didn’t come, although they were never on the

original list. So I think if I am going to do this, it would probably

be more effective to at least give the appearance of more balance

because I would like to hear from them and better understand how

these programs are supposed to work.

I agree with Dave Price that I can’t for the life of me figure out

how we can justify economically to the majority of the population

maintaining the 1872 mining law. Most of the companies that have

benefited from it are foreign firms anyway, and they get in many

cases billions of dollars using public property that they are mining

and are paying, what, two fifty an acre or something in some cases.

This is absurd. I mean, it is almost criminal to be able to take that

from the public, to use it for such high profit making companies

that make such high profits and have a very substantial profit

margin, it appears. So that is pure politics. It is Congress’ fault. It

is inexcusable. It would seem we ought to do something about it.

Likewise, some of the timber programs where we pay for the

roads, and the royalties we get don’t come close to paying for the

cost of the roads, and oftentimes in the virgin forests or forests that

clearly have an ecological benefit to the entire population; so,

again, it would appear to be pure politics, and even in timber programs, increasingly these seem to be Canadian, Japanese firms,

particularly Japanese firms, and they are processing the lumber in

their country, which is where the jobs are. The jobs aren’t so much

in cutting down the trees. It is the processing and selling the lumber and marketing the paper and so on.

The third one is in grazing. How private landowners can compete

for offering grazing on their land when the public gives it such a

deep, deep subsidy is again scandalous to be doing that. Of course,

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poor Mike Synar used to do that every time, and every year he

would try to correct it, and the people in his district were furious

at him. They had the benefit, they didn’t want to lose it, and people

like you are a real annoyance when people have a nice benefit

going, a nice thing going for themselves and somebody like you

comes up and say, hey, wait a minute, this isn’t fair; this ought to

be corrected.

And I know that there are few of us on the Hill who have the

kind of intellectual strength and courage that you have consistently

shown throughout your career. Basically, that is been your career,

and I applaud you for doing so, Mr. Nader. I do think sometimes

you go a little over the top on some of this stuff—you get a little

carried away—and that is why I want to hear from some of the

beneficiaries of these programs so we can make sure that we have

got a balanced presentation.

Some of the foreign programs where we offer subsidies, OPIC

really pays for itself, and so while you can argue that that money

may not be used most efficiently, we do get enough money back

that I think it washes, but when you get into the IMF—and I guess

you are not recommending eliminating ESM—but I think you reference some programs like the IMF and so on, probably the enhanced structural adjustment, et cetera.

We have got an awful lot of poverty throughout the world, and

we could give it in direct grants and too often those direct grants,

at least during the Cold War period, went to people in power, and

they used it and little of the money stayed in the country except

in their palaces and most of it wound up over in Switzerland in the

case of some countries.

So I think if we are going to provide aid, it ought to be in the

form of loans, even if we write off those loans and deeply subsidize

the interest cost. But you know, if we become too perfectionist in

our approach, there is very little we are going to do, particularly

in terms of foreign countries where we have very little control over

their forms of emerging democracy and free enterprise systems.

So I just want to see some caution in this, but nevertheless, I

would like to see a lot more progress than has been accomplished.

I liked your article, a terrific article, but it brings to mind some

testimony that Donald Trump gave in the early 1990’s when we

had the credit crunch and the recession, particularly in commercial

offices, and he said, you know, the problem is the 1986 law—I am

looking for a light; I don’t see a light, but I guess you are being

generous, thank you—the problem is the 1986 law. He says that,

you know, I made more money from the 1986 law that gave an

across-the-board benefit to wealthy people like me than I did under

the preceding tax code, but I have done much less to generate jobs

and to act in a way consistent with the public welfare.

Even though I would still be making money, I wouldn’t be making as much money and my money would be much more targeted

if it hadn’t been for that 1986 law, and he suggested we ought to

target tax incentives. He said if you target tax incentives, I am

going to where the money is. Where if tax incentives are—I am

going to spend more of my money in ways that are consistent with

what public officials consider to be in the greatest good.

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Likewise, technology executives, particularly when they were

asked what would you like, they made us the most selfish recommendation, which is human nature. We would like an acrossthe-board tax cut, so we pay less personal taxes, and we eliminate

a lot of tax incentives. Subsequently, those industries came back

and said, you know, that really wasn’t what was in our best interest. It hurt jobs, it hurt our industry, and we wish that we could

put back some of those targeted tax incentives.

This is the argument I am making with you. I am sort of using

you as a foil here because I am really directing it at our Chairman,

who vastly prefers across-the-board tax cuts instead of targeted tax

incentives.

Chairman KASICH. Gentleman’s time is definitely winding down.

Jim, we have got some Members here.

Mr. MORAN. But that is what I am trying to elicit from you. If

you are going to have one or the other, don’t we accomplish more

with targeted incentives than across-the-board tax cuts? How is

that for winding up real quick?

Chairman KASICH. Good job.

Mr. NADER. I am going to answer this very quickly. The biggest

abuses come from these targeted tax cuts. They are not followed

through to see whether they register. Most of those haven’t registered. The safe harbor targeted cut in 1981 was a disaster in

terms of its pretension to increase investment in productive equipment. General Electric made $6.5 billion in those 3 years, received

a $120 million refund, paid no Federal income tax, and then invested in buying RCA. What they would have paid to the government they used instead to buy RCA. That further concentrated the

number of contractors to the Pentagon and didn’t create new jobs

or new productive equipment.

So I would hold that targeted tax cuts should be very, very narrowly tailored, like if we want to build a solar energy—incubate a

solar energy industry and there is a definite way to measure it,

that is a good targeted tax cut, but overall it is an invitation to

broad abuse.

Mr. MORAN. Well, I can see——

Mr. KASICH. The gentleman’s time has kind of expired here. I

know he didn’t get the answer he wanted, but that is OK.

Mr. Collins, do you have any questions?

Mr. COLLINS. Just briefly.

Chairman KASICH. The gentleman is recognized.

Mr. COLLINS. You mentioned targeted tax cuts. I think tax cuts

should be targeted to working folks in this country, but I also think

that there should be some targeted tax incentives to create jobs for

working folks in this country.

Jim, you just mentioned you would love to hear from some how

tax incentives or the lack of tax incentives affect their particular

industries. I just left the Ways and Means Committee, and some

of that is going on over there right now, especially in the area of

international trade as how foreign tax codes differ from U.S. Tax

codes.

In Mr. Nader’s remarks here he refers to the Daimler, Daimler

Chrysler corporation and an interesting question was, why is it not

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a Chrysler Daimler, Daimler corporation which would be a U.S.

Corporation versus a German corporation?

I am sure that several things went into making the decision as

to why it is headquartered in Germany or one of the large parts

of that decision was not even a consideration. It was the fact that

the U.S. Tax codes are very brutal to corporations, especially those

as compared to tax codes in Germany and other nations. So there

is a lot of consideration that is going on in not only just England.

Chrysler, which you have other corporations like BP and Case and

Volvo, all of those, the headquarters are in other countries rather

than here. Eventually I am afraid you will see more and more of

those U.S. Jobs go to those nations where there is a more favorable

tax code, tax incentives, tax provisions that some people would call

corporate welfare.

Thank you, Mr. Chairman.

Mr. KASICH. I want to thank you for coming today. We are going

to have testimony from Mr. Sununu, Mr. Shadegg, and Mr. Miller,

and I encourage you at some point to perhaps give Mr. Miller a

call. He has been fighting a long struggle on the issue of sugar that

I think would be very interesting for you to talk to him, and I will

also let the panel that is going to come soon of the conservatives

know of your interests to on one level see if we can find one or two

issues where we can raise some public support to make a change,

and I want to thank you for your appearance here today and your

exhaustive testimony and we will just see where this whole thing

will lead.

Mr. NADER. Thank you. I think this is a good beginning today

and we hope to follow through on some of your suggestions. I thank

the members of the committee as well.

Chairman KASICH. Thank you, sir. We are now going to recognize

Mr. Sununu from New Hampshire, Mr. Miller from Florida, and

Mr. John Shadegg, Congressman Shadegg from Arizona. I think

that to get started, we will recognize Mr. Miller. Congressman Miller from Florida can proceed.

STATEMENT OF THE HON. DAN MILLER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF FLORIDA

Mr. MILLER. Thank you, Mr. Chairman. Let me thank you for

having this hearing. It is a special week for you, I think because

the President announced earlier this week, and CBO will be announcing tomorrow, that we are going to have the first real budget

surplus in 25 years. This is something I know you have been working on in your now seventh year in the Budget Committee so it has

to be a very satisfying week for you.

However, what I am here to talk about is the corporate welfare

program, the sugar program, which I call the sugar daddy of corporate welfare. It is a program that is bad for consumers; it is bad

for taxpayers; it has cost jobs that are lost in this country. It is bad

for the environment and it is really bad economic and trade policy.

Basically the way the program works is we can’t grow enough

sugar in the United States so we have to import sugar. But we restrict the amount of sugar that is brought into this country to

maintain a high price of sugar. The price of sugar in the United

States is over four times the world price. You can go to Canada and

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you can buy sugar today for about five cents a pound. In the

United States we pay over 20 cents a pound for sugar. The price

of sugar has been maintained at that rate for the past many years

because of Federal policy. It is something I say costs a lot for the

consumer.

Now, we passed a farm bill back in 1995, and it was a very good

program. We really reformed a lot of agriculture. I think it was one

of the major pieces of legislation this Congress passed over the past

several years because it did reform some antiquated programs.

However, the sugar was one program that was barely changed.

This program costs the American consumer over a billion dollars

a year. Sugar is used in everything from cereal and candy. It is a

regressive type of tax too, so it is something that costs consumers

and is going to cost the Federal Government because we are major

purchasers of food products whether it is in food stamps, veterans

hospitals, the WIC program and such. It is corporate welfare because 42 percent of the benefits goes to 1 percent of the growers.

In my home State of Florida, two companies control 75 percent of

the sugar. So it is not like you have a little family farmer in the

sugar business. One family has over $65 million a year benefit

from the sugar program, according to the GAO estimates.

This is not only corporate welfare in the United States, it is corporate welfare around the world because we give quotas to other

countries. So if someone grows sugar in Australia where they have

a free market of sugar, they sell it around the world for about a

nickel a pound; however, in the United States we pay 20 some

cents a pound for it. In the Dominican Republic, which has the

largest of the quotas, most of that quota is controlled by the same

family in Florida that is a dominant sugar grower in Florida. That

is a corporate welfare that helps a select few people all over the

globe.

There are jobs being lost, first in the refinery business because

we have lost sugar refineries all across the country. We had 11 of

them close, good paying jobs in this country because of the sugar

program specifically. It also affects jobs because of companies that

use sugar will not continue production in the United States. I will

give you a classic case and it is from Georgia and it is a company

called Bob’s Candies. It is a third generation company that makes

candy canes. They can’t continue making them in the United

States because the sugar is so expensive. They have to move them

outside the United States because sugar is so much cheaper to

produce them there and then bring the candy canes into the United

States.

Environmentally it is a costly program for Florida because of the

Everglades. The sugar program creates incentives for overproduction and overutilization of the land which then creates all the damaging runoff on the Everglades. We will be announcing tomorrow

a big effort to restore the Everglades. The Vice President will be

up on Capitol Hill tomorrow to make the announcement but we

will be spending billions of dollars over the years.

In addition, this is another crazy part of the program, is the solution to the Everglades problem, is we are buying a lot of the Everglades sugar lands so we have more areas to detain the water and

filter the water. We are buying the land from the sugar companies

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at inflated prices because of the sugar program. I mean, it makes

no sense, the whole program. And then trade. I am a supporter of

free and open trade and fair trade, but when we go and open up

markets for our products around the world and that is what our

trade policy should be is to open up markets for our products, other

countries say, wait a minute, you restrict us to sell sugar to the

United States. Why should we open up our products to you? We are

the most open country there is on trade in the United States, in

the world, and yet sugar, we restrict it. It is hypocritical of our government to be defending the sugar program and at the same time

trying to say open up your markets. This is a program that’s bad big government. As I say, it is bad for the consumer. It is bad for the taxpayer. It is bad for the environment and it benefits a limited number of sugar barons in this

country. It is a program that we fought very hard and my colleagues here worked with me in 1995 during the authorization. We

were not successful. I appreciate your support in the past, and I

look forward to having the challenge one more time to finally eliminate this sugar daddy of corporate welfare. I ask that my official statement be put in the record. Thank you, Mr. Chairman.

[The prepared statement of Mr. Miller follows:]

PREPARED STATEMENT OF HON. DAN MILLER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF FLORIDA

Chairman Kasich, ranking member Spratt and fellow Members of Congress, I am glad to be back before this Committee on which I served during the 103rd, 104th

and 105th Congress. I miss my assignment on the Budget Committee and the opportunity to participate in critically important debates such as the issue of corporate

welfare.

I am here today to discuss the sweet deal that sugar producers are receiving under the sugar daddy of corporate welfare; the U.S. sugar program. Contrary to what the big sugar producers may tell you, the sugar program was not reformed in the 1996 Farm bill. While other farm commodities will gradually

experience a phase-out of price supports, big sugar producers will continue to reap

the benefits of this corporate welfare program. Through price supports, the sugar program keeps the price of sugar in the United States artificially high. By tightly limiting the amount of sugar that may be imported into the United States, and subsidizing the operations of sugar producers

through Federal loans, the sugar program forces the price of domestic sugar to be

at least twice as high as the price of sugar on the world market. While this is a sweet deal for sugar producers, it leaves a sour taste in the mouths of taxpayers, consumers, American workers, and the environment. GAO estimates

that the sugar program costs consumers more than $1 billion every year in higher

prices for food and table sugar. Jobs for American workers have been eliminated because of sugar refineries that have been forced to shut down and because of companies relocating overseas where sugar is cheaper. The environment is damaged by sugar production in Florida. The subsidized pro- duction of sugar in Florida results in phosphorous-laden run-off flowing into the Everglades, which contributes to the destruction of this fragile ecosystem. Amazingly,

the Federal Government continues to subsidize sugar producers, even as Congress

participates in a multi-billion dollar project to repair the damage done to the Everglades. Tomorrow, the Army Corps of Engineers will announce a long-awaited and

ambitious plan to save the Everglades.

Further, the sugar program harms our position with foreign governments when

negotiating trade agreements. Much of the financial hardship being experienced by

our nation’s farmers is due to contraction of overseas markets for U.S. agricultural

exports. We need to work to open the markets in foreign nations. It is hypocritical

and counterproductive for the United States to protect the sugar industry while urging other countries to reduce their trade barriers. Quite simply, our negotiators

must decide whether it is more important to preserve an outdated sugar program

than to open markets for competitive American farm products.

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For the past several Congresses I have introduced amendments to the Agriculture

Appropriations Bill as well as stand alone legislation to reform the Federal sugar

program. This year I introduced H.R. 1850 with Congressman George Miller (D-CA).

This Miller-Miller bill currently has 57 bi-partisan co-sponsors including Chairman

Kasich and seven other members of this subcommittee. Senator Charles Schumer,

Senator John Chafee, Senator Judd Gregg and Senator Dianne Feinstein have introduced companion legislation in the Senate. H.R. 1850 has the support of national

taxpayer, consumer, and environmental advocacy groups.

As my time is limited I will concentrate on the corporate welfare aspects of this

program. Specifically, how the sugar program costs consumers over $1 billion dollars

a year and it benefits a select few sugar producers. Moreover, I will discuss how

the sugar program kills U.S. sugar refinery jobs.

COSTS TO TAXPAYERS

The GAO has estimated that the present sugar program costs over $1 billion per

year in higher prices for table sugar and food. This cost has been confirmed by Public Voice for Food and Health Policy. Not only do higher costs affect the prices paid

at the cash register, they affect the taxpayer in the costs of government. Higher food

costs mean higher entitlement spending under Food Stamps or other government

programs such as school lunches and Meals on Wheels. It is a regressive form of

corporate welfare benefitting a select few producers while making every consumer

pay more at the cash register to justify this program. The U.S. Department of Commerce has noted that the ‘‘effect of the sugar program is similar to a regressive sales

tax, which hits lower-income families harder than upper income families.’’ If you

support regressive taxation, then I guess you have no problem with the U.S. sugar

program. If you do not favor taxing the poor more heavily, however, you should

favor changes in our sugar policies.

Finally, the flight of businesses out of the country due to the high domestic cost

of sugar results in lost revenue at the local, state and Federal levels. Although no

calculation of this lost revenue is currently available, it is significant in light of the

many thousands of displaced workers.

BENEFIT TO A SELECT FEW

The GAO reported that 42 percent of the sugar programs benefits went to just

1 percent of the sugar producers in 1991 and 33 big sugar barons each received

more than $1 million in extra revenues under the program. One producer even received $65 million in 1 year.

Time Magazine did a story last November on the Fanjul family that outlined how

the U.S. sugar subsidy has helped propel this family into the ranks of the multimillionaires. I commend it to your reading as it fairly captures how the sugar program helps a few well connected folks while sacrificing the good of the rest of the

country.

I must emphasize this because you will hear; ‘‘Don’t kick farmers when they are

down’’ or ‘‘the family farm needs support, not a kick in the teeth.’’ Great sound bites,

but totally inappropriate with the sugar program. Sugar plantations are not family

farms in the normal sense of that phrase. In 1995, the USDA compared the noncash economic benefits that accrue to farmers of various commodities thanks to government action. Wheat gets $23 per acre in government benefits, cotton farmers $87

per acre. Sugar gets $472 per acre. Moreover this artificially high price per acre of

sugar acreage complicates efforts to restore the Everglades by creating an economic

incentive to utilize more Everglades for sugar farming. And this benefit goes to a

select few sugar barons.

JOBS LOST

The two main American industries adversely affected by our sugar program are

sugar refineries and manufacturers of products that utilize sugar.

Often, sugar refineries are unable to find a consistent and adequate supply of

sugar to operate year round. The variations create economic inefficiencies and waste

which result in these facilities being unable to stay in business. Moreover, refineries

process sugar and require sugar cane and beet to operate. Needless to say, buying

this raw material in the United States is overly expensive when compared to the

world price. Why would a company buy large quanities of sugar cane at $ .22 per

pound when they can buy at $.045 per pound in a foreign nation and take advantage of other favorable economic factors such as labor costs and government regulation?

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Accordingly, it is not hard to see why our sugar system is sending refinery jobs

overseas. As recently as 1981 there were 23 sugar refineries in the United States.

Today, there are only 11 refineries. Over 3,500 jobs have been lost by closures at

the refineries due to a sugar program that only benefits a select few. (See Exhibit

A, which follows:)

Similarly, manufacturers of products that rely on sugar are greatly affected by the

present sugar subsidy. Ask any businessman would they rather buy sugar at 22

cents per pound or at 4.5 cents per pound and they would all agree they would like

the cheaper sugar. Even with a duty that raises the cost to over 19 cents per pound

when sugar is brought into America, businessmen know that 19 cents is cheaper

than 22 cents. And businessmen know that they need to pack up and leave the

United States if they want to get that cheaper sugar. Also, the incentive remains

to move operations overseas if the company is pursuing an aggressive export strategy.

I think the best example of the present sugar program driving jobs out of America

is the story of Bob’s Candies. Bob’s Candies was the largest producer of candy canes

in America. Candy canes are a very cyclical industry and are made to be a low cost

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candy. However, the U.S. sugar program throws large roadblocks in the way of domestic candy makers. Accordingly, Bob’s Candies moved to Jamacia where sugar is

much cheaper. The president of Bob’s Candies recently told Reader’s Digest that the

company would save more than $2 million a year in raw materials if the sugar program was scrapped. This savings would enable the company to keep jobs in America

and lower retail prices. Unfortunately, it just makes good business sense to go overseas to get cheaper sugar to make candy. How many Bob’s Candy Canes will this

Committee tolerate?

Also, the Committee should note that the cost of our sugar program was a main reason why Coke and other soda companies do not use sugar in soft drinks. Sugar

got too expensive. The program priced sugar out of the lucrative soft drink industry.

Instead, soft drinks now use high fructose corn syrup (HFCS) which does not have

the high costs and economic inefficiencies of the sugar program. Finally, I ask this committee to keep in mind the fact the sugar industry is not large in comparison to other aspects of the economy. According to USDA data there

are between 40,000 and 70,000 jobs directly related to the sugar program. This is

a small number compared to the 520,000 jobs in the food processing industry or the

thousands of lost Everglades related tourist jobs. Congress must not blindly protect

a small special interest sugar program at the expense of the greater good.

CONCLUSION

I am grateful for the Budget Committee and its willingness to stand up to the sacred cows of government. I believe sunshine on these programs is one of the greatest ways to fix the outrageous use of corporate welfare to give the select few a benefit at the expense of everybody else. The sugar program is the epitome of this system. It is a regressive system that raises the costs of goods for all consumers, it

contributes to the destruction of the Everglades, it causes U.S. jobs to move overseas, and it harms American efforts to open trade markets around the world. Congress must end this sweet corporate welfare cavity. I hope any member with questions about the sugar program will feel free to contact me or my staff at any time.

I urge this Committee to support the Miller-Miller bill (H.R. 1850) and all other efforts to end the sugar program. Thank you.

Chairman KASICH. The gentleman from Arizona is recognized.

STATEMENT OF THE HON. JOHN B. SHADEGG, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ARIZONA

Mr. SHADEGG. I thank you, Mr. Chairman, and members of the

committee. It is a privilege to be here with my distinguished colleagues and to speak before this committee. As many of you know,

I was once a member of this committee and philosophically I still

feel like a member of the committee.

Under you leadership, Mr. Chairman, I think the committee has

endeavored to create a smaller, less expensive, less intrusive and

more responsive Federal Government, but to achieve those goals it

is critically important that we aggressively seek out and eliminate

wasteful bureaucratic spending and especially corporate welfare.

Now, you say those words and of course anyone in the corporate

world immediate becomes defensive. Many of the projects which we

label corporate welfare are indeed well intended and in fact beneficial. But most importantly, I would note the private sector, not

the Federal Government should be funding the bill for those

projects. I would also note that it is worth some reflection by us

that guided in this job as we are by the U.S. Constitution, nowhere

in that great document which sets out our specific enumerated

powers are we given the authority to subsidize the private sector.

Mr. Chairman, the American taxpayer is being asked every day

to pay more and more and a greater share of his or her earnings

to the Federal Government. Families are forced to live with both

spouses working just to get by and sustain their lifestyle, and I

think we have seen some of the consequences of that excessive taxVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00221 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
219

ation burden on the families of America, particularly with the specter of the Columbine High School incident and others like it where

one has to wonder if the tax burden isn’t forcing families to spend

too much time out of the home and not enough time at home. I

think that is a new and compelling reason for you to focus your efforts on corporate welfare.

I want to focus my remarks largely in the energy area and I am

going to cite some examples which are well known to members of

this committee. The first one of course is one that we discussed

when I was on the committee, and that is the Department of Energy’s fossil energy R&D plan. I would note we have had some success under your leadership on this issue. Since the Republicans

took the majority of the Congress that budget has been cut by 15

percent but it is still funded at a level of over $1 million per day.

Let’s look at the program. It is intended to help coal, oil, and gas

industries to maintain their market share by allowing them to

draw on government funded research on new products and processes. And yet the Congressional Budget Office looking at the Energy Department’s fossil R&D program specifically said in a report

issued just—in April of this year, Federal programs in the fossil

fuel area have a long history of funding technologies that while interesting technically had little chance of commercial feasibility

even after years of Federal investment. As a result, much of the

Federal spending has been irrelevant to solving the Nation’s energy

problems.

CBO went on to point out something that I think my eighth

grade son in Phoenix would have figured out on his own. They

pointed out that private entities are more attuned to which new

commercial technology has commercial promise than would be Federal officials.

Another example of wasteful corporate welfare under the DOE is

the DOE’s coal research and development program, and here I

would point out that between fiscal year 1978 and fiscal year 1997,

DOE spent $2.7 billion on coal liquefaction. It spent—it authorized

to spend $10 million in fiscal year 1999. And yet the President’s

Commission on Science and Technology released a report in September 1997 in which the President’s commission said the Department of Energy should terminate its program for the direct liquefaction of coal. A similar comparison can be made of the department’s coal gasification program.

Again, I believe the coal research and development program for

coal gasification should be eliminated. Again we are talking about

a significant commitment of money. DOE figures show that in that

same time period, 1978 to 1997, $1.5 billion was spent on this program. $73.9 million was authorized in fiscal year 1998 and in fiscal

year 1999 the number is 91.5 million and yet Greenwire, a respected report commenting on this program, which admires the

program because of its clean technology says coal gasification is a

virtual failure, pointing out that it has failed to win industry backing over the last 10 years and now comprises less than 1 percent

of the current worldwide energy generation market. By contrast,

private sector R&D programs in the energy field have been extremely successful.

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In my testimony I point out some comments on this but let me

just cite one. Business Week in a report issued in November 1997

said technological advances are slashing the cost of finding, producing, and refining oil creating a new economic calculus for the

oil industry. The average cost of finding and producing oil has

dropped by about 60 percent in real materials in the past 10 years

while proven reserves are about 60 percent greater than in 1985.

Another topic of great concern to me is that of the corporate welfare in the form of the Federal power marketing associations—administrations. As I think you well know, I had introduced legislation in this area, Mr. Chairman, and it is driven by the simple

point that the Federal Government should no longer be in the business of producing electrical power. I find it interesting to note, Mr.

Chairman, that at a time when other parts of the world, including

Eastern Europe and South America, are privatizing their electrical

facilities, United States, which should be the cornerstone of the

free market, continues to subsidize government owned and produced electrical power.

Private utilities, by the way, have proven that they can do a

more efficient job of producing hydroelectric power than the Federal Government. In a 1997 report by CBO entitled ‘‘Should the

Federal Government Sell Electricity?’’, CBO found the inadequate

maintenance of power assets and resulting low use of power generating capacity show how high the cost of Federal power is. And

then they made this particular point. Over the past 5 years, nonFederal dams produced an average of 20 percent more electricity

per unit of capacity than did dams supplying the power market administrations.

As you know, Mr. Chairman, there are five of these organizations, Bonneville, Alaska, Southeastern, Southwestern, and Western. As you also know, we privatized the Alaska Power Administration already. Bonneville is a special case because it is burdened by

nonfunctioning nuclear facilities. But that leaves three PMAs

which are prime candidates for privatization, SEPA, SWPA, and

WAPA. Privatizing those marketing—those power administrations

would accomplish a number of important goals. First, it would get

the Federal Government out of the business of producing electrical

power. While low cost government provided electricity may have

been justified at one point in time for economic development in the

1930’s and 1940’s, it no longer is necessary. And it doesn’t make

sense. The PMAs are now subsidizing power in such wealthy areas

as the suburbs of Los Angeles, the City of Las Vegas, Silicon Valley, and such resorts as Vail, Colorado, and Hilton Head, South

Carolina. Everyone is aware of the absurdity of asking Americans

across the country who live in less prosperous communities to subsidize the electric rates of those who live in the area serviced by

the PMAs. It would also save Federal taxpayers tens of thousands,

indeed millions, indeed hundreds of millions of dollars.

The three PMAs I have identified cost the American taxpayers

approximately $300 million each year. And this year alone the Senate has proposed in its energy and water appropriations earmark

to increase funding by $92 million above the current budget request for those three authorities. I think this can be done. I think

it can be done following concepts which would benefit all of the

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country. The greatest obstacle to privatizing the PMAs is to overcome the objections of those now getting cheaper electrical power,

but I think it is important to note that while 24 percent of the

American public benefits by current low rates, the remaining 76

percent of Americans pay for those subsidized rates. I would simply quickly point out that the fear of the current PMA customers that their rates will go up is one of the largest obstacles that we have to privatizing the PMAs. And yet other countries around the world have overcome these kinds of concerns. The

bill I drafted was built on the success of the Czech Republic, which

used a system called voucher privatization. Under voucher privatization those with vested interest in the government owned entity

are given a voucher which can be traded for stock. As a result of

that, the people currently benefiting from cheap public power

would stand to benefit from the sale of the entity because they

would own a portion of it. Now, the Czech government used this

and it succeeded in moving from an economy that was 96 percent

publicly owned at the fall of communism to where 64 percent of the

entire economy had been privatized in 5 years by building public

support for the privatization of public entities. The legislation lays

out how we can achieve that goal and I would strongly urge you

to take a look at it.

Let me simply conclude with some general remarks about the Department of Energy. It is indeed I believe a classic example of

a wasteful bureaucracy. In the materials you have been given there

is a number of stories, but one I particularly like is a story of a

program where the Disney organization, Walt Disney, is working

in a project sponsored by Sandia National Laboratory in Albuquerque, New Mexico. We as a taxpayer are kicking in slightly over

$300,000 to help the Disney Corporation find a better way to

launch the 3,000 rockets it launches each night as they close down

the facilities at Disney Land.

Now, I have been there, Mr. Chairman, and I enjoy the fireworks

display but I am hard pressed to understand why the taxpayers of

America should be subsidizing Disney’s research. It only made, I

believe, 11—$1.1 billion last year as its profit.

In my testimony, Mr. Chairman, I also cite President Clinton’s

Foreign Intelligence Advisory Board, which just issued a scathing

report on the weapons labs, the adequacy of the measures that

have been taken there to respond to the security threat. Fundamentally, it found that there was 11 team management structures which was incapable of performing itself and described DOE

as a dysfunctional bureaucracy. Those are not my words, Mr.

Chairman. They are the recommendations of the President’s own

advisory board.

Again, I applaud you and the members of this committee for

holding this hearing and I urge you to be relentless in going after

corporate welfare and wasted bureaucracy.

[The prepared statement of Mr. Shadegg follows:]

PREPARED STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ARIZONA

Mr. Kasich, members of the Budget Committee, thank you for allowing me to testify today. As most of you know, I was previously a member of this committee, and

I continue to feel like a member of the Committee. During my tenure in Congress,

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this committee, led by Chairman Kasich, has endeavored to create a smaller, less

expensive, less intrusive, and more responsive federal government. To achieve these

goals we must aggressively seek out and eliminate, wasteful, bureaucratic spending,

especially ‘‘corporate welfare’’—that is, subsidies to private sector endeavors that the

federal government has no business supporting. Before I go any further, let me be clear. Many of the projects funded by ‘‘corporate welfare’’ may be beneficial. However, the private sector—not the federal government—should be footing the bill. I believe in the Constitution, and nowhere in that

great document is the federal government authorized to subsidize the private sector.

Our country was founded upon freedom. When the federal government begins replacing freedom and individual initiative with government subsidies, we begin to

lose the spirit and brilliance of independence, relying on government bureaucracy

instead of individuals.

Today, you have heard from my colleagues Mr. Sununu of New Hampshire and

Mr. Miller of Florida. Their testimony on the sugar subsidy and various programs

within the Department of Commerce focused on just some of the many examples of

corporate welfare which riddle the federal budget.

As just one example, as of FY 96, the federal government has spent more than

$1.6 billion on the Advanced Technology Program, which subsidizes for-profit corporations, research institutions, and joint ventures. The General Accounting Office

recently found that 63 percent of ATP applicants never even sought private sector

funding before applying for government aid. Grant recipients include multi-million

dollar companies that, on average, have research and development budgets of $3.5

billion. Such ‘‘needy’’ grantees include:

• IBM: $111,279,738

• General Motors: $82,134,245

• General Electric: $75,449,636

• Ford Motor Co. $66,457,718

• Sun Microsystems $50,113,692

• Texas Instruments $45,545,315

• Sarnoff Corporation $38,270,692

• United Technologies $37,011,925

• Phillips $36,518,925

(Source: MSNBC study of data provided by ATP, 1997)

Mr. Chairman, with American taxpayers paying an ever increasing share of their

earnings to the federal government, with families forced into having both spouses

work just to get by and sustain a decent standard of living, we can no longer defend

this level of wasteful spending on some of the wealthiest companies in the world.

Indeed the Commerce-Justice-State-Judiciary Appropriations Subcommittee’s report

stated it well: ‘‘in an era of scarce federal research and development dollars, funding

ATP is simply a low priority.’’ (Report to accompany HR 1274, 1997) This is a gross

example of misdirected federal dollars.

Let me turn briefly to corporate welfare related to energy.

THE DEPARTMENT OF ENERGY IS A FEEDING TROUGH FOR CORPORATE WELFARE

FOSSIL ENERGY R&D

One specific example of wasteful corporate welfare at the Department of Energy

is the Fossil Energy R&D program. Although it has been cut by 15 percent since

Republicans assumed the majority in 1995, it was still funded at $365 million in

FY 97. That’s more than one million dollars a day! The DOE markets this program

as a plan to ‘‘improve the capability of the nation’s petroleum industry to produce

additional supplies of clean, domestic natural gas and oil.’’

The Fossil Energy R&D program is intended to help the coal, oil, and gas industries maintain their market share by allowing them to draw on government funded

research on new products and processes for the commercial market. Its activities

range from research in universities and national laboratories to applied R&D and

company specific technology development and demonstration activities.

In April of this year, however, the Congressional Budget Office (CBO) stated the

following about Fossil R&D:

* * * Private entities are more attuned to which new technology has

commercial promise than are federal officials. Federal programs in the fossil

fuel areas have a long history of funding technologies that, while interesting

technically, had little chance of commercial feasibility, even after years of

federal investment. As a result, much of the federal spending has been irrelevant to solving the nation’s energy problems * * * [In addition] because energy prices are low, potential users of such technology have little incentive

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to invest in implementing it. Consequently, the technology developed by the

program may well sit on the shelf until it becomes obsolete. (CBO, April

1999)

The President’s own advisors have criticize elements of DOE’s coal research and

development program. As yet another example of misspent federal dollars, the DOE

spent $2.7 billion on ‘‘coal liquification’’ research and development between fiscal

years 1978 and 1997. In fiscal year 1998 the program received approximately $10

million; in fiscal year 1999 the request is for $7.3 million. Yet according to the President’s Commission on Science and Technology report on Federal Energy Research

and Development of the Challenges of The Twenty First Century [PCAST], released

on September 30, 1997 ‘‘The Department should terminate * * * direct liquefaction

of coal.’’

Likewise, ‘‘coal gasification’’ is another area of coal research and development

which should be eliminated. According to DOE figures, $1.5 billion has been spent

on coal gasification research and development between fiscal year 1978 and fiscal

year 1997. Coal gasification funding was approximately $73.9 million in FY 98, and

FY 99 funding was near $91.5 million. Yet even Greenwire reported in October 1997

that coal gasification was a virtual failure. It reported that ‘‘Coal gasification. * * *

has failed to win industry backing over the last ten years and now comprises less

than 1 percent of the current world wide energy-generation market.’’

By contrast to these wasteful, government funded programs, even the Clinton Administration has acknowledged the importance of private sector research and development in the energy field. PCAST stated: ‘‘In the private sector, energy R&D has

been an important engine of progress, enabling firms to improve their products and

invent new ones, so as to increase their shares of existing markets, establish and

penetrate new ones, and maintain or increase performance while reducing costs.’’

And, a November 3 1997, BusinessWeek article made it clear that companies are

moving forward on fossil R&D:

Technological advances are slashing the costs of finding, producing, and

refining oil, creating a new economic calculus for the oil industry. * * * The

average cost of finding and producing oil has dropped about 60 percent in

real terms in the past 10 years, while proven reserves are about 60 percent

higher than in 1985. And these official figures far underestimate the

amount of accessible oil in the ground.

Another specific example of the Department’s corporate welfare subsidies is the

Energy Conservation R&D program. While the program has seen some cuts over the

last few years, it should be eliminated altogether. In 1997 Congress appropriated

nearly $400 million to finance corporate market development and product promotion

programs. One of these programs, ‘‘Building America’’ pays for start-up costs and

promotional activities for groups that want to promote energy efficient buildings. Included within the program was money for DOE to enter into licensing agreements

with the world’s largest air conditioning manufacturers to market a new heat pump.

In return, these companies stand to make millions of dollars from this improved

product with no payback to the taxpayer.

THE PMAS SHOULD BE PRIVATIZED

One area of corporate welfare about which I feel very strongly is the Power Marketing Administrations (PMAs). Simply put, the government should no longer be in

the business of producing electrical power. And, private utilities do a more efficient

job of producing hydroelectric power than the government. In its 1997 report,

Should the Federal Government Sell Electricity? CBO found:

The inadequate maintenance of power assets and the resulting low use

of power-generating capacity show how high the cost of supplying federal

power is * * * One consequence * * * is an inability to generate and transmit power at [intended] capacity * * * Over [the past five years], non-federal dams produced an average of 20 percent more electricity per unit of capacity than did dams supplying the power marketing administrations.

In the 1930’s, the federal government began building a number of dams, primarily

in the West and South as a way to stimulate the economy during the Great Depression and promote regional economic development. The dams were built primarily for

flood control, irrigation and navigation.

It was also recognized that these dams had tremendous potential for generating

electricity. To market this electricity, the federal Power Marketing Administrations

were created corresponding to different regions of the country where the dams are

located. There were originally five of these agencies: Bonneville, Alaska, Southeastern, Southwestern, and Western. Recently, Alaska has been privatized. The

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largest, Bonneville, is a special case, financed in a different way and, alone amongst

the PMAs because it includes a number of non-functioning nuclear facilities. This leaves three PMAs as prime candidates for privatization: Southeastern (SEPA), Southwestern (SWPA), and Western (WAPA). Privatizing SEPA, SWPA,

and WAPA would accomplish a number of important goals. First, it would get the

federal government out of the business of producing electrical power, a sector of the

economy in which it does not belong. While low-cost, government-provided electricity

may have been justified for economic development during the 1930’s and 1940’s, it

is not necessary today. Many of the once rural and undeveloped areas which benefit

from this low-cost power have grown into thriving areas. These include suburbs of

Los Angeles, the city of Las Vegas, and ski resorts such as Vail, Colorado. There is simply no justification for forcing federal taxpayers across America, many of whom life in less prosperous communities, to subsidize the electric rates for those

who live in areas serviced by the PMAs. Privatizing would also end the constant drain imposed by the PMAs on the federal treasury. Perhaps a more fitting term would be a hemorrhage of the national treasury. According to the General Accounting Office, these three PMAs cost the American taxpayers approximately $300 million each year in unrecovered costs and financial subsidies. This year alone, the Senate’s version of the Energy and Water

Appropriations bill for FY 2000 added $39,594,000 to the Southeastern Power Administration above the budget request, allowed for an additional $60,000 above

budget request for operation and maintenance at Southwestern Power Administration, and provided an additional $52,084,000 above the budget request for Western

Area Power Administration. In fact, the Senate Energy and Water Appropriations

bill earmarks a total of another $92 million above the budget request for regional

power authorities.

In addition to ending the constant financial drain, privatizing the PMAs would enable the American taxpayers to realize a return on the investment which they

have put into the PMAs over the years. It would do so by bringing in a significant

amount of revenue to the federal treasury, revenue which could then be used for

debt reduction or tax relief.

Under legislation I introduced in the 105th Congress, privatization would accom- plish a fourth vital goal: it would directly benefit the consumers of PMA generated

power. Presently, approximately one quarter of Americans get some portion of their

electricity from PMAs. While these consumers may have benefitted from the PMAs

in the form of lower electric rates, the legislation I introduced, unlike any other bill

before Congress, would ensure that they would also benefit from their sale. As Congress and the states debate deregulating the electric utility industry, it is important to point out that one of the basic premises of a free market in electricity

is a level playing field for all utilities. The PMAs pose yet another problem here.

PMAs are required by law to sell power to their preference customers at a price

close to the cost of production. This is an artificially low price. Not only is it lower

than private utilities can match (since the government is required to not make a

profit) but, according to the General Accounting Office, this price has typically not

covered all of the costs associated with the PMA.

The beneficiaries of these artificially low prices are called the preference customers, which are typically rural electric cooperatives and municipally owned utilities. They are able to buy power from the PMAs at artificially low rates, then distribute and resell the power at higher rates to residential and commercial consumers. Because preference customers can buy power from the PMAs at an artificially low price, these preference customers have an unfair advantage over private

utilities which must pay higher prices for their power.

By providing cheap power to the preference customers, PMAs undermine the transition to the free market. The PMAs also often discourage efficiency. They and their

customers do not need to be efficient to compete because they get low cost, subsidized PMA power regardless of the efficiency of their operations. The PMAs are

inherently inefficient because, as part of the government, they have no incentive to

be efficient.

The preference customers serve approximately 24 percent of the American public.

The remaining 76 percent of Americans do not receive any benefits, either direct or

indirect, from PMAs, but must subsidize the lower rates for the preference customers through their tax dollars.

To solve the PMA problem, I have proposed a three step plan to privatize the

Southeastern, Southwestern, and Western PMAs. This plan grew out of a report

which I coauthored entitled Lights Out on Federal Power. In this report, we examined not only the benefits of PMA privatization but also how to achieve this in a

way which would turn the current users of PMA power from potential opponents

of privatization into enthusiastic supporters.

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The essential difficulty which this report identifies and which must be addressed

before any PMA privatization plan will work is the fear of current consumers of

PMA power that privatization will cause a significant increase in their electric bills.

To address this concern, we examined the experiences of other countries which were

faced with the task of privatizing state owned industry. It is curious that, at a time

when other parts of the world including Eastern Europe and South America are

privatizing their electric facilities, the United States—the cornerstone of the free

market—continues to subsidize government-owned power.

The approach used by the Czech Republic to privatize state owned industry is the

option most likely to enlist the support current PMA consumers. With the fall of

Communism, the Czech Republic faced a significant problem. How could an economy

in which 96 percent of business assets were owned by the government be privatized

in such a way that would gain the support of a majority of the people?

The method which the Czechs developed is one called ‘‘Voucher Privatization.’’

Each citizen was allowed to purchase vouchers which could be exchanged for shares

of the enterprises being privatized. Enterprises being privatized were sold at auctions in which people were able to bid on shares in the enterprises and pay for them

with their vouchers. The price of the vouchers was purposely set very low (around

$40) relative to the expected value of the shares (around $1,200) to enable individual citizens to make a significant profit. This approach generated very high levels

of public support for privatization. Most Czech citizens took part and most obtained

shares worth much more than their vouchers.

In using this approach, the Czech government accepted the fact that it would realize a smaller gain from privatization than it would through a sale to the highest

bidder. They recognized, however, that it was better to build public support for privatization by allowing ordinary Czechs to directly benefit. The result was extremely

successful. The Czech Republic succeeded in privatizing 64 percent of its economy

between 1990 and 1995 and did so with the overwhelming support of its citizens.

During the 105th Congress, I introduced this plan as H.R. 296. An updated

version of this legislation will be introduced shortly.

First, as a transition step, the legislation establishes three government corporations which correspond to the three PMAs being privatized. Second, it directs the

Secretary of the Treasury to issue warrants to the end-use consumers of the three

PMAs. These warrants are the heart of the plan and correspond to the ‘‘vouchers’’

issued by the Czech government during its privatization.

These warrants entitle each end-use consumer to buy shares of stock in the government-owned corporation at a low fixed price called the ‘‘strike price.’’ This ‘‘strike

price’’ allows end-use consumers to make money by either purchasing shares for less

than their free-market value or by selling the warrants to others.

The gains for consumers of PMA power vary depending upon what percentage of

their power comes from a PMA but should be enough to cover potential rate increases. For example, the average residential consumer of SEPA would receive $179,

SWPA would realize $402, and WAPA, including households in Arizona, would receive $156 under this legislation. As consumers of larger amounts of PMA-generated

power, commercial and industrial customers would receive a greater number of warrants and would therefore realize even larger amounts.

The third step is the sale of stock in the three government corporations to the

public. Once 60 percent of stock in each corporation is in private ownership, its status as a government corporation ends and it becomes a private corporation.

PMA privatization is a reform which is long overdue. While previous Congresses

were able to avoid the technical complexities and political difficulties of addressing

the issue, the upcoming deregulation of the electricity market makes the PMA problem impossible to ignore for much longer. Deregulation is not a question of ‘‘if,’’ it

is a question of ‘‘when.’’ In this world of free market competition, PMAs are a harmful anachronism. It is our duty in Congress to tackle this problem and change PMAs

from an impediment to a useful element of the free market.

THE DOE IS INCAPABLE OF REFORM

Finally, I would like to address the overall issue of the Department of Energy.

I have long been a supporter of the proposal by my colleague, Mr. Tiahrt of Kansas,

who has introduced legislation to abolish the DOE in the past three Congresses.

The Department of Energy is a wasteful bureaucracy without a true sense of mission. Founded on the heels of the energy crisis of the 1970s, the Department’s energy-related functions now account for only 10 percent of its budget. Even the GAO

talks about the scattered function of the DOE. In a 1995 report to Congress, GAO

stated ‘‘almost from the time of its creation in 1977, DOE has been in transition.’’

GAO has also said that the agency is ‘‘burdened by mission overload’’ and has a ‘‘diVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00228 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
226

minishing sense of purpose.’’ Yet while the agency has struggled and floundered, its

budget has grown by 235 percent in the last 20 years.

Furthermore, the DOE has developed into a feeding trough for corporate welfare

recipients. Over the last four decades, Congress has appropriated $50 billion in

grants and research money, much of it directed towards energy R&D.

Most recently, the ineffectiveness of the DOE and the National Laboratories has

grown to dangerous levels. The Cox Report showed that critical security breaches

and a lack oversight have resulted in the transfer of sensitive missile technology to

the Chinese government. In light of these discoveries, I am more committed than

ever to doing away with this department.

In March 1999, President Clinton asked his Foreign Intelligence Advisory Board

[FIAB] to undertake a review of, and issue a report on, the security threat at the

Department of Energy’s weapons labs and the adequacy of the measures that have

been taken to address it. On June 18, FIAB issued its report.

The findings of the panel, headed by former Senator Warren Rudman (R-NH),

were scathing. For example:

• ‘‘The * * * Panel found a large organization saturated with cynicism, an arrogant disregard for authority, and a staggering pattern of denial.’’

• The ‘‘Panel has concluded the Department of Energy is incapable of reforming

itself—bureaucratically and culturally—even under an activist Secretary.’’

• ‘‘The Department of Energy is a dysfunctional bureaucracy.’’

• ‘‘* * * the Board is extremely skeptical that any reform effort, no matter how

well-intentioned, well-designed, and effectively applied, will gain more than a toehold at DOE, given its labyrinthine management structure, fractious and arrogant

culture, and the fast-approaching reality of another transition in DOE leadership.’’

• ‘‘The current form of the Department took shape in the first year of the Carter

administration through the merging of more than 40 different government agencies

and organizations, an event from which it arguably never recovered.’’

The report concludes that the weapons complex is so permanently flawed that significant change must occur. Mr. Chairman, these are not my words. They are the

recommendations of the President’s own Advisory Board.

While the elimination of the Department of Energy may not exactly qualify as

‘‘corporate welfare,’’ the savings realized by doing so would be significant. Instead

of continuing to reward a broken, fundamentally flawed system, we should eliminate

it altogether. Continuing to fund the Department, its many and scattered missions,

and its wasteful programs has not yielded positive results. It is a clear example of

a bloated and inefficient government organization that has grown unruly and out

of control.

Mr. Chairman and Members, I applaud you for holding this hearing and urge you

to be relentless in your efforts to end wasteful ‘‘corporate welfare’’ and inefficient

federal bureaucracies wherever possible. We must begin to shrink the size of the

federal government and I can think of no better place to start than the ‘‘corporate

welfare’’ at the Department of Energy. Thank you.

Chairman KASICH. I want to really compliment the gentleman for

his testimony. I would recommend to the gentleman that he distribute that. I don’t know if the whole testimony but maybe summarize and distribute it to the Congress on the issue of the Department of Energy because I think earlier when I suggested that that

department didn’t need to exist, the question is, well, how will we

do these various functions? There are some functions you are going

to keep. The question is do you need everything in order to keep

the vital functions? Can you get rid of the things that you don’t

need?

And I think your testimony was—it was excellent. I think the

membership needs to know about it and they need to know precisely how we can make this Department of Energy a lot more efficient and I think you laid out program by program some of the

things that should go. And of course since you are all members of

the Appropriations Committee, I hope you will be prepared for my

question about why don’t any of these things go. I thought you

were on Appropriations, John.

Mr. SHADEGG. No, Commerce.

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Chairman KASICH. The gentleman from New Hampshire is recognized.

STATEMENT OF THE HON. JOHN E. SUNUNU, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW HAMPSHIRE

Mr. SUNUNU. Thank you very much, Mr. Chairman. It is a pleasure to be here today. I would like to do a couple of things, offer

some comments of my own about the Department of Commerce but

also to present testimony on behalf of Representative Ed Royce. Ed

is the principal sponsor of legislation to dismantle the Department

of Commerce and take the operations and streamline them, consolidate them, and in some cases give them more independence. But

as a cosponsor of that legislation I fully recognize that so much of

what the Department of Commerce does isn’t pro business at all.

Critics often point out, well, if you want to dismantle the Department of Commerce, you must not be supportive of the business

community or economic growth and opportunity. It is just the opposite. The pro economic growth position is to stop the kind of distortions and incentives we have out there that work against efficient

markets and that Mr. Nader in our previous testimony testified to

at length.

As Members of Congress, we really have to remind one another

from time to time that all things don’t flow from Washington and

that every conceivable human endeavor doesn’t need a department

here in Washington to manage its activity or guarantee its continued vitality. Oftentimes it is not just unnecessary but it can even

be harmful and the Department of Commerce is an excellent example of that case in point. According to its own inspector general, the

Department of Commerce has evolved into ‘‘a loose collection of

more than a hundred programs delivering services to about a thousand different customer bases.’’ The GAO says that the department

has ‘‘the most complex web of divided authorities and shares its

mission with at least 71 other departments, agencies, and offices.’’

a former Secretary of Commerce, Mr. Robert Mosbacher, says that

the department is ‘‘nothing more than a hall closet where you

throw everything that you don’t know what to do with.’’ And we as

Members of Congress need to do something about that kind of duplicative and wasteful bureaucracy.

The Department of Commerce is expected to perform a task totally at odds with the American ideal of government. It determines

winners and losers in our economy by distributing subsidies, incentive packages and other selectively provided benefits and that

phrase ‘‘picking winners and losers’’ is one that in the series of testimony we hear today will come up over and over again. Every time

a company gets a grant, whether it is for $300,000 to develop better fireworks or for $2 million to develop a better mousetrap, they

are getting those funds to the detriment of another firm that didn’t

get the money. Every time we choose one industry, whether it is

steel or aluminum or textiles or electronics to receive these special

grants, that is to the detriment of another industry that didn’t get

the money. It is anticompetitive and quite frankly it is no exaggeration to say it is un-American.

As much as $695 million was spent last year by just three of the

department’s many subsidy programs, the Advanced Technology

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Program, the Economic Development Administration, and the Manufacturing Extension Partnership. And notwithstanding the fact

that these programs have important words in their title, like technology or manufacturing or economic development, that belies the

fact that they are choosing these winners and losers. Corporate X

gets the money but corporate Y does not. Industry A gets the

money but industry B does not and therein lies the nature of the

anticompetitive practices.

Supporters of the departments assert: ‘‘Well, this is really a

small percentage of the Federal Government and it really isn’t

much money.’’ But it is a lot of money. It is a tremendous amount

of money. More importantly, it is money that is earned by the

American taxpayers, sent to Washington, and then distributed by

Federal bureaucrats. Essentially we are asking hard working families to subsidize businesses which oftentimes aren’t even producing

products that are worthwhile, as in the cases that Mr. Shadegg

mentioned, where not just millions but billions of dollars have been

spent for technologies that never even came to fruition.

Finally this $695 million is siphoned away from productive investment so that bureaucrats or oftentimes politicians in Washington can dole out favors or take credit for job creation. Every dollar that is taken by Washington in taxes so that bureaucrats can

determine who gets subsidized is one less dollar that that individual or family has or small business has to invest in their wellbeing, their own economic development, economic future that is

competitiveness that is driven by free market.

Government handouts also penalize successful companies by forcing them to subsidize their competition. I spoke about this earlier.

Company X is paying taxes but if they don’t get a grant, they don’t

get the benefit and company Y does. They are essentially paying

to have their competitors strengthened. A few years ago there was

one company that had developed a video compression technology

after years of investment and research and development. 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

exact same or competing technology.

Defenders of these subsidies claim that they are necessary because the programs they fund aren’t adequately pursued by private

investors because they are high risk. T.J. Rogers, however, who is

the founder of Cypress Semiconductor, has noted that the ‘‘high

risk argument that is used by the Department of Commerce is usually justification to subsidize poor investments.’’ High definition TV

is one of the clearest examples of the failure in these government

targeted handouts. Japanese businesses with subsidies from the

Federal Government in Japan that totaled over a billion dollars in

the late 1980’s sought to help and nurture and encourage the high

definition television market using the current existing analogue

technology. And the French government did the same. Between the

two of them, they invested over $2 billion in a government sponsored program to standardize the high definition technology around

a government chosen practice. In the United States we denied the

$1.2 billion that was being sought in subsidies and the argument

for needing the $1.2 billion was we had to do what the Japanese

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were doing or we had to do what the French were doing. But the

fact is that the digital technology that was ultimately developed by

private markets, by American firms, made the government sponsored technology in Japan and France completely obsolete. As a result, as the high definition market—or when the high definition

market—fully develops, the American standard developed by a private consortium is going to be the market winner. That is how private markets work. That is how competition

works. And that is why we need to end the distortions in the private market that these subsidies create.

Subsidies also fuel high taxes and drive high taxes. They are di- rectly related. Higher taxes, more subsidies. And as we have the

need for higher and higher subsidies, we reach out to the taxpayer

to pay more and more of a share of their income. In 1993 the largest tax increase in history was passed and in 1994, the Advanced

Technology Program received its highest level of funding ever. Increasing the tax burden on American families and industry so that

bureaucrats can give something back to the politically powerful is

not right. Mr. Nader talked about the moral implications of penalizing those that are most in need so that we can hand out Federal

subsidies and it is especially worth noting that although the Advanced Technology Program has fortunately seen a reduction in

funding since 1995, their funding has gone from $450 million a

year to under $200 million a year in the last 4 years, I haven’t seen

any sharp curtailment in the American productivity. In fact, it has

been just the opposite. American productivity continues to increase.

Unemployment is lower. So it is a completely false argument that this program or any other Federal plan is necessary to instill competition in private

markets. The way to enhance competitiveness in productivity is to

minimize government interference, lower the tax burden on investment, reduce the tax rates and lower the regulatory burden.

Tim Draper, a Silicon Valley venture capitalist, flatly states that

‘‘government subsidies, winners and losers selected by non-market

forces simply distort the market.’’ The government’s job should be

to create the best possible economic climate and to let business and

industry do what it does best, which is to create economic opportunity. Good public policy isn’t about political distribution of resources but about maintaining rules that allow the exchange and

production and distribution of good ideas and good products. In

short, we must allow the free market to work. It is the individuals

voluntarily investing their own money that drives progress and economic growth, not government subsidies or corporate welfare.

Mr. Chairman, thank you very much for your time.

[The prepared statement of Mr. Royce follows:]

PREPARED STATEMENT OF HON. EDWARD R. ROYCE, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

I would like to thank the committee very much for the opportunity to testify

today.

‘‘The policy of the American government is to leave their citizens free, neither restraining nor aiding them in their pursuits.’’

With those few words, Thomas Jefferson articulated the premise of the Constitution and the genius of our political and economic system. Freedom and justice require government to be a neutral body that applies the law equally. The preamble

of the Constitution outlines the premise of the document and states that it is to

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‘‘promote the general welfare.’’ This is quite different than distributing selected benefits.

As Members of Congress, we have to remember that all things do not flow from

Washington, nor does every conceivable human endeavor need a department in

Washington to manage its activity or guarantee its continued vitality. Not only is

it unnecessary, it’s harmful.

The Department of Commerce is a perfect example.

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.’’

The Department of Commerce is expected to perform a task totally at odds with

American ideas of government—determining winners and losers in our economy

through subsidies, incentive packages and other selectively given perks.

In other words, political influence is what drives rewards rather than competence

in providing goods and services to customers.

The Department claims to be an advocate of America’s small business community,

yet it routinely competes with small businesses by providing products, administrative support, and specialized weather and mapping services that are readily available in the private sector.

$695 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. Supporters of the Department assert that this is a small percentage of the Federal budget and isn’t much

money.

First, it is a lot of money.

Second, it’s money earned by the American taxpayer before it was taxed and given

away.

And third, it’s $695 million dollars siphoned away from productive investment so

that Washington can dole out favors. Every dollar taken by Washington in taxes so

that bureaucrats can determine who gets subsidized is one less dollar that can be

invested in promising technology.

T.J. Rogers arrived in California with $700. He founded Cypress Semiconductor

in 1983 which now employs over 2,000 people and is worth well over $1.5 billion.

I would argue that the $700 invested by the person who owned it will prove to be

more productive than the $695 million that was given away in subsides.

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.

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’re necessary because the programs

that they fund aren’t adequately pursued by private investors due to their high degree of risk. T.J. Rogers notes that the ‘‘high-risk’’ argument used by the Department of Commerce is usually justification to subsidize poor investments. He points

out that the important evaluation is about the return on investment (ROI), not risk.

Using this analysis shows that investments with high risk and ordinary or low return are those that are given subsidies. Investments with a good return are enthusiastically supported by private investors because they are seen as a wise use of

their money. On the other hand, those that are considered poor investments are

given government subsidies.

High-definition TV is one of the clearest failures of government targeted handouts. Japanese businesses, with subsidies that totaled $1 billion in the late 1980’s,

sought to help HDTV using existing analog technology. The French did the same.

In the United States, we denied the $1.2 billion in subsidies that some had sought

to compete with these foreign rivals. American companies went on to develop an alternative technology with their own money.

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In Japan, HDTV was transmitted by satellite. The picture quality was only mar- ginally 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. We relied on the market, and

again it showed that the market works. Economic growth and technical innovations are not a result of selective govern- ment 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 the growth of one another. In 1993, the larg- est tax increase in history was enacted. In 1994, the Advanced Technology Program

was funded at its highest level before or since. 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 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 sub- sidies * * * 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 distort and harm the relationship be- tween business and government. Much of what is called ‘‘industrial policy’’ is really

little more than a political payoff to unfairly favored industries or businesses. This

is not the proper role of the Federal Government nor is it right. People in America

get up every day and work hard so they can provide for their families. It’s just not

right for their government to take that money which they earn in order to provide

subsidies and special programs for multimillion-dollar corporations with their hands

out in Washington. Good public policy is not about the political distribution of resources, but about maintaining rules which allow exchange, production and distribution. In short, we

must allow the free market to work. It is individuals voluntarily investing their own

money that drives progress and economic growth, not government subsidies. The Department of Commerce should be abolished and with it those programs which stifle innovation and fuel increased tax burdens. Today, I am introducing legislation to do just that. Thank you for the opportunity to appear today before the Committee.

[The prepared statement of Mr. Rodgers follows:]

PREPARED STATEMENT OF T.J. RODGERS, PRESIDENT AND CEO, CYPRESS

SEMICONDUCTOR CORP.

The list of unproductive—and sometimes even ludicrous—‘‘investments in govern- ment-industry partnerships,’’ unnecessary subsidies and outright gifts to America’s

corporations by our government, is long, shameful, and very well documented. What’s lacking is not another regurgitation of the evils of corporate welfare, but a Congress and president with the courage to do something about it.

Stereotypes of our political parties would lead one to believe that corporate welfare is the darling of Republicans, and under attack by Democrats. But, my direct

experience in testifying on corporate welfare before the House of Representatives

and Senate on five occasions over a 10-year period is that Democrats and Republicans are equally to blame for the shameful corporate giveaways. (On one occasion,

I was personally attacked by Rep. Herbert Klein, D-N.J., and was so offended that

I offered to fly at my expense to New Jersey during the next election to campaign

on behalf of his opponent: ‘‘New Jersey voters, I am a Silicon Valley CEO who says

’no’ to corporate welfare, but your congressman insists on taxing you and sending

your money to Silicon Valley. ’’)

Most Silicon Valley chief executive officers are dead-set against corporate welfare,

even if it means their companies would lose government funds. (In the same congressional session in which Rep. Klein impugned my integrity and motives, Silicon

Valley Rep. Anna Eshoo, D-Calif., condescendingly told the committee that she was

more in touch with the desires of Silicon Valley companies than I, and that Silicon

232

Valley did want government funding. Consequently, on my fifth trip to Congress,

I took only one day to gather the signatures of 78 Silicon Valley CEOs on a statement declaring unequivocally that they did not want corporate welfare.)

I am the vice-chairman of the Semiconductor Industry Association, which represents the vast majority of silicon production capability in the United States. The

SIA is on record opposing government subsidies for the semiconductor industry.

Corporate welfare persists because many companies outside the semiconductor

business, unlike most Silicon Valley companies, make a handsome living at the taxpayers expense. For example, General Electric is a large recipient of corporate welfare, and its CEO, Jack Welch, refused to sign our petition to Congress to end corporate welfare.

Archer Daniels Midland of Iowa rakes in approximately $400 million a year in

government subsidies of different types and earmarks part of that money for political activities focused on keeping its government funding. ADM is a big campaign

contributor and a heavy funder of Sunday morning political television programs.

One reason Congress has chosen consistently not to act on corporate welfare is that

the states and the congressmen that represent them benefit from it. The situation

is very similar to the scattering of military bases (and expenditures) around the

country not for strategic, but for political reasons.

Much of the corporate welfare these days comes under the ‘‘technology’’ heading.

Trendy politicians for example, have taken on the Internet as a second deity. Many,

if not most, government technology giveaways are unproductive or even wasteful.

The unfortunate aspect of wasteful government technology largess is that it is

currently drying up funding for the worthy cause of teaching hard science at our

universities. At the same time the government is putting pork-barrel money into dubious corporate projects, we have a critical shortage of engineers and scientists so

bad that it threatens high-technology growth. To alleviate this problem in Silicon

Valley, Stanford University is currently trying to raise $300 million to create funded

scholarships for science and engineering graduate students. Although Stanford certainly would not agree, I think their potential loss of government funding will be

ultimately beneficial: In the long run, it will free the university system from government curriculum dictates.

In general, I believe that Silicon Valley has created its wealth and miracles precisely because its chief executives refuse to engage in the competition for pork-barrel

funding and rarely engage in time-consuming political activities. We watch after our

businesses, and value winning in the marketplace over using the force of government (subsidies, tariffs, quotas, antitrust activities, etc.) to beat our competition.

The current Microsoft antitrust litigation is an unfortunate and rare

counterexample.

Over the last 10 years, I have traveled at my company’s expense on five occasions

to testify before either the House of Representatives or the Senate on the wastefulness, destructiveness, and unfairness of the corporate welfare system. I have not

been well received. After I prepared for hours and travelled for a day to testify, Sen.

Howard Metzenbaum, D-Ohio, arbitrarily cut my testimony to three minutes. At the

same hearing, the only other committee member present, Sen. Patrick Leahy, D-Vt.,

didn’t seem to appreciate my message against Sematech, a chip industry giveaway

he supported; he did not greet me, thank me for my testimony, or even look up once

from his reading material during my testimony. I gave my last two presentations

on corporate welfare to a nearly empty room with only one committee member in

attendance. Consequently, I now believe that I am an actor in a play that waxes

eloquent about cutting corporate welfare but has no last act.

If this committee is serious about eliminating corporate welfare, what to do is

strikingly simple: put all pork-barrel projects in a single package and have a vote,

yea or nay, to eliminate corporate welfare across the board, once and for all. It’s

that simple—and that hard.

EXECUTIVE SUMMARY

Two-hundred-twenty-one years ago, American colonists declared independence: to

be free and to pursue their interests in free markets with limited government. Real

Americans hated taxes. They listed as a cause for rebellion in the Declaration of

Independence: ‘‘for taxing us without our consent.’’ Their new constitution limited

government and banned personal income taxes. The Revolution produced the American Dream, during which the common man became better off more quickly than

any other time in history. For our first 200 years, from 1776 to 1976, America’s per

capita income grew at the rate of 458 percent per century, versus the 3 percent per

century growth rate of the pre-American world.

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Now, the American dream—that every generation will enjoy a higher standard of living—is threatened. Since 1976, the GDP per capita growth rate has steadily declined from 2.5 percent per year to 1.5 percent per year, and we hear people say,

‘‘America needs a raise.’’ In 1913, the 16th Amendment legalized a Federal income

tax with a levy of 1 percent of GDP. Today, the American Dream is being eroded

by the ever-increasing burden of federal, state, and local taxes, which consume a

whopping 35 percent of our national output. Although we are at peace and without

a Cold War, our government is currently spending at a higher rate than the peak

30 percent-of-GDP rate of World War I, and nearing the record 50 percent-of-GDP

rate of World War II ! There is a broad consensus that government spending must

be cut.

Eliminating ‘‘corporate welfare’’ should be a priority in government spending re- duction. The risks are minimal. Savings could reach $275 billion over 5 years. And

there is a moral imperative: We should not be asking our senior citizens to tighten

their belts while our government is literally subsidizing the sale of Chardonnay to

the French.

The current pork-barrel system of taxing and spending (read: wealth confiscation and centrally controlled redistribution) creates a downward economic spiral. With

corporate taxes so high, companies must lobby for givebacks to remain competitive.

Congress is consequently put under extreme pressure to ‘‘bring home the pork’’ to

home-state corporations, some of which are political contributors. Payouts to those

corporations then pressure the government to raise taxes, which, in turn, stimulates

corporations to invent new subsidies, sometimes creatively labeled ‘‘government investments’’ or ‘‘government-industry partnerships.’’ ‘‘Government-industry partnership,’’ is Washington-speak that means Americans will be compelled to pay for some

silly program like the ATP proposal to re-bioengineer cotton, making the cotton fibers more like polyester. We should choose to break out of this downward economic

spiral by ending corporate welfare now. Technology subsidies to corporations are sold using technobabble to camouflage unjustifiable investments, which typically fall into four categories: • Subsidizing the rich: Sematech. We gave $800 million over an 8-year period to 14 electronics companies that currently make more than $800 million in profit every

month—and they don’t even have to pay it back. • Competing unfairly with private industry: the ATP video compression project. C-Cube Microsystems was venture funded in Silicon Valley and lost money for years

before its video compression technology took off. C-Cube woke up 1 day and found

a $1.2-billion-dollar rival entering its market with government funding. C-Cube’s investors paid full fare. • Spending that provides no benefit: Gallium arsenide wafers in space. Vitesse Semiconductor in Camarillo, California, makes some of the world’s fastest chips

using an exotic semiconductor called gallium arsenide. Vitesse sees no value whatsoever in the $500-million NASA plan to make gallium arsenide chips in space.

• Spending that hurts the intended beneficiary: European semiconductor subsidies. The European Union put a tariff on semiconductor chips to protect its fledgling chip industry. Now, the EU is removing this tariff, but not before higher chip

prices decimated its computer industry. Meanwhile, European chip companies lost

market share anyway.

Taxes to fund government boondoggles come from two sources: from the rich who

can afford to pay excess taxes, and from working people whose lives are less well

off when the government takes their money. It is immoral and un-American to take

money away from people who are just making ends meet in order to subsidize corporations—or anything else. Taxing the rich to fund poorly managed government

programs is simply a self-destructive decision: It does nothing more than move

money and investment decisions away from proven moneymakers (read: job producers) to Washington amateurs. In both cases, Americans lose.

One common rationalization for corporate welfare is that Japan and Europe subsidize their corporations, compelling U.S. corporate subsidies in order to remain

competitive. The rationalization is totally false. Objectively viewed, Japan’s programs have been consistent losers. Western Europe’s socialized economies are

among the least healthy on the planet, second only to the 100 percent-socialist disasters in Eastern Europe. The choice to take money from citizens to pursue the government’s ‘‘good ideas’’ is pure and simple socialism, which has been consistently

self-destructive to the economies of those countries pursuing it to any degree. The

damage falls on a gray scale ranging from America’s first income-taxless society to

the near-100 percent wealth control of the collapsed Soviet state. Our current taxes

total 35 percent of GDP, in the middle of the gray scale.

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 comVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00236 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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mission, as we did in the most recent military downsizing. Silicon Valley CEOs

would support a fair package proposal to cut corporate subsidies, as attested by a

list of names in an appendix to this report. The commission mechanism allows Congress to avoid the lose-lose proposition of voting either for more corporate welfare

or against a subsidy to a home-state corporation.

CORPORATE WELFARE VS. THE AMERICAN DREAM

Our forefathers hated taxes. They viewed them as confiscation of individual

wealth. They threatened rebellion over the Stamp Act of 1765—a British invention

to raise money from the colonies by requiring a tax stamp on documents. They

threw the tea into the harbor in 1773, rather than paying taxes on it. And they listed as a cause for rebellion in the Declaration of Independence: ‘‘for imposing taxes

on us without our consent.’’ The Constitution turned on its head the basic premise

of all prior world governments. In other countries, the king, or other sovereign,

owned the land, the citizens, their property, and their wealth. People were allowed

to own property and to have rights only through the grace of the king, sometimes

in a formal agreement such as the Magna Carta. The American Constitution created

a bottom-up country by ensuring the people’s right to be free: they owned themselves, their intellectual and physical property, and their money. The markets were

to be free and the new government was to be given only limited, enumerated powers. Those powers not enumerated were specifically reserved for the people. The new

government made it unconstitutional to levy an income tax on individuals. The Real

Americans who founded our country wanted ‘‘the government off of our backs and

out of our pockets,’’ to use a Reagan phrase.

This first-ever, morally profound decision to organize a country ‘‘by the people, of

the people, and for the people’’ led to the most rapid improvement in the well being

of the common man in history. During our first 220 years, the gross domestic product (GDP) per capita of Americans grew from $60 per person in 1776 (equivalent

to $919 in 1996 dollars) to $28,540 per person in 1996. Personal income per capita

in 1996 was $24,296, or 85 percent of GDP per capita—most of GDP per capita falls

through to personal income. GDP per capita grew at an unprecedented rate of 458

percent per century from 1776-1996, effectively doubling every 40 years. It took

mankind 30,000 years to reach $919 per year, while America catapulted its citizens

from $919 to $28,540 in just 220 years.

FOOTPRINT OF CAPITALISM

GDP PER CAPITA (1996$)

Source: U.S. Gov’t, Stanford University.

Figure 1. GDP per capita in America rose to $28,540 in 1996 of which 85 percent

or $24,296 ended up as personal income per capita, based on government statistics

which go back to 1869. Another source, Another Economic View of American History, by Passell and Atack, provides the estimates for U.S. GDP per capita in 1775

as $60, equivalent to $919 in 1996 dollars.

The doubling of income every 40 years gave rise to the American Dream—the expectation that every new generation in America would be better off than the prior

235

generation. Something special happened in America in 1776: When the common people decided to stop serving government and to mandate government to serve, they

prospered as never before.

THE SLOWDOWN

The first Americans would have scoffed—or rebelled—if the government had proposed to tax them to ‘‘stimulate the economy’’ by ‘‘investing’’ taxpayer dollars in

‘‘government-industry partnerships.’’ That type of language, Washington-speak, is

the very un-American language of confiscated wealth, weakness, and usurped freedom. Ultimately, if we don’t change—it will be the language of defeat. A closer examination of GDP per capita over the last 20 years, from 1976 to 1996, shows a

slow down.

Source: U.S. Gov’t; 1996$, 20-yr CAGR.

Figure 2. Graphing the 20-year compound annual growth rate of GDP per capita

from 1976 to 1996 shows a decline in growth from about 2.5 percent per year to

about 1.5 percent per year. The 2.5 percent growth rate of GDP per capita in 1976

corresponds to a doubling every 28 years. The slower 1.5 percent GDP per capita

growth rate corresponds to a doubling every 46 years.

The American Dream, the engine of our prosperity has not stopped, but it is slowing down. We continue to hear that the working man is not getting better off and

that ‘‘America needs a raise.’’ How do we get back on track?

CUT GOVERNMENT SPENDING

One important factor slowing the American economy is the ever-increasing consumption of our national wealth by government. In 1913, the 16th Amendment lifted the constitutional ban on Federal income taxes. The first Federal income taxes

were modest in both scope and magnitude.

INCOME TAXES THEN AND NOW

1914 1994

Increase

(percent

per year)

Income taxes paid (billions) ............................................................................................... $6.7 $683.4 6.0%

Income taxes as a % of GDP ............................................................................................. 1% 10% ................

Per capita income taxes ..................................................................................................... $69 $2,622 4.7%

Individual tax filers (000’s) ................................................................................................ 360 113,829 7.5%

% of population filing return ............................................................................................. 0.5% 45% ................

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INCOME TAXES THEN AND NOW—Continued

1914 1994

Increase

(percent

per year)

IRS budget (millions) .......................................................................................................... $110 $7,100 5.3%

IRS employees ..................................................................................................................... 4,000 110,000 4.2%

Pages of Federal tax law .................................................................................................... 14 9,400 8.5%

Pages of IRS forms ............................................................................................................. 4 4,000 9.0%

Top income tax rate ............................................................................................................ 7% 40% ................

Income tax rate on median family ..................................................................................... 0% 28% ................

Source: Cato Institute. All dollar figures in 1994 dollars.

Table 1. The first Federal income tax in 1914 was almost insignificant in terms

of the total and per capita amount paid, the percentage of GDP consumed, the percentage of the population required to pay taxes, and the complexity and size of the

IRS.

During the last 80 years, every aspect of the Federal income tax system has

grown much more rapidly than the economy. In 1994, the personal per capita Federal income tax levy of $2,622 reached 12 percent of the $22,104 personal income

of Americans. The combination of federal, state, and local taxes now supports spending which consumes a whopping 35 percent of GDP. Our government is currently

consuming a higher percentage of our gross domestic product than the 29 percent

spending peak of World War I!

Source: Harry Browne Reports, U.S. Gov’t statistics.

Figure 3. Government spending as a percentage of gross domestic product has increased consistently since the New Deal of the 1930’s. Total spending includes federal, state, and local taxes, adjusted for the Federal exemption from state and local

taxes. Even though we have no ‘‘hot’’ or Cold War in progress, government spending

is near 49 percent of GDP, the all-time record set during World War II.

Despite this rapid increase in tax collections, the government spent money even

faster, piling up in addition a national debt of $4.7 trillion dollars by 1994, over

$18,000 for every American. The interest payments on the national debt now

amount to two-thirds of the entire budget of the Defense Department. It’s time to

cut back.

CUT CORPORATE WELFARE

I believe we ought to eliminate immediately most corporate subsidies, so-called

‘‘corporate welfare,’’ which amounts to about $65 billion a year. The electronics industry would be unscathed if it lost all of its subsidies, although a few individual

237

companies might be hurt. (Of course, it would be precisely those CEOs who would

travel to Washington to make ‘‘end of the world’’ speeches.) When U.S. airlines were deregulated, removing subsidies in the form of higher fares, the industry got healthier, weak competitors were absorbed by better-managed companies, and airfare became affordable for the first time to many Americans. The airline industry is healthier and better off without subsidies. There is also a moral imperative regarding corporate welfare: unjustifiable sub- sidies, such as those to promote the sales of wine and oranges in Europe, should

be eliminated completely before the discussion turns to asking senior citizens to endure cuts in Social Security and Medicare. Our current pork-barrel system of taxing and spending has created a vicious downward economic spiral that will be difficult to break. If two corporations are

taxed at a rate of 37 percent (my company’s current total tax rate), but one of them

receives a subsidy equivalent to a 10 percent-point rebate, the subsidized company

will enjoy visibly higher profitability, higher share price, and an enhanced ability

to raise funds at a lower cost. Consequently, companies must compete for government subsidies whenever those subsidies make a competitive difference. Even

though this is my seventh trip to Congress to oppose corporate subsidies, I would

without hesitation pursue any important subsidies offered to my company, because

it is my obligation to our shareholders to do my best for them, including obtaining

any available low-cost funding. A company that failed to do so would be as foolish

as an individual who refused to take income tax deductions because of a strong belief in a flat tax.

The spiral continues as corporations build lobbying organizations to pressure Con- gress to ‘‘deliver the pork’’ to home-state corporations, which are often political contributors. As Congress succeeds in rewarding home-district corporations with their

‘‘fair share of the government pie,’’ the pressure falls right back onto the government to raise the revenue to pay out all of those subsidies. The spiral is completed,

as it was in 1993, when tax revenues are raised to pay the bills by hiking taxes

on corporations which then seek new and creative subsidies to offset their higher

tax rates.

We can use happy words like ‘‘government-industry partnership,’’ and ‘‘effective representation’’ to describe the process, but the economics of the downward spiral

is precisely socialism; that is, the mandated movement of money from individuals

and companies to central government control. At one extreme, when all of the assets (save those of the black market) are controlled by central government planners, we have pure, Soviet-style socialism. At the

other extreme, when income taxes are illegal, we have American-style capitalism,

circa 1776. That is a black-and-white representation. Today, Americans live in a

gray world where the government takes and controls 35 percent of the country’s

yearly production. Western Europe’s economies are more socialist than ours, and

they show it. They have slow growth rates and unemployment rates so high that

they would limit any American presidency to one term. And, of course, the socialist

disasters of Eastern Europe make even the ailing Western Europe economies look

great.

Sometimes, it is difficult to see the obvious big picture because of incremental

thinking. An increased tax of only a nickel a day per American supports a $5 billionper-year subsidy. With easy money and companies promising breakthroughs in

health care, pollution control, or electronics for ‘‘only’’ a few billion dollars, government often makes the wrong choice. The road to socialism is paved with nickels—

trillions of them—each taken from Americans with the greatest good intent.

The synopses of ATP programs dazzle us with possibilities: ‘‘next-generation video

compression,’’ ‘‘high-definition television (HDTV) studio,’’ ‘‘new generation laserbased welding,’’ ‘‘less polluting, more cost efficient painting process,’’ ‘‘super-hard

coatings of boron nitride,’’ and so forth. All of these ostensibly compelling and costeffective requests for corporate subsidies beg the big question: ‘‘If you are General

Motors, with annual sales of $160 billion, and $20 billion in the bank, why don’t

you fund this great XYZ idea yourself, and patent it?’’ GM is prevalent in the ATP

programs, but don’t overlook Ford, Chrysler, General Electric, AT&T, IBM, Black

and Decker, Honeywell, 3M, U.S. Steel, duPont, RCA, Phillips, MCI, Goodyear,

Amoco, Kodak, Polaroid, Xerox, Caterpillar, Westinghouse, and Time Warner—apparently, Bugs Bunny needs the taxpayers’ money.

All of these great corporations with all of their great ideas and big bucks somehow

need nickels from the American taxpayer to bring their ideas to market.

There are two reasons for the apparent dilemma. First, some of the projects are

worthy and the big companies are simply looking for a tax rebate to get value from

their extensive lobbying groups. The second reason is risk avoidance—companies

want the government to help fund their long-shot projects.

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I believe that the ‘‘high-risk’’ argument used by the Commerce Department is usu- ally just an excuse for making poor investments. Breakthrough ideas often involve

great risk; that is, a significant chance for failure. The important evaluation is really not about risk, but about return on investment (ROI). Risky ideas can be great,

if they offer huge returns. It is like gambling: A bet that has only a 1-in-10 chance

is very risky, but it is a big winner if its pays 100-to-1. Conversely, a bet that wins

9 times out of 10 has very low risk, but is not worth making if it pays back only

even odds. In Silicon Valley, we have become rich (San Jose has the highest per capita income in the United States) by making many very risky bets, some of which

turned out to be colossal winners, like the microprocessor chip. No company in Silicon Valley has ever had the size or assets of General Motors, yet most of us have

taken big risks—to get even bigger returns. Analyzing ROI rather than risk shows

which poor investments get foisted off on the government: the ones which have high

risk and an ordinary return. The mentality of investing ‘‘free’’ government money

is straightforward: ‘‘We would never invest our corporate money on this Edsel of a

project, but if the government invests in it, great. If the Edsel succeeds, it will be

a nice business; if not, we have not lost anything.’’

Medium return/high-risk investments are sold to the government using

technobabble. Let me give you an example. Most of you are lawyers, and I have a

Ph.D. in transistor physics. On Monday, I could convince you that there is a national imperative to build ‘‘gallium arsenide wafers in the near-perfect vacuum of

space to achieve near-perfect tetrahedral crystals with very high electron mobility.’’

I would convince you with a modified form of the classic ‘‘Russian missile gap’’ argument, which worked so well for the Defense Department during the Cold War. I

would paint a picture of a potentially catastrophic technical threat, with which our

foreign competitors could wipe out an entire American industry segment. You would

support the project. (As a matter of fact, you did, as I will discuss later.)

Meanwhile, on Tuesday, I could come back and tell you that my original technology calculations were in error, and that a more refined version of an existing

technology—indium antimonide—could save the day.

And, as a test of my skills of persuasion, I might come back on Wednesday to turn

you around again based on recently published ‘‘new data.’’ Given that I were a credible scientist from a credible corporation, you would have no choice but to agree.

And don’t think that your technical experts could help you deal with me—they are

the ones my company didn’t hire.

I would not even have to be dishonest or a cynic in order to mislead you. I spend

many working hours exercising my skills as an engineer/businessman to figure out

which one in 10 of the ideas presented to me are worthy investments for our shareholders. I often say ‘‘no’’ to well-meaning engineers in our company who are convinced that their high-risk/medium-return idea is really a medium-risk/high-return

idea. Indeed, most Silicon Valley entrepreneurs don’t start new companies to become

techno-millionaires, but to prove their old bosses wrong, to show that their great

ideas were misjudged. I founded Cypress Semiconductor Corporation 14 years ago

precisely for that reason. Making difficult technology decisions professionally is

what Silicon Valley is about. Whenever a dollar is transferred from San Jose to

Washington, its chances of being invested in something important diminish greatly.

So far we have discussed two unjustifiable forms of corporate welfare, subsidies

to the rich, tax rebates for research and development that would have been done

anyway, and spending for no benefit, funding low ROI programs that will never pay

off. There are two other common categories: spending that actually harms the beneficiary and unfair government competition against private industry.

SEMATECH: A SUBSIDY TO THE RICH

By 1986, the Japanese were starting to take over the semiconductor industry,

once dominated by American companies. The Semiconductor Industry Association

lobbied for a $500-million subsidy called Sematech, a technical consortium. They

used the classic arguments to justify Sematech: ‘‘critical industry,’’ ‘‘Japan has subsidies/we need subsidies,’’ and ‘‘jobs will be lost.’’ Sematech was funded, and my

company inquired about joining, but the 14 Sematech charter members (12 of the

14 were billion-dollar-plus corporations) effectively excluded us and America’s other

100-plus small semiconductor companies by using the mechanism of a $1-million

yearly minimum membership fee. Although Sematech was sold to Congress as a

consortium open to all companies willing to pay dues of 1 percent of sales, the $1

million minimum meant that a $20-million semiconductor company actually had to

pay 5 percent of sales. Big companies got a break, paying maximum yearly dues of

$15 million. Consequently, for a $3-billion semiconductor company, the dues

amounted to 0.5 percent of sales—10 times lower than the dues paid by the small

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companies. That is why so few companies joined Sematech, even though it had $500

million to spread around.

My battles with Sematech started when our engineers were denied access to an

advanced piece of wafer-making equipment called a ‘‘chemical mechanical polisher’’

(CMP) machine manufactured by an Arizona company then named Westech.

Sematech contracted Westech to develop the CMP machine and asked that the machine be held off the market and offered to Sematech members only for 1 year. The

president of Westech assured me that the equipment would be on the open market

and that there was no deal between his company and Sematech, but Cypress was

denied access to that critical piece of wafer-making equipment, which could have differentiated between winners and losers in the next-generation technology. It was at

that point I became a vocal critic of Sematech, the ‘‘government-industry partnership’’ that attacked all competitors, including American corporations like mine.

There were rumors about other Sematech deals with equipment manufacturers, but

Sematech assured me that there were no ‘‘hold-back’’ equipment contracts. It turns

out that there really were contracts to hold back new equipment. I should say that

Sematech’s new president, Bill Spencer, ended that practice voluntarily.

Several years later, I agreed to become an expert witness in a trial in Austin,

Texas, in which Travis County sued Sematech for failure to pay local road and

school taxes. Sematech had claimed on its tax exemption form that it was a ‘‘charity.’’ I used my position as a witness to subpoena documentation from them, requesting any contracts between Sematech and the manufacturers of wafer-making equipment, including Westech and others, as well as any contracts between Sematech and

its own members. Sematech’s lawyers were fast asleep, and provided me with a sixinch stack of contracts, including precisely the contract between Sematech and

Westech Corporation to develop and manufacture a ‘‘chemical-mechanical polisher,’’

which was to be sold to Sematech members only ‘‘for a period of 1 year after the

point of normal product introduction.’’ There were also other hold-back contracts. A

bonus of the fishing expedition: Sematech had also granted development contracts

to its own members, casting doubt on the fairness of the 50-50 ‘‘partnership’’ between its members and the government.

The behavior of the Sematech members was neither illegal nor unethical.

Sematech asked for and received an antitrust exemption at its formation. It used

the combined resources of its members and the government to create a competitive

advantage, and it did a good job of keeping its secrets away from its competitors.

Sematech did what rational people do when the government gives them free money

and an exemption from the rules.

A few years ago, Sematech announced that it was not going to accept the last

$200 million of its second $500 million grant. Based on my discussions with

Sematech leaders, I know that they desired to be independent of government restrictions and not to accept government subsidies when their industry was doing better

financially. Consequently, Sematech’s budget was cut in half, yet its performance remained essentially unchanged. Bill Spencer changed Sematech from an expensive

800-employee manufacturing organization to a leaner research center and information clearinghouse that relies more on the manufacturing resources of its members.

I believe that if Sematech had been formed as a private consortium with a smaller

budget, it would have come to its current, more efficient model of operation much

more quickly. But with government money, an organization can afford to be inefficient.

To be fair to Sematech, I should note that the abuses I have mentioned are more

than 5 years old and that the new regime at Sematech is doing a good job.

Sematech’s initial membership of 14 has now dwindled to 10, but the consortium

appears to provide value to those remaining companies—it simply never should

have been funded by the taxpayer. Sematech falls into the ‘‘subsidies for the rich’’

category because its members include Intel, Motorola, Digital Equipment Corporation, IBM, AT&T, Texas Instruments, Advanced Micro Devices, Rockwell, and National Semiconductor. These companies make enough profit every month to pay back

the government’s 8-year, $800-million investment. At the very least, Sematech

should have been funded by a loan, not a gift from the taxpayer.

Jerry Sanders, for 28 years the CEO of Silicon Valley’s third biggest chip company, Advanced Micro Devices (AMD), is a board member of Sematech. He would

disagree with a lot of what I’ve said. Also, it was his company that I left to start

my company. He challenged me on that issue, too. Cypress and AMD are competitors who have disagreed in court—twice—on intellectual property issues. But, Jerry

and I agree on one statement, the one he and I signed at the end of this testimony

asking you to cut off corporate welfare. Other Silicon Valley CEOs have also signed

up.

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UNFAIR COMPETITION: THE ATP VIDEO COMPRESSION PROGRAM

Video compression is the technology that enables digital TV and small-dish sat- ellites. Conventional television requires one satellite transponder per channel and

a 10-foot dish to receive the weak analog signal. Digital TV signals are clearer, and

10 channels fit on one satellite transponder (think of the billions saved on the extra

satellites that we will not need). The basic concept of video compression is that

frame after frame, most TV pictures don’t change much. When Dan Rather presents

the evening news, he moves, but the set behind him does not, begging the question

of technologists: Why not just transmit the differences from frame to frame, rather

than re-transmitting the entire picture? The concept is obvious and simple, but the

mathematical algorithms and special-purpose computers required to implement it

are decidedly not. The leader in video compression technology is C-Cube Microsystems Inc., a quarter-billion-dollar Silicon Valley startup company, which has received an Emmy for its contribution to the television industry. C-Cube is the largest

and most technologically potent company in a new industry that will reshape picture transmission not only in television, but also in computers and on the Internet. Dr. Alex Balkanski, a brilliant mathematician and businessman, is C-Cube’s CEO.

I am a member of its Board of Directors. Despite C-Cube’s leading technology, becoming a successful business in the video compression market has been a struggle.

Changing the way pictures are transmitted in a government-regulated market is a

prolonged task. The venture-funded company lost money for years while waiting for

its technology to take off. Shortly after C-Cube started making a profit, we were

shocked to find out that the government had funded one of our competitors. An ATP

grant went to LSI Logic Corporation, one of America’s top-ten semiconductor companies, to help fund their effort in video compression. Perhaps LSI Logic intended to

enter the video compression market anyway, so its R&D group did the heads-up

thing by getting all available funds. LSI Logic’s CEO is Wilf Corrigan, a friend and

competitor. Wilf Corrigan and I agree on ending corporate welfare, as his signature

attests.

SPENDING FOR NO BENEFIT: GALLIUM ARSENIDE WAFERS IN SPACE

Gallium Arsenide (GaAs, pronounced ‘‘gas ’’) is a semiconductor five to 10 times faster than silicon. GaAs chips are used to transmit data at very high speed on the

so-called ‘‘electronic data superhighway.’’ GaAs chips are capable of transmitting

and receiving signals on a single fiber-optic cable at the rate of 10 billion bits per

second, fast enough to transmit 250,000 typed pages of information per second. The Space Vacuum Epitaxy Center (SVEC ) is billed as ‘‘a NASA center for the commercial development of space.’’ It is funded to grow GaAs wafers on space shuttle flights using a process called epitaxy. NASA’s Wake Shield was designed to grow

GaAs crystals behind a shield sweeping through space some 30 miles away from the

contaminants surrounding the space shuttle. The theory: The vacuum in space is

much better than the vacuum earthbound equipment can provide, thus offering the

potential to grow more perfect crystals in space. (NASA’s technobabble is award

winning: ‘‘molecular beam epitaxy’’ doing ‘‘ordered growth’’ in an ‘‘atom by atom

manner’’ of ‘‘near theoretical’’ atomic quality in an ‘‘ultra-vacuum of 10-14 torr’’ as

part of a ‘‘cost and time-efficient program’’ which ‘‘could be a model for future commercial space endeavors. ’’)

The Wake Shield became one primary objective of five NASA missions. No one at SVEC would say exactly what the cost of the space wafer experiments was, but

a ball-park estimate is $200 million per flight, shared among several experiments.

The management of the Wake Shield claimed that although the initial wafers would

be astronomically expensive, later production of GaAs wafers in space would cost

only $10,000 per wafer, a number declared to be commercially viable. Congress

bought off on SVEC, and at least two missions have been flown. Dr. Lou Tomasetta, the CEO of Vitesse Semiconductor Corporation in Camarillo,

California, studied at MIT. He is an expert in transistor physics, data communications, and GaAs integrated circuit manufacturing. I enjoy ‘‘tech talk’’ with Lou during our monthly meetings at Vitesse, where I am also a member of the board of directors. Neither Lou nor I can figure out why our government is making GaAs wafers

in space. Lou calls the program a ‘‘solution looking for a problem.’’ Vitesse is one of America’s Big Three GaAs companies. Given the possibility that Lou and I were

missing something, I called Steve Sharp, a Silicon Valley friend of mine who moved

to Oregon to run TriQuint Semiconductor, another of the Big Three. Steve said that

he was buying GaAs wafers for $175 each, and that the very highest performance

GaAs wafers sold for $1,000. He said that it would be very difficult to figure out

how to make money on a $10,000 space wafer. His final comment was, ‘‘I tend to

ignore this sort of request.’’

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In response to criticisms I published in an industry publication, Electronic News,

challenging the commercial value of the space wafers, the head of the SVEC project

said the wafers ‘‘could be useful for technologies not yet developed’’ and then listed

numerous commercial products including CD players and optic fibers that already

are on the market, with technology derived from ordinary terrestrial wafers. Maybe we are all missing something, but I think our government has taken sev- eral hundred million dollars from American taxpayers to subsidize an exotic technology manufactured in an exotic place for a super-high-tech industry that neither

needs nor cares about the investment.

SPENDING THAT HURTS THE BENEFICIARY: EUROPEAN SEMICONDUCTOR SUBSIDIES

Recently, countries with advanced electronic capabilities agreed to remove tariff barriers on a broad range of electronic products because they realize that high

prices hurt everyone in the electronics industry. In an industry where life depends on fast improvement, consider the effect of the tariff that the European Union placed on semiconductor chips imported into Europe.

Currently, semiconductors comprise about 20 percent of worldwide electronic shipments. In other words, the average personal computer contains about 20 percent of

its value in semiconductors. Put another way, for every $1 in semiconductor sales,

there are $5 in computer or home electronics sales.

When the European Union decided to protect its fledgling semiconductor industry by imposing a stiff 14 percent tariff on imported chips, it also raised the price that

the European computer industry had to pay for its most important raw material,

chips. The EU policy to protect its small semiconductor industry had a devastating

impact on its much larger computer industry. Europe’s largest computer company,

Great Britain’s ICL had to sell a 50 percent stake to Fujitsu to stay afloat. Nixdorf,

a prominent German computer company, was acquired by Siemens after a financial

crisis. Italy’s Olivetti, Europe’s biggest PC producer, still sells PCs, but stopped

manufacturing, triggering big layoffs. The market share of European computer companies as a group declined. And what happened to the fledgling European semiconductor industry while it was being protected? Its market share dropped from 10.2

percent to 5.4 percent from 1988 to 1996. In this case, government ‘‘help’’ damaged

all parties concerned.

THE HIDDEN COSTS OF TECHNOLOGY SUBSIDIES

If a tax of a nickel per day per American supports $5 billion in yearly subsidies, the whole $65 billion-per-year tab for corporate welfare can be viewed as a ‘‘mere’’

65 cents per day per American. An obvious question comes to mind: ‘‘Wouldn’t you

be willing to pay 65 cents a day to make America’s companies the most competitive

in the world?’’ While I hope your answer to that question is ‘‘no,’’ I would also like

to point out that true cost of corporate welfare exceeds that cost by a lot. Consider

the tax levy for corporate welfare as it applies to two groups, average Americans

and rich Americans. That 65 cents per day is $237.25 per year, a nontrivial sum

for the average American. That means less money in the pockets of families struggling to make ends meet: a bicycle not bought, a vacation not taken, or missing the

monthly college fund payment. It is unconscionable and un-American that we would

tax working families while we fund the dubious corporate subsidies I have reviewed. On the other hand, it is much easier to talk about funding corporate welfare by eliminating those ‘‘tax loop holes for the rich’’ (who pay ‘‘only 50 percent’’ of their

income to the government). I am an example of one of those rich people who can

afford to pay more taxes. Although I came to California with only $700, I became

a founder of a startup chip company which employs over 2,000 people. My personal

wealth comes from the 2 percent of the shares of our company I still own, most of

them held since our founding in 1983. The market value of our company is now $1.5

billion. Two percent of $1.5 billion is $30 million. I am rich. What does it matter

if the government takes an extra million dollars from me in order to fund corporate

welfare or other ‘‘good ideas’’? Like many Silicon Valley people who have created wealth, I consume very little of my net worth. I’m interested in transistors, companies and competition—not

yachts and airplanes. Consequently, I invest almost all of the money I have earned

right back in Silicon Valley. I have already described two of the companies that I

not only invest in, but help to run as a board member. There are numerous other

companies that I invest in because I know what they do and why it will make a

difference. In aggregate, I hold shares in over 100 companies, almost all of them

Silicon Valley high-technology companies whose names you would not recognize.

When Congress and the President voted to raise my personal taxes in 1993, I paid

the extra amount by selling some of those Silicon Valley stocks. That money then

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went to Washington to be ‘‘invested’’ in ‘‘government-industry partnerships’’ related

to the ‘‘electronic data superhighway’’ (at least as the PR described it at that time). The point is this: When government raises taxes on wealthy individuals, it is sim- ply taking investment dollars from those individuals and moving them to Washington. Proven moneymakers and job creators lose control over the investment of

their funds and unproven Washington amateurs take over. The real question for

Americans is, ‘‘If you had to bet the creation of your job on investment from wealthy

people in the private sector versus investment from the government, which would you

choose?’’ The answer is obvious. Although it is good stump rhetoric to fume about ‘‘tax breaks for the rich,’’ the fact is the average American loses out every time a

dollar is taxed out of the private sector. If you really want to enhance the competitiveness of American corporations, cut the capital gains tax and let me invest my

own money—I’m very much better at it than government is.

There is one final hidden cost of government interference in the free market: The

inefficient use of human resources is the most devastating cost of all. All CEOs

know one fundamental truth: that the human knowledge and energy collected in a

company is what drives profit. It’s not assets, or factories, or cash, but people that

separate one company from another. Consequently, in Silicon Valley, we fight titanic

battles to woo employees in an area where unemployment is less than 2 percent.

When Cypress was a startup company, we wooed numerous employees from Intel

with the lure of a more prominent position (in a very much smaller company), and

the potential wealth from stock options. Intel, now the largest semiconductor manufacturer, has counter-attacked in the Valley with a new campaign promising—in

writing—a Hawaiian vacation as a sign-on bonus for working at Intel. Recently,

when one of our competitors, Cirrus Logic, suffered a problem in the marketplace

prompting layoffs, we hired an airplane to fly over Cirrus’s headquarters carrying

a banner with the message that we had jobs open and listing our Internet address.

Corporate welfare can have a devastating effect in an environment like Silicon

Valley. While companies are fighting with salary, stock, and promotions to woo the

best and brightest, the government sometimes uses corporate welfare to prop up

sick companies. Consider this hypothetical case: When the automobile industry was

moving from mechanical carburetors to electronic fuel injectors, what if the government decided to ‘‘protect jobs’’ in the carburetor industry by subsidizing carburetor

companies? With American fuel injector companies starving for the human talent,

and Japanese competitors taking market share, the government would be spending

money to keep people at the failing carburetor companies in order to ‘‘save jobs.’’

Subsidizing losing companies traps people in dead-end jobs, prevents other companies from getting the talent they need, and gives our international competitors an advantage.

JAPAN AND EUROPE SUBSIDIZE, SO MUST WE

One of the most common-and erroneous—rationalizations for corporate welfare is

a scare tactic: Foreign governments give out corporate welfare; America must do the

same to remain competitive. Perhaps Europe is not an immediate threat, but what

about Japan?

Sematech was formed at the height of the Japanese attack on the American semiconductor industry. The American semiconductor industry dominated its market,

from its origin in the ’60’s, through the ’70’s. As late as 1982, America held a 57

percent-32 percent chip market share advantage over Japan. But in the ’80’s fortunes reversed, and by 1989 Japan actually took a 50 percent-37 percent lead. Clyde

Prestowitz, a big fan of government subsidies, wrote the book Trading Places, and

testified before Congress that Japan’s semiconductor subsidies, channeled through

its Ministry of International Trade and Industry (MITI), were responsible for the

defeat. Prestowitz declared that the American semiconductor industry was lost to

the Japanese and pondered whether or not the American computer industry could

survive (both assertions were wrong). In 1993, I debated Prestowitz at the Cato Institute, where he went so far as to declare that the semiconductor industry was created by defense spending. Nothing could have been further from the truth, yet

Prestowitz was presented as an expert to justify subsidies to Silicon Valley, about

which he knew very little.

I also debated Michael Maibach, the chief lobbyist for Intel Corporation, on public

television in 1993. Maibach said that Sematech was needed to maintain the domestic supply of military chips. What if our military had to depend on Japan? It was

another scare tactic used to justify corporate welfare. Even at its lowest point in

1989, America still manufactured 37 percent of the world’s $49.7-billion worth of

chips. The military rationalization for corporate welfare sounded OK in Washington,

but it had no rational basis. I reminded Mr. Maibach that my company, Cypress

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Semiconductor, shipped 20 percent of its production to the military and had chips

in the F-14, F-15, F-16, and F-18, as well as many of the guidance and weapons

systems aboard those airplanes. My position was vindicated a few years later when

Intel announced that it was voluntarily exiting the military-chip business, despite

its Sematech subsidy. Cypress still ships a wide variety of chips to the military. Did MITI subsidies to the Japanese semiconductor industry hurt our chip compa- nies? Were Japanese companies sharing secret data in a way that would violate

American antitrust laws? The answer to both questions is ‘‘no.’’ In 1992, I convinced

Dr. Yoshio Nishi to testify to that effect at a congressional hearing. Dr. Nishi, then

the head of chip development at Hewlett Packard, had been head of the VLSI program at Toshiba, one of the few MITI-sponsored programs that seemed to work. The

MITI VLSI program was targeted at entering the dynamic random access memory,

or DRAM market, the biggest chip market in the world. Japan successfully entered

that market en masse, causing Silicon Valley’s three largest companies, Intel, Advanced Micro Devices, and National Semiconductor, to abandon the DRAM market.

Intel later acknowledged that it felt it could have weathered the storm, but chose

to abandon DRAMs in order to put its full force behind microprocessor development.

What a great decision that was! I was working in the memory group at Advanced

Micro Devices at the time. We did exit the DRAM business because we could not

make money in it. We felt at the time that Japan was dumping DRAM chips into

the U.S., selling them below manufacturing cost. In retrospect, I believe now that

Japan simply got better at manufacturing than us for a while and was able to

produce the chips at extremely competitive costs. Charlie Sporck, then president of

National Semiconductor, was the father of Sematech. Sporck used the DRAM failure

as a rallying cry. Dr. Nishi ran the Toshiba DRAM program, which was the most successful of the Japanese efforts. He testified that there was very little financial aid from MITI to the Japanese semiconductor industry, and also that the Japanese semiconductor

companies—intense rivals—never shared secret information, but only general ‘‘road- map’’ information that allowed the companies to gauge the effectiveness of their programs and make sure they were headed in the right direction. Three important

American semiconductor companies did remain in the DRAM race: Motorola, Texas

Instruments, and then-startup Micron Technology in Boise, Idaho. TI now manufactures DRAMs in plants around the world, and Micron has grown to be a $3-billion

company known to be able to outmanufacture any of its Japanese rivals. The domestic military chip supply was never in danger, and MITI had very little to do with

the Japanese success in the mid ’80’s. Superbly managed Japanese companies simply beat us—for a while. The tables have now turned. America again leads Japan in semiconductor market share. Intel’s decision to focus on the microprocessor business, combined with its excellent execution, have propelled it to become the No. 1 semiconductor company in

the world. American semiconductor manufacturing capability has caught up to Japan’s. Our focus on designing innovative chips has proven to be more important

than Japan’s focus on grinding out commodity chips at very low cost. Many of the

American semiconductor companies that were very small startups at the time of

Sematech’s formation, my company, Altera, Xilinx, Linear Technology, Maxim, Micron Technology, LSI Logic, and VLSI Technology are now substantial semiconductor corporations with revenues from $500 million to $3 billion. These companies

manufacture a dazzling variety of products. We all export to Japan. The innovativeness and resilience of the American semiconductor industry enabled it to react to

the attack—and win.

Although the MITI VLSI program was successful, the fact is that MITI has also

wasted huge amounts of money and has many more failures than successes. For example, MITI’s high-definition television (HDTV) program spent $1 billion to define

and dominate the next-generation HDTV. Some American executives immediately

appealed to Congress to get their corresponding piece of corporate welfare. The realities: 1) the U.S. won the High Definition Television (HDTV) race with a superior

digital design, and 2) the only digital TV deployed today is not that burdensome,

FCC-approved HDTV system, but a digital enhancement of ordinary television. (Prediction: I have a 2000-line, super-enhanced TV in my house that qualifies as

‘‘HDTV,’’ but uses a normal TV input signal. That system will be deployed commercially, and the expensive new HDTV being pushed on a reluctant industry by the

FCC will stall; no wonder CBS and NBC want ATP grants to build the first HDTV

station.) MITI caused Japanese taxpayers (who live in homes with half the square

feet per person of Americans) to lose $1 billion on its HDTV boondoggle.

TRON was a nickname for a Japanese advanced, fifth-generation computer partially funded by MITI that threatened to wipe out the U.S. computer industry. It

turned out to be a loser, and the U.S. computer industry remains dominant. MITI

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support to the Japanese aircraft and biotech industries has also produced no tangible results. MITI focuses on 13 Japanese industries. The four areas of heaviest emphasis are

textiles, mining, basic metals and chemicals. Despite that, these areas ranked

lowly—13th, 12th, 10th, and 9th, respectively, in growth rate among the 13 industries. In response to the theory that MITI was not trying for growth in those industries, but simply subsidizing declining industries to ease their pain, Harvard economist David Weinstein stated, ‘‘But if that is true, that makes Japanese industrial

policy very like its French and American counterparts over the past four decades—

politically driven, favor-based, [and] non-helpful to the nation’s overall economic

functioning.’’

As I testified before Congress in 1995, ‘‘Corporate welfare does not work anywhere

in the world. It does not work because it penalizes a country’s winners with excess

taxes in order to fund that country’s losers with inefficiently run government programs. ‘They’ve got subsidies; we need subsidies,’ is exactly wrong. America will be

much more competitive on a relative basis if we allow the nations with whom we

compete to squander their taxpayers’ money, while we encourage our companies to

win without subsidies. It’s like the Olympics: there comes the day when an athlete

must walk alone into the arena of competition. The government cannot lift the

weights and run the miles that are required to be a champion—only an individual

can.’’

The fact is that in western Europe or Japan, the choice to take money from citizens to pursue the ‘‘good ideas’’ of government has been consistently self destructive

to their economies. Socialism does not work. Socialism is immoral. We should abandon socialist programs like corporate welfare.

BARRIERS TO PROGRESS: THE SYSTEM AND LOBBYISTS

One of the biggest barriers to eliminating the corporate welfare drain is the pork

barrel system itself: Members of Congress are put in a lose-lose situation forced to

choose between voting down a significant subsidy for a home-state corporation, or

voting to continue corporate welfare. Congress recently faced the same situation in

the downsizing of the military. Individual senators were very reluctant to vote to

close down major bases in their home state, yet everyone agreed that the Soviet collapse provided a great opportunity to reduce spending. The solution—to appoint an

independent panel to collect military cuts into a single bill for a ‘‘yes’’ or ‘‘no’’ vote

without amendments—turned out to be a winner. It got the job done, and even in

California where we were hit very hard by military downsizing, most of us believe

that we are all better off. We should follow the same procedure with corporate welfare.

Prior to traveling here, I polled a few CEO friends of mine in Silicon Valley to

see if they would support a statement saying that they would support cuts to corporate welfare, even if it meant cuts in government funding to their companies.

Most agreed, and their statement is attached as an appendix to this testimony. As

a general rule, Silicon Valley CEOs like smaller governments and lower taxes, and

are willing to forego subsidies to achieve those goals. CEOs would much rather

make money with healthy companies in a healthy economy than receive welfare

from the government.

I believe that the popular impression that CEOs cling strongly to their corporate

welfare is completely inaccurate and stems from two sources: 1) a few CEOs who

receive massive subsidies and do fight for them, and 2) industry lobbyists who are

out of touch with their constituencies.

I have testified before the Senate and House against corporate welfare since 1989.

In my 1995 testimony before a House Subcommittee, my opponent was a lobbyist

from the American Electronics Association (AEA). His testimony started with, ‘‘We

represent 10,000 corporations * * *’’ What struck me was that my company was a

member of AEA, and that we were paying this man to argue against me! The AEA

was out of touch with the Silicon Valley CEOs I know, and absolutely misrepresented my position. Furthermore, the AEA had never polled me to determine whether or not our company wanted them to lobby for maintaining Commerce Department

subsidies. The AEA started as a Silicon Valley-based electronics organization. Now,

like many other lobbying organizations, it has moved to Washington and been coopted by the pork-barrel process. One unspoken assumption behind the AEA seems

to be, ‘‘Our job is to bring home the pork for electronics companies.’’ Although many

of us agree with tactical positions taken by the AEA on workplace or technical

issues, I know that there is no consensus support for pork-barrel politics among

high-tech CEOs. When I returned to California after that meeting, I asked why we

had joined the AEA. The answer was that our membership was solicited by mail,

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the dues were low, and we simply signed up in order to get information. I fired the

AEA; we are no longer members. We are members of the National Association of Manufacturers (NAM). I testified

earlier that I do not believe the American taxpayer should be compelled to subsidize

the sale of American products overseas. The most recent cover story of the NAM

Briefing newsletter is entitled, ‘‘NAM Report Proves Export Financing is Critical to Job Creation.’’ NAM favors taxing people to subsidize exports. They argue that the

Japanese, French, and Spanish do it, and we must also in order to be competitive.

In other words, they are using every tired argument debunked in this testimony to

justify their favored form of corporate welfare. I am going to fire NAM as soon as

I get home.

CONCLUSION

Our government did best for its people when it stayed near its founding principles of free markets, limited government, and enlightened self interest. It did better economically and it did better morally. Unfortunately, starting with the 16th Amendment, and then the New Deal in the 1930’s, we have drifted toward socialism. The government now controls 35 percent

of America’s output. That makes us all poorer and less free.

The reasons for government taking one-third of what Americans produce are couched in Washington-speak and technobabble and do not stand up to scrutiny.

The words rationalize the workings of a system in which taxing and spending drive

us in a downward economic spiral.

We are at a cross-roads where we can choose to seize the opportunity to leave epi- thets like ‘‘pork barrel’’ and ‘‘corporate welfare’’ behind us and return to the high

ground. American business has always been ready to lead. By 1800, America had more corporations than all of Europe, combined. We can help revitalize the American

Dream. Stop taking money from Americans for socialist subsidies—companies do not need or want that kind of money. Capitalists make money from customers who vol- untarily trade their money for the higher value we provide them. We declare independence from the corporate welfare state. The difference between

it and free market capitalism is the difference between taking and giving, immorality and morality, poverty and wealth. Make the right choice, end corporate welfare.

DECLARATION OF INDEPENDENCE: END CORPORATE WELFARE

The high taxes that our company and its employees pay to support the current local-state-federal government tax burden of 35 percent of GDP hurts our economy

more than any possible corporate benefit from government spending. If an independent commission similar to the military base-closing commission identified a fair

and substantial government spending cut in the area of so-called ‘‘corporate welfare,’’ I would support that cut, even if it meant funding cuts to my own company.

Jerry Sanders, CEO, Advanced Micro Devices

AlexBalkanski, CEO, C-Cube Microsystems

Len Perham, CEO, IDT

Jack Gifford, CEO, Maxim Integrated Products

Rodney Smith, CEO, Altera

T. J. Rodgers, CEO Cypress Semiconductor

Wilf Corrigan, CEO, LSI Logic

John Doerr, Partner, Kleiner, Perkins, Caufield & Byers

John East, CEO, Actel Corporation

Richard Previtt, President, Advanced Micro Devices

Duane J. Roth, Chairman, President, & CEO, Alliance Pharmaceutical Corporation

Chuck K. Chan, General Partner, Alpine Technology Ventures

James C. Morgan, Chairman & CEO, Applied Materials, Inc.

Gene R. Miller, President, Astec Semiconductor

Jess R. Marzak, Managing Director, BankAmerica Ventures

Robert G. Barrett, Managing Partner, Battery Ventures

Charles Crocker, Chairman, President, & CEO, BEI Electronics Inc.

Don Bell, CEO, Bell Microproducts

Bruce Dunlevie, General Partner, Benchmark Capital

Edward M. Leonard, Partner, Brobeck, Phleger & Harrison LLP

Joe Costello, President, Cadence Design Systems

Michael L. Hackworth, President & CEO, Cirrus Logic

Ted Buttner, President & CEO, Coastcom

Mark B. Hoffman, CEO, Commerce One

Ray Latham, CEO, Computer Graphics Systems

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Thomas Van Overbeck, CEO, Cornerstone Imaging

Fred Bialek, Director, Cypress Semiconductor

Ken Virnig, President, Devine and Virnig, Inc.

John Mullen, President and CEO, Dynamic Network Solutions, Inc.

M. Kenneth Oshman, CEO, Echelon Corporation

Curt Wozniak, CEO, Electroglas, Inc.

Norbert Laengrich, CEO, Embedded Performance, Inc.

Paul Rogan, President, Equipe Technologies

William L. Harry, CEO, Exclusive Design Company

Jack F. Nicholson, Managing Partner, Fell & Nicholson Technology Resources

Thomas W. Ford, Managing Partner, Ford Land Company

Allen Batts, President & CEO, Hello Direct

Herman Miller, President & CEO, INET Corporation

Samuel D. Colella, General Partner, Institutional Venture Partners

Scott Cook, Chairman, Intuit

Jim Hawkins, President & CEO, Invivo Corporation

Floyd Kvamme, Partner, Kleiner, Perkins, Caulfield & Byers

Stephen R. Knott, Chairman of the Board, Knott’s Berry Farm

Michael Troy, CEO, KnowledgePoint

Bob Swanson, CEO, Linear Technology

John Blokker, President & CEO, Luxcom

Del W. Masters, President, Maxstrat Corporation

Dubose Montgomery, Managing Director & General Partner, Menlo Ventures

Frank DeRemer, President, MetaWare, Inc.

Gale Aguilar, President, Mitem Corporation

Thomas W. Weisel, Chairman & CEO, Montgomery Securities

Robert White, Principal, Montgomery Securities

George Still, Partner, Norwest Venture Capital

Richard Hill, CEO, Novellus Systems

Robert Cohn, Chairman & CEO, Octel Communications

Herbert M. Dwight, President & CEO, Optical Coating Laboratory

Bryan Sheets, Principal, Paul Capital Partners

John M. Richards, Chairman & CEO, Potlatch Corporation

Jim Ashbrook, Chairman of the Board, Prism Solutions, Inc.

Dado Banatao, Chairman, S3 Incorporated

S.S. Fishman, President, Sara Scientific Co.

Al Shugart, Chairman, CEO, & President, Seagate Technology

Pierre Lamond, Partner, Sequoia Capital

James V. Diller, Chairman & CEO, Sierra Semiconductor

John A. Sobrato, General Partner, Sobrato Development Companies

Garrett A. Garrettson, President & CEO, Spectran

Robert M. Stafford, President, Stafford Capital Management

Tom Stemberg, Chairman & CEO, Staples

Scott McNealy, CEO, Sun Microsystems

Robert L. Tillman, President & CEO, Sunshine Medical Instruments, Inc.

Larry Israel, CEO, Telesensory Corporation

Burton J. McMurtry, Venture Capitalist

Lou Tomasetta, President & CEO, Vitesse Semiconductor

Michael McCarthy, President and CEO, Web Publishing, Inc.

Ronald Swenson, Partner, Western Technology Investment

J. Emmett Hammond, President, Wireless Data Corporation

Bernard Vonderschmitt, Chairman, Xilinx, Inc.

William H. Welling, CEO, Xiox Corporation

Phillips Smith, CEO, Zycad Corporation

THE POLITICAL GREENING OF SILICON VALLEY

Silicon Valley went political for the first time to stop Proposition 211, the California ballot initiative that would have subjected Silicon Valley companies to a blizzard of shareholder lawsuits. Of course, real shareholders almost never bring socalled shareholder lawsuits, these suits are brought by securities-litigation specialists such as Bill Lerach, the market-share leader in suing high tech companies.

Lerach was the author of Proposition 211.

During my 28 years in Silicon Valley, I saw Intel’s chairman emeritus, Gordon

Moore, only about once per year. Our conversations were almost exclusively about

the chip business. During one extraordinary 3-month period in 1995, however, I met

four times not only with Gordon Moore, but also with a large group of Silicon Valley

CEOs, to talk politics: how to defeat Proposition 211. That Silicon Valley leaders

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would convene for and contribute $30 million to a political activity was unprecedented. We did it because Proposition 211 threatened the core of how we do business. For example, one of the provisions of Proposition 211 made it illegal for companies to indemnify their board of directors against lawsuits. How could any Silicon

Valley company assemble a board of directors if the directors’ personal property

were liable to the vagaries of class action lawsuits? We defeated Proposition 211 by a 3-1 margin, but our activism on Proposition 211 triggered the still-ongoing series of media reports on the ‘‘political greening of Silicon Valley.’’ The press badly wants us in the action: Silicon Valley should stop sitting on the sidelines, stop being isolationist technonerds, recognize the value of government-industry partnerships, become part of the process and help lead the country.

I believe we could make no bigger mistake. Silicon Valley is what it is because

of the core values that drive our success. The politics-as-usual we ignore is antithetical to—and highly destructive of—those core values. I will build the framework for

that conclusion—starting with the basic American freedoms that allow for the very

existence of Silicon Valley—as follows:

• Freedom and free markets (that is, capitalism) are built into the Constitution

and the Bill of Rights.

• America is unique in that it was the first truly free nation.

• Freedom creates prosperity.

• Silicon Valley is an island of freedom and free markets, more in line with 1776

America and its government than 1998 America and its government.

• Many CEOs practice not free-market capitalism but collectivism in one of its

forms.

• Collectivism is the irrevocable enemy of capitalism.

• The collectivism espoused by big government undermines capitalism and therefore the fundamental wealth-producing process of Silicon Valley.

• Rapport with Washington offers only downside to Silicon Valley.

• For these reasons, Technet, the Silicon Valley lobbying organization, is a bad

idea.

FREEDOM IN AMERICA

The basic premise of freedom is: I own myself. Therefore, I do what I want and

go where I want—subject, of course, to the responsibilities to observe the freedom

of others.

Our freedoms beyond self-ownership are enumerated in the Bill of Rights, constitutional amendments 1-10. (Here, I would like to stop to thank the Cato Foundation for the booklet given to each of you, a pocket-sized reprint of the Declaration

of Independence, the Constitution, and the Bill of Rights.)

The first amendment calls for freedom of religion, speech, press, and assembly.

The form of these rights is particularly important: ‘‘Congress shall make no law prohibiting the freedom of * * *.’’ I call this form a ‘‘protective right,’’ because it tells

us what the government cannot do to us, not what the government promises to do

for us, like the so-called right to a ‘‘decent’’ wage, what I refer to as an ‘‘entitlement

right,’’ one which is not part of our basic freedoms—and shouldn’t be, as I’ll explain

later.

The first 10 amendments take the form of protective rights: to protect us from

government because our founders did not trust unfettered democracy. John Adams,

our first vice president and second president, said:

‘‘We may appeal to every page of history we have hitherto turned over, for proofs

irrefragable, that the people, when they have been unchecked, have been as unjust,

tyrannical, brutal, barbarous, and cruel, as any king or senate possessed of uncontrollable power. The majority has eternally, and without one exception, usurped over

the rights of the minority.’’

John Adams would say, ‘‘I told you so,’’ if he knew that the TV-sitcom son of Archie Bunker, ‘‘meathead’’ Rob Reiner, had just succeeded in passing California Proposition 10, an initiative to tax smokers 50 cents a pack because Reiner doesn’t like

cigarette companies and smoking. The tax is earmarked to ‘‘help children,’’ via a

new, ill-defined, statewide bureaucracy. Even if we dislike smoking and believe in

helping children, we should never support any government action that confiscates

the property of a minority group at the whim of, in the case of Proposition 10, a

50.1 percent majority. High-tech leaders Microsoft and Intel are currently learning

that yesterday’s Gallup-Poll heroes can become today’s pariahs, just as subject to

unfair government action as the tobacco companies.

The Constitution also allows individuals to own their own thoughts—that is, their

intellectual property—in the form of our patent system. And the Fourth Amendment

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of the Constitution also defines the right to own real property without the fear of

unwarranted search or confiscation: ‘‘The right of the people to be secure in their

persons, houses, papers, and effects, against unreasonable searches and seizures,

shall not be violated.’’

With the right to own real and intellectual property comes the right to freely trade property with others. That’s the basic mechanism of capitalism: free trade between consenting parties. I think most Americans embrace these basic freedoms. Our government talks that talk, but as we know, they certainly do not walk that walk. Consider the so-called ‘‘living wage’’ measure just adopted by the city of San Jose. One advocate of the new $10.75-per-hour mandated wage said that ‘‘we should find

it in our hearts’’ to pass the measure. Although he did find compassion in his heart,

unfortunately, he had to reach into someone else’s pocket to pay for his compassion.

That’s what is wrong with the San Jose and all other minimum wage laws: They

strip away the basic right of consenting parties to freely trade their goods and services in an uncoerced marketplace. Minimum-wage laws are not about compassion,

they are about politics—politicians currying favor with one block of voters by turning the government into a collective bargaining agency with powers well beyond

those of any union.

Often, capitalists defend free markets with the wrong reasons—on economic rather than moral terms. The president of the San Jose Chamber of Commerce argued

against the new ‘‘living wage’’ law because it will cause economic harm. That may

be true, but most in harm’s way will be the poor, many of whom will face the prospect of being fired from their jobs under the new law because they cannot provide

the value to warrant their new non-market salary. But economic harm is not why

minimum-wage laws are wrong. Minimum wage laws are wrong because they

immorally strip away our basic freedom to trade our services and property freely.

It is also true that lost freedom causes economic harm, as I will demonstrate later.

Minimum-wage laws are one example of entitlement rights. Other examples include a government guarantee to a given wage, health care, or a job. Although we

all want a world with good wages, universal health care, and low unemployment,

we must realize that these goals are not ‘‘rights’’ at all in the sense of our Constitutional rights; they are nothing more than a government demand that Americans surrender their property and wages to achieve government-mandated objectives. If we

believe in the basic protective rights outlined in the Constitution, we cannot consistently believe in any entitlement ‘‘right’’ that negates those basic rights.

AMERICA, THE FIRST FREE NATION

America was founded on principles unique and profoundly different from those of

its predecessors. Our Constitution defined a government that was for the first time

architected from the bottom-up (the people owned a government that was created

to serve them) rather than from the top-down (the king-dictator, tribe leader, politburo—owns you and your property). One might be tempted to say that the European

monarchies were on the path of providing rights like ours, but, even under the assumption of similar rights, there was a profound philosophical difference. For example, British rights were granted in documents like the Magna Carta, which granted

some rights from an otherwise top-down government. The American mind-set was,

‘‘I am the king, I own you and your property—even your wife on the first night—

but, being a good king, I will grant you the following rights.’’ In our bottom-up government, the first 10 amendments are protective rights, covering most daily activities—speaking, praying, owning things, defending yourself—over which government

control was explicitly forbidden. The mind-set was totally different, ‘‘We are the people; we own the government—and it will not be allowed to interfere with us in the

following ways.’’

Furthermore, the Bill of Rights finishes with the 10th Amendment, which imposes

a limit on government: ‘‘The powers not delegated to the United States by the Constitution * * * are reserved to the states respectively, or to the people.’’ In other

words, the government was specifically forbidden from meddling in an area where

no powers were expressly granted.

I wonder what the authors of the Bill of Rights would say about the Federal Government’s current micromanagement of our daily lives, like the case of the meatpacking plant in Cincinnati, Ohio, that was penalized in 1 week by the Food and

Drug Administration for unsanitary plant conditions, and by OSHA the next for unsafe working conditions caused by frequently washed wet floors?

In addition to the personal and economic freedoms outlined in the Bill of Rights,

our Constitution did not allow a Federal tax to be imposed on individuals; no revenue stream was to be created to feed a potential monster. Americans paid no FedVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00251 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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eral taxes until 1913, when we mistakenly passed the 16th Amendment to allow the

Federal income tax. The passing of that amendment set the tone of duplicity common in tax legislation today. The 16th Amendment was passed with a promise that

there would be a top-bracket tax of only 7 percent levied only on the richest 1 percent of Americans. The promise lasted 3 years. By 1918, the average American was

taxed, and the top-bracket rate reached 77 percent. Since no one would ever really

pay a 77 percent income tax, we instituted some very destructive systems: complex

tax laws to aid in tax dodging, Congressional micromanagement of the economy

using tax breaks, and the practice of giving political contributions in return for tax

breaks and subsidies.

The corporation was an important part of our economic freedom, even in colonial

times. Corporations provide the ability for people to work together with joint liability, rather than individual liability. That means if the company we work for becomes

liable to another company or individual, our personal property cannot be confiscated, only that of our company. One reason Proposition 211 was so abhorrent to

Silicon Valley is that it made it illegal for the directors of a company to have the

same individual liability protection enjoyed by all other company employees. Without corporations, individuals would not organize to perform tasks greater than individuals can achieve alone. America did not invent corporations, but we embraced

them. By 1800, there were more corporations in America than in all of the great

countries of Europe combined.

FREEDOM CREATES PROSPERITY

Ayn Rand once asked the rhetorical question, ‘‘Where did the extra come from?’’

She was referring to the wealth created by capitalism. She noted that after capitalism’s invention, wealth creation reached the rate of 300 percent per century, while

prior to capitalism, the world had achieved a rate of only 3 percent per century. I

decided to quantify more carefully Rand’s back-of-the-envelope look at economic

prosperity. My most accurate estimate for wealth creation since 1776 is 458 percent

per century.

Figure 1. This graph of Gross Domestic Product (GDP) per capita vs. year shows

that Americans in 1776 produced $919 per person per year in 1996 dollars, according to a 1994 Stanford economic study done by Passell and Atack. By 1869, the Department of Commerce reported its first results at $3,124 per person per year. Since

1869, yearly data shows an increase to $28,540 in 1996. The growth rate of GDP

per capita from 1776 to 1996—which is nearly identical to the growth rate of the

average wage—is thus best estimated at 458 percent per century.

Rand was right—something big did happen around 1776—and the common man

became much more prosperous, much faster, than ever before in history.

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A more contemporary look at the relationship between freedom and prosperity is

produced on a yearly basis by Canada’s Fraser Institute, whose Economic Freedom

Index ranks countries according to complex measures including:

• The size of government as a percent of the economy.

• Government investment relative to the private sector.

• The use of price controls.

• The top marginal tax rate.

• The right of citizens to own foreign currency.

• The right of citizens to hold foreign bank accounts.

• The protection of property rights.

• The freedom to trade with foreigners.

• Taxes on international trade.

• Private vs. public bank ownership.

• The use of interest rate controls.

• The use of conscripts to obtain military personnel.

It is interesting to note that the military draft is considered in an economic context, separate from its impact on human rights. However, if you think back to the

basic rights of owning yourself and of trading your services to others at a mutually

agreed-upon price, there is a big difference between forcing people to join the military under the threat of jail and obtaining a voluntary agreement with people to

serve in the military for compensation. I doubt that the Vietnam War would have

happened if Americans had to pay for it at free-market prices.

The factors in the Fraser index are weighted and condensed into a single scale

that ranges from zero to 10, the best score. All of the world’s prosperous, large

economies—the U.S., the U.K., Canada, Japan, Germany, and France—have freedom indices in the top 20 percent of the index. Conversely, Fraser’s bottom-20 percent is populated exclusively by economic train wrecks.

Figure 2. A list of the world’s countries, ranked by economic freedom on a scale

of 1-10. The United States ranks No. 3 in economic freedom.

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Figure 3. The correlation between national GDP per capita and freedom shows

that freer countries are richer countries.

Comparing the five quintiles of the Fraser Economic Freedom Index shows that

countries in the top 20 percent of the index have a per capita income which is more

than 10 times that of countries in the bottom 20 percent.

Figure 4. The growth rate of real GDP per capita increases as economic freedom

increases.

In addition to earning a higher yearly income, people in freer countries also see

their income growing at a rate faster than that of people in countries with less freedom. In the least-free countries, per capita income is actually shrinking. The old

adage that the ‘‘rich get richer, and the poor get poorer’’ is a fact. The rich get richer

not because of some unfair advantage, but because they demand freedom. Again, we

should remember our priorities: we’re free because that is morally right—and we’re

prosperous because we’re free.

SILICON VALLEY, BASIC AMERICAN VALUES AT WORK

The free market in Silicon Valley is not well ordered or even predictable. People

are free to quit, to start up their own company, and they often do. More often than

not, start-ups end in failure: three out of four don’t make it. That tolerance for failure is a very important factor that differentiates the Silicon Valley economy. When

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a start-up company fails in Silicon Valley, no one wails about the unfairness of foreign competition or the need for government intervention. We simply say something

like, ‘‘Did you hear that Schlock Tech cratered?’’ And then we get on with making

sure we don’t suffer the same fate. Failure is OK in Silicon Valley, because we truly

believe that people are the key asset of any company, and that the newly defeated

will be quickly re-employed to try again. When one of our competitors had a large

layoff a few months ago, our HR department hired an airplane to fly over its headquarters, hauling a banner with our name and web site address. While the ‘‘right

to fail’’ is a key attribute in a truly capitalistic economy, it is alien to the securityseeking ‘‘old economy.’’ When Chrysler got in trouble, it successfully pleaded for a

government bailout ‘‘to save jobs.’’ When Intel got in such deep trouble in 1985-1986

that it laid off one-third of its work force, it never asked for a bailout, and there

was no surge in unemployment. The rest of Silicon Valley simply hired the windfall

of exceptional talent.

When a Silicon Valley company can no longer afford to support its employees and

shareholders, it is natural and right that the process Schumpeter described as ‘‘creative destruction’’ be allowed to move employees from low productivity jobs in a

troubled company to higher productivity jobs elsewhere. It is not only wrong to coerce people into supporting a failing company, it’s also economically disastrous for

our government to save old, low-productivity jobs just because that company has developed a skillful lobbying department.

The basic right of individuals to own their ideas takes on particular importance

in Silicon Valley. Most ventures are funded specifically because of their intellectual

property. Cypress’s original intellectual property consisted of a way to make transistors faster than those of our competitors and a business plan to bring that technical

capability to the market. Our 15-page business plan—and the six founders to pull

it off—sold to a consortium of six venture firms for $3.5 million. Today Cypress’s

market capitalization has grown to approximately $1 billion—that’s a typical, even

modest, story of wealth creation in Silicon Valley.

Silicon Valley is an economic meritocracy where people know that salary is not

the path to prosperity. They know that ‘‘owning a piece of the rock’’—and then making the rock worth a lot of money—is the only way to prosper. Here, the greatest

wealth goes to those who create the greatest value. Intel became rich because it

sells 80 million computer chips a year for about $200 each, a great value because

each of those computer chips has about 50,000 times the power of a 1950’s-vintage

mainframe computer that cost $5 million.

Silicon Valley knows that the old adage ‘‘money makes money’’ is false. We know

that people make money, and money makes money only when it’s invested in the

right people. That’s why Silicon Valley considers people to be an asset, not a liability, the way government views them. That’s why when we see an immigrant we do

not see a potential welfare case but an intellect with the potential to help one of

our companies. The chairman of our board of directors and four of Cypress’s ten executive vice presidents are immigrants.

Silicon Valley is a successful and dynamic example of the basic American values

outlined earlier at work: private property, intellectual property ownership, and free

markets. Just as Americans are better off than people in other countries because

our economy is freer, so the people of Silicon Valley are better off than the average

American, because the Silicon Valley economy is even more free.

I view Silicon Valley as a place of ‘‘free minds and free markets,’’ to use the trademark phrase of the Reason Foundation. Capitalism is not just an economic system

here, it is a way of life. And, to me, it is a natural way of life. I always remember

a bumper sticker that read, ‘‘Capitalism: What people do when they’re left alone.’’

Capitalism has made the whole Valley rich, not just its CEOs. The 4.2 million factory workers employed by the high-tech industry earn almost twice the yearly wage

of workers in other industries. And—as I will illustrate in a poignant example—our

markets have enabled us to become strategically important to America, as we have

invented or commercialized revolutionary innovations such as the silicon chip, the

computer, genetic engineering, and the Internet.

I don’t want more government in Silicon Valley. Government can do only two

things here: take our money, limiting our economic resources, or pass laws, limiting

our other freedoms.

The question then arises: Why does Silicon Valley appear to be ‘‘going political’’?

Why do we see some of our CEOs actively embrace Washington? The

counterintuitive answer is that many businessmen are not capitalists, as I have defined that term. Indeed, in many corporations, there are better capitalists in the

stockroom than in the boardroom.

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MANY CEOS ARE NOT CAPITALISTS

I used to naively assume that a CEO, by the nature of his or her job, was a free- market capitalist. That view became problematical when I noted that some CEOs

did very non-capitalistic things, like lobbying for corporate welfare. I wondered, was

there some sort of ‘‘new capitalism,’’ embodying concepts like ‘‘government-industry

partnerships,’’ that transcended my traditionalist version? The Cato essay, ‘‘The

Paradox of the Statist Businessman,’’ by Theodore J. Forstmann, addresses this apparent contradiction.

Forstmann points out that just as the basic values of most ministers are under- mined by the TV evangelist, Jimmy Swaggart, so are the values of capitalist CEOs

undermined by what Forstmann calls the statist CEO, those CEOs who compete

using the power of the state.

The prototype capitalist CEO lives right here in Silicon Valley: He or she is an

entrepreneur with a position earned on merit, often the head of a start-up company

that has created wealth not only for the CEO but also broadly for employees and

shareholders.

Let’s contrast a hypothetical Silicon Valley capitalist businesswoman with a hypothetical statist businessman. To visualize the statist businessman, think about the

behemoth company you dislike most—a company that is arrogant, treats its customers poorly, has lost market share, is always ‘‘downsizing,’’ and fights a protracted battle with hostile, unionized employees. Its CEO is almost undoubtedly a

statist businessman.

While the entrepreneur earned or created her position, the statist businessman

achieved his position by climbing the corporate ladder, much the same way a politician climbs the political ladder—by currying favor with the right people; by not

stepping on the wrong toes; and by building a power base. And like the politician

who has clawed his way to the top, holding power is the statist businessman’s top

priority, even above the interests of his company. Meanwhile, the entrepreneurial

businesswoman has no time for corporate power struggles, she has to concentrate

on the tumultuous world of Silicon Valley, where a new start-up or well-staffed big

company might take a devastating toll on the competition in only a few quarters.

The statist businessman draws a huge salary and bonus, as negotiated by his

agents. His perks—corporate jets, limos, lavish expense-account dinners—are the reward for climbing the ladder. Those of you who have traveled here for this meeting

will find out that there are no great, super-expensive restaurants in Silicon Valley

and that night life here is characterized by freeways jammed at 7 p.m., when we

leave work. The corporate jet is a Silicon Valley joke. Gil Amelio’s short tenures as

CEO of National Semiconductor and then Apple Computer were punctuated by derisive reports on how he insisted that each company pay for his private airplane.

Once, as I flew in a middle seat in coach class into Beaufort, South Carolina, to

speak to a Fortune 500 conference, I counted 52 corporate jets that flew in the CEO

for golf—and a little conferencing.

The entrepreneurial CEO keeps her salary and bonus very modest by Fortune 500

standards. That is not to say Silicon Valley entrepreneurs cannot get very rich:

Intel’s founders have earned hundreds of millions of dollars in capital gains. It is

easy to make a hundred million dollars in Silicon Valley—all you have to do is own

1 percent of your company and then spend 20 years making that company worth

$100 billion. Intel’s current $160-billion market capitalization was created from

nothing. Intel’s employees and shareholders benefited with over $99 of capital gain

for every $1 collected by its founders.

The statist businessman wins using the state; that is, government. His large and

effective lobbying organization is skilled at reducing taxes on his company, increasing the taxes on competing import products, creating quotas to block the imports

he cannot tax away, and lobbying for pork—those ‘‘government-industry partnerships’’ that allow him to continue on in businesses that would not otherwise be economically justified. Archer Daniels Midland Corporation’s chairman, Dwayne

Andreas, is one of the most effective statist CEOs, dubbed the ‘‘prince of political

influence’’ by The Wall Street Journal. About half of ADM’s agricultural products

are subsidized or protected by the Federal Government. The company rakes in $400

million per year from the government, gives lavishly to both major parties, and advertises heavily on Sunday morning TV political talk shows. ADM gets my vote for

the most unreasonable subsidy: a tax break on each gallon of corn-ethanol production that exceeds the production cost of the gallon of gasoline it replaces.

While the statist CEO has a well-staffed Washington office and government action

agenda, most Silicon Valley companies do not have any presence in Washington at

all. Even large Silicon Valley companies, such as Intel, have only a modest presence

in Washington. And even then, Intel’s six full-time lobbyists do only defensive

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work—to protect the company from inappropriate, top-down government mandates—rather than lobbying for corporate welfare. The differences between the capitalist entrepreneur and the statist businessman

could not be greater: It is the difference between free market capitalism and the collectivism inherent when government distorts free market action. The statist busi- nessman is no friend of Silicon Valley. He could not be more different from Silicon

Valley leaders, despite the fact that his title may be ‘‘CEO.’’

COLLECTIVISM, ENEMY OF CAPITALISM

There are many forms of collectivism, some are mislabeled as ‘‘capitalism.’’ The former Soviet Union is a straightforward example: collectivism took the form of socialism, an unmitigated economic disaster. However, consider the Japanese

keiretsus and Korean chaebols. They’re labeled ‘‘crony capitalism’’ by the press but

are really nothing more than mutations of collectivism.

The freedom of Americans to invest their money in a diverse, international money

market contributes to our high score on the Fraser Economic Freedom Index. The

Japanese money market is not free. Japanese people cannot choose among 500 different mutual funds. Free-market competition for Japanese investment by American

financial institutions is banned by the cronies that run crony capitalism.

With limited investment choices, the Japanese put their money into post office accounts, which currently pay 0.25 percent interest—yes, you heard me correctly. Of

course, any American financial institution would be overjoyed to give the Japanese

people 2.5 percent interest, 10 times the going rate, but that’s not allowed. Having

used the government to block free-market choice for savings, the keiretsus then exploit their ‘‘government-industry partnerships’’ to use the cheap money as they

want, usually as below-market loans to subsidize manufacturing companies.

Although the men who run the keiretsus are much more competent than those

who ran the Soviet Politburo, no elite power structure can make decisions as well

as the free marketplace. The keiretsus looked unstoppable in the ’80’s, when they

effectively attacked our semiconductor industry. But the strategy of the Japanese

keiretsus and Korean chaebols—to use nearly free money to gain market share

without regard to profitability—has no more economic integrity than a Ponzi

scheme, it just takes longer to collapse.

Meanwhile in Silicon Valley, American investors, represented by their tough and

aggressive mutual fund managers, demanded fair returns on their money, forcing

our companies into a pay-as-you-go mode. With 6 percent money, our industry had

a tough time competing against Japanese competitors with 0.25 percent money, but

the free market capitalism of Silicon Valley prevailed over the collectivism of Japan.

After a brief period of market-share leadership, the Japanese semiconductor industry has collapsed far into second place with a 32.5 percent market share, compared

with America’s 49.2 percent, according to semiconductor research organization

Dataquest.

Clyde Prestowicz declared the demise of the American semiconductor industry in

his naive book, ‘‘Trading Places,’’ a work that became the mantra for every collectivist in Washington who wanted more control of Silicon Valley. The Japanese semiconductor scare produced Silicon Valley’s only noncapitalist aberration, the successful lobbying effort to gain $1 billion in corporate welfare to support Sematech, a

semiconductor industry consortium. Fortunately, our leaders woke up quickly and

dumped the subsidy with hundreds of millions of dollars still available. The current

charter of our Semiconductor Industry Association now calls for ‘‘free and open markets,’’ and the SIA board of directors is on record saying that it will not lobby for

government subsidies. What Washington lobbying group do you know that stands

for free and open markets with no subsidies?

In 1997, I testified before Congress to support the elimination of the Department

of Commerce, a primary delivery vehicle for corporate pork. By circulating a statement denouncing corporate welfare only 48 hours before my departure, I was able

to get signatures of 79 Silicon Valley CEOs, who agreed to swear off corporate pork,

even if it meant that their companies lost government funding. Do you think I could

convince Archer Daniels Midland’s chairman to sign that document? I even tested

one of my icons, Jack Welsh, the CEO of General Electric, a big recipient of corporate welfare. Jack said ‘‘no’’ via a letter written in bafflegab by one of his ‘‘government relations’’ people.

Americans may live in the most economically free major world economy, but capitalism vs. collectivism is not a black-white dichotomy; it has a gray scale. Currently, our state, local, and Federal Governments control about 40 percent of our

gross domestic product—that is 40 percent of the combined output of every American.

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Figure 5. Prior to the enactment of the Federal income tax in 1916, only 10 percent of America’s then-small GDP was required to run the government. During periods of war, the amount spiked up, but later returned close to prior levels. There are

two noticeable periods of American economic socialization: in the 1930’s, when President Roosevelt took a second 10 percent of America’s output for the Great Depression, and in the post-World War II period, when America and other democracies

began a process of economic socialization. President Reagan mitigated that trend in

the 80’s, but he did not reverse it.

Although you may think that 40 percent of GDP is an excessive cost for government, most of the socialized democracies of Europe spend more than 40 percent—

and have the stagnant economies to show for it.

One easy way to pinpoint the absurdity of the American tax bite is to question

the 39.6 percent tax rates levied on Silicon Valley CEO’s and the 36 percent rate

levied on their companies. The standard argument for higher taxes is that they fund

a greater good, like curing cancer. Of course, it is not at all clear that cancer could

not be cured more quickly and cheaply with private funds, or that the ‘‘greater good’’

espoused is always as noble as fighting cancer. My favorite line item in this year’s

omnibus budget—pork-barrel legislation of cosmic proportion—is a $500,000 line

item for horse-manure management. I am not joking with you, it is really in there.

And while you are laughing, I’ll add that there is another $500,000 line item for

pig-manure management. Two Congressmen, two states, two campaign promises

kept—it is the American government way.

Let me attack the tax-for-greater-good argument as it applies to us in Silicon Valley. Consider the effect when the Clinton-Gore administration raised the tax on Silicon Valley companies from 35 percent to 36 percent. Vice-President Gore basks in

the technology image that a few Silicon Valley leaders have given him. But that

extra 1 percent tax Al Gore levied on Silicon Valley takes away billions of dollars

from Silicon Valley—over $400 million a year from Intel alone. Consider that corporate tax on Intel a choice: either Intel invests its own profits, or surrenders those

profits as taxes to be invested by the government. Intel’s $400 million will be invested; raising or lowering taxes just decides who invests it. From that perspective,

we have the preposterous claim that high-tech VP Al Gore can do better by investing the $400 million than could Intel’s CEO, Craig Barrett. I state the obvious:

Every American would be better off if Craig Barrett invested the $400 million.

An equally absurd situation arises when the government taxes Silicon Valley

CEOs at a rate of 39.6 percent. By raising the tax on top-bracket individuals from

36 percent to 39.6 percent, the Clinton-Gore administration will have extracted in

the neighborhood of $1 million in extra taxes from the average Silicon Valley CEO

by the time their administration ends in 2000. In my case, I have paid those extra

taxes by selling off some of my investments, most of which are made in electronics,

biotech, and Internet-related companies right here in the Valley. Many of those companies are funded by venture capitalists with whom I work. I often evaluate compaVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00258 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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nies, people, and business plans for venture capitalists. Sometimes I even join the

boards of start-up companies to help them succeed. Who would best invest the last

$1 million that I earned and gave to the government, me or high-tech VP Al Gore? Silicon Valley is an island of capitalism in a sea of collectivism. We are sur- rounded by big governments, big unions, big media, and big, statist corporations. We

are an island of meritocracy in a sea of power struggles. In Silicon Valley, the

phrase ‘‘what you know is more important than who you know’’ is a fact of life, not

just an unrealized ideal.

DO NOT NORMALIZE SILICON VALLEY’S RELATIONSHIP WITH WASHINGTON

By the very way it works, Washington undermines the free minds and free mar- kets that are the cornerstone of Silicon Valley’s success. Republicans claim their

party stands for free markets, but they are the enemy of individual freedom, desiring to control by Federal law what you watch and what your reproductive habits

are. The Democrats claim that their party stands for individual freedom, but they

have always been the party of the free lunch, the party willing to tax and spend

because they arrogantly believe they have a better idea of what to do with your

money than you do.

The metric that differentiates Silicon Valley from Washington does not fall along

conventional political lines: Republican vs. Democrat, conservative vs. liberal, right

vs. left. The key issue separating Silicon Valley from Washington is freedom vs. control. That is the metric that contrasts individual freedom to speak vs. tap-ready telephones, local reinvestment of profit vs. taxes to Washington, encryption to protect

privacy vs. government eavesdropping, success in the marketplace vs. government

subsidies, and a free Internet vs. a regulated Internet.

Once you understand that the left-right or liberal-conservative dimension is not

the dimension that measures the gap between Silicon Valley and Washington, you

will begin to see that the Washington politicians who argue vehemently about their

supposedly profound differences are really cut from the same cloth. Think about the

ultimate left- and right-wing figures in history. Perhaps the ultimate left-winger is

Joseph Stalin and the ultimate right-winger is Adolph Hitler. Were these men really

that different? Or does the left-right spectrum actually turn in on itself, putting Hitler and Stalin next to each other? I believe Hitler and Stalin were nearly the same,

with the only thing separating them being the list of things for which they would

kill you. In these less totalitarian times, we might view famous current left- and

right-wingers, Teddy Kennedy and Newt Gingrich, as being nearly the same, separated only by the list of things for which they would put you in jail or take your

money.

The political parties are not even delivering their half-promises of freedom. The

Republicans are not delivering on economic freedom, and the Democrats are not delivering on individual freedom. Newt Gingrich, the self-proclaimed champion of

small government, just managed the passage of a bill to purchase hundreds of millions of dollars worth of C130 cargo aircraft that the Pentagon stated publicly it did

not want. The Pentagon has complained that it receives unneeded C130’s every

year, which it quickly passes along to National Reserve units. Quite by coincidence,

those C130’s are made in Georgia, Gingrich’s home state. And Kennedy, the champion of personal freedom who protects individuals from big corporations, just authored a healthcare bill, which for no discernible reason whatsoever allows the

American government to confiscate your assets—yes that is right, to violate the

Constitution and take away your property—if you obtain foreign citizenship.

Who goes to Washington? Those who have chosen governing—that is, ruling—for

a profession. Washington is in the business of restricting freedom, and, therefore,

in the business of undermining the foundation of Silicon Valley.

On the economic side, what has Washington got to offer Silicon Valley? Consider

the pork-barrel process by which Washington works: it extracts 20 percent of the

yearly output of Americans as Federal taxes, consumes much of it to run a grotesquely inefficient organization, and then allows us to fight to get back the rest of

what we first earned in the form of grants and subsidies. Silicon Valley is not very

good at the pork-barrel game. Statist companies have refined their lobbying skills

for decades. We cannot and do not want to win at their game. Famous bank robber

Willie Sutton, when asked why he robbed banks, said, ‘‘Because that’s where the

money is.’’ Today, Silicon Valley is where the money is. Anyone who believes that

money will flow uphill from Washington to Silicon Valley is very naive.

Simon Cameron, three-time U.S. Senator from Pennsylvania from 1847-1877,

said, ‘‘An honest politician is one who, when he is bought, stays bought.’’ By that

standard, President Clinton is not a good politician. One of the few political issues

of interest to Silicon Valley is shareholder litigation reform, an effort to protect our

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businesses from continuous barrages by the shareholder lawsuit industry. Over half

the member companies of the American Electronics Association have been sued for

shareholder fraud by a small group of law firms specializing in this lucrative endeavor. We must believe that either half of AEA member companies are crooked,

or that we have a group of lawyers running amuck. In 1995, Silicon Valley lobbied

for the Securities Litigation Reform Act, the SLRA, an act that put a higher burden

of proof on plaintiffs in shareholder lawsuits before they are allowed to initiate the

extraordinarily expensive discovery phase of a trial. My company was sued in 1992 when our share price dropped after we reported $0.15 earnings per share for the quarter compared with analysts’ expectations of

$0.20. The ‘‘fraud’’ claim was ‘‘justified’’ by using several of my quotes (for example,

in 1991, after seven consecutive years of growth, I said we expected to grow again

in 1992) and by declaring that earnings below expectations must therefore constitute fraud. This ridiculous complaint, created in hours by a legal lawsuit factory,

launched us into a 5-year, $5-million proceeding, before a Federal judge found the

case had no merit and threw it out of court.

The 1995 SLRA was carefully crafted by the Senate to balance the opposing objec- tives of limiting frivolous lawsuits while preserving the right to sue for those truly

defrauded. Even though Clinton wooed Silicon Valley by telling us he supported litigation reform, he had also taken political contributions from plaintiff lawyers. He

chose them over us and vetoed our litigation reform bill. Fortunately for us, the

SLRA was so well-crafted that a Democratic Congress overrode Clinton’s veto.

Shortly after that fiasco, Clinton returned to Silicon Valley for some more PR and

to raise money at a prominent CEO’s house at a $50,000 per plate dinner. One dinner topic was litigation reform. Clinton then accepted several hundred thousand dollars to perform a back-flip. He turned on the securities lawyers and denounced

Proposition 211, which would have effectively overridden the newly enacted SLRA

in California.

Politicians know that playing both sides of an issue often brings in money from each side. Clinton repeated the performance this year when he flew to Silicon Valley

for one fund raiser, and then flew on to San Diego the next day for a fund raiser

hosted by Silicon Valley’s legal nemesis, Bill Lerach. Siding with the Clinton administration may give Silicon Valley a temporary ad- vantage on some issues, but in the long haul, this administration undermines our

basic values. The Democrats have no monopoly on undermining our values. Republican Bob Dole was the patron saint of Archer Daniels Midland’s billions of dollars

in taxpayer subsidies. Dole flew on ADM’s plane numerous times at submarket

rates and purchased a Florida condo from ADM, also at a sub-market price.

Pork-barrel politics is not only wrong, it is also highly inefficient. Often, the grants that come back to Silicon Valley are politicized into a state of worthlessness.

For example, 4 years ago, Electronic News published a report about making gallium

arsenide—a semiconductor several times faster than silicon—aboard the space shuttle. Despite my own graduate-level training in transistor physics, and the fact that

I was a member of the board of directors of Vitesse Semiconductor, the largest commercial manufacturer of gallium arsenide chips, I could see no economic benefit

whatsoever in the space chips. Neither did Dr. Lou Tomasetta, Vitesse’s CEO, who

called the space chips ‘‘a solution looking for a problem.’’ In this case, an ‘‘industrygovernment partnership’’ launched several $150-million shuttle flights without consulting with the industry partners, who would have predicted correctly that the

‘‘chips in space’’ program was useless. This is a classic and apparently contagious

example of collectivist science: When I visited Zelenograd, Russia’s version of Silicon

Valley, near Moscow, I found that the Politburo had funded the same project.

Stacked neatly in the corner of a museum were space-grown crystals not only of

gallium arsenide, but also indium antimonide and lithium niobate.

On the personal side of freedom, Washington is in the control business, but faces

an obstacle described by Ayn Rand, in ‘‘Atlas Shrugged,’’ ‘‘There’s no way to rule

innocent men. The only power government has is to crack down on criminals. When

there aren’t enough criminals, one makes them: one declares so many things to be

a crime that it becomes impossible for men to live without breaking laws.’’

Many of you who traveled here may not know that you broke a Federal law. This

year, under a new law, it is illegal to carry prescription drugs not sealed in their

original container. So, if you use a pillbox to carry a prescription drug along with

your aspirin and vitamins, you broke a Federal law.

In addition to the asset confiscation penalty on foreign citizenship I described earlier, Sen. Kennedy authored a law with 100 pages of ‘‘healthcare crimes,’’ which also

passed this year. These laws also turned the Federal Governments new weapon of

choice—asset confiscation—on doctors that commit such crimes. Kennedy is ready

to guarantee our so-called right to healthcare—by violating Americans’ Fourth

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Amendment right to be secure in their persons, houses, papers, and effects against

unreasonable searches and seizures.’’ Why should Silicon Valley engage with a culture that attacks freedom on so many fronts?

As ‘‘healthcare crime’’ laws are to medicine, so are the extraordinarily ambiguous

and illogical antitrust laws to business. Rand ridiculed the contradiction of ‘‘free

markets, enforced by law.’’ The antitrust laws, a modern invention of the so-called

trustbusting era—in effect make it illegal for a company to be conspicuously successful. The ambiguity of the laws grants the government huge powers to define on an

ad hoc basis what is legal and illegal, thus giving it control over the company’s operations. Often the government uses another oxymoronic device, the ‘‘consent decree,’’

to enforce its will on businesses seeking to avoid protracted litigation against a foe

with unlimited resources.

Illogic comes from illogical laws. Consider the 1945 antitrust case of the United

States vs. Alcoa Aluminum. Federal Judge Learned Hand was Alcoa’s judge and

jury in that case, as is typical in antitrust cases. He broke Alcoa apart with a judgement that contained this rationalization:

It was not inevitable that [Alcoa] should always anticipate increases in

the demand for ingot and be prepared to supply them * * * before others

entered the field. It insists that it never excluded competitors; but we can

think of no more effective exclusion than progressively to embrace each new

opportunity as it opened.

That’s right, Alcoa was convicted and broken apart for committing the crime of

building an efficient company that gained market share!

Some high technology companies are now conspicuously successful. And, true to

form, Washington’s attack on Intel and Microsoft already has begun. The dreadful

vagaries of the antitrust laws are most evident in the ongoing Microsoft trial. A single judge listens to the complaints of a few resentful competitors, reads a colorful

memo from a Microsoft executive talking about ‘‘choking the air’’ out of some competitor, and then has the power to break apart the company founded and built by

others over a decade, perhaps destroying billions of dollars of market capitalization

in the process. A verdict against Microsoft would read as poorly in time as does the

Alcoa verdict now. If convicted, Microsoft would be guilty of this crime: continuously

adding features to its software, while bringing the price per function of its software

to an all-time record low to the benefit of its millions of customers.

The justice department once offered Microsoft a way out: agree to offer browser

software from its competitor, Netscape. I respect Bill Gates for rejecting what might

have been a relatively painless escape and for litigating the issue on principle.

Think about the topics of the last few minutes: pork-barrel politics and laws limiting freedom by creating new classes of criminals. Why would we ever voluntarily

involve ourselves in the Washington morass?

TECHNET, A BAD IDEA

Technet is a new Silicon Valley lobbying organization. Its website shows a cartoon

of a Silicon Valley nerd shaking hands with a Washington bureaucrat. Technet

could be the unofficial embassy that normalizes our relationship with Washington.

That would be a very bad idea.

When I asked my assistant ‘‘who the hell runs that organization,’’ she gave me

a list of its directors, which included two venture capitalists who funded Cypress

in 1983, two investment bankers who brought Cypress public in 1986, a former

member of Cypress’s board of directors, four CEOs of respected Silicon Valley chip

companies, four CEOs of important Cypress customers, and Cypress’s current chairman of the board of directors. At that point, I thought my criticism of Technet might

best be done with diplomacy, but unfortunately, I lack the diplomacy gene.

I opposed Technet prior to its founding. Technet was an extension of the antiProposition 211 initiative. After the victory over 211 there was a leftover contributions kitty, and I was asked to leave in Cypress’s share to fund other political endeavors, like contributing to politicians who support Silicon Valley. My refusal letter

read as follows:

I am really speaking out against that pork-barrel system. Why else would

I lobby against Sematech, a subsidy for my own industry? I also lobbied

against the Department of Commerce—to abolish it—specifically because it

is one primary vehicle of corporate welfare. Given that mindset, you can understand how I would never support a politician like Anna Eshoo [a local

Silicon Valley Democratic congresswoman]. She may agree with us on one

or two technology issues to save her political butt, but she is a liberal-socialist who voted to increase taxes on all American corporations. She is the

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enemy, standing against everything I stand for. It is only an accident of political expediency that causes her ever to be on the same side of a given

issue. Just as I wouldn’t give money to PBS television, to be used to batter

free markets and corporations, I don’t give money to politicians to buy their

vote on any given issue.

I guess you could say that I was adamantly opposed to Technet, even before it got started. At least Technet is honest in its support of the pay-for-play Washington system. Here is an excerpt from a typical Technet email:

I would like to call your attention to two congressman who have recently visited Silicon Valley and who have played a key role in our * * * success.

Rep. Billy Tauzin * * * and Rep. Mike Oxley * * * We’ll be following up

with phone calls and emails to ask for your financial support for these two

friends. We hope you will consider making a $1,000 donation to each of

them.

It seems that Technet agrees with Will Rogers’ observation that ‘‘America has the

best Congress that money can buy.’’

In fairness to Technet, I should mention that its two current initiatives are K12 education reform, and the Unified National Standards Act, yet another law designed to eliminate frivolous shareholder lawsuits, one necessitated by the fact that

securities lawyers now sue companies in both state and Federal courts, under two

sets of rules, making securities lawsuits even more painful and expensive.

Since Technet is not about to close up shop based on my criticism, I hope it will

at least follow this advice:

• Never lobby for pork-barrel measures;

• Never move headquarters to Washington (the demise of other lobbying organizations);

• Never lobby for a narrow issue like beating Microsoft at the expense of a fundamental issue like government control over free markets.

JOHN DOERR, VENTURE CAPITALIST

John Doerr was a leader in the victory over Proposition 211, and is currently a

Technet leader. The press has singled him out as the icon for the political greening

of Silicon Valley. John has supported the current administration, and there is talk

in the Valley about ‘‘Gore and Doerr in 2004.’’ In addition, John is a general partner

at Kleiner, Perkins, Caufield & Byers, one of the firms that funded Cypress. He also

served on Cypress’s board of directors for 10 years. And he is a friend of mine.

Once I stated in a magazine interview that John Doerr would be better off if he

stayed home and did his job as a venture capitalist. John read my remarks and reasonably misinterpreted them as criticism. He shot back in another magazine article

that I was a ‘‘cowboy entrepreneur’’ who needed to think beyond the confines of Silicon Valley. After that, I called John to explain to him in detail what I meant by

my statement. First, I got him to agree with my premise that the biggest success

he could have at Technet would be to get the Unified National Standards litigation

law passed quickly and efficiently. (Today, he would probably also add improving

K-12 education as a big goal.) Once we had established the definition of success for

John Doerr at Technet, I reminded John of the success he had already achieved as

a venture capitalist. What I said to him was a lighterweight version of the following

statement, which I have enhanced by reading through the reports I receive from

Kleiner-Perkins:

John, in addition to starting Cypress, you and your firm also started

eight other chip companies—including big winners like LSI Logic, VLSI

Technology and Xilinx—companies with $4.7 billion a year in revenue and

16,400 employees. By funding such companies as America Online and

Netscape, you commercialized the Internet and then enriched it by funding

companies like Amazon.com that put the bookstore on line. In addition to

that, I am aware of a dozen or more new companies Kleiner-Perkins has

funded that will literally define the future of the Internet. You and your

partners also launched the biotech industry by funding not only Genentech,

but 20 more biotech and healthcare companies that fix vision with lasers,

perform genetic engineering, create skin tissue to repair burns, make

ultralow-dosage X-ray machines, and produce equipment for use in spinal

surgery. One of your companies could literally cure cancer.

And you and your partners, along with the network of Silicon Valley venture capitalists, have funded those amazing companies that have revolutionized our country—for less money than it takes to build a single warship.

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John, who is more valuable to us? John Doerr, the lobbyist who can get

the Unified National Standards Act enacted, or John Doerr, the venture

capitalist who has helped change the world?

John, we can’t afford to send you to Washington.

How could John Doerr respond to that? He said, ‘‘Well, when you put it like that

* * *.’’

John Doerr is a great example of the enhanced value of an individual in a capitalist society. The example also dramatically illustrates the efficiency of free-market

investments, compared with the investments of collectivist organizations. With the

money to buy one warship, the Politburo probably would have bought one more warship, later to be mothballed. Japanese and Korean collectivists probably would have

added another unneeded semiconductor memory plant to acerbate the current chip

glut which is so severe it has devastated the Japanese and Korean economies.

In Silicon Valley, with the same money, John and the network of venture capitalists built an economic battleship that generates wealth from the private property

of ideas traded in a free market.

Washington builds battleships, battleship laws, and battleship bureaucracies.

That’s why we shouldn’t normalize our relationship with it. To do so would be to

choose against capitalism and freedom. When we see the government attacking our

successes, such as Microsoft and Intel, we should stand together to defend that attack on free markets. And when we see the government seizing the assets of tobacco

companies, we should not be quiet because we don’t like tobacco. The obscenity of

Federal and state attorneys general lining up like plaintiffs’ attorneys to confiscate

the assets of a company will surely be repeated. Right now, Washington is already

calling the much-publicized ‘‘Year 2000’’ problem a ‘‘chip problem.’’ I won’t waste

your time on the technological absurdity of that position.

The point is that if we sit back while the government illegally seizes the assets

of the tobacco companies, we may find the same carpetbagging attorneys suing to

gain Silicon Valley’s assets soon after January 1, 2000.

Silicon Valley is an island of capitalism and freedom admired around the world.

We must remember that free minds and free markets are the moral foundation that

have enabled our success. And never allow those freedoms to be diminished for any

reason.

Chairman KASICH. I want to really compliment all three of you

for just outstanding testimony. I have just one or two questions

and then I will recognize Mr. Ryan. Mr. Miller, you make a very

compelling argument. What does the other side say?

Mr. MILLER. The other side will say it is jobs and they can’t compete in the world market. But they say you have subsidized sugar

elsewhere around the world. We have subsidized sugar in France

but we have laws keeping subsidized products from coming into the

United States so that is not a valid argument. Yes, if they have to

compete in the world market you may lose a few jobs but agriculture is a huge net exporter for this country as far as our ability

to compete. We should be able to compete. When you start protecting industries, as we have with sugar, you are making them

less efficient and you are enriching a very small number. So the

argument they will make, we will lose jobs. But I say you are losing jobs from the companies like candy companies and cereal companies. Congressman Don Manzullo, from the Chicago area, says

he has a cough drop company that won’t move the rest of their facilities from England because sugar is too expensive in the United

States. Soft drinks, Coke and Pepsi no longer use sugar in their

drinks in the United States because sugar is too expensive. So we

have cost jobs even though some people with individual sugar

growing districts would argue that. That is the only argument they

can make.

Chairman KASICH. What do you three gentlemen think we can

do to get something accomplished on these fronts? And I know that

you all share each other’s feelings about your specific testimony.

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Why don’t we start with you, Mr. Shadegg. What are we going to

do to—what is it going to take to be successful in your judgment?

Mr. SHADEGG. I think it is extremely difficult to succeed in this

area in this climate because you see just yesterday the Federal

budget apparently is going to sustain an additional windfall and

more revenues and I think some of the pressure that was there

when we first started down this road may well be gone. But I do

think that American politics is driven by fundamental fairness and

I think as my colleague Mr. Miller pointed out, there are always

winners, and Mr. Sununu made the same point. There are always

winners and losers in each of these programs. The sugar subsidy

is a good example of that. The power marketing administrations

are good examples of that where some people are winning and benefiting and others are hurting, and yet I think it is clear that in

each and every example of corporate welfare, if the program were

eliminated and in some cases you have to eliminate it in a careful

and methodical fashion so you minimize the losses and maximize

the benefits of the program, at the end of the day doing away with

these corporate welfare subsidies will benefit all of the taxpayers,

make more dollars available.

So I think it is largely an education effort so that people understand two things, one that the winners really aren’t winning all

that much and second, that it is not justified. I think that is completely—a completely fair description of, for example, the power

marketing administrations, the sugar subsidy, and so many others,

as Mr. Sununu pointed out, where government picks a winner or

loser and typically picks an inefficient winner punishing everybody

else for that agency.

Chairman KASICH. What approach do you have in terms of eliminating the Department of Energy? Where are you at this point?

Mr. SHADEGG. Well, quite frankly, Todd Tiahrt has the lead legislation in this area and has had for the last several congresses. I

think he is doing the right thing. Your colleague Mac Thornberry

is noted as being in the morning paper, the Hill, in trying to work

in some restructuring in those areas where the Department of Energy should continue to remain active, the labs themselves. And

yet, as you see, he is being punished by the Secretary of Energy

for his efforts and there are threats to fire employees inside the department who are cooperating with Max’s efforts.

I think you said the right thing. I think what we have to do with

regard to the Department of Energy is sort out that which needs

to be done and should be done. Clearly we have to have some

weapons labs. Clearly there are some other programs within those

departments which should continue. But there are quite clearly

also many, many, many programs.

Indeed, I would suggest perhaps more than half of the department’s budget which could be flat eliminated without having a loss.

Like any other institution, it has sought to perpetuate itself. With

the end of the Cold War, the demands on the Department of Energy weapons labs have diminished and yet they wanted it to serve

a need so you have seen private industry become much more involved in those labs. It is taking advantage of those labs and we

are wasting millions if not billions of taxpayer dollars. I think we

have to do a very, very aggressive job at looking at what should

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just be gotten rid of completely, done away with, gone, finished.

And I think that we have a window of opportunity to do that now

because of the security breaches which has caused everyone to

focus on what is wrong at the lab.

Chairman KASICH. Mr. Miller, what challenges do you have and

how do we——

Mr. MILLER. Speaking about sugar specifically, during the authorization bill in 1995 we came within five votes of the House. It

came very close. This had good bipartisan support. It was the Miller-Schumer bill. Congressman Schumer is now Senator Schumer

and he is leading the effort over in the Senate side. Now it is the

Miller and Miller bill with George Miller. George Miller and Dan

Miller don’t always vote alike but we agree on this issue. The

broader we can get our coalition to support this the better. It is

going to be a perseverance effort. We have got to stick with it. As

you know a few years ago we used to have a wool mohair program.

We had a honey program. It was just year after year you just keep

hammering away at the program. The American people get tired of

this. There was an article in Readers Digest not long ago about the

sugar program. NBC’s the ‘‘Fleecing of America’’ did a piece about

the sugar program. Time magazine has done an article. The more

the American people get fed up with this program, raise it with

their representatives, Democrat and Republican, the better the

chance we will have to do it.

Now, with the sugar program you can’t just go to the Agriculture

Committee and ask for them to get rid of the program. They are

not going to do it. I testified before them and they are not as

friendly a group as we have here in the room today. But the fact

is it has got to come up for reauthorization. When we reauthorize

programs as discussed earlier by the budget questions, that is the

opportunity we have that we should force the fights on these issues

and we need to build up that coalition and just don’t give up, and

that is the position I am taking.

Chairman KASICH. Is there any dispute about the impact on the

Everglades?

Mr. MILLER. No, there is no dispute. We are going to spend in

the $10 billion range to restore the Everglades but sugar is only

one of the contributing factors. It is not the only cause of it. But

the problem is they are only going to contribute roughly 2 percent

to the total cost of the restoration of the Everglades yet they are

a major contributor of the problem. One of the other irritating

things about this program is that one of the solutions of the Everglades is buying up land to filter the water as it goes through the

Everglades. We are buying the land from the sugar growers and we

are paying an inflated price for the land because of the sugar program, which makes no sense. And so we really got a double hit in

that area.

Chairman KASICH. Mr. Sununu.

Mr. SUNUNU. I think to answer your question about what can be

done, I would begin with enforcing and doing everything we can to

enforce fiscal restraint of these spending caps, the budgetary caps,

because what they have done over the last 4 or 5 years is to force

choices to be made. And as a result, we have seen that in programs

like Advanced Technology Program, there has been a reduction, not

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the elimination of the program, but a reduction in the funding. In

the case of fossil fuel R&D or clean coal R&D, programs that have

been very ineffective, we have seen a reduction in funding.

So the pressure of the budget caps have forced us to make some

choices and in this case good choices by minimizing the amount of

funding that is going to these subsidies and these market distortions. I think budget process reform is part of the answer, focusing

on the needs to ensure that programs are either authorized or they

don’t get funded.

Sunsetting programs was talked about earlier by the first panel

and finally to focus our efforts as you have suggested, Mr. Chairman, the opportunity to create a coalition and to focus on one or

two programs, achieve success in those areas, and then move on in

order to highlight the fact that with a little bit of unity and a little

bit of focus of resources and effort we can be successful in energizing the public, getting them to recognize how much of their

money is being wasted on these programs and then make a difference.

Chairman KASICH. Mr. Ryan is recognized.

Mr. RYAN OF WISCONSIN. I want to thank the Members for coming here today. I am a new Member of Congress and I came with

a little bit of experience here and I witnessed in the 104th Congress tremendous amount of momentum in the direction of eliminating the Department of Commerce and the Department of Energy, and eliminating the sugar subsidy five votes short. The momentum was there and it seemed to be based upon a philosophical

principle that no longer should the government be involved in picking winners and losers in the marketplace but that the taxpayers

through the private free market should do those types of decision

making.

It seems like we have strayed from that goal, strayed from that

vision, strayed from those principles and although the discretionary

budget caps helped put pressure on these things, I wanted to ask

you since you as Members of Congress, Dan, I think you are in

your fourth term, and John, you are in your second—why? What

has been happening? Why have we lost momentum on this point?

Let’s go to the senior one, Representative Miller.

Mr. MILLER. Well, there is a broad coalition of support for these

programs unfortunately. I will stay with sugar since that is what

my specific topic is today. We have a great coalition opposing the

sugar program. We have consumer groups which recognize what a

regressive tax is. We have the environmental community strongly

supporting us on this. We have all the conservative anti-big government groups against this. And anybody that uses sugar is against

it. Now, who’s in on the other side? It is only the small group of

sugar growers. But again, they just team up with other people. I

have to scratch my head how other conservatives justify this program. I was a little baffled when I went through the fight in ’95.

But the frustration now is it will not be up for reauthorization

until 2002.

When we can sunset things and force them up for authorization,

we have a real fight. Trying to do it through the appropriations

process, which is the committee I serve on, is not where the battle

should be. You are not going to get a free standing bill up there.

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We have to gear up for the reauthorization. I think the more we

can force authorizations and allow those fights to take place, we

are going to have some victories. So we are going to have some victories but we are going to have to keep perservering.

Mr. RYAN OF WISCONSIN. If I could add to your point and as a

cosponsor of your bill I think the environmental concerns were important and valid ones but in my district there are jobs concerns.

Nestle’s has a plant in Burlington, Wisconsin which we call Chocolate City, U.S.A. In Burlington, Wisconsin we do Nestle’s Quick,

which is the milk powder you add. We do the Nestle’s crunch bars.

We do the big size, the little bite size. Nestle’s employs about 400

people there in Burlington, Wisconsin. It is a state of the art plant.

They want to expand in this plant but they will not do so because

of the price of sugar. We have a milk system that also is out of

whack and I won’t get into that but Nestle’s wants to employ more

people in Chocolate U.S.A. Because it is a great community to build

a plant in to build more jobs, but because of the price of sugar

these jobs are not going to be created. They will actually be created

in other plants they have overseas. Now, it seems to me that we

are at a critical philosophical juncture. Where are we going to decide that the nucleus of our economy is? Washington and bureaucrats and the Department of Commerce, Energy, and other places

which are going to pick the winners and losers in the marketplace

or are we going to go back with the Constitution and the idea that

the individuals are the nucleus of our economy. That seems to be

where we are right now.

You know, we have asked welfare mothers to go back to work

and earn a paycheck instead of going to the mailbox to get a welfare check. It seems to me that is very fitting to ask big corporations who are getting corporate welfare checks from Washington to

go out and earn a profit and go back to work themselves instead

of coming to Washington for a handout. It seems only logical. I

would like to ask Congressman Sununu a couple of quick questions

about the Department of Commerce.

I believe that was an agency created in 1910 and has evolved so

much over the years. What do you think are other ways that we

can do to pursue the advancement of commerce and do you believe

that the Department of Commerce needs to exist? I know your answer on that one, but has it outlived its use on this and is it a tool

of economic development encouraging economic growth or is it a

barrier toward economic development and economic growth?

Mr. SUNUNU. I think in a lot of respects it is a barrier to economic growth. But let me talk a little bit about what exactly the

dismantling act would entail because as is the case with the Department of Energy, there are components of the Department of

Commerce that really can provide long-term value and that in fact

in some ways ought to be given greater independence. Specifically

the National Weather Service and NOAA. The bill would establish—would consolidate the oceanographic and atmospheric and scientific functions of NOAA within a much more independent National Oceanographic and Atmospheric Administration. It would

bring together the Bureau of Standards, spectrum research, the

National Telecommunications Information Administration and the

Office of Space Commerce, bring all of these within the core funcVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00267 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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tions of NOAA and preserve the functions of the National Weather

Service.

But at the same time it would, one, consolidate all of the duplicative agencies that handle trade functions which include the International Trade Administration, the Bureau of Export Administration, the Office of the United States Trade Representative, and the

Inspector Management within the U.S. Trade Administration,

bring those all together into a single trade agency. It would terminate some of the unnecessary programs that I spoke about earlier,

the agencies of the EDA, the National Telecommunications and Information Administration, and the Technology Administration that

simply have outlived their usefulness if they ever had any usefulness in the first place. And then it would wipe out certain department programs like the Office of Technology Program, the NOAA

Fleet, and the Advanced Technology Program that are counterproductive as you described earlier or even the grant programs

under the National Telecommunications and Information Administration that oftentimes are targeted at specific states. Just to go

down a few programs and it is not necessarily a specific criticism

of what might be produced by the program, but you certainly have

to question whether it is a Federal function at all or whether it belongs in the Department of Commerce when we have a sea grant

oyster disease account, zebra mussel account, the mussel program,

the Charleston, South Carolina special management plan, the

Chesapeake Bay observation buoys. These may or may not be

worthwhile programs but is it really a Federal responsibility? And

in some cases if there is going to be funding and research it ought

to be done through agriculture or through the fish and wildlife in

the Interior bill. There simply is not a need for a stand-alone Department of Commerce that is picking the winners and losers in

our economy.

Mr. RYAN OF WISCONSIN. Could I ask each of you this question.

What are the savings estimates on the different bills you are talking about and what would be the 1-year savings estimates?

Mr. SHADEGG. Let me start. I would like to if I could, comment

briefly on your first question because I think that was a very important question. What is the difference in the dynamic from 1994

when we first came in, and I know you were here then, not in the

same capacity, and now? I think it is a function of the law of diffused interest versus concentrated interests. A reality is that each

of these programs has a concentrated interest which supports it,

which is a very, very small portion of the overall economy. Those

who benefit from the sugar subsidy, those who benefit from the

power marketing administration. Those are concentrated interests.

The interests in favor of the greater good, not wasting the money

on these programs is a diffused interest. On any given program

those who object to it and are being hurt by it are being hurt to

a very, very small degree. Those who are benefiting, for them it is

life and death. I think in 1994 we came here with an overall purpose of looking at the scope of the Federal Government. We were

looking at the big picture and we were willing to focus on those diffused interests and the concentrated interests hadn’t been able to

respond. I think you cite a very good example of where we were

successful. Welfare reform is a good example of where we looked

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at the program. There was a diffused interest in eliminating it, but

there had been enough publicity on the abuses in welfare that that

diffused group of all Americans said look, welfare isn’t working.

That was fundamentally the objection and so we were able to overcome the resistance of the concentrated interests, those they believed to be benefiting from the current system.

As it turns out, we were right. People who were benefiting under

or thought they were benefiting under the old system hadn’t been

benefiting, weren’t benefiting. They are much better off now than

they were then and that has been demonstrated all across the

country. I think then is the message of how we recapture that. I

don’t think without the change in control of the Congress you can

ever have that broad range of power to take on concentrated interests in the interest of the greater good, the larger.

So I think what we have to do is focus, focus as a Congress, focus

as a Federal Government on specific programs, educate the American people on why those specific programs are bad, the sugar industry—subsidy being an example, the power marketing administration being an example. Point out how those are hurting everybody and not working and then we can realize kind of the greater

good. You can empower the diffused interest to overcome the powers of the concentrated interest.

As for your last question, the subsidy of the power marketing administrations is about—I am just talking about SEPA, SWPA, and

WAPA—is about $300 million per year. The revenue estimates

from the sale depending upon whether you do a sale to the highest

bidder, which I think is politically impossible because the concentrated interest of the people that are getting cheap power will

block you or whether you do a voucher privatization like the Czech

Republic, as I mentioned in my testimony, where you allow the

people currently benefiting from subsidized PMA power to get an

economic benefit. I have a friend who worked here in Washington

for a while, an economist, Hoover Institute trained economist, who

in discussing the power market administration said, look, it may

be a subsidy but they stole it fair and square. And what he was

saying was the people benefiting from the PMAs have that right

right now and it’s difficult to take it away from them. That is why

I think it is important to become a genius. The legislation we wrote

says, all right, you are getting it back right now. Let’s reward you.

Let’s let those people getting subsidized public power benefit from

the sale of the PMAs and quite frankly legislation proposes that

they be sold to those same people so they stay in control. We give

them an economic incentive to stay happy with a privatization. It

worked in the Czech Republic. I think it can work here. It can overcome the power of their concentrated resistance.

Mr. RYAN OF WISCONSIN. One of the reasons why I asked about

the scores, is because I see rising out of your testimony possibly a

new strategy and a new consensus of how to elevate the diffused

interests, and that is this. Congressman Sununu, you mentioned

that the pressure of living under the discretionary spending caps

has helped us pursue these goals of eliminating corporate welfare.

Well, that pressure is really mounting right now. And these discretionary spending caps as we designed them in the Budget Committee revolve around the goal of protecting the Social Security

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trust fund, revolve around the goal of saying every penny of Social

Security taxes you pay should go to Social Security, period, end of

story, and take that off budget. Then what you are left with is a

quandary we have right here in Congress this summer with the

spending caps with our appropriation bills. We are now at a point

of deciding priorities and spending within the Federal Government

and there are obviously different degrees of these priorities. Do we

help with veterans health care? Do we help with education, other

types of programs? And when you put these corporate welfare programs against these programs, when we are coming under tremendous pressure to stick to the discretionary spending caps, which we

all support doing and on top of that support the discontinuation of

the raid on Social Security, I think the diffused consensus, the diffused effort to try and go after these corporate welfare programs

is significantly buttressed. That is why I asked what kind of money

are you talking about that we are going to save and can we transfer that money into our priorities within the discretionary budget

caps?

Mr. SUNUNU. Congressman, in the case of the Department of

Commerce legislation, there is in excess of $700 million in direct

grants from the programs that provide the largest amount of

grants to either otherwise profitable corporations or entities that

really aren’t deserving of those grants and then through the consolidation of the trade functions and the consolidation of the oceanographic and weather functions I think it would be very realistic

to realize in excess of $300 million in savings, which would bring

the total savings on an annual basis to over a billion dollars.

Mr. RYAN OF WISCONSIN. It is a lot of money.

Mr. MILLER. The sugar program the General Accounting Office

estimates it is over a billion dollar cost to the American consumer.

It is rather shrewd the way the program was developed. Actually,

on paper the Federal Government makes a little money from the

sugar program because the sugar growers are in effect taxed to

keep the program going. The Federal Government makes about $50

million off of it. However, the General Accounting Office also

looked at what the sugar program costs the Federal Government

and it is over a $100 million because we are a huge purchaser of

food products, food stamps, veterans hospital, military facilities

that provide food. So there is a real cost but the thing is it is just

bad economics. It is bad for trade. It is bad for the environment.

It has got all the other bad reasons.

Mr. RYAN OF WISCONSIN. Thank you very much, gentlemen. I

yield back the balance of my time.

Chairman KASICH. Mr. Wamp has one question and then we will

get to former member Bob Shamansky before we go to a vote.

Zach? Mr. Wamp?

Mr. WAMP. Thank you, Mr. Chairman. Just a quick statement

about farm subsidies. When people ask me after four and a half

years of serving in the House what surprises me the most, it is always my first response that somehow agriculture subsidies and the

whole price support system have survived this changeover in mentality from Democrats to Republicans. Agriculture is just so institutionally prominent around here. I still can’t believe that we say we

are reforming things, but it continues on. I oppose them all, and

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I commend you for continuing to push this issue even though it

gets drowned out by so many other issues and even though there

is such a bipartisan coalition behind the continuation of these programs.

But my question, Mr. Shadegg, is about the Department of Energy. I would first ask that we are careful in painting everything

at DOE with the same brush. Clearly there are a lot of problems

with weapons labs, security and espionage, et cetera, et cetera. We

all know about that now. But if you look at the multipurpose laboratories, like Oak Ridge National Laboratory, which I represent,

Argonne, Brookhaven, and the other labs, there is a lot of positive

science taking place. The only caution I would raise as we evaluate

the effectiveness of the Department of Energy, and I am disappointed as well even though I have a site in my district with the

management by the Department of Energy, that we are careful to

not lose any of the equity that the government has in these multipurpose laboratories and the value of the laboratories. As we look

at your proposal, for instance, how would we address the management of the science investment that this Federal Government has?

Basic research is a legitimate Federal Government role and we

need to protect those facilities where we have so much value coming to not just the government but directly to the people in this

country. I would also say when we first were elected, you and I together and came here, the Galvin report had just come out. It assessed the role of the national laboratories, because we as a nation

have not come to grips with what is the role of the laboratories in

the post Cold War era. For over 50 years our national laboratory

system was driven by one thing, one mandate: To be nuclear supreme as a nation. Well, we accomplished that. Cold War is over.

We are the most supreme nation in the history of the world in

terms of this. The buildup and the science investment was all

predicated on national security needs.

We haven’t established as a nation yet what is the role of our national laboratory system in the post Cold War era. As you look at

reform proposals for DOE or anybody else that is in the science and

basic research business, we need to say where are we headed?

What are we trying to do? Are we going to try to keep people alive

and be a hundred years old? What is the mission? What is going

to drive this investment? Otherwise it ends up being an annual

maintenance obligation as opposed to a real vision for our country.

Mr. Shadegg.

Mr. SHADEGG. I would agree with you that the fundamental

question is what should the role be. I think I would also completely

agree that in this post Cold War era, the role of the laboratories

deserves to be reexamined. In an earlier exchange between myself

and the chairman, we talked about the fact when you do an audit

of DOE, you need to look at what functions that it is important

that it continue to do and I think the labs fall in that category, but

there are things that even the labs are doing that may not even

be necessary. I cited an example of a program where Sandia Lab

is working on improving the fireworks at Disney Land, a $300 million program. Why do we need that?

I think it is very important that we ask what are the functions

of the Department of Energy, are they properly organized and

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where should they be located in structure? Clearly the work of the

weapons labs needs to go on, needs to go on under government supervision and is extremely important.

I don’t believe you were here for that part of my testimony, but

President Clinton had the Foreign Intelligence Advisory Board undertake a review of the labs themselves, particularly the weapons

labs, and look at what is going on and their report was scathing.

I think you put your finger on it correctly. We need to make careful

decisions about which functions are important, what goals we want

them to achieve. Beginning—there are critical comments which I

went over in researching my remarks for today. There are critical

comments about the structure of the Department of Energy and

about its lack of mission from literally the day of its creation, and

I listened to my colleague Mr. Sununu’s comments about the criticisms of the Commerce Department being a hall closet in which

you throw everything that you don’t know what to do with. I think

that is what we have done with DOE and I think it is time to sort

it back out, decide what should be within the capacity of DOE,

what should the structure be, but also, and the chairman and I

talked about this, what things can we flat out eliminate that the

government simply has no business being involved in, and that, as

I think Mr. Sununu eloquently pointed out, when the government

picks winners and says, well, we will subsidize this activity but not

that one, we will aid this industry but not that one, we are acting

in a way which is antithetical to the premise behind this country,

which is an individual initiative ought to be the driving force in our

economy and ought to be rewarded, not bureaucratic allocation of

money or power.

Chairman KASICH. The gentleman from Georgia is recognized.

Mr. CHAMBLISS. Thank you, Mr. Chairman. I apologize for not

being here. I was over in Agriculture Committee dealing with another favorite subject of my friend from Florida, the dairy program.

We were talking about something over there that is very appropriate when we talk about the sugar program. Dan and I have had

many conversations about this, and while I have no parochial interest in sugar, I very much have a parochial interest in agriculture.

In spite of what my friend from Tennessee says, there is a place

for Federal Government in agriculture. That place may not be exactly where we are today and where we ought to end up from a

Federal perspective but, you know, we don’t play on a level playing

field in the world market. We keep talking about putting our farmers into the world market. A lot of our crops simply don’t have a

world market, number one, because of the high subsidies that are

paid by other countries and the ability of our farmers to compete

is just not there. And I think the sugar program is a classic example of that.

Dan, you are right, there are—there have been changes in that

program. They may not have been changes that seemed to be positive but changes that created a positive flow into the U.S. Treasury

from the sugar program. There is a tax on sugar growers. It has

created anywhere from $3 million to $68 million in positive cash

flow into the U.S. Treasury over the last 15 years since 1985, when

that program truly went to a no net cost program to the taxpayer.

Now, again, you may be right that it has cost attached to it to the

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standpoint of having to treat veterans at hospitals or other health

care related incidents, but my gosh, what does salt do to people?

We can’t go into dealing with the cost to the government from agriculture products and determine which ones we are going to try to

regulate to a heavier extent based upon health care issues. Be that

as it may, we are headed down a road that we have been traveling

for the last 5 years, which I think is a very good road, and that

is getting the government more and more out of the agricultural

arena.

But when we put our charts up back in 1995 and we showed to

the American farmer we are going to start reducing the influence

of the government in your markets and put you more in the world

market, we had that on one side of the chart. And on the other side

of the chart, we also had benefits that were going to flow to those

folks to make the playing field level, benefits such as reduced regulation. Have we done that? No. We are going to have reduction in

taxes. Have we done that? To a limited extent we have. But there

were any number of other items over there that we were going to

use to offset the bottom line problem that that farmer was going

to have in the long run through a change in agriculture policy.

We need to do a better job of keeping our farmers in business,

and the sugar program is one that simply doesn’t cost the American taxpayer anything. The sugar farmer that participates in the

program and gets a loan from CCC has to pay the loan back, and

in the last 10 years, the only two loans that have been in default

on the part of the farmer have created a positive inflow into the

U.S. Treasury because the government wound up selling the collateral for more than the loan amount.

So there has simply been a positive cash flow in the sugar program by the sugar program into the U.S. Treasury that doesn’t

translate into corporate welfare in any way you look at it.

Now does it cost the consumer more? Now that is an issue that

I guess we could argue, but it is not really material to the argument of corporate welfare, but when you look at the numbers

again, since 1990, the amount of the world—of the price for raw

sugar that was paid to the producer has decreased by 13 percent.

Now, has a bar of candy decreased by 13 percent at the retail level?

Has the price of any sweetened products—any products sweetened

by sugar decreased at the retail level by any amount? And I submit

to you that you just can’t show me a product that has decreased

by any amount even though the price to the farmer has decreased

over the last 10 years by 13 percent.

So I would stand and argue with you, Dan, that when we look

at programs such as our agriculture programs and, in particular

sugar, that there is no corporate welfare there, and I am sorry I

missed your testimony, but I have heard it before so I know exactly

what you said.

Mr. MILLER. May I respond? I need to—with all due respect, I

need to disagree with you. General Accounting Office, which is the

neutral authority in this, says it cost the American consumer over

a billion dollars a year and consumers are taxpayers, and actually,

they are very shrewd, this sugar industry, to in effect create a tax

on the sales to pay the government about this $50 million a year.

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To me it is the bribe to the Federal Government to keep the program going.

But one thing—agriculture is very competitive in the world economy today. Tropicana is my largest employer in my district. Over

20 percent of their product is sold outside the United States. Over

50 percent of the fresh grapefruit raised in Florida is shipped outside the United States. We have got more citrus than we can sell

in Florida, and we have got to find world markets for it, and we

have got to open up those markets, whether it is in Japan, China

or Europe, to sell our citrus, but if we say, well, we won’t let you

sell your sugar, but we want to sell our citrus, that is not how you

negotiate a trade agreement. Our agriculture people have a huge

net surplus in agricultural exports, as you well know. That is one

of the shining parts of our export market today.

So we need to open up markets, and if we are trying to defend

and protect one, and sugar is about the only one that hasn’t

changed. They did some technical changes but the price of sugar

is legislated at over 20 cents a pound, period. It has been that for

the past 10 years. It won’t go down because the Federal Government has this complicated process to keep it up there.

So I think it cost the American consumer who is the American

taxpayer.

Mr. CHAMBLISS. Let me just quickly respond to that, and that is

what I said earlier. When the price to the producer goes down by

13 percent over the last 10 years, you should see a correlation to

that savings on the part—at the retail level, and you just don’t see

it, Dan. You don’t see it. I mean, the price of a candy bar has increased, if anything, by anywhere from 10 to 50 percent, in some

particular instances that I know about, and it just doesn’t work

that way.

Mr. RYAN OF WISCONSIN. If the gentleman will yield for a second,

we have a vote coming up, but you mentioned you were doing an

agricultural hearing marking up a bill to solidify the current status

quo on dairy, and I could submit to you that part of the reason why

we have had no reduction in the cost of candy bars, specifically

chocolate candy bars, is because one of the factors for production,

in addition to sugar, is milk, and we have an antiquated, Depression Era, socialized milk system right now that gives producers a

higher price of milk. Producers in Florida based upon their geographic location and proximity to Eau Claire, Wisconsin, so we are

paying farmers in Florida and New York, Arkansas, Alabama,

more money to produce milk because they live farther away from

Eau Claire, Wisconsin. And a big part of the reason why candy

bars, chocolate candy bars haven’t gone down so much is because

of this antiquated, socialized milk system we have which in and of

itself is a good example of corporate welfare.

Chairman KASICH. You know, the steady, old hand of the chairman, you know, left the dais just for a few minutes, and now this

has degenerated so badly. We got milk, sugar and peanuts if the

truth be told. Anyway but I think——

Mr. CHAMBLISS. Mr. Chairman, can I add just one thing, though?

Now, I am going to agree with you. He hit on something that is

absolutely essential for the future of agriculture and the future of

these programs, and that is trade. You are right. There are probVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00274 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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lems. There is not a level playing field out there, and the way we

can level it through good trade notions, and agriculture has not received a profile from a trade perspective that it needed to receive,

and it is not just this administration. It is previous administrations

also, but I think we are in an atmosphere now where we can make

those changes and we can negotiate. If you eliminate the subsidies

worldwide, then you are going to see significant changes in our programs, and our folks would be able to compete in whatever may be

determined as the, quote, world market, unquote.

Chairman KASICH. We are going to take a recess, but I know

that we have got the next panel. Mr. Shamansky, who has been

here all day, will be next, along with David Minge. We have two

votes. One is 15 and then I think just a vote on final. So we should

be able to get back—I will be back immediately and encourage the

members to come back, but I think in a nutshell this kind of sums

up the problem you have here when you have sugar yes, sugar no,

milk. The key is how do we find the handful of issues that can get

the momentum going, and it is going to be based upon a strong

consensus, not just inside, but with the outside groups as well. I

would anticipate we would be back here within 20 minutes. So the

committee will stand in recess.

[Short recess.]

Chairman KASICH. The committee will come to order. We have

got with us Congressman David Minge from Minnesota, and my

friend from Columbus, Ohio, former member Bob Shamansky, and

I think Bob, if you don’t mind, we will start with David and then

come to you, and David, the floor is yours.

STATEMENT OF THE HON. DAVID MINGE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MINNESOTA

Mr. MINGE. Thank you, Mr. Chairman. First, I would like to

compliment you on scheduling this series of presentations today.

We have had hearings on, so to speak, corporate welfare, and there

is probably no area where this is more conspicuous and more egregious than what has been called the competition between the

States or smokestack chasing, where one State is trying to raid a

business, to raid another State to draw that State’s business into

its State, where we have professional sports teams who are playing

one State off against another, one metropolitan area off against another, to see who will contribute the most money for a stadium, all

of this being done at taxpayer expense.

There is some examples of this that really stand out and define

the nature and the magnitude of the problem. Let me take a 1993

agreement between the State of Alabama and Mercedes Benz. The

State of Alabama and local units of governments in that State provided a subsidy package worth an estimated $250 million to build

an auto plant in Alabama. Each of the jobs, estimated to be 1,500,

that would be created by the project cost the people of the State

of Alabama $168,000.

Similarly, the Marriott Corporation, headquartered in Maryland,

determined it needed to build and expand its headquarters facility.

It looked across the Potomac to Virginia and started a bidding war

between Virginia and Maryland. Before it was over it is estimated

that as much as $70 million in subsidies from the State of MaryVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00275 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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land are being provided to this very profitable and successful business corporation so that it would retain its headquarters in the

Maryland area.

Now, this is a contest among the States that many of us may

stand here in Washington and look and say, well, gee, this is up

to the States to figure this out, but the sad truth is the States can’t

do it on their own. It is like unilateral disarmament. If the States

make a pledge that they are not going to engage in this type of

smokestack chasing or raiding, that agreement is only successful

until some State decides it is going to break the arrangement.

Probably the longest running competition and the most often violated agreements are between New York and New Jersey. New Jersey with regularity tries to lure corporate headquarters or other facilities from Manhattan across the Hudson River, and they have

been successful and New York responds, and then the States agree

they won’t do it anymore, and next thing you know they are up to

the same type of conduct again.

In Minnesota we face this in numerous settings, and it has

reached the point where the Minnesota State legislature has petitioned Congress to take action to respond to this type of problem.

The State legislative request was matched by a request from the

governor of the State, and at least eight other states have made

similar requests of Congress. We have the power under the commerce clause of the Constitution to regulate interstate commerce.

It is our act. If we want to try to bring some order to this chaos,

we can do so. If we choose not to, then this destructive competition

among the States, at great expense to taxpayers, continues on from

year to year.

Mr. Chairman, in your own State of Ohio I am aware of a situation where the City of Cleveland struggled to keep the Cleveland

Browns’ ball team. It didn’t want the team to move to Baltimore,

and the city offered a package worth an estimated $175 million.

Yet at the same time the public schools in Cleveland were in trouble. Eleven were closed in 1995 for lack of funding.

Clearly, we have to identify our priorities in this country, and I

believe that the citizens in almost every State agree that the priority is not tax subsidies to profitable business operations and to

professional sports teams, but instead it is education, and if we are

going to be of assistance to the States and the communities with

reference to this destructive competition, the type of legislation

that I have proposed is the most effective way to proceed.

My bill, which is called the Distorting Subsidies Limitation Act,

is H.R. 1060. I have worked on this with economists, with business

development leaders and officials from a variety of locations around

the country and received support for my effort, and I would just

like to point out in closing that this is not a problem unique to the

United States. Canada has had this problem. They have taken

steps to address it. The European Union perhaps provides the best

example. They have recognized that this type of destructive competition within the European Union can cost member countries

hundreds of millions of dollars, and as a consequence as a part of

the initial charter that was set up, a bureau was created that has

the specific responsibility of dealing with this type of smokestack

chasing situation in the European Union.

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I would urge that this committee recognize the importance of this type of legislation and that my colleagues on the committee join

with me in pressing for a hearing before the appropriate committee

in Congress and ultimately consideration on the floor in passage. Thank you.

[The prepared statement of Mr. Minge follows:]

PREPARED STATEMENT OF HON. DAVID MINGE, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MINNESOTA

I am pleased by the opportunity to testify before the committee today on a type of corporate welfare that deeply concerns me due to the extensive cost to the taxpayer. States and cities across the country are competing against one another to lure companies that will provide jobs to local residents. This has been happening for

years, and it probably always will, given our country’s commitment to the free market economy and rigorous competition. Some localities simply do a better job of ensuring that their area has an educated workforce, efficient transportation infrastructure, and is generally more attractive to employers. That’s one of the tenets of good

government—create an environment that promotes economic growth and jobs. But in the last several years we have seen an increase in competition between the states based on something other than the quality of the roads, schools, or available labor force. Local governments are being forced to spend scarce taxpayer dollars

for incentives to attract specific companies looking for a new home, or even more

discouraging, just to keep a business from packing up and leaving town. This practice is wide spread. A 1993 Arizona Department of Revenue study found that half the 50 states had recently enacted financial incentives to induce companies

to locate, stay or expand in the state. Targeted businesses have ranged from airline

maintenance facilities, automobile assembly plants and professional sports teams to

chopstick factories and corn processing facilities. These deals often range into the

hundreds of millions of dollars.

For example, Pennsylvania, bidding for a Volkswagen factory in 1978, gave a $71 million incentive package for a factory that was projected to eventually employ

20,000 workers. The factory never employed more than 6,000 and was closed within

a decade.

In a 1993 agreement with the State of Alabama, Mercedes received a sweetheart subsidy package worth $253 million to build an auto plant in that job-starved state.

Each of the 1,500 jobs created cost the state taxpayers $168,000. And most recently, the Marriott Corporation gleaned what is estimated to be as much as $70 million in subsidies from the State of Maryland and Montgomery

County to expand their operation. This firm has been headquartered for decades in

the Free State, and has prospered nicely with the help of an educated and productive workforce. When company executives threatened to pick up and leave after 44

years in Maryland, and when they sat down with Virginia officials to discuss ‘‘options,’’ Maryland had little choice but pony up with $70 million in tax breaks and

road projects or risk seeing Marriott ride into the sunset. While spending billions of dollars to retain and attract businesses, state and local governments struggle to provide such public goods as schools and libraries, public

health and safety facilties, and the roads, bridges and parks that are critical to the

success of any community. These subsidy deals have a direct effect on the availability and quality of public services. The city of Cleveland, while it struggled to keep the Cleveland Browns football team from moving to Baltimore, announced the closing of 11 schools in 1995 for lack

of funding, yet the city offered to spend $175 million of public money to fix the

Browns’ stadium to ward off Baltimore’s successful offer to attract the team.

My own state of Minnesota is experiencing a similar dilemma. There has been a

lot of talk in the last couple of years about the Minnesota Twins being lured away

by a publicly financed stadium in another part of the country. That talk had quieted

but has just recently reappeared on the front pages of Minnesota newspapers. The

Twins have long been pressing the state and local government for a new sports stadium. It appears now that the cities of Minneapolis and St. Paul are gearing up for

a bidding war to publicly finance a new stadium to lure the team. This comes less

than 2 years after the state legislature and the city of Minneapolis decided against

financing a stadium.

This is being played out around my state in even our smallest communities. I

have had some personal experience with the issue when I served on the County Development Commission in my hometown of Montevideo in western Minnesota. I

275

know from my own work how frustrating it can be for a smaller community to have

to compete with communities that have deeper pockets or that are more willing to

give breaks or go into debt to win a deal.

All told, state and local government across the country provide more than $15 billion annually in tax rebates and other subsidies, according to Kenneth Thomas of

the University of Missouri, St. Louis. That price tag is staggering. Those funds could

educate 3 million elementary school students, hire 300,000 police officers or construct 6,000 miles of four-lane highway.

Millions of dollars of bonds are issued every year by state and local governments

to finance projects that benefit a specific business. These bonds are tax free because

they were intended to finance schools, infrastructure and other civic improvements,

not sweetheart deals to corporations or professional sports teams.

It gets worse. Some of these distorting subsidies are financed through Federal tax

dollars. The U.S. General Accounting Office (GAO) reports that Federal block grant

funds are being used not only to create jobs, but subsidize the movement of jobs

from one state to another. Why should the nation’s taxpayers finance these deals

that benefits job growth of one state to the detriment of another?

Individual states and local governments are powerless to put a stop to the practice. Unilateral disarmament in this bidding war could mean the loss of thousands

of jobs to other jurisdictions. At the same time, businesses cannot be blamed for

wanting to move into a community that offers the best incentive package. What is

clear is that the system itself is flawed, and that we are due for a tune up.

We must start considering how to stop the use of tax subsidies that squander limited public resources and distort economic decision-making. I am encouraged that

nine state governments, including the Minnesota Legislature, have passed resolutions urging Congress to find an answer to this lingering question. I have consulted

with the Minnesota’s Department of Trade and Economic Development, Mel

Burstein and Art Rolnick of the Minneapolis Federal Reserve Bank, Ohio State Senator Charles Horn, local economic development planners and many others to develop

legislation and build interest in resolving this problem.

I have introduced a bill that is intended to end competition based on public giveaways rather than sound economic principles. The Distorting Subsidies Limitation

Act of 1999 (HR 1060) requires businesses benefitting from special grants or tax deferrals to be taxed on the value of the subsidies at the same rates as currently apply

to other income under the Federal corporate tax structure. Let’s face it, these subsidies are income that businesses are milking out of local government. I think of

this proposed tax as a ‘‘sin tax’’ meant to stop an undesirable activity. I also propose

an across the board prohibition on the use of tax-exempt bonds or Federal resources

by states and communities to lure businesses or prevent them from considering

other locations.

Several other Members of Congress have put together legislative proposals in attempt to halt these distorting subsidies. I salute their efforts, and hope that as concern about this unwise use of public resources continues to grow, we in Congress

can hammer out a consensus approach. The point is that Congress is empowered

by the Interstate Commerce Clause as the only entity that can put a stop to the

economic war between the states.

Mr. Chairman, U.S. Sugar policy does not belong in this hearing.

NO U.S. SUGAR SUBSIDIES OR QUOTAS

The U.S. government has made no payments to U.S. sugar producers in decades.

Since 1985, consistent with Congressional intent, U.S. sugar policy has been run at

no cost to the U.S. Treasury. Since 1991, U.S. sugar policy has been a revenue raiser, with significant ‘‘marketing assessment’’ funds contributed annually to the U.S.

Treasury.

Critics contend that other commodity programs were phased out in the 1996 Farm

Bill. In fact, spending by USDA’s Commodity Credit Corporation on these ‘‘eliminated’’ programs—such as foodgrains, feedgrains, oilseeds, and cotton—have risen

from $4.6 billion in 1996 to an estimated $18.2 billion in 1999—and deservedly so,

given the financial crisis in which American farmers now find themselves.

Spending on sugar did not increase one penny during that time, even though producer prices for sugar, like other crops, have fallen since 1996. In fact, expenditures

for sugar policy have remained at zero, while sugar policy revenues have averaged

over $40 million per year.

There are no longer any domestic quotas for sugar production. Any farmer that

wants to raise sugar beets or any investor who wishes to establish a processing

plant can do so. Production is a function of the domestic market economy.

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RESPONSE TO FOREIGN SUGAR SUBSIDIES

U.S. sugar policy is a necessary response to foreign sugar subsidies. In the absence of U.S. sugar policy, the U.S. would be swamped with subsidized foreign production and efficient American sugar farmers would be driven out of business.

American sugar producers are competitive by world standards. They rank 18th

lowest cost of 96 producing countries, most of these developing countries, despite

American producers facing some of the world’s highest government-imposed costs for

labor and environmental protections.

The world market, however, is distorted by enormous production and export subsidies. These subsidies leave the world market for sugar a thinly traded, highly

volatile dump market, with price levels currently running barely one-fourth of the

world average cost of producing sugar.

If this Committee is looking for sugar subsidies, it would be far better advised

to look to the European Union (EU). EU export subsidies on the sugar they dump

on the world market are currently running about 25 cents per pound. That’s nearly

40 percent higher even than the U.S. support price itself, which has been frozen at

18 cents per pound since 1985.

It would be absurd to cut out the modest U.S. sugar policy while foreign governments, such as the European Union, continue their massive subsidies, which depress the world sugar market. We cannot allow foreign dump market sugar—produced by countries whose producers are less efficient than ours but who enjoy high

subsidies—to drive competitive, unsubsidized American sugar producers out of business.

CONSUMER BENEFITS

In addition to the taxpayer benefits, consumers benefit strongly from U.S. sugar

policy. American consumer prices for sugar are stable and low. The retail refined

sugar price in this country has been virtually unchanged throughout the 1990’s.

Furthermore, our price is fully 32 percent lower than the average retail sugar price

in the rest of the developed world. In terms of minutes worked to purchase one

pound of sugar, we are virtually the lowest in the world, second only to tiny Singapore.

CONSUMER RISKS

If U.S. sugar policy were removed, or the U.S. producer price for sugar further

reduced, American consumers would see no benefit in the short run and be hurt in

the long run.

The food and candy manufacturers and retailers who oppose U.S. sugar policy can

offer no assurance that they would pass their savings on lower ingredient prices

along to consumers. A look at the past is revealing. For example, since 1990 the

wholesale refined sugar price received by sugar producers has dropped nearly 13

percent. Meanwhile, the retail refined sugar price has not dropped at all, and retail

prices charged for candy, ice cream, cookies, cakes, and other highly sweetened

products have risen 20-30 percent.

In the long run without a stable U.S. sugar policy, American producers would

likely be forced out of business and we would become more dependent on the volatile

world market. Consumers would face the risk that sugar prices would skyrocket as

they have in the past. The food manufacturers and retailers do pass along higher

costs.

GAO STUDY

Critics of U.S. sugar policy cite, as their sole source of economic analysis to support their cause, a 1993 study by the General Accounting Office that was requested

by ardent sugar-producer foe Congressman Charles Schumer (D-NY). This study,

which attempted to quantify consumer costs and theoretical producer benefits of

U.S. sugar policy, has been slammed repeatedly by sugar market experts at USDA

and at universities.

Experts have excoriated the study because of its simplistic, and utterly false, assumptions. The GAO assumed the U.S. could take all its sweetener needs from the

thinly traded, highly volatile sugar market—increasing demand on that market by

about 50 percent—without that market price rising at all, and that food manufacturers and retailers, who would have access to this endless supply, frozen at a low

price, would then pass 100 percent of their savings on low sugar prices along to consumers. In fact, history has shown the actual passthrough is much closer to 0 percent.

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JOBS

While job loss in the U.S. cane refining industry has been unfortunate, it has been

far outweighed by the spectacular growth of jobs in the U.S. corn sweetener industry.

During the mid-1980’s, U.S. beverage manufacturers switched from sucrose sugar

to lower-priced fructose corn sweeteners. As a result of the decreased demand for

sugar, the U.S. imported less foreign raw cane sugar, some U.S. cane sugar refineries closed, and several hundred jobs were lost. However, this foreign-sourced cane

sugar was replaced with domestically sourced corn sweeteners. The number of

American jobs generated, directly and indirectly, by the growing and processing of

U.S. corn for sweetener has been estimated at 247,715.

U.S. consumers now benefit from access to U.S. corn sweeteners, the most inexpensively produced nutritive sweetener in the world, for more than half their sweetener needs.

TRADE POSITION

The U.S. sugar import system is fully in compliance with all the United States’

international trade commitments.

The U.S. far exceeded its Uruguay Round Agreement (URA) commitment in the

GATT. The URA required imports of at least 3-5 percent of domestic consumption;

the United States bound its import quota at several times that, about 10-15 percent

of consumption, and in some years has imported more than 20 percent of its consumption. Meanwhile, many major sugar-producing or consuming countries were required to make no changes in the URA, and many other foreign countries have yet

to even minimally comply with their URA commitments.

The United States has complied fully with its NAFTA commitments, though Mexico has reneged on its commitments regarding both corn sweeteners and sugar.

ENVIRONMENT

American growers and processors of sugar produce sugar in full compliance with

the world’s highest environmental standards. The Florida sugar industry is participating in an Everglades restoration project that has been approved by the state and

Federal Governments, and sugar producers are way ahead of schedule in their

water-runoff commitments.

The closure of the sugar industries of Florida and the rest of the United States,

which would be the inevitable result of legislation proposed by Congressman Miller,

would shift sugar production from the United States—the country with the highest

environmental standards—to the developing countries which dominate global sugar

production, but have little or no environmental standards and enforcement. The

global environment certainly would not benefit if we had to clear more Brazilian

rain forests in order replace sugar grown in Florida and Minnesota.

H.R. 1060: THE DISTORTING SUBSIDIES LIMITATION ACT

H.R. 1060, the Distorting Subsidies Limitation Act, introduced by Rep. David

Minge (MN) is a comprehensive legislative initiative which attempts to curb the use

of economic subsidies by state and local governments to lure or retain new or existing businesses.

For several years, governmental entities have engaged in the use of targeted subsidies which include grants, below market loans or rent, and tax deferrals, aimed

at a particular private business entity in an attempt to entice a business to a particular municipality. Because of these ‘‘distorted subsidies’’ state and local governments are being forced to compete against one another using scarce tax dollars that

would otherwise be used for essential public goods and services such as schools, police and fire protection and road improvements.

When state and local competition takes the form of preferential treatment for a

specific business, it interferes with interstate commerce, distorts the allocation of resources, and leaves states to provide too few public goods and services. Nationally,

one notorious example is the 1993 agreement between the state of Alabama and

Mercedes Benz. Mercedes received a sweetheart subsidy package worth $253 million

to build an auto plant. Each of the 1500 jobs created cost the taxpayers nearly

$168,000 per job.

In March, 1999, Rep. Minge introduced HR 1060 which requires businesses benefitting from special grants or tax deferrals to be taxed on the value of the subsidies

at the same rates as currently apply to other income under the Federal corporate

tax structure. The legislation would also impact the use of public funds for building

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sports stadiums. The proposed tax should be viewed as a ‘‘sin tax’’ meant to stop

an undesirable activity. The less tax collected, the better. The goal is to stop the

practice of corporations wheedling special deals from local governments and to encourage economic competition among states based on factors such as quality of services, reasonable and efficient regulatory policies and fair tax structures.

DESCRIPTION OF HR 1060, THE DISTORTING SUBSIDIES LIMITATION ACT

TAXABILITY OF SUBSIDIES

H.R. 1060 creates a Federal excise tax on businesses benefitting from special tar- geted economic subsidies. If a business accepts the economic subsidy offered by the

state or local government, the subsidy will be subject to the excise tax which will

be computed on the aggregate value of the subsidy for calendar year in which it was

received. The rate of the tax will be the same that applies in determining the regular income tax of a corporation. The rates are as follows:

Aggregate Total of Subsidy Tax Rate Less than $50,000 15%

$50,001–$75,000 25%

$75,000–$10,000,000 34%

Above $10,000,000 35%

The excise tax does not apply if the subsidy is part of the long-term taxing and spending policies of the governmental unit or if the subsidy is available to all business entities.

DEFINITION OF ‘‘DISTORTED SUBSIDY’’

The economic subsidies subject to the excise tax include:

• Any grant; • Any contribution of property or services; • Any right to use property or services; • Any loan made available to a business at rates below those commercially avail- able to taxpayers; • Any tax deferrals or payment of any tax or fee; • Any guarantee of any payment of any loan or lease; • Any reduction for fees or other charges for the use of governmental facilities such as roads, sewage treatment facilities, and solid waste disposal facilities. There will be no excise tax rendered on the value of an economic subsidy which is provided for employee training or other educational programs. The legislation

shall apply to any economic subsidy provided to a business 30 days after the date

that this bill is enacted.

TAX EXEMPT BOND FINANCING

H.R. 1060 also denies the exemption from tax for interest on bonds providing tar- geted state or local government development subsidies for a specific business entity.

The legislation shall apply to bond obligations issued after the enactment of this

bill.

FEDERAL FUNDING

H.R. 1060 prohibits the use of Federal funds by a state or local governmental unit for any targeted subsidies. If it is determined that Federal funds have been used

for targeted subsidies, the bill provides for recovery of those funds from the governmental unit or the business entity. H.R. 1060 is not intended to deny the use of Federal program dollars for economic development if the Federal program dollars are available to all businesses or are

used for an established Federal economic development program such as an enterprise zone.

The legislation shall apply to Federal funds provided after the enactment of this

bill.

ECONOMIC INCENTIVES BY STATE AND LOCAL GOVERNMENTS

High profile examples include:

• 1978: Volkswagen, Pennsylvania, $70 million, 1,500 jobs—Has gone out of business

• 1986: Sears, Illinois: $240 million, 6,000 jobs, cost $40,000 per job.

• 1988: Toyota, Kentucky, $150 million, 3,000 jobs, $50,000 each job.

• 1988: Diamond Star (Chrysler Mitsubishi), Illinois, $118 million, 2,900 jobs,

$40,000 each job.

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• 1990: General Motors-Saturn, Tennessee, $70 million, 3,000 jobs, $23,000 each

job.

• 1992: United Airlines, Indiana, $290 million, 6,000 jobs, $48,000 each job.

• 1992: BMW, South Carolina, $150 million, 1,500 jobs, $100,000 each job.

• 1993: Mercedes, Alabama, $250 million, 1,500 jobs, $165,000 each job.

• 1994: Dofasco/Co-Steel, Kentucky, $140 million, 400 jobs, $350,000 each job.

Mr. CHAMBLISS [presiding]. Thank you, David, and I am just

sorry you weren’t here for our little sugar debate earlier. I would

have had some help.

Mr. MINGE. It sounds like it was a sweet discussion.

Mr. CHAMBLISS. Mr. Shamansky, welcome to the Budget Committee, and we look forward to hearing from you.

STATEMENT OF THE HON. ROBERT SHAMANSKY, A FORMER

REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO

Mr. SHAMANSKY. Thank you, Mr. Chairman. I want to thank all

the members of the committee and especially Chairman Kasich for

the invitation to appear here today, but I will digress only to this

extent right now and say that I am against legislative term limits,

and the reason I say that, I cite myself as an example of why you

don’t need legislative term limits for Members of the House of Representatives because Mr. Kasich succeeded me from the 12th District. So I think that is pretty good proof you don’t need legislative

term limits.

Approximately 80 million people invested their money in securities, both stocks and bonds, issued by businesses, which have made

our market economy the most envied in the world. Those 80 million

people include most likely a majority of the members of this committee, as well as a majority of the other people in this room. In

fact, for the first time in history, the American people have more

money invested in securities and other financial items than they do

in their homes.

Businesses have a choice of raising money within one State, such

as Ohio, in which case they would register with the Division of Securities of the Ohio Department of Commerce. However, if those

businesses want to raise large sums of money across the entire

country, through our various stock exchanges, they must register

voluntarily with the United States Securities and Exchange Commission, the SEC. These national markets regulated by the SEC

have trillions of dollars invested through them.

One of the main reasons why Americans have invested in the securities markets is because the securities and exchange legislation

passed in the 1930’s has assured them that they would be treated

fairly by the securities markets which come under Federal regulation. For example, such cases as Greater Iowa Corporation v.

McLeldon are cited as holding that securities and exchange legislation has broad remedial purposes for the protection of the investing

public and should be liberally and flexibly construed.

This committee this day is performing one of the most important

but too often unappreciated of its functions, which is that of investigation and oversight. Without this function would we have had

the reforms of the abuses uncovered at the Internal Revenue Service? It is quite clear that the answer to that is a clear no.

I became aware of some very unfair and indefensible practices by

the securities industry the hard way. My aunt died in 1985, and

280

I and a trust created by my late mother, my aunt’s sister, were the

beneficiaries of my aunt’s estate. In the beginning of 1988, when

I was gathering the Forms 1099 for the dividends from the stock

I had inherited from my aunt, I discovered that I did not have a

Form 1099 for the year 1987 for the most valuable stock I had inherited from her.

When I contacted the transfer agent in New York I was told that

I had not been sent a Form 1099 for the year 1987 because I had

not received any dividends in 1987. The reason I had not received

any dividends, they told me, was because dividend checks sent to

me in 1986 had been returned to the transfer agent because they

could not be delivered to the address the transfer agent was using.

When a check like that was returned, no further dividends were

mailed thereafter.

I asked why they had not looked me up in the phone book because I had been at the same address since 1966. They said they

never look up anybody in the phone book. I had to look them up.

I asked, well, what if I had been made ill by a stroke and could

not look anybody up. They said I still had to look them up.

I asked, what if I were dead, and they said I still had to look

them up.

I asked, what if someone in your shop had been negligent in preparing my address. They said I still had to look them up.

I pointed out that I was a lawyer and that they had just invented

a new principle of American law, that is, they were negligent; I suffered because I did not receive any money nor the interest earned

on my money; and they benefited from their negligence because

they were using my money as an interest free loan; that is, they

would turn over my principal but not the money earned by my

money.

They said I still had to look them up.

I then noted that they had accumulated over $500 of my dividends over a period of four quarters and that over those four quarters or 1 year they could not find me. They agreed that they could

not find me during that year.

I asked them how long it would have taken them, a bank transfer agent, to look me up if I had owed them the $500?

I have yet to receive an answer to that question. The answer of

course is that it would have taken less than a minute and cost

them less than one dollar to check me electronically in a database.

You must understand what happened in that case. They only

sent notices to any—on any check that had been returned to them.

Now, clearly the address on the check that had been returned to

them was no good, so they made a point thereafter only to send notices to the addresses that were already proven bad. That is guaranteed not to find anybody.

In August 1992 I brought the subject of the unfair treatment of

so-called lost security holders to the attention of my congressional

classmate, now Senator Ron Wyden, who instantly grasped the significance of my disturbing experience. Ron, as chairman of a Subcommittee of the Committee on Small Business, wrote to Richard

Breeden, then chairman of the SEC, twice that year. On February

22 of 1993, Chairman Breeden wrote Ron back in part as follows,

‘‘although the absolute value of undeliverable accounts, about $10

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billion according to the division’s, that is the Division of Market

Regulation, estimate is substantial, this is only one-tenth of 1 percent of the approximate $10 trillion capitalization of U.S. Equity

and debt markets.’’ In other words, $10 billion not belonging to

them was just not enough to bother about.

Based on the enclosed exhibits, and Mr. Chairman, I would ask

you to make as part of the record the items——

Chairman KASICH. Without objection.

Mr. SHAMANSKY. Thank you, Mr. Chairman. Based on the enclosed exhibits and my direct experience with the Division of Market Regulation at the SEC, former Chairman Breeden’s peremptory

dismissal of the $10 billion in undeliverable accounts is a fair characterization of the culture or attitude of the Division of Market

Regulation and the SEC itself toward millions of security holders

who are owed billions of dollars of their own money. Understand

this. This is not government money at any level. This is not any

corporation’s money, but this is the money belonging to you and

me, the individual investor, and our market economy is dependent

on encouraging individuals to put their money in the markets.

In its October 7, 1997, release of the revised rules 17Ad.17, et

cetera, the SEC said it had first estimated that there were 250

thousand lost security holders but that it later estimated that there

were three million lost security holders, owed possibly more than

$450 million. It is only fair to point out that the SEC was off by

a factor of 12 between its first and last estimates of the number

of lost security holders. Among those experts in this field that I am

familiar with, most believe that the most recent estimate of about

$450 million is too low, also, and I mention the disparity as a fair

gauge of the expertise residing in the Division of Market Regulation at the SEC.

Please understand that we are not talking about any money belonging to any government at any level nor to any money belonging

to any corporation. We are talking about uniting owners of securities with their dividends and interests rightfully earned by their

securities for which they paid their hard earned money.

On July 28, 1993, the subcommittee staff presented to Chairman

Wyden, as you know now Senator Wyden, a report entitled, ‘‘Return to Sender Tens of Thousands of Undeliverable Dividend Payments in Limbo.’’ ‘‘Individual Investors Lose Billions of Dollars of

Shareholder Assets Because of Lax Transfer Rules, Indifferences by

Public Companies and Government Regulators.’’

In addition to working with Senator Wyden and his staffs, I have

been invited to speak before three annual meetings of the National

Association of Unclaimed Property Administrators, otherwise

known as NAUPA, and a national meeting of the Securities Transfer Association on the subject of lost security holders.

Every State in the Union and the District of Columbia have unclaimed property laws which require holders of other people’s

money to turn over to the respective states, after periods of from

3 to 7 years, the money being held. The States have been doing this

for decades, and they have all used public records, published originally in newspapers and at county and State fairs, and that are

now published by a majority of states on the Internet. These states

have been doing this without any security or privacy problems. It

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is important to repeat that. They don’t have any privacy or security

problems, and they have been doing it for decades. Likewise, corporations have procedures to check claimants for undelivered dividends and interest, and these procedures work very well. In other

words, there are no privacy or security problems except in the

minds of those who do not want the lost security owners to obtain

their own money.

The advent of the computer and the Internet has completely

changed the way securities and their owners can be kept track of.

We are no longer in the days of three by five cards shuffled by

hand. As a surgeon should be held liable for negligence today, if he

operated to repair a bone fracture without first using a readily

available X-ray machine, so should those who transfer securities

today if they refuse to use readily available databases, especially

where that refusal benefits others than the owners of the securities.

There are three very big credit rating agencies, companies which

keep tab on almost every person in the United States who ever got

credit or has made investments. When it comes to those who own

stocks and bonds, their databases can find up to 80 percent or

those sought, starting with either a name, an address or a Social

Security number, which is on, I believe, every driver’s license

issued in the United States as required by Federal law.

People who own stocks and bonds are not trying to hide from

their own money. Almost without exception owners of stocks send

in their Social Security numbers on a form W-9 to transfer agents

so the transfer agents will not withhold 20 percent of the dividends

for the IRS.

People want to get their money, and the 50 States and the District of Columbia have demonstrated conclusively that there are no

legal, ethical or other policy considerations such as privacy or security which prevent delivery to owners of securities the dividends

and interest earned by their securities.

It was my lot to bring to the attention of the SEC through Senator Wyden that the SEC was not assuring investors that they

would have their dividends and interest delivered to them promptly, or at all, by the use of good databases.

Under the SEC’s existing regulations, specifying ‘‘certificate detail,’’ that is, they had to maintain ‘‘the address of the registered

security holder,’’ the SEC had and has the authority of providing

for the following common-sense, nonrocket science practices which

were suggested to it by me as an investor in correspondence and/

or during various meetings at the SEC.

First, beside transfer agents, the regulations regarding lost security holders should apply to broker-dealers, corporate trustees, personal and institutional custodians and mutual funds, and issuers

which do their own transfer work, because transfer agents maintain records for only approximately one-half of the security holders

in the United States. The SEC in 1996 proposed changes to include

recordkeeping broker-dealers, but then reversed itself in 1997, saying that changes only applied to recordkeeping transfer agents.

Second, regulations, which apply to security holders lost on or

after December 8, 1997, should apply equally to all security holders

who had been lost before December 8, 1997. Here again, the SEC,

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especially the Division of Market Regulation, I will use a strong

word, betrayed the shareholder because they then exposed the

shareholder to the practices of the so-called heir-finders (they are

called searchers or locators, or if you ask people who work for the

States in the area of unclaimed property, some of them refer to

these nice folks as either vampires, blood suckers or other nice

things like that), because these are the people who will send you

a letter and say, I know where $10,000 belongs to you and for from

25 percent to 50 percent, I will tell you where it is. And the States

have tried to regulate this and it doesn’t work.

What happened then is that the SEC—and there is nothing in

the regulation they adopted which could possibly justify this interpretation—the SEC on its own said if you were one of those unfortunate three million who were lost before December 8, 1997, you

are still subject to that kind of treatment from these locators.

Third, the lost security holder regulations should apply to security holders who meet the $25 de minimis test adopted by the SEC

in 1997, if their checks remain uncashed for 7 months. The next

regularly sent dividend and interest checks should inform the

payee that a previously sent check had not been cashed and that

the notice should request a call to a toll free number or other communication.

There is sound precedent from the Prudential Insurance Company for notices like this, and I have conferred with the president

of the First Chicago Trust Company of New York, one of the biggest of the transfer agents, and he agreed with his staff that it

would cost it virtually nothing to make this change because the letters are being sent, all the papers are being sent, the postage being

paid. It just says on the next regularly sent dividend payment,

please cash your check. Matter of fact, just yesterday I picked up

from my aunt, who is almost 94, a letter from Morgan Stanley

Dean Witter asking about a check sent to her last December that

wasn’t cashed. There is no reason that this should not be uniform.

Fourth, all of the data on lost security holders generated by

transfer agents, broker-dealers, et al., should be sent to the SEC

for a listing on one Internet web site. A majority of states already

put their unclaimed property lists on the Internet, and NAUPA has

a web site where it is pooling the various State lists. NAUPA, that

is the State group, created the web site because the SEC had proposed in 1996 such a web site for itself, only to reverse itself after

it had been lobbied hard by those who did not want the lost security owners found. Prominent among those were the so-called heir

finders or locators, depending on who is describing them.

The SEC already has the Thompson Financial Network operate

the SEC’s lost and stolen securities program under the name of Securities Information Center, SIC. If the SEC has a web site for its

list of stolen or lost pieces of paper, why can it not have a web site

for its lists of lost owners of the securities? Why should a piece of

paper be treated better than the owners of the pieces of paper?

It must be pointed out that the United States Government and

the world Jewish community shamed the Swiss Bankers Association into publishing on an Internet site a list of unclaimed Holocaust era accounts which the Swiss Bankers Association had previously maintained had been lost or destroyed. I checked this web

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site from my office in Columbus for the name Klein, K-L-E-I-N, and

I came up with three hits. That is from Columbus. There is no reason why the few big American banks which control the biggest

transfer agents, and it is really a sideline for them, do not do what

the Swiss show can easily be done, that is, put on the Internet the

SEC list of lost security holders, which is what the States are already doing with their unclaimed property lists, and which the

SEC actually proposed in 1996.

Based on my experience over these last 11 years, I believe that

there is sufficient interest in the private sector to distribute the information on the Internet at no cost to the SEC, once the information has been delivered electronically to the SEC. There is of course

no reason to publish on the Internet the amount owed to lost security holders nor the quantity of securities owned by the lost security holder. All that is needed is the simple fact that John Q. Public

is owed something by the XYZ corporation.

I want at this moment to just quote from the Federal Register

of October 7, 1997, from Page 52233 as follows. Now this is where

the SEC reversed itself on having the same kind of an Internet site

that a majority of the States have. ‘‘Most commenters were opposed

to the creation of a lost security holders database.’’ I am sure they

were because the people who didn’t want the people to get their

money would oppose it.

‘‘Many commenters believe that the database would result in a

loss of privacy for security holders.’’ Well, the States have been

doing this for 40 years or more, and how else would they know they

were on the list if it weren’t published somewhere?

Continuing. ‘‘Other commenters suggested that the data base

would result in fraudulent claims.’’

My observation on that is there are no such privacy or security

problems because the States have been doing it for 40 years, and

there are no such problems.

And this is my favorite of all. ‘‘Finally, some commenters

opined—obviously a lawyer wrote that—that the database would be

of limited utility because it would require that security holders

take the initiative to discover whether they had unclaimed assets.’’

Members of the committee, I have no idea what that means. I

have read it a hundred times. That has to be one of the dumbest

statements I have ever heard. It must mean that you might look

yourself up on a list, but that is forever. Now, there is only one

thing dumber than that statement, and that is the fact that the

people of the SEC thought that it had some kind of relevance. It

makes no sense to say that, and yet I think this is as good a clue

of the problem that the investor has with what the SEC has done.

Fifth, money due lost security holders as redefined here, which

is held by any of the holders as redefined here, must hold that

money in trust accounts, so that the security holder will get the interest earned by his or her dividends and interest instead of becoming a reward to those holding the undelivered dividends or interest.

In other words, we have got to stop rewarding people for not doing

their jobs and giving over the money to the owners.

The case of Delaware v. New York is where New York and Delaware fought over approximately $1 billion in dividends and their

underlying stock generated in street name accounts owned by lost

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security holders who used the major broker-dealers headquartered

in New York City. Investors who leave their securities in street

name with their broker-dealer can be as easily lost as any other

name on any other list.

Another important reason for requiring that the security holders’

money be held in trust accounts can be gleaned from the $63.5 million in fines in addition to a return of $19.1 million illegally taken

by Bankers Trust Corporation of New York in early 1994. This over

$19 million was taken from unclaimed property due to lost customers of the bank, and it was illegally used to fraudulently increase the profits of the bank instead of sending that money to the

States as required.

There is a long list of cases that says when a corporation issues

a dividend that dividend should be held in a constructive trust for

the shareholder, so that when he shows up he not only gets his

principal but he gets the interest earned by his principal. We have

got to stop rewarding the person who keeps that money away from

the shareholder, and the easy way to do that is follow this line of

cases and say the interest follows the principal.

Sixth, if a locator or finder, those other people I mentioned earlier, is engaged by any transfer agent to locate lost security holders

at a cost to the lost security holders after the obligatory two database checks, those lost security holder accounts should be placed

with locator or heir finders only on the basis of open bidding by locator/heir finders for batches of such accounts, each account in each

batch to receive due diligence. In fact, the National Association of

Unclaimed Property Administrators has urged the SEC to protect

lost security holders from the excessive charges, that is, from 25

percent to 50 percent, of heir finders or locators. Again, the SEC

never mentioned in its release how much these locators/heir finders

charge. It took State Street Bank and Trust in a critique of the

rule to expose this 25 percent to 50 percent charge.

Seventh, the United States of America through its many arms

and agencies holds great sums of money due others. The United

States Money Return Commission should be created to locate all of

this money owed to others. The U.S. Government should put the

information on one Internet web site, and then the commission

should simplify the method whereby any claimant can obtain his

or her money wherever it may be in the United States Government. There is simply no reason for the U.S. Government not to

use currently available technology to unite people with their money

now held by the U.S. Government. The same principle applies to

the securities industry.

There is a list among the exhibits of the many different agencies

which have web sites, but you have to seek them out, and they are

all different.

Not one State law is changed by any of these suggestions. These

regulations only affect those who come within the clear jurisdiction

of the Securities and Exchange Commission. NAUPA has encouraged the SEC to unite lost security holders with their money years

before the money becomes unclaimed property due for delivery to

the States. The elected State officials know that it is the intent of

the State laws on unclaimed property to have their respective citizens get the money that is due them. It simply makes no sense to

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those elected State officials to force their lost security holder citizens into giving interest free loans to those who are holding money

belonging to the lost security holders who are residents of their respective states.

Thank you, Mr. Chairman, for this opportunity.

[The prepared statement of Mr. Shamansky follows:]

PREPARED STATEMENT OF HON. ROBERT SHAMANSKY, A FORMER REPRESENTATIVE IN

CONGRESS FROM THE STATE OF OHIO

Approximately 80 million people have invested their money in securities—both

stocks and bonds—issued by businesses, which have made our market economy the

most envied in the world. Those 80 million include—most likely—a majority of the

members of this Committee as well as a majority of the other people in this room.

In fact, for the first time in history, the American people have more money invested

in securities and other financial items than they do in their homes.

Businesses have a choice of raising money within one state, such as Ohio, in

which case they would register with the Division of Securities of the Ohio Department of Commerce. However, if those businesses want to raise large sums of money

across the entire country through our various stock exchanges, they must register

with the United States Securities and Exchange Commission (SEC). These national

markets regulated by the SEC have trillions of dollars invested through them.

One of the main reasons why Americans have invested in the securities markets

is because the securities and exchange legislation passed in the 1930’s has assured

them that they would be treated fairly by the securities markets, which come under

Federal regulation. For example, cases such as Greater Iowa Corp. v. McLeldon, (CA

Iowa 1967, 378F2d.783), are cited as holding that securities and exchange legislation has broad remedial purposes for the protection of the investing public and

should be liberally construed.

This Committee this day is performing one of the most important, but too often

unappreciated of its functions, which is that of Investigation and Oversight. Without

this function by the Congress, would we have had the reforms of the abuses uncovered at the Internal Revenue Service? It is quite clear that the answer to that question is a clear ‘‘No!’’

I became aware of some very unfair and indefensible practices by the securities

industry the hard way. My aunt died in 1985, and I and a trust created by my late

mother, my aunt’s sister, were the beneficiaries of my aunt’s estate. In the beginning of 1988, when I was gathering the Forms 1099 for the dividends from the stock

I had inherited from my aunt, I discovered that I did not have a Form 1099 for the

year 1987 for the most valuable stock I had inherited from her.

When I contacted the transfer agent in New York, I was told that I had not been

sent a Form 1099 for the year 1987, because I had not received any dividends in

1987! The reason I hadn’t received any dividends was because dividend checks sent

to me in 1986 had been returned to the transfer agent, because they could not be

delivered to the address the transfer agent was using. When a check like that was

returned, no further dividend checks were mailed thereafter.

I asked why they had not looked me up in the phone book, because I had been

at the same business address since 1966. They said they never look anybody up in

the phone book. I had to look them up.

I asked: ‘‘What if I had been made ill by a stroke and could not look anyone up?’’

They said I still had to look them up.

I asked, ‘‘What if I were dead?;’’ and they said I still had to look them up!

I asked, ‘‘What if someone in your shop had been negligent in preparing my address?’’ They said I still had to look them up.

I pointed out that I was a lawyer and that they had just invented a new principle

of American law, i.e., they were negligent; I suffered, because I did not receive my

money nor the interest earned by my money; and they benefited from their negligence, because they were using my money as an interest-free loan, i.e., they would

turn over my principal but not the money earned by my money.

They said I still had to look them up.

I then noted that they had accumulated over $500.00 of my dividends over a period of four quarters, and that over those four quarters or 1 year they could not find

me. They agreed that they could not find me during that year.

I then asked them how long it would have taken that bank/transfer agent to look

me up if I had owed them the $500.00?

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I have yet to receive an answer to that question. (The answer is, of course, it would have taken them less than a minute at a cost of less than $1.00 to check me

electronically on a database.) In August, 1992 I brought the subject of the unfair treatment of so-called ‘‘lost securityholders’’ to the attention of my Congressional classmate, now Senator Ron

Wyden, who instantly grasped the significance of my disturbing experience. Ron, as

Chairman of a Subcommittee of the Committee on Small Business, wrote to Richard

C. Breeden, then Chairman of the SEC on August 20 and August 13, 1992. On February 22, 1993, SEC Chairman Breeden wrote Ron back in part as follows, ‘‘* * *

although the absolute value of undeliverable accounts, about $10 billion according

to the Division’s (Division of Market Regulation) estimate, is substantial, this is only

about one-tenth of 1 percent of the approximate $10 trillion capitalization of U.S.

equity and debt markets.’’

Based on the enclosed exhibits and my direct experience with the Division of Market Regulation at the SEC, former Chairman Breeden’s peremptory dismissal of the

$10 billion dollars in undeliverable accounts is a fair characterization of the culture

or attitude of the Division of Market Regulation and the SEC itself toward millions

of securityholders who are owed billions of dollars of their own money!

In its October 7, 1997 Release of the revised Rule 17Ad.17., the SEC said it had

at first estimated that there were 250,000 lost securityholders, but that it later estimated that there were 3,000,000 lost securityholders owed possibly more than $450

million. It is only fair to point out that the SEC was off by a factor of twelve (12)

between its first and last estimates of the number of lost securityholders. Among

those experts in this field that I am familiar with, most believe that the most recent

estimate of about $450 million is too low, also.

Please understand that we are not talking about any money belonging to any government at any level, nor to any money belonging to any corporation. We are talking about uniting owners of securities with their dividends and interest rightfully

earned by their securities for which they paid their hard-earned money.

On July 28, 1993 the Sub-Committee staff presented to Chairman Wyden a report

entitled: ‘‘Return to Sender,’’ tens of thousands of ‘‘undeliverable’’ dividend payments in limbo. Individual investors lose billions of dollars of shareholder assets because of lax transfer rules. Indifference by public companies and government regulators.

A PAY DAY FOR PUBLIC COMPANIES AND STATES?

In addition to working with Senator Wyden and his staffs, I have been invited

to speak before three annual meetings of the National Association of Unclaimed

Property Administrators (NAUPA) and a national meeting of the Security Transfer

Association (STA) on the subject of lost securityholders.

Every state in the Union and the District of Columbia have unclaimed property

laws, which require holders of other peoples’ money to turn over to the respective

states—after periods of from 3 to 7 years—the money being held. The states have

been doing this for decades, and they have all used public records published originally in newspapers and at county and state fairs and that are now published by

a majority of states on the Internet. These states have been doing this without either security or privacy problems. Likewise, corporations have procedures to check

claimants for undelivered dividends and interest, and these procedures work very

well. In other words, there are no privacy or security problems, except in the minds

of those who do not want the lost security owners to obtain their own money.

The advent of the computer and the Internet has completely changed the way securities and their owners can be kept track of. We are no longer in the days of ‘‘3

x 5’’ cards shuffled by hand. As a surgeon should be held liable for negligence today,

if he operated to repair a bone fracture without first using a readily available xray machine, so should those who transfer securities today, if they refuse to use

readily available databases, especially where that refusal benefits others than the

owners of the securities.

There are three very big credit rating companies which keep tab on almost every

person in the United States who ever got credit or has made investments. When

it comes to those who own stocks and bonds, their databases can find up to 80 percent or more of those sought, starting with either a name, an address, or a Social

Security number, which is on, I believe, every driver’s license issued in the United

States as required by the Federal law.

People who own stocks and bonds are not trying to hide from their own money.

Almost without exception owners of stocks send in their Social Security numbers on

a Form W-9 to transfer agents so that the transfer agents will not withhold twenty

percent (20 percent) of the dividends for the IRS.

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People want to get their money, and the fifty states and the District of Columbia

have demonstrated conclusively that there are no legal, ethical, or other policy considerations such as privacy or security, which prevent delivery to owners of securities the dividends and interest earned by their securities.

It was my lot to bring to the attention of the SEC through Senator Wyden that

the SEC was not assuring investors that they would have their dividends and interest delivered to them promptly—or at all—by the use of good addresses.

Under the SEC’s existing Regulation 17 CFR Part 240. Rule 17Ad-10. specifying

‘‘Certificate detail,’’ e.g., ‘‘(4) the address of the registered securityholder,’’ the SEC

had and has the authority of providing for the following common sense, non-rocket

science practices, which were suggested to it by me as an investor in correspondence

and/or during various meetings at the SEC:

1. Beside transfer agents, the regulations regarding lost securityholders should

apply to broker-dealers, corporate trustees, personal and institutional custodians

and mutual funds, and issuers which do their own transfer work, because transfer

agents maintain records for only approximately one-half (1/2) of the securityholders

in the United States. The SEC in 1996 proposed changes to include recordkeeping

broker-dealers, but then reversed itself in 1997, saying that changes only applied

to recordkeeping transfer agents.

2. Regulations, which apply to securityholders lost on or after December 8, 1997

should apply equally to all securityholders who had been lost before December 8,

1977.

3. The lost securityholder regulations should apply to securityholders who meet

the $25.00 de minimis test adopted by the SEC in 1997, if their checks remain uncashed for 7 months. The next regularly-sent dividend and interest checks should

inform the payee that a previously sent check had not been cashed, and the notice

should request a call to a toll-free number or other communication. There is sound

precedent from Prudential Insurance for notices like this, and I have conferred with

one of the most prominent transfer agents that this can be easily done through their

computers at insignificant cost.

4. All of the data on lost securityholders generated by transfer agents, broker/

dealers et al., should be sent to the SEC for listing on one Internet website. A majority of states already put their unclaimed property lists on the Internet, and

NAUPA has a website where it is pooling various state lists. NAUPA created the

website, because the SEC proposed such a website for itself in a 1996 release, only

to reverse itself after it had been lobbied hard by those who did not want the lost

securityholders found. Prominent among those were ‘‘heir finders’’ or locators (or

vampires) depending on who is describing them. The SEC already has the Thomson

Financial Network operate the SEC’s Lost and Stolen Securities Program under the

name of Securities Information Center (SIC). If the SEC has a website for its list

of lost or stolen pieces of paper, why can it not have a website for its list of the

lost owners of securities? Why should a piece of paper be treated better than the

owner of a piece of paper?

It must be pointed out that the United States Government and the world Jewish

community shamed the Swiss Bankers Association into publishing on an Internet

website a list of unclaimed Holocaust era accounts, which the Swiss Bankers Association had previously maintained had been lost or destroyed. (I checked this

website from my office in Columbus for the name ‘‘Klein,’’ and I came up with three

hits!) There is no reason why the few big American banks, which control the biggest

transfer agents, do not do what the Swiss show can easily be done, i.e., put on the

Internet the SEC list of lost securityholders, which is what the states are already

doing with their unclaimed property owners lists.

Based on my experience over these last 11 years, I believe that there is sufficient

interest in the private sector to distribute the information on the Internet at no cost

to the SEC once the information has been delivered electronically to the SEC. There

is, of course, no reason to publish on the Internet the amount owed the lost

securityholders nor the quantity of securities owned by the lost securityholder. All

that is needed is the simple fact that John Q. Public is owed something by XYZ Corporation.

5. Money due lost securityholders as redefined here, which is held by any of the

holders as redefined here, must hold that money in trust accounts, so that the

securityholder will get the interest earned by his or her dividends and interest instead of becoming a reward to those holding the undelivered dividends or interest.

The case of Delaware v. New York, 507 U.S. 490, 113 S. Ct. 1550 (1992), is where

New York and Delaware fought over the approximately $1 billion in dividends and

their underlying stock generated in ‘‘street name’’ accounts owned by ‘‘lost’’

securityholders, who used the major broker-dealers headquartered in New York

289

City. (Investors who leave their securities in ‘‘street name’’ with a broker-dealer can

be as easily lost as any other name on any other list.)

Another important reason for requiring that securityholders’ money be held in

trust accounts can be gleaned from the $63.5 million in fines in addition to the return of $19.1 million illegally taken by Bankers Trust Corporation of New York in

early 1994. This $19.1 million was taken from unclaimed property due to lost customers of the bank, and it was illegally used to falsely increase the profits of the

bank, instead of sending that money to the states as required.

6. If a locator/heir finder is engaged by any transfer agent, et al., to locate lost

securityholders at a cost to the lost securityholder after the obligatory two database

checks, those lost securityholder accounts should be placed with locator/heir finders

only on the basis of open bidding by locator/heir finders for batches of such accounts,

each account in each batch to receive due diligence. In fact the National Association

of Unclaimed Property Administrators has urged the SEC to protect lost

securityholders from the excessive charges (from 25 percent to 50 percent) of heir

finders or locators.

7. The United States of America through its many arms and agencies holds great

sums of money due others. The United States Money Return Commission should be

created to locate all of this money owed to others; the U.S. government should put

the information on one Internet website; and then the Commission should simplify

the method whereby any claimant can obtain his or her money wherever it may be

in the United States government. There is simply no reason for the U.S. government

not to use currently available technology to unite people with their money now held

by the U.S. government. The same principle applies to the securities industry.

Not one state law is changed by any of the above. These regulations only affect

those who come within the clear jurisdiction of the Securities and Exchange Commission. NAUPA has encouraged the SEC to unite lost securityholders with their

money years before the money becomes ‘‘unclaimed property’’ due for delivery to the

states. The elected state officials know that it is the intent of the state laws on unclaimed property to have their respective citizens get the money that is due them;

it simply makes no sense to those elected state officials to force their lost

securityholders citizens into giving interest free loans to those who are holding

money belonging to the lost securityholders, who are residents of their respective

states.

Chairman KASICH. The gentleman from Pennsylvania is recognized.

STATEMENT OF THE HON. JOSEPH M. HOEFFEL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. HOEFFEL. Thank you, Mr. Chairman. I would like to read

part of my testimony that is marked ‘‘Amended 10 a.m., 6/30/99.’’

Mr. Chairman, thank you for the opportunity to appear before the

committee to speak about corporate welfare and the need to reform

the unending flow of taxpayer funds into corporate pocketbooks.

As a matter of simple fairness, corporate interests must be required by Congress to share in budget discipline. We must no

longer support programs and subsidies that waste our resources

and tax dollars, hurt the environment and discourage and hinder

competition in the private sector.

It is time for Congress to acknowledge that Federal subsidies, including tax advantages, which may have been enacted for a valid

purpose for a specific industry, can become obsolete, anticompetitive or no longer in the public interest, and it is unfair to require

the U.S. Taxpayer to support such unnecessary spending or tax

breaks that do not provide a substantial public benefit.

Further, since no public body has systematically evaluated these

Federal subsidies, it is time for Congress to create a commission to

review such unfair corporate welfare payments and to advise Congress on reform or elimination of such payments.

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Now, Mr. Chairman, just because Congress hasn’t reviewed the

corporate welfare situation, it doesn’t mean others have not reviewed, and I have with me a pile of reports, really a partial pile

of studies, that many groups have made of corporate welfare. Many

of these groups will be testifying later this afternoon. We have determined what the problem is. Not everybody agrees on specific

matters that need to be changed, but there have been lots of studies about the evils of corporate welfare, but Congress has not yet

figured out a way to deal with it.

There are many examples of the problem, Mr. Chairman. The

Center for Policy Attitudes released a poll saying only 19 percent

of the respondents feel that government is run for the benefit of all

the people, while 75 percent of the American people think government’s run for the benefit of a few big interests.

The Citizens Against Government Waste was highly critical of

last year’s budget bill, determining that that bill enacted 2,838

pork barrel projects, totalling $12 billion, into law.

The Congressional Joint Committee on Taxation reviewed the

1998 budget and said it contained 79 new tax provisions, each of

them benefiting fewer than 100 American taxpayers.

Time magazine, which Ralph Nader referred to earlier, has concluded that the costs of corporate welfare are the equivalent of

nearly 2 weekly paychecks from every working man and woman in

this country, and they further estimated in that Time series that

the Federal Government pays out annually $125 billion in corporate welfare, equivalent to the annual income tax paid by 60 million of our fellow taxpayers.

Clearly, clearly we have to act. I am proposing that we pass into

law the Corporate Welfare Reform Commission Act to establish a

congressional advisory commission to examine and recommend to

the Congress after careful review a list of Federally supported programs which have outlived their initial purposes or that fail to provide a substantial public benefit.

We seem to know where we want to go on this issue. We have

got all of these reports that we could ever possibly want to evaluate, but we don’t know how to get there. We are missing a means

to implement reform responsibly and quickly.

My legislation will provide such a mechanism. The legislation

would provide for the establishment of a five member independent

nonpartisan commission with all of the membership appointed by

Congress. The commission would identify unfair Federal subsidies

to profit making industries, tax preferences and below market rate

fees and recommend reform of those provisions to the Congress

under a rigid timetable for reform or termination.

Generally excluded from this review would be Federal programs

primarily designed for public health and safety, for education and

for the environment.

The timetable suggested in my legislation would require the commission to submit to Congress no later than December 1st, 2000,

a report containing the commission’s findings and its recommendations. Congressional leaders shall promptly then introduce implementing legislation and the committees would have 120 calendar

days from the day of referral to report the bills or the bills shall

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be discharged and promptly placed on the legislative calendars of

both Houses.

The debate shall be limited. Amendments would be in order during legislative deliberations. Mr. Chairman, legislation on corporate welfare reform was intro- duced in the lasting Congress and hearings were held. In this Congress, we are moving forward sooner, and I compliment the Chair

for pushing this matter forward and showing the courage to do so.

Perhaps by taking a slightly different angle on this we can speed

up the process.

We need to institutionalize our efforts and when conclusions are

made by this proposed commission we need to have an expedited

consideration by Congress to implement the decisions. My legislation would do that.

I ask the committee and urge the committee to quickly adopt this process to begin to restore confidence in the Congress and its commitment to guarding the public purse. Thank you very much. [The prepared statement of Mr. Hoeffel follows:]

PREPARED STATEMENT OF HON. JOSEPH M. HOEFFEL, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. Chairman, Mr. Spratt, I appreciate the opportunity to appear before the Com- mittee to speak about Corporate Welfare and the need to reform the unending flow

of taxpayer funds into the pockets of private corporate pocketbooks. As a matter of simple fairness, corporate interests must be required by Congress to share in the burden of budget discipline. Further, we must no longer support programs and subsidies that waste our resources and tax dollars, hurt the environment

and discourage competition in the private sector. In a poll released on May 10th of this year by the Center for Policy Attitudes, only 19 percent of the respondents said that government is run for the benefit of

‘‘all the people’’ while 75 percent said that it is run for the benefit of ‘‘ a few big

interests.’’

The Congress is now in the midst of its annual appropriations work schedule. I can only hope that last year’s experience has taught us a lesson. According to an

analysis of the the 3,000 page Omnibus Appropriations Act and the five other Appropriations bills by the Citizens Against Government Waste, the Congress enacted

into law 2,838 pork barrel projects totaling $12 billion dollars. It is small wonder that public skepticism abounds.

Federal programs should not be turned into an accumulation of special interest

provisions.

Public support for programs depends on the belief that they are for the public good. If the trend in special interest provisions continues, public confidence in the work

of the Congress will be further undermined. The Congress will be seen as returning

to a policy of public spoils and not of shared sacrifice for the benefit of most Americans. In a month-long series of articles which covered the breadth of this problem late last year, Time magazine researchers concluded that the costs of Corporate Welfare

were the equivalent of nearly two weekly paychecks from every working man and

woman in America.

This is truly staggering. It was further estimated in the same series of articles that the Federal Government has paid out $125 billion annually in corporate welfare, equivalent to all the income tax paid by 60 million individuals and families.

Corporate Welfare is comprised of subsidy elements of Federal spending, Federal

usage fees below market rates and special tax preferences that benefit commercial

industries and corporations by providing a public benefit that is less than the cost

of such program to the Federal taxpayer and providing an unfair competitive advantage or financial windfall.

No effort to stanch the outflow flow of tax dollars can succeed without addressing

each of these categories.

Additionally, some review should be made of special interest subsidies and tax

breaks inserted into the Federal budgets without adequate public notice or review.

In fact, the 1998 Balanced Budget contained 79 new tax provisions, each benefiting

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fewer than 100 American taxpayers according to a Congressional Joint Committee

on Taxation study.

Private organizations with divergent points of view such as the Heritage Foundation, the Progressive Policy Institute, the Cato Institute, Common Cause, Citizens

Against Government Waste as well as a coalition of Friends of the Earth, Taxpayers

for Common Sense and the U.S. Public Interest Research Group have, in the past,

published lists which identify Federal programs which waste tax payer monies. Additionally, organizations such as Ralph Nader’s Public Citizen, National Taxpayers

Union and American for Tax Reform have all participated in the past by endorsing

attempts to plug this drain on the budget .

This wide ranging interest is further demonstrated by the actions of both the Congressional Budget Office and the Library of Congress. In 1995, the Congressional

Budget Office (CBO) published a study of Federal Financial Support of Business.

Also, in 1995, the Economics Division of the Library of Congress published its own

list of Federal Programs that could financially benefit Business Enterprises. In

1997, CBO once again revisited this issue. Finally, the Administration’s annual

budget submission carries tables of ‘‘tax expenditures’’ as one of the several categories of programs which this Commission should examine as it moves toward the

goal of lightening the burden on the American Taxpayer.

I will introduce the Corporate Welfare Reform Commission Act of 1999, in the

coming days that would establish a Congressional advisory commission to examine

and recommend to the Congress, after careful review, a list of federally supported

programs which have outlived their initial purposes or that exceed in tax support

the benefits for the American people.

In a word, we seem to know where we want to go on this issue, what we are missing is a means to implement reform responsibly and swiftly. My legislation provides

such a mechanism. This legislation would provide for the establishment of:

1. A five member, independent nonpartisan Commission with all the membership

appointed by the Congress.

2. The Commission would identify unfair Federal subsidies to profit making industries, tax preferences, and below market user fees and recommend reform of

these provisions to the Congress under a rigid timetable for reform or termination.

3. Generally excluded from the review would be Federal programs primarily designed for public health and safety, education and the environment. The proposal

is modeled after the successful Base Realignment and Closure Commission and is

designed to remove politics from the subsidy review process.

I have already taken action to make the Administration aware that this is a matter that requires a serious effort. On March 3, I wrote to Office of Management and

Budget Director Jack Lew requesting that he provide me a list of government benefit programs that meet the criteria of Corporate Welfare Programs.

In his reply to me, Director Lew identified 16 separate statutory proposals in the

President’s Budget to close corporate tax shelters, proposals relating to methods of

business accounting that overstate expenses or understate receipts in an attempt to

reduce taxes due and reductions in benefits through better management of users

fees. On the spending side, Director Lew pointed to the Administration’s efforts to

reduce lender subsidies and recapturing part of the reserves of guarantee agencies.

As one Member of Congress with limited resources compared with those of the

Treasury Department, it is hard to thoroughly evaluate the merit of such a broad

range of programs and tax expenditures. This Commission will have resources necessary to accomplish the goal. It also has the advantage of being a single focus effort

not beset by competing daily requirements which would detract from a speedy, complete review necessary for successful completion of this work.

Legislation on Corporate Welfare Reform was introduced in the last Congress.

Hearings were held. This Congress we are moving forward earlier in the session.

Perhaps, by taking a slightly different direction, we can speed up the process. We

need to institutionalize our efforts and when conclusions are made by the Commission, we need to have expedited consideration by the Congress to implement these

decisions.

My legislation would do just that.

I urge the Committee to expeditiously act to adopt this process including the timetable to begin to restore confidence in the Congress and its commitment to guarding

the public purse, one of our most serious responsibilities.

Chairman KASICH. I want to thank the panel. We have another

panel that will follow this. I would like to concentrate my questions—and first of all, I want to pay a very high compliment to my

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friend, Mr. Shamansky, and it is pretty clear from this testimony,

you have been about 11 years, Bob?

Mr. SHAMANSKY. Yeah.

Chairman KASICH. Well, why can’t we get something done about

this?

Mr. SHAMANSKY. I think we are now with this hearing. We have

made some progress. It is really an institutional problem of at all

places the SEC, and I keep referring to the division of market regulation. It is simply amazing to me. I asked a person in a position

to know what goes on over there, and I said why won’t they do the

job that clearly has to be done and the law expects them to do, and

he looked me in the eye and he said, ‘‘Bob, you are a single investor

out in Columbus?’’ And I said, yes. And he said, ‘‘When they leave

the division, are you going to give them a job?’’ And the answer is

obviously no. I don’t know any other explanation. They are simply—it is a classic case of the regulator captured by the regulated,

and in this particular case, I have yet to meet a CEO that doesn’t

want his shareholders to get the shareholders’ dividend. They all

want them to.

You know John B. McCoy, and I know John B. McCoy. I am

working with him to make sure that Bank One, and you know,

clearly working with him on that, to make sure that the industry

moves on, because all we are talking about is returning money to

the—John wants his shareholders to get their money, and he wants

his transfer agent to just use the technology and move on with it.

The private sector will just apply the technology. The problem is,

I think, institutional at the Securities and Exchange Commission.

Chairman KASICH. Where do you think the proper point is up

here for resolving this, Bob, and if we were to try to move to find

somebody on a committee at jurisdiction, who could grab this thing

and get this thing done, where would we go? Would that be the

Banking Committee? Would it be the Commerce Committee?

Mr. SHAMANSKY. I would defer to your expertise on that, John.

I don’t know which one—I am sorry, I wish I were more knowledgeable on that. Clearly——

Chairman KASICH. Is Ron Wyden doing anything besides the report?

Mr. SHAMANSKY. As you know, legislative counsel is working on

the different elements to present a bill and that really is to remind

the SEC what its job is and the authority that it has. The only

thing that they may need to be encouraged on is the idea of when

dividends are declared and interest earned on bonds, say, just put

it in trust accounts. None of this is rocket science. We are not taking—we are not bothering any State laws. There are no expenditures. It is just making sure that money is delivered to the rightful

owners, and that is so simple. These people at the SEC can’t handle that.

Chairman KASICH. Or don’t want to.

Mr. SHAMANSKY. Apparently.

Chairman KASICH. Well, I think we need to make an effort. I

mean, it is total—this seems to me like something that just should

have been done in 11 days, not 11 years, and I think we have got

to figure out how we can move all the various contacts we have to

try to get this resolved.

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Mr. SHAMANSKY. Mr. Chairman, this is based on my experience.

This is truly a nonpartisan issue. I have yet to meet Democrat, Republican or anybody else who said a shareholder shouldn’t get his

dividend and a bondholder shouldn’t get his interest. This is not

what you are arguing. It is strengthening our market economy, and

you do that by encouraging the individual to put his money in it.

Chairman KASICH. Well, just an element of fairness, too. I mean,

it is just simple common sense. Gentleman from Georgia.

Mr. CHAMBLISS. I don’t have any questions.

Chairman KASICH. Gentleman from Pennsylvania.

Mr. SMITH. No questions, Mr. Chairman. We have the testimony

of everyone except Representative Hoeffel. Are you going to make

that available?

Chairman KASICH. We have his written testimony. Bob, what we

need to do is just stay on top of this and see how we can get this

resolved, and to the gentleman from Pennsylvania, I am obviously

very interested in your legislation, would like to have a good look

at it, and I can’t imagine I wouldn’t be helpful on that.

To Mr. Minge, David, what have you found in your—what has

your experience been so far in your efforts to try to reign some of

this in?

Mr. MINGE. Well, I have worked in several different capacities.

One is to meet with business and State officials that are involved

in economic development and planning, and by and large I found

the reception to be quite positive. In fact, the largest criticism that

I have had or the most significant criticism is that my bill is not

stern enough, that instead of essentially a 100 percent tax on any

benefit, I use a lower tax rate or in the alternative they said why

don’t you just flat out prohibit this and have some agency that is

responsible for the enforcement of this so that we don’t have states

using taxpayer money for subsidies to induce businesses to move

from one State to another.

When it comes to our colleagues here in Congress, there is some

skittishness. There is a reluctance to jump into what they think is

essentially a State and local issue. They feel if states and municipalities want to compete with each other and spend taxpayer dollars trying to woo each other’s corporate headquarters, that is, you

know, sort of like this is America, that is what we do, but on the

other hand, as I have sat down and talked with colleagues about

this, they have recognized that this is a very uncomfortable position that their State is often put in, and they would like to see

something done.

And what I am doing now is concentrating on finding cosponsors

and starting to talk to the Ways and Means Committee ,which is

the committee that would have jurisdiction over my bill, to see if

they would consider having a hearing on it.

Chairman KASICH. I want to thank all three of you, and I hope,

Congressman Minge, that you will help me to assist Mr.

Shamansky in being able to get an outcome. I mean I can promise

you that he didn’t do this because he had any self-interest, I can

promise you that. He stumbled into something, and he went this

isn’t fair, and as a result, he has just been pursuing it, and we

have actually worked with him for a while, but we need to get

something resolved on this front. So I hope in a bipartisan way you

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will join with me, and we will make sure we can get this resolved

for him.

Mr. MINGE. John, maybe this is something the three of us, now

that we have heard it, we can cosponsor together. I think that he

has a marvelous set of proposals and I compliment him.

Chairman KASICH. It is kind of hard to believe, especially in the

era of all the communication, the technology, it is just pretty amazing.

Mr. SHAMANSKY. If I may, Mr. Chairman, show in a sense a

softie I am. I am a lawyer, as I have said repeatedly. That is why

I spotted the word ‘‘opine’’ I think, but yesterday, I walked in front

of the Supreme Court building, and it says ‘‘Equal Justice Under

Law.’’ I want you to understand, I am affected by it. I actually believe that, and I was asked earlier, how could you and I be operating on this, and I said that is what this—but that is what this

country is about. We are agreeing on the issue, and we are talking

about fairness and justice, and it is equal, and that is all we are

talking about, but it is what we are talking about.

Chairman KASICH. That is exactly right. I want to pay you the

highest compliment for coming today, and I hope we can somehow

soon end this frustration. OK.

We go to our final panel, which is going to be a very interesting

panel. Grover Norquist, Americans for Tax Reform; Steve Moore,

the CATO Institute; Robert McIntyre, Citizens for Tax Justice; Jill

Lancelot, one of my favorites, Taxpayers for Common Sense; and

Tom Schatz with the Citizens Against Government Waste.

Is Jill still with us or did she leave? OK. I think we will start

with the way they are listed on the sheet here. So, Grover, you

get—oh, I am sorry, you are right. I will go to my favorite witness,

Jill Lancelot, who will—are you prepared, Jill, to start?

STATEMENTS OF JILL LANCELOT, LEGISLATIVE DIRECTOR,

TAXPAYERS FOR COMMON SENSE; THOMAS SCHATZ, PRESIDENT, CITIZENS AGAINST GOVERNMENT WASTE; ROBERT

McINTYRE, DIRECTOR, CITIZENS FOR TAX JUSTICE; STEPHEN MOORE, DIRECTOR OF FISCAL POLICY STUDIES, CATO

INSTITUTE; GROVER NORQUIST, PRESIDENT, AMERICANS

FOR TAX REFORM

STATEMENT OF JILL LANCELOT

Ms. LANCELOT. I am. Thank you, Mr. Chairman and members of

the committee. My name is Jill Lancelot. I am cofounder and Legislative Director of Taxpayers for Common Sense, and certainly, Mr.

Chairman, I would like to say thank you for giving us the opportunity to appear here today, but in particular I want to thank you

for your leadership on this issue.

In the interest of time, I think I will skip through where Taxpayers for Common Sense is unless you think that is necessary. It

is in the testimony, and folks can see who we are, but I am obviously here to talk about Federal subsidies to business through direct Federal payments and tax breaks. It is a practice that we have

all come to know as corporate welfare. Taxpayers for Common

Sense believes the corporate welfare both drains the U.S. Treasury

and misuses taxpayer money.

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The projected budget surplus that has been making headlines

this week in no way obviates the need to reduce unnecessary and

wasteful government spending. There is never a time to waste the

hard earned money of taxpayer dollars. Instead, Congress should

work to further bolster America’s current economic strings by removing the drain of corporate welfare, a misguided spending priority that needs to end now.

Not only is corporate welfare a misuse of taxpayer money, but it

can have other ramifications as well. It can distort the market by

maintaining industries that may not be able to compete on their

own. Generally speaking, picking and choosing corporate winners is

best left to the market.

Corporate welfare also denies a fair return on taxpayer owned resources and properties. Corporate welfare continues programs long

after they have achieved their intended purpose. Perhaps it may be

impolitic to mention this, considering I am testifying before a house

committee, but we do think that corporate welfare can sometimes

encourage an unhealthy relationship between politicians and industry, each coming to depend on the other.

I have chosen five examples that we deem corporate welfare, and

I will summarize them quickly in the interest of time. The first

four are also in the Green Scissors report and part of the Green

Scissors campaign, and as noted earlier this morning, Ralph Nader

has talked about some of these, but I think it is worth mentioning

them again. Clearly, they are on many people’s lists.

The nuclear power industry provides a prime example of the government propping up an industry that the market was unwilling

to support. In 1957, when no private insurance——

Chairman KASICH. Jill, excuse me 1 second. Is there a way you

can summarize these five because we are going to be here all day

if we don’t do that. At least most of them have been here—Moore

has been here for 3 hours.

Ms. LANCELOT. Well, as Mr. Nader said, Price Anderson prematurely pushed an industry into the market, and it has so far had

about forty—there are many different estimates out there, $47 billion in subsidies to date, and the government, the Congress and

Department of Energy have just funded two more unnecessary programs.

The barge industry is a fine example where companies don’t pay

their fair share, which is an area we think is corporate welfare as

well. The taxpayers built the waterway system, and the users don’t

pay for their operation and maintenance. We are talking about

companies like Archer-Daniels-Midland, Cargill, Conagra or Dupont. We think that they can afford to contribute at least 50 percent to the operation and maintenance of the inland waterway system.

As Mr. Nader and other Members of Congress mentioned, the

1872 mining law which governs the extraction of precious hard

rock minerals on public lands, there is no royalty on these. The

mining industry takes these precious metals for free. Even though

the coal, oil and gas industries pay a royalty for the privilege of extracting those resources from public lands, the government has

been forced to give away more than $240 billion of minerals under

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this law. This is, I think, a very good illustration of corporate welfare because it denies taxpayers a fair return on their assets.

The Clean Coal Technology Program, another good example. Not

only has this program failed to achieve its intended purpose, but

it also benefits a wealthy industry that doesn’t need its help. GAO

says that it is a program fraught with waste and mismanagement.

Those are the four corporate welfare programs that the Green

Scissors campaign has also targeted.

The defense contract mergers, which is what Mr. Nader talked

about as well, although these are not in the spotlight right now because there is—none of them are taking place, the Pentagon can

under current policy appropriate funds to reimburse defense contractors for expenses that are related to corporate mergers. The recipients of these funds include corporations such as General Electric, Northrop Grumman, Hughes Aircraft, and the decision to

merge any of these related expenses should certainly be solely the

responsibility of the companies involved. Taxpayer handouts should

not fund these or any other many business decisions that private

companies must make every day.

In 1996 Congress passed legislation that ended public welfare as

we knew it. Today we need similar legislation that calls for an end

to taxpayer subsidized handouts to financially strong businesses

and mature industries.

That does end the formal part of my testimony, but I would like

to make one other comment, if I may. The good news that I take

from this hearing is that organizations that often disagree seem to

find common ground on this issue. And I would like to applaud the

chairman and enthusiastically support the suggestion that you

made that we all sit down and come together and figure out one

or two issues that we can all work on, and I just want to make—

tell a quick story.

This is the way to make something happen, where you have disparate groups coming together and members from both sides of the

aisle coming together, focusing on one or two issues. It happened

in 1983 before you—I sort of show my age here because it happened prior to the chairman coming to Congress—but the Clinch

River Breeder reactor was a program that the government wanted

to fund with a lot of money. I and others put together something

called the Taxpayers Coalition Against Clinch River, and it had

some of the people here on that maybe—some of the people here

at the table actually the organizations hadn’t started yet—but Citizens for Competitive Enterprise Institute, which was their first

year, was involved along with business groups, religious groups,

environmental groups, taxpayers groups.

We formed this coalition and we killed the Clinch River Breeder

reactor when it was going to be built in the State of Tennessee——

Chairman KASICH. That sounds like a holy alliance.

Ms. LANCELOT. In the State of Tennessee. We did this in 1983

when Howard Baker was majority leader of the Senate in whose

State the Clinch River Breeder reactor was going to be built. In the

House we had people like Vin Weber, a conservative from Minnesota; George Brown, Democrat liberal from California; and everybody in the middle; Claudine Schneider, moderate Republican from

Rhode Island. In the Senate, we had Senator Bumpers, we all know

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Senator Bumpers from Arkansas that would be; and very conservative Republican from New Hampshire, Gordon Humphrey; and

they stood up on the floor and they talked about the subsidies and

the corporate welfare of this program and we beat it. So I applaud you. I support you. Let us do it. Thank you.

[The prepared statement of Jill Lancelot follows:]

PREPARED STATEMENT OF JILL LANCELOT, LEGISLATIVE DIRECTOR, TAXPAYERS FOR

COMMON SENSE

Good afternoon. My name is Jill Lancelot, and I am Co-founder and Legislative Director of Taxpayers for Common Sense (TCS). Mr. Chairman, thank you for the

opportunity to testify before the House Budget Committee’s hearing on Corporate

Welfare. I want to thank you, Mr. Chairman for your leadership on this issue. TCS is dedicated to cutting wasteful government spending and subsidies and keeping the budget balanced through research and citizen education. We are a politically independent organization that seeks to reach out to taxpayers of all political

beliefs in working toward a government that costs less, makes more sense and inspires more trust. Taxpayers for Common Sense receives no government grants or

contracts.

Mr. Chairman, today I am here to speak about Federal subsidies to business through direct Federal payments as well as tax breaks. This practice has come to

be known as ‘‘corporate welfare.’’ TCS believes that corporate welfare both drains

the US Treasury and misuses taxpayer money.

The projected budget surplus making headlines this week in no way obviates the

need to reduce unnecessary and wasteful government spending. There is never a

time to waste the hard-earned tax dollars of the American people. Instead, Congress

should work to further bolster America’s current economic strength by removing the

drain of corporate welfare, a misguided spending priority that needs to end.

Not only is corporate welfare a misuse of taxpayer money, but it can have other

ramifications as well. It can distort the market by maintaining industries that may

not be able to compete on their own. Generally speaking, picking and choosing corporate winners is best left to the market. Corporate welfare can also encourage an

unhealthy relationship between politicians and industry with each coming to depend

on favors from the other. All, of course, at the expense of the taxpayer. Let me expand on these points with several examples.

NUCLEAR INSURANCE AND RESEARCH

The nuclear power industry provides a prime example of the government propping

up an industry that the market is unwilling to support. Beginning after World War

II with the Atoms for Peace program, America was determined to convert nuclear

power into a productive rather than a destructive force. Then in 1957 the government released its first nuclear reactor safety study. This study concluded that a nuclear power accident could result in $7 billion of property damage and thousands

of injuries. Recognizing the potential costs, a Vice President from GE told Congress

that his company and others would not build nuclear power reactors unless they

could be shielded from full liability in the event of such an accident. Since no private insurance companies would insure the reactors, Congress stepped in by passing

the Price Anderson Act of 1957, a federally underwritten insurance scheme that

paved the way for the construction of nuclear power reactors. Although originally

enacted for only 10 years in an effort to jump-start the fledgling industry, it has

been periodically extended and continues today to shield the nuclear industry from

its full financial responsibility.

Forty-two years ago the government defied signals from the private sector and

prematurely pushed the nuclear power industry into the market place. And still,

after $47 billion in subsidies and no reactor orders since 1974, the government continues to throw money at the industry to help it keep its head above water.

Congress made history during the FY98 appropriations process when, for the first

time since 1950, it did not give any direct money to the nuclear power industry.

This was quickly reversed when Congress provided $19 million in FY99 for the Department of Energy’s Nuclear Energy Research Initiative (NERI). To date, the Senate-passed Energy and Water Appropriations bill for FY00 has provided $25 million

for NERI and $5 million for the Nuclear Energy Plant Optimization program.

These programs will examine reactor aging issues—work already being performed

by the Nuclear Regulatory Commission (NRC). Once again the government is subsidizing research for the mature commercial nuclear reactor industry by setting up

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brand new programs that are duplicative and unnecessary. The nuclear power industry generated $141 billion in 1996 revenues—surely it can afford to improve mature products without more taxpayer subsidies.

BARGE SUBSIDIES

Second, consider the barge industry. Federal programs perpetuate an uneven playing field by subsidizing financially flush corporations that have it well within

their means to pay at least 50 percent of the costs associated with operating and

maintaining the nation’s inland waterways. The Congressional Budget Office has declared the barge industry the most heavily subsidized mode of transporting goods. It is estimated that Congress appropriates

about $500 million annually for the operation and maintenance (O&M) of inland waterways. The O&M of this system requires, among other activities, the dredging of

shipping channels and the rehabilitation and repair of locks and dams, costing taxpayers millions each year. TCS believes that, as major beneficiaries, the barge industry should contribute at least 50 percent to the overall costs of inland waterway

O&M.

Among the beneficiaries of this subsidy are a small group of 20 wealthy barge owners. These corporations include: • American River Transport Co., a division of Archer-Daniels-Midland Co. (a com- pany with sales in FY ’97 of $13.9 billion) • Cargo Carriers, Inc., a subsidiary of Cargill, Inc. (a company with sales in FY ’97 of $67.7 billion) • Peavey Barge Lines, a subsidiary of Conagra, Inc. (a company with sales in FY ’97 of $24.0 billion) • Consolidation Coal Co., a subsidiary of Dupont Nemours & Co. (a company with sales in FY ’97 of $46.7 billion)

Inland waterway operation and maintenance is a cost of doing business. Tax- payers paid to build the waterway system. At least let the users contribute to its

maintenance.

HARD ROCK MINING

The General Mining Law of 1872 is the granddaddy of all subsidies and is often

at the top of many lists of outrageous give-aways. With good reason. The 1872 mining law governs the extraction of precious hard-rock minerals such as gold, silver,

and platinum that are located on public lands belonging to the American people.

First, under the law the mining industry is entitled to take free of any charge,

gold and other precious minerals found on public lands. By comparison, oil and natural gas companies are charged a 12.5 percent royalty for extracting resources from

public lands; for coal mined on the surface a royalty rate of 12.5 percent is paid and

8 percent for coal mined underground.

Second, the law entitles large multinational corporations to take full title (called

patenting) to mineral-rich lands for no more than $5.00 an acre. Through patenting

or royalty-free mining the U.S. government has had to give away more than $245

billion of minerals.

CLEAN COAL TECHNOLOGY PROGRAM

Third, consider the Clean Coal Technology Program. Since 1985 at least $1.2 billion has been spent for this program. A 1991, General Accounting Office (GAO) report found a history of waste and mismanagement—a large number of projects had

either been terminated within a few years of being funded, experienced substantial

schedule delays, or exceeded their budgets.

This mismanagement continues. Currently, there are seven projects that have

been in the design phase for between 5 and 10 years and have yet to go to construction. Two of those projects are in bankruptcy. Other projects have been moved from

site to site not finding any place suitable. The Department of Energy still has a

$610 million commitment to these projects that are still in the ‘‘design phase’’.

Furthermore, the program is duplicative because similar research is being funded

by the coal industry and by states in coal producing regions in an effort to promote

the coal industry.

In 1996, the total value of domestic coal production exceeded $19 billion. This mature industry hardly needs a subsidy program, especially one that has serious questions regarding its effectiveness and productivity.

The CCTP is a glaring example of the government’s poor track record when it

comes to selecting viable corporations. If left on its own, the CCTP most likely

would not have survived the vagaries of the marketplace. However, as with so many

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corporate welfare programs, the subsidies allow an inefficient and impractical program to survive thanks to taxpayer dollars.

DEFENSE CONTRACTOR MERGER SUBSIDIES

Corporate welfare involving defense mergers currently has fallen out of the spot- light as mergers have declined, but nevertheless could reappear at any time. Under

existing policy, the Pentagon can spend appropriated funds to reimburse defense

contractors for expenses related to corporate mergers. Called ‘‘restructuring funds’’

these handouts reward contractors for expenses for an activity that they presumably

would have done anyway for sound business reasons. Recipients of the funds have included defense giants such as General Electric, Northrop Grumman, and Hughes Aircraft. Since the merger subsidy program began

in 1993, these and other defense companies have billed over $817 million to the

Pentagon. The decision to merge and any related expenses are solely the responsibility of the companies involved. Taxpayer handouts should not fund these or any

of the other many business decisions that private companies must make every day.

CONCLUSION

In August 1996, anger at America’s public welfare system culminated in the pas- sage of the Personal Responsibility and Work Opportunity Reconciliation Act, legislation that ended welfare as we knew it. Today we need similar legislation that calls

for an end to taxpayer subsidized hand-outs to financially strong businesses and

mature industries.

Note: Attached is TCS’s ten top corporate welfare items

TEN TOP CORPORATE WELFARE ITEMS

1. SUBSIDIES TO THE HARD ROCK MINING INDUSTRY

The 1872 Mining Law governs the extraction of precious hard-rock minerals such as gold, silver, and platinum that are located on public lands belonging to the American people. First, it entitles the industry to take free of any charge, gold and other

precious minerals found on public lands. Second, the law entitles large multinational corporations to take full title to mineral-rich lands for no more than $5.00

an acre. Under 1872 mining law the government has had to give away more than

$240 billion worth of minerals.

2. SUBSIDIES TO THE TIMBER INDUSTRY

The U.S. Forest Service loses hundreds of millions of dollars selling trees from our National Forests to private timber companies. According to reports from the General

Accounting Office (GAO) the Forest Service lost more than $2 billion from 1992 to

1997. One of the primary reasons for these huge losses is due to money-losing timber sales. More often than not, the Forest Service loses money when it sells National Forest trees because the agency charges timber companies far less than it

costs to prepare and administer the sales. Furthermore, taxpayer dollars are spent

on the construction of logging roads to assist timber companies in cutting and removing timber. The GAO reported that timber road construction cost American taxpayers $387 million from 1992-1997.

3. SUBSIDIES TO THE LIVESTOCK INDUSTRY

Grazing on public land by privately-owned domestic livestock is subsidized by tax- payers because the fee charged is not enough to cover the costs of the program administered by the U.S. Forest Service and the Bureau of Land Management. The

program costs at least $5.76 per animal unit month (AUM) yet the current fee is

only $1.35 per AUM. Recipients of grazing subsidies include major companies such

as Union Oil, Getty Oil, Newmont Mining, and Anheuser Busch.

4. DEFENSE CONTRACTOR MERGER SUBSIDIES

Under existing policy, the Pentagon can spend appropriated funds to reimburse

defense contractors for expenses related to corporate mergers. Recipients of the

funds include corporations such as General Electric, Northrop Grumman, and

Hughes Aircraft.

5. OVERSEAS PRIVATE INVESTMENT CORPORATION

The Overseas Private Investment Corporation (OPIC) provides subsidized loans

and insurance to corporations for overseas investment. The insurance covers exproVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00303 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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priation, political violence and currency inconvertibility. OPIC also finances joint

ventures in which foreign enterprises can own up to 75% of the project. Taxpayer

money should not be used to encourage unstable overseas investment by multinational corporations who likely have the resources to find their own financing and

insurance.

6. ADVANCED TECHNOLOGY PROGRAM (ATP)

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

grant near-winners ‘‘continued their research and development projects despite a

lack of ATP funding’’. Recipients of these funds have been General Electric, Xerox,

Dupont, Caterpiller, and United Airlines.

7. MARKET ACCESS PROGRAM

The Market Access Program (MAP), formerly known as the Market Promotion Program, is administered by the Foreign Services Department of the U.S. Department of Agriculture to encourage exports of agricultural projects. MAP funds consumer-related promotions of high-value products through trade shows, advertising

campaigns, commodity analysis, information on foreign markets and training of foreign nationals. In the last 10 years, more than $1.5 billion of taxpayer money was

authorized for MAP—funding promotions that benefit large trade organizations and

cooperatives, such as Sunkist and Ocean Spray, who can easily afford their own advertising.

8. SUBSIDIES TO THE COAL INDUSTRY

A. The Clean Coal Technology Program is a program with a history of waste and

mismanagement. B. The Department of Energy’s research and development program is an unneces- sary program because it duplicates research conducted privately. The government

has invested in programs that are ineffective and in which the market has shown

no interest.

9. SUBSIDIES TO THE BARGE INDUSTRY

Each year, Congress appropriates approximately $500 million for the operation

and maintenance of the 11,000-mile Federal inland waterway system. Operation

and maintenance consists of, among other activities, the dredging of shipping channels and the rehabilitation and repair of locks and dams. Among the beneficiaries

of this government service are a small group of 20 wealthy barge owners, including

subsidiaries of Cargill, Inc. and Conagra, Inc. The barge industry should pay for at

least 50% of the costs associated with inland waterway operation and maintenance.

10. SUBSIDIES TO THE NUCLEAR INDUSTRY

In 1957, when no private insurance companies would insure nuclear reactors because of the magnitude of potential costs, the government stepped in by passing the

Price Anderson Act. That legislation prematurely pushed the nuclear power industry into the market place. Forty-two years and 47 billion dollars later the U.S. government continues to subsidize the industry. Last year the Department of Energy

created two new unnecessary and duplicative programs.

Chairman KASICH. Tom.

STATEMENT OF THOMAS SCHATZ

Mr. SCHATZ. Thank you very much, Mr. Chairman. I very much

appreciate the opportunity to be speaking today on business subsidies and certainly appreciate your leadership in this area over

the years, and all of us at this table have worked together on this,

and we look forward to continuing to do that in the future.

As you know from your attendance at our press conference earlier this month, each year Citizens Against Government Waste

publishes Prime Cuts. This year the edition had 640 recommendaVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00304 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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tions that would save taxpayers more than $147 billion in 1 year

and $1.2 trillion over 5 years. Prime Cuts proves that there are

plenty of answers to the question of how Congress can stay within

the budget caps from the 1997 Balanced Budget Act.

Among the most significant recommendations are the business

subsidy items. Our top 10 list includes the Advanced Technology

Program, the Clean Coal Technology Program, Dairy, Peanut and

Sugar Subsidies, the Essential Air Service, the Export Enhancement Program, Market Access Program, Overseas Private Investment Corporation, Partnership for a New Generation of Vehicles,

Power Marketing Administrations, and the Rural Utilities Service.

Time will not permit me to elaborate on all of these programs.

They are all discussed in my formal statement, and therefore, I

would like to focus briefly on the Advanced Technology Program.

ATP was established in 1990 under President George Bush. It

was supposed to promote the competitiveness of U.S. business by

accelerating the development and commercialization of promising

high risk technologies with substantial potential for enhancing U.S.

economic growth. The intentions were noble, but the premise from

which they were hatched was wrong. To agree with ATP’s supposition, one would also have to agree that government funding creates wealth and that companies need government grants in order

to innovate.

Government does not create wealth. It takes our taxes, keeps

some for itself for administrative purposes and sends it back to the

public. It cannot judge the marketplace as well as the private sector. If Federal spending did create wealth, then surely West Virginia would be one of the wealthiest States in the Union, given the

deluge of Federal spending the State has enjoyed in the past decade. However, West Virginia is currently the second poorest State.

In regard to ATP, a 1996 General Accounting Office study found

that 63 percent of the companies that applied for this funding from

the Government didn’t even bother to look elsewhere for money,

and half of those rejected managed to find alternate sources of support. It is always easier to look for the handout than to do your

own homework in the private sector and get money.

And the money ATP provides is virtually nothing, about 1 percent compared to what the technology sector itself spends on research and development. According to the National Science Foundation, private industry spent more than $221 billion on R&D in

1998, up 7 percent after inflation from the year before, and all you

have to do is look at the rush to get those Internet stocks out and

the new tech stocks out on the market and on Wall Street, and you

can see the money flowing in through venture capital. That is the

way these advanced technologies should be funded.

The companies are already doing this research. They will continue to do it without government assistance. They are also helped

by the 20 percent R&D tax credit which is available to everyone,

not just those companies selected by the Department of Commerce.

Microsoft, of course, is a prime example of how R&D should work

in the free market. Bill Gates didn’t go to the government for a

handout. He stuck it out in his garage, and today, this is obviously

the most dynamic software company in the world and it was built

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through American ingenuity, not with the government’s help. The

company spends $3 billion a year on R&D.

And here are some examples of what the Advanced Technology

Program has been doing. Film technologies to replace paint on aircraft, a joint venture between 3M and United Airlines, and it would

save about a $100,000 on a new Boeing 747. The companies that

benefit from this new technology should be funding the research

themselves.

Application of gene therapy to the treatment of cardiovascular

diseases. The National Institutes of Health currently spends $264

million on the Human Genome Research project. Now, that is

where this money should be going, and as it turns out, it is our understanding, although we have not totally verified it, that the company that got this money went out of business at the end of last

year.

There is another one, ultra high density magnetic recording

heads. Research money goes to a who’s who of Fortune 500 companies: Digital Equipment, Eastman-Kodak, Hewlett-Packard, IBM.

They will get the benefit of the increased market share from this

technology.

And finally, something called a suite of process monitoring and

control technologies to cut costs and improve quality in the U.S.

auto industry. This will clearly help only the U.S. auto industry,

which now spends $171⁄2 billion a year on R&D. Why should the

taxpayers be paying more?

Mr. Chairman, this list is only the beginning. This is the big pile

of ATP grants, and a lot of them are fairly interesting, but all of

them are really a waste of money because you are talking about

a tiny percentage of the R&D, and you are talking about choices

being made through a bureaucracy and not through the marketplace. I look forward to answering any questions on this or any of

the other programs listed in our statement or even in the Prime

Cuts, and I look forward to your continuing excellent work and

your leadership in this area.

[The prepared statement of Mr. Schatz follows:]

PREPARED STATEMENT OF THOMAS A. SCHATZ, PRESIDENT, CITIZENS AGAINST

GOVERNMENT WASTE

Good morning, Mr. Chairman. Thank you for the opportunity to testify today before the House Budget Committee. My name is Tom Schatz, and I represent the

600,000 members of the Citizens Against Government Waste (CAGW).

CAGW was created 15 years ago after the late Peter Grace presented to President

Ronald Reagan the 2,478 findings and recommendations of the Grace Commission

(formally known as the President’s Private Sector Survey on Cost Control). These

2,478 recommendations provided a blueprint for a more efficient, effective, less

wasteful, and smaller government.

Since 1984, the implementation of Grace Commission and CAGW recommendations has helped save taxpayers $625 billion.

Testifying before this committee is both an honor and a privilege. CAGW works

tirelessly to educate the American public about wasteful government spending and

the long-term implications of a bloated bureaucracy. Hearings such as this one will

help CAGW in its mission to make government more accountable.

Mr. Chairman, as you know by your attendance at our press conference earlier

this month, each year CAGW publishes Prime Cuts, a comprehensive list of spending cut options available to Congress. The 1999 edition listed 640 recommendations

that could save taxpayers more than $147 billion in 1 year and $1.2 trillion over

5 years. Prime Cuts proves that the problem in Washington is not the lack of ideas,

but the lack of political courage to implement them.

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Among the most disturbing recommendations in Prime Cuts are the business sub- sidy items. In short, business subsidies, or corporate welfare as they are often

called, are government spending programs that provide unique benefits or advantages to specific companies or industries. Corporate welfare includes subsides,

grants, cut-rate insurance, low-interest loans and loan guarantees, trade restrictions, and other special privileges that confer benefits on targeted firms or industries.

There are many programs that are classified as business subsidies. CAGW’s top ten list is as follows:

1. The Advanced Technology Program (ATP)

2. The Clean Coal Technology Program

3. Dairy, Peanut and Sugar subsidies

4. The Essential Air Service

5. The Export Enhancement Program (EEP)

6. The Market Access Program (MAP)

7. The Overseas Private Investment Corporation (OPIC)

8. Partnership for a New Generation of Vehicles

9. Power Marketing Administrations

10. The Rural Utilities Service (RUS)

The Clean Coal Technology Program was created in 1984 to assist private indus- try with developing commercial technologies that would use coal in environmentally

sound ways. The General Accounting Office (GAO) has cited numerous demonstration projects that are experiencing difficulty in meeting cost, schedule, and performance goals. The Department of Energy has been more than generous to participating

companies by extending project deadlines several times to allow their sponsors to

restructure them. Even if the projects were to perform well, coal has very few remaining applications and is a dying substitute for other fossil fuels. The rationale

for the Clean Coal Technology Program no longer exists, so the program should no

longer exist. Based on a 60-year-old pricing scheme created to ensure an adequate supply of pure and wholesome milk, marketing orders inflate the prices of all products that

contain milk. Milk marketing orders are regulations approved by dairy farmers in

individual fluid milk markets that require dairy manufacturers to pay minimum

monthly prices for milk purchases. The most illogical of all the provisions is the ‘‘differential’’ pricing scheme, which charges the manufacturers of fluid milk additional

premiums, based in part on how far the manufacturing plants are from Eau Claire,

Wisconsin. This makes about as much sense as the Federal Government requiring

computers manufactured in Maine to be sold at a higher price than those manufactured in the Silicon Valley. The USDA milk marketing rule adopted in April 1999

merely reduces the number of regional milk marketing orders from 31 to 11 and

the blatant disparity in the price differentials, but fails to enhance industry competitiveness.

As a result of the 1996 Farm Bill, farmers now have the freedom to farm almost

everything, except peanuts. Only farmers who own or lease a production quota can

legally grow peanuts to be sold for edible use. With a government-guaranteed support price of $610 per ton (compared to a world price of $350 per ton), domestic

prices are 74.3 percent higher than the average world market price. This imposes

a hidden peanut tax of as much as $500 million annually on U.S. consumers. As

taxpayers, consumers are hit again for millions of dollars that the Federal Government pays each year in inflated peanut prices for government feeding programs.

The present sugar program consists of a domestic commodity loan program that

sets a support price (loan rate) for sugar and establishes an import quota system

that restricts foreign competition and ensures a high domestic price for sugar. When

Congress reformed most agricultural programs in the 1996 Farm Bill, it left the

sugar program virtually untouched. The sugar program costs consumers at least

$1.2 billion in higher costs for sugar and sugar-containing products, and it costs taxpayers another $90 million in higher prices for sugar and sugar-containing products

purchased for the Federal Government’s feeding programs. A handful of wealthy

sugar barons, who represent less than 1 percent of the nation’s sugar growers, gobble up 58 percent of the program benefits. These are not small family farmers. In

a recent year, 33 cane sugar growers obtained more than one million dollars each

from this government boondoggle, and one grower alone received $65 million.

The Export Enhancement Program (EEP) was established in 1985 to subsidize the

export of agricultural commodities. EEP participants negotiate directly with buyers

in a targeted country and then submit bids to USDA for cash bonuses. Wheat growers have been the primary beneficiaries of EEP, which has awarded nearly $7.2 billion in bonuses since its inception. Proponents claim that EEP is necessary because

European wheat farmers are heavily subsidized, thereby creating an uneven playing

305

field for U.S. wheat to be sold overseas. But this program is simply a handout to

big corporations so they can dump wheat on the international market. The 1994

Uruguay Round of the General Agreement on Tariffs and Trade, which pledged to

reduce both the volume of subsidized exports of agricultural products and budgetary

outlays on export subsides for those products, also reduces the need for this corporate welfare giveaway. The Market Access Program (MAP) is the Federal Government’s attempt to help build foreign markets for multimillion dollar companies. In the past, this corporate

handout has gone to multinational corporations such as Burger King, Dole, Purina,

and Sunkist. Even though the 1996 Farm Bill placed tighter restrictions on MAP

spending, this program still needs to be eliminated. No one has been able to determine whether MAP actually works, but even if it did, why should private citizens

pay for it? The Overseas Private Investment Corporation (OPIC) was created to provide subsidized direct loans, guarantees of private lending, export credit assistance, and political risk insurance to corporations. It tempts companies to invest in countries

where their better sense tells them not to. The Federal Government should not be

using tax dollars to subsidize such risky investments. Power Marketing Administrations (PMAs) were established in the 1930’s to pro- vide remote areas of the country with access to electricity. There are currently four

PMAs serving parts of 33 states. The electricity provided by PMAs is sold well below

the actual cost of producing electricity; the Federal Government makes up the difference through subsidies. There are two ways that PMAs could be privatized: a

transitional government corporation could prepare them for sale within a fixed time,

or their assets could be sold to existing customers or on the open market. The Congressional Budget Office notes that Federal sales of power only reduce utility bills

slightly and therefore privatization would initially raise rates for a small number

of consumers. These increases would simply address a market distortion caused by

subsidized electricity; they would not ‘‘gouge’’ the consumer. The national movement

to deregulate the electric industry requires that PMAs be privatized in order to

begin to even the playing field. The initial mission of Rural Utilities Service (RUS) (formerly known as the Rural Electrification Administration) was to assist the nation’s rural areas with utility infrastructure development. This mission has been accomplished. RUS survives today

to bring low-cost electricity to former remote locations - for example Aspen and Vail,

Colo.; Hilton Head, S.C.; and Potomac, Md. Other beneficiaries of low-cost electricity

include major telephone holding companies. An April 1997 GAO report stated that

$8 billion, or 19 percent, of the RUS’s outstanding principle on loans was owed by

borrowers that were experiencing financial difficulties (read: they won’t be paying

the money back). RUS survives today in a new and unnecessary form. The electrification and telephone subsidies should be eliminated, especially to nonrural

areas, and current borrowers should be encouraged to pay off their loans.

While all of these are prime examples of business subsidies, I would like to focus

my testimony today on one particular program, the Advanced Technology Program

(ATP).

ATP was established in 1990 under President George Bush. It was supposed to

promote the competitiveness of U.S. business by accelerating the development and

commercialization of promising high-risk technologies with substantial potential for

enhancing U.S. economic growth. The intentions were noble, but the premise from

which they were hatched was wrong. For one to agree with ATP’s supposition, one

would also have to agree that government funding creates wealth and that companies need government grants in order to innovate.

Government does not create wealth. It is ludicrous to think that any entity that

levies taxes and then distributes that money after skimming a portion for administrative purposes could create wealth better than an individual or company. It is not

the government’s money; it is the people’s money that is being recycled back to

them. Secondly, if Federal spending did create wealth, West Virginia would surely

be one of the wealthiest states in the union based on the deluge of Federal spending

that state has enjoyed in the past decade. However, West Virginia is currently the

second poorest state.

Government programs don’t add to the pool of research and development funds;

they actually take the place of private funds. A 1996 GAO study found that 63 percent of companies that applied for ATP grants didn’t even bother to look elsewhere

for funding. Yet half of those rejected for grants managed to find alternate sources

of support.

Further, the money ATP provides is virtually nothing compared to what the technology sector itself spends on research and development. According to the National

Science Foundation, private industry spent more than $221 billion on R&D in 1998,

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up 7 percent after inflation from the year before. These companies are already doing

the research, and will continue to do it without government assistance. They are

also helped by the 20 percent R&D tax credit, which is available to all companies,

not just those selected by the Department of Commerce (DOC). Handing out tax dollars to a chosen few companies is much more likely to result in the underwriting

of poor investments than allowing the marketplace to make those decisions. One

only need look at the initial public offerings of Internet company stocks and the

rush to invest in new technologies to realize that, once again, the private sector is

far ahead of the government.

The Microsoft Corporation is a prime example of how research and development

should work in the free market. It is one the most innovative companies in the history of America. Microsoft Chairman Bill Gates started out with a vision and,

through hard work and perseverance, built one of the most dynamic software companies in the world. Microsoft was built with American ingenuity, not a government

handout. The company spends $3 billion a year on R&D.

Corporate subsidies often go by the name of ‘‘government investments’’ or ‘‘government-industry partnerships.’’ These programs are disguised by techno-talk, as exhibited on the Department of Commerce’s website, which devoted an entire page to rebutting CAGW’s corporate welfare claim. The following grants provide insight into

ATP:

Film Technologies to Replace Paint on Aircraft: 3M and United Airlines jointly

propose to develop environmentally sound film products to replace paint used on aircraft exteriors. This will help reduce drag on airlines and can reduce fuel consumption by up to 1 percent or more, saving $100,000 or more annually on a Boeing 747.

It is safe to say that that companies who benefit from a new technology should pay

for the research and development of that new product.

Application of Gene Therapy to Treatment of Cardiovascular Diseases: Gene therapy is the identification and eventual manipulation of a cell to correct a genetic defect. The National Institute of Health’s National Human Genome Research Institute

is currently undertaking this research. With a budget of $264,892,000 for this

project in fiscal year 1999, this research is moving forward without the aid of ATP.

Ultra-High Density Magnetic Recording Heads: This research money goes to a

Who’s Who of Fortune 500 companies, including Digital Equipment Company, Eastman-Kodak, Hewlett-Packard, and IBM. All will get the benefit of an increased market share with the development of this new technology.

A suite of process-monitoring and control technologies to cut costs and improve

quality throughout the U.S. auto industry: The Department of Commerce openly admits that this technology will help the U.S. auto industry. This grant, highlighted

in DOC’s Prime Cuts rebuttal, is typical bureaucratic thinking that the government,

not private industry, should be the leading force behind research and development.

The auto industry currently spends $17.5 billion annually on R&D. Why should taxpayers pay for more?

Mr. Chairman, this list is only the beginning. While time does not permit me to

discuss all ATP grants, I would like to submit the list CAGW has obtained to date.

With the approaching appropriations battle, Congress needs to cut government

waste to stay within the budget caps. Members should shine a white-hot spotlight

on business subsidies. Eliminating such items from the budget will end a cycle of

dependence that some corporations have on the Federal Government.

Five years ago, Congress took bold leadership in reforming welfare for the poor.

It is now up to the Budget Committee and Congress to reform business subsidies.

I congratulate you on your courageous leadership in this battle over the years, and

hope your colleagues will join you.

Thank you very much for this opportunity to testify. This concludes my testimony.

I will be happy to answer any questions at this time.

Chairman KASICH. Thank you, Mr. Schatz.

Mr. McIntyre is next.

STATEMENT OF ROBERT McINTYRE

Mr. MCINTYRE. Thank you, Mr. Chairman.

Chairman KASICH. I would also thank you for your patience because I know you have been here for an extended period of time,

and I also know you have a very extended testimony, and I would

like to make sure that without objection all of that is included in

the record, and the gentleman’s recognized.

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Mr. MCINTYRE. Thank you, Mr. Chairman. It seems like many

hours ago when my former boss Ralph Nader said that this was the

first hearing on corporate welfare ever. Well, this may be the longest hearing on corporate welfare ever, but alas, it’s not the first.

Over the 25 years that I have been hanging around this town

doing this, working for Ralph for part of that time, I believe I have

attended about 50 or 60 corporate welfare hearings—at the corporate welfare committees, also known as the House Ways and

Means and Senate Finance Committees. They have had thousands

of such hearings, as best I can tell. I didn’t go to them all.

Chairman KASICH. As an assistant to Ralph Nader, if I was a

teacher, you started off clearly with an ‘‘A’’ from Ralph Nader. Go

ahead.

Mr. MCINTYRE. As we all know, I suppose, the Federal Government provides lots of financial assistance to businesses, and as

most people have discovered when they have looked, most of that

is through the Internal Revenue Code. We calculate that almost

$200 billion this fiscal year will be granted to businesses and their

owners in the form of tax preferences. That is a lot of money. It

is enough that we could cut taxes by about a sixth if these subsidies didn’t exist or we could pay for more of all those government

programs that the public likes.

Either way, it seems that American taxpayers who don’t benefit

from these preferences—and among those taxpayers there are

many American businesses—have a right to ask whether these tax

preferences for business are serving the public good.

Well, trained well by Ralph Nader, I have always been a free

marketer. It always seemed to me that the private sector is really

what drives most of what this country does in terms of the economic growth, and that generally they are pretty good at it. The

government’s very important role is to provide the legal structure,

the education system, the highways, the basic scientific research

and all the other things that government needs to do and needs to

do well to make our economy and our society prosper.

The problem with these corporate welfare items is that they

muck up both sides of the equation. They make it hard for the government to do its job because they use up lots of government resources, and they make it hard for the private sector to do its job

because they have the government telling private businesses what

to invest in and what to do. Neither of those is a good strategy for

long term growth or for a healthy American economy or for an

economy that is fair.

So my general view is I want you guys to do your job, I want

you to have the resources to do it, and I want private business to

do its job, and I don’t want you guys telling them what to do. That

is why over the years I have been a strong opponent of corporate

welfare.

Despite my eloquence over the years, many Members of Congress

seem to think that putting tax entitlements into the Internal Revenue Code is really a terrific way to do business. Why? Well, one

reason, perhaps the biggest of all, is that it has certain advantages

if Congress decides to give away money. Let us say that you want

to give General Motors a billion dollars. You could put it in a

spending bill, ‘‘General Motors gets a billion dollars for being a terVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00310 Fmt 6633 Sfmt 6602 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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rific American company that makes pretty good cars.’’ But that

shows up as spending, and then you have to raise taxes to do it,

and that shows up as taxes, and so people are mad at you for subsidizing General Motors and they are mad at you for raising their

taxes. But if you put the subsidy in the tax code, ‘‘General Motors

gets a billion dollars off on its taxes,’’ that shows up in the budget

as a tax cut overall and no spending overall. So you get to have

your cake and eat it, too. So tax subsidies have an advantage over regular spending unfor- tunately, and that is one big reason why we have so many of them.

By the way, I picked out General Motors not quite at random since

in 1995 and 1996, despite making several billion dollars in profits,

GM didn’t pay any taxes. It didn’t because in its wisdom Congress

in 1993, with President Clinton’s endorsement, that was the Democrats, augmented by Congress in 1997, with not too much Democratic support, so I guess that was the Republicans, decided to exempt General Motors’ leasing operations from what had been some

prohibitions against negative tax rates. As a result, GM’s leasing

operations zeroed out General Motors from tax, which is too bad.

Now, of course, as the members of the Ways and Means Committee who were here before pointed out, all of these tax breaks are

supposedly justified as incentives for valuable economic activity.

Well, let me tell you something. Most of these things are pure

waste, and that is the good news. When companies come into the

Congress and ask for a subsidy for something, they are not coming

in to ask you to tell them what to do. They are asking you to pay

them for what they are doing anyway. That ought to be obvious.

So you have to understand that when you are subsidizing these

companies at their request, they are going to just do what they

would have done anyway. That is the good news. The bad news is

occasionally these subsidies actually work, and you really distort

economic behavior. The classic example of that was in the early

eighties when President Reagan, in his first incarnation before he

became a born again tax reformer, decided that we should build

empty office buildings all over the United States and pay companies to do it. We did and we got the empty office buildings, and the

next thing we know, as the Bush Treasury pointed out, we had the

S&L crisis. So, yeah, when Congress gets its finger really deep in

telling businesses what to do it is not a good result.

Now, I don’t have any more time, but I do have some corporate

welfare examples in my testimony. I point out that I just picked

four that I thought were illustrative. We have a long report that

is up on our web site that looks at all of the tax preferences in the

code and offers a critique of them. Most of our comments are kind

of negative. I encourage the committee to put a link to our report

on its web site if you want to know what we really think.

So thank you, Mr. Chairman. I really appreciate it.

[The prepared statement of Mr. McIntyre follows:]

PREPARED STATEMENT OF ROBERT MCINTYRE, DIRECTOR, CITIZENS FOR TAX JUSTICE

Thank you for the opportunity to testify today on the topic of ‘‘unnecessary business subsidies,’’ or as it is often popularly styled, ‘‘corporate welfare.’’

As is well known, the Federal Government provides financial assistance to businesses in a variety of ways and for a variety of stated purposes. The vast bulk of

such assistance is provided through special tax abatements for businesses that enVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00311 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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1 Congressional Budget Office, Federal Financial Support of Business, Oct. 1995.

2 In its 1995 analysis of business subsidies, CBO used a rather narrow definition of business

tax preferences, leaving out many of those that benefit business investors or subsidize business

products, notably, most capital gains breaks, some tax-exempt bonds, and the exemption for lifeinsurance inside buildup. Based on the most recent figures published by the Joint Committee

on Taxation, the fiscal 2000 total of business tax preferences included on CBO’s 1995 list is $80

billion. Adding the investment tax preferences that CBO did not include, the total in fiscal 2000

comes to $195 billion. Even this total is probably understated, particularly with regard to multinational corporation subsidies. Note that the total reported here includes an estimate for the

cost of business meals and entertainment write-offs, which was excluded from the CBO list.

Note also that tax breaks for retirement savings are excluded from the investment subsidies reported here.

gage in favored activities. As the Congressional Budget Office noted in 1995, ‘‘The

Federal Government’s efforts to promote business are heavily weighted toward tax

preferences, with spending and credit programs accounting for a smaller share of

Federal efforts.’’1

In fiscal 2000, the total cost of business tax preferences, including those that benefit business investors or subsidize business products, is estimated to be $195 billion2—far, far larger than direct-spending business subsidies. One can easily calculate that personal and corporate tax rates are about 20 percent higher than they’d

need to be if these tax preferences for business and investment did not exist. Or

alternatively, the government could provide far more public services than it currently does at the same statutory tax rates that are now imposed. Citizens and companies that do not benefit from these tax preferences have a right to ask whether

they are serving the public good.

We have organized our society to leave most decisions about what to buy and

what to make to the free-market decisions of millions of consumers and businesses.

Both economic theory and experience teach us that this is generally a wise choice.

Of course, it takes a robust legal and political system to make these private decisions possible. Government must provide the legal system, the public infrastructure

and the educational system. It must set the rules for commerce, deal with areas

where markets do not work well, such as environmental protection and consumer

protection, and smooth out the rough edges of capitalism to make sure that those

who do not succeed are not left too far behind. It takes substantial public resources

to build such a well-functioning economic and social framework, and it behooves the

government not to waste its resources on usurping the role of markets where they

do well on their own.

‘‘Corporate welfare’’ is a prime example of where government can undermine its

ability to do its own job while simultaneously interfering with the private sector’s

ability to do what it does best. Curbing such unwarranted interference should be

high on the list of those who want a more efficient government and a strong private

economy.

In my testimony today, I do not propose to offer an exhaustive critique of all the

business subsidies in the tax code. Instead, I want to discuss some general principles, and then focus on a few of the more notable tax-based business subsidies.

For a more extensive analysis, I refer the committee to Citizens for Tax Justice’s

1996 report, The Hidden Entitlements (from which portions of this testimony are

adapted).

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I. GENERAL PRINCIPLES

Today, there are few who would challenge the notion that tax abatements designed to accomplish some social or economic goal unrelated to equitable tax collection are a form of government subsidy. Both those who lobby for such tax preferences and those who enact them understand this truism. Indeed, these tax-based

subsidy programs even have an official name: ‘‘tax expenditures.’’ As the Joint Committee on Taxation explains:

Special income tax provisions are referred to as tax expenditures because

they are considered to be analogous to direct outlay programs * * *. Tax

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3 Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 1996-

2000, Sept. 1, 1995, p. 2. See also Congressional Budget and Impoundment Control Act of 1974

(P.L. 93-344), sec. 3(a)(3).

expenditures are most similar to those direct spending programs which have no

spending limits, and which are available as entitlements.3

For instance, suppose the government wants to subsidize wages for low-income

workers. It could try to accomplish this goal in various ways. One might be by regulation, to wit, by setting a minimum hourly wage that businesses are required to

pay. Alternatively, the Department of Health and Human Services could provide direct wage subsidies to eligible workers. Or a wage subsidy could be administered

by the Internal Revenue Service, either by reducing income taxes for low-income

workers, including tax ‘‘refunds’’ for those who owe no income tax, or by offering tax

credits to businesses that hire low-income people.

In fact, the government follows all three approaches. First of all, of course, there

is a minimum wage. Second, many low-income workers have their salaries supplemented by welfare, food stamps, unemployment compensation and so forth. And

third, the tax code provides an ‘‘earned-income tax credit’’ to low- and moderate-income working families and tax credits to businesses that hire certain low-income

workers.

Most government spending through the tax code is not targeted toward low-income people, however. In fact, tax breaks tend to reward those with the most lobbying muscle in Washington. Organized corporate interests have been particularly

successful in obtaining tax subsidies—so much so that corporate tax expenditures

currently equal more than 40 percent of total corporate tax payments.

Tax subsidies as entitlements: When the Joint Committee on Taxation describes tax expenditures as similar to entitlements, it means that most of them continue without further review once they are put into the tax code. In contrast, direct

spending on defense, roads, environmental protection, and other non-entitlement

programs must be approved every year, and it takes an appropriation bill passed

by Congress and signed by the President to do so. If a such a ‘‘discretionary’’ program turns out to cost more than expected, it—or something else—must be scaled

back in the annual budget. But if the price tag on a tax break goes up, it continues

anyway—and the process of curbing it is much more difficult.

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The budget advantages that tax entitlements enjoy over most direct spending pro- grams is illustrated in the budget just approved by Congress, which contemplates

huge reductions in most areas of domestic discretionary spending as a share of the

economy over the next decade. (See table.) In contrast, tax subsidies are expected

to maintain, or even expand, their claim on the economy over the same period. Standards for evaluating business tax subsidies: Size alone would seem to

mandate that any serious analysis of possible ways to improve government efficiency and curb waste must include business tax subsidies within its scope. Like

other spending programs, tax subsidies ought to be evaluated on the following

grounds: 1. Is the subsidy designed to serve an important public purpose?

2. Is the subsidy actually helping to achieve its goals?

3. Are the benefits, if any, from the subsidy commensurate with its cost?

4. Are the benefits of the subsidy fairly distributed, or are they disproportionately targeted to those who do not need or deserve government assistance? 5. Is the subsidy well-administered?

Few if any business tax subsidies could pass these tests.

Oversight issues: With regard to the fifth point, one might question whether the Internal Revenue Service is ever the appropriate agency to administer a government

spending program. After all, the IRS’s expertise is in tax collection, not construction

or farming or business investment. Would we ask the Energy Department to administer the Social Security system on the side? Would we expect the Defense Department to do a good job running the food stamp program? Does anyone think the

Labor Department should be in charge of securities regulation? To be sure, handing a program to the IRS to run has advantages. The bureau- cratic overhead may be fairly low, since the IRS will inevitably devote most of its

attention to its main mission of collecting taxes. But the price for that lack of attention may well be inefficiency in the administration of the program. In particular,

hugely expensive business tax expenditures purportedly designed to encourage productive investment usually operate with little or no oversight as to whether they

are actually achieving their goals. If a direct spending program is failing to achieve

its goals, the agency in charge of the program will usually be held accountable. But

no one thinks to blame the IRS if the tax-based programs it ‘‘administers’’ prove too

costly or fail to work. Why do many lawmakers find tax subsidies attractive? Poor administration,

lack of cost controls, and unhappy distributional results are ‘‘features’’ that are far

too typical of tax-based subsidies. Yet despite these obvious drawbacks, many politicians, at both the Federal and state levels, find tax expenditures extremely attractive. One wonders: Do they think poorly administered programs are a good idea?

Are they unconcerned about the impact of uncontrolled spending on the budget? Are

they unconcerned about the adverse effects on taxpayer confidence in the tax system

that tax-subsidy abuses can create? Or do they simply see tax subsidies as a way

to exert power over society and the economy without having their efforts show up

in the official spending budget?

This last point may be the most important. Because of the way the government’s

budget books are kept, politicians can have their cake and eat it, too. A direct

spending program shows up in the official budget as Federal outlays and the taxes

that pay for the program as revenues. But if an equivalent tax expenditure program

is enacted, paid for with taxes on people and/or companies not benefitted, the combination shows up in the aggregate budget numbers as a wash. Neither net taxes

nor spending will appear to go up in the official budget. In recent years, this has

made tax subsidies the tool of choice for many lawmakers.

For example, in their 1994 ‘‘Contract with America,’’ GOP leaders in Congress

talked a lot about cutting spending. But among the most significant specific expenditure changes they proposed in 1995 were more than $100 billion a year in increased

tax-based spending programs. Ironically, these huge new tax entitlements—mostly

targeted to large corporations and the wealthy—were designed to show up in the

budget not as additional spending, but as tax cuts. Likewise, in recent years, many

of President Clinton’s program initiatives have been styled as tax cuts rather than

spending.

Ultimately, of course, tax entitlements are not free. As was noted earlier, if all

current tax business and investment tax expenditures were suddenly repealed, for

example, income tax rates could be reduced across the board by about a sixth. Such

a radical step is unlikely, of course. But eliminating or scaling back even some of

these kinds of tax entitlements could make a very significant difference in improving tax fairness and easing most people’s tax burdens. Such steps would also be

likely to improve economic growth to boot, by curbing wasteful tax-sheltering activities and thereby increasing productive market-driven investment.

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4Ways and Means Committee Report on H.R. 3838, the Tax Reform Act of 1985 (which became the Tax Reform Act of 1986), pages 145-46. 5 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (May 4,

1987), p. 98.

Most corporate tax subsidies are pure waste. If you think for a minute about

how these subsidy programs came into being, then this is quite obvious. Businesses

do not lobby the government to tell them what to do. They lobby for subsidies for

doing what they already do, and would continue to do anyway. Thus, companies

that buy lots of equipment want subsidies for buying equipment. Companies that

do lots of research want subsidies for research. Companies with international operations want subsidies for operating internationally. And so forth.

As the House Ways and Means Committee noted in its report on what became

the Tax Reform Act of 1986,

Proponents of massive tax benefits for depreciable property have theorized that these benefits would stimulate investment in such property,

which in turn would pull the entire economy into more rapid growth. The

committee perceives that nothing of this kind has happened.4

To say that most business subsidies pay companies for doing what they would do

anyway does not mean, of course, that they have no effect at all. For one thing, their

cost means that other taxpayers must pay higher taxes or get lower government

services. For example, if the price of business subsidies is less government investment in education, we may all suffer the adverse consequences. Likewise, businesses

that get lower subsidies than their competitors may find themselves unfairly disadvantaged in the marketplace.

In addition, even though businesses may not always realize it, subsidies do tend

to have at least marginal effects on behavior. But if one believes in free markets,

rather than central planning, these tax-induced economic distortions usually tend

to be detrimental rather than helpful. As the official report on the 1986 Tax Reform

Act notes, in the loophole-ridden era from 1981 to 1985,

* * * the output attainable from our capital resources was reduced because too much investment occurred in tax-favored sectors and too little investment occurred in sectors that were more productive but which were taxdisadvantaged.5

In rarer cases, business subsidies can be so large that they cause large economic

shifts. That was the case from 1981 to 1986 in the real estate industry, where lavish

tax subsidies caused a huge wave of excess office construction around the country.

As the Bush Treasury Department noted in a letter in August 1991:

Neutral taxation promotes the efficient allocation of investment resources, while the ability to use numerous tax incentives available for real

estate prior to the 1986 Act had the opposite effect, the result of which was

substantial overbuilding, one of the primary causes of the savings and loan

crisis.

Thus, most business tax subsidies are at best pure waste, and even worse, can

sometimes cause perverse economic effects.

II. FOUR EXAMPLES OF CORPORATE WELFARE IN THE TAX CODE

Let us now turn to a few of the many notable examples of business subsidies in

the tax code. I’ve picked four items to illustrate various ‘‘features’’ of business subsidies:

• Tax breaks that don’t work (accelerated depreciation).

• Tax breaks with perverse results (multinational tax preferences).

• Tax breaks with little oversight (R&E credit).

• Tax breaks with virtually no justification at all (business meal deductions).

I should emphasize that all of these share common defects with one another.

1. ACCELERATED DEPRECIATION

Accelerated depreciation rules allows businesses to write off their purchases of

machinery, equipment and buildings for tax purposes faster than the assets actually

wear out. Special tax breaks for business capital outlays entered the tax code in the

sixties, and were enlarged in various ways thereafter. The process reached its

apotheosis in the major expansion of depreciation write-offs included in President

Reagan’s 1981 tax cut act.

With the 1981 act, the tax-shelter floodgates opened. By 1983, studies by Citizens

for Tax Justice found that half of the largest and most profitable companies in the

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nation had paid no Federal income tax at all in at least one of the years the depreciation changes had been in effect. More than a quarter of the 250 well-known companies surveyed paid nothing at all over the entire 3-year period, despite $50 billion

in pretax U.S. profits. General Electric, for example, reported $6.5 billion in pretax

profits and $283 million in tax rebates. Boeing made $1.5 billion before tax and got

$267 million in tax rebates. Dupont’s pretax profits were $2.6 billion; after tax it

made $132 million more. CTJ’s findings were similar in 1984, 1985 and 1986.

In response to public clamor, his own newfound misgivings and the disappointing

economic results of the 1981 corporate tax incentives, President Reagan helped lead

the fight for the loophole-closing Tax Reform Act of 1986. The 1986 act greatly

scaled back depreciation and other tax breaks for business property. The changes

curbed corporate tax avoidance opportunities and made taxpayers out of most of the

former corporate non-payers.

While companies paid more in taxes after 1986, however, business investment

flourished. As former Reagan Treasury official, J. Gregory Ballentine, told Business

Week: ‘‘It’s very difficult to find much relationship between [corporate tax breaks]

and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went

gangbusters [on investment].’’

Despite its advances, the 1986 Tax Reform Act did not end corporate depreciation

subsidies. Even today, businesses are allowed to write off the cost of their machinery and equipment considerably faster than it actually wears out—a subsidy estimated by the Joint Committee on Taxation to cost $37 billion in fiscal 2000.

Moreover, when equipment is purchased with borrowed money, the current tax

system produces outright ‘‘negative’’ tax rates—making such investments more profitable after tax than before tax! As a result, corporate buying and selling of excess

tax breaks through equipment ‘‘leasing’’ deals have remained widespread. Indeed,

leasing tax shelters received a substantial boost from legislation enacted in 1993

and 1997. These acts substantially gutted the 1986 reforms that had curbed excess

depreciation of debt-financed capital outlays (as in common with leasing). As is wellknown to tax professionals, the combination of debt-financing and accelerated depreciation typically produces negative tax rates. To curb such tax shelters, the 1986 act

set lower depreciation write-offs under the Alternative Minimum Tax. Unfortunately, the 1986 AMT depreciation reforms have been repealed.

One can see examples of the sometime startling effects of the accelerated depreciation rules by a quick perusal of corporate annual reports. For example, in 1995,

Eastman Kodak paid an effective Federal tax rate of only 17.3 percent—less than

half the 35 percent statutory corporate tax rate—mainly because of $124 million in

tax subsidies from accelerated depreciation. Accelerated depreciation was one of the

key reasons why American Home Products paid only a 15.6 percent tax rate on its

$4.2 billion in U.S. profits from 1992-94. Allied Signal got $51 million in accelerated

depreciation tax breaks in 1995, helping it pay a tax rate of only 10.7 percent on

its $3.4 billion in U.S. profits over the past 4 years. And General Motors received

tax refunds totaling almost $1.4 billion dollars in 1995 and 1996, despite reported

U.S. profits of $5.2 billion, apparently in large part due to depreciation tax breaks

generated by its leasing activities.

Economists also complain—rightfully—that accelerated depreciation often skews

investment decisions away from what makes the most business sense and toward

tax-sheltering activities. This can, for example, favor short-term, tax-motivated investments over long-term ones.

With its huge cost, minimal direct value to most people and sad economic record,

accelerated depreciation might seem to have little going for it. Yet several recent

proposals would expand depreciation tax subsidies far beyond even their current levels. The GOP’s 1995 ‘‘Contract With America’’ originally included a $30-billion-dollar

a year super-accelerated depreciation plan promoted by Budget Committee Chairman John Kasich (R-Ohio) that would have let companies write off more than they

actually spent buying new equipment. A conceptually similar increase in depreciation write-offs is a key feature of the ‘‘flat tax’’ proposed by Rep. Dick Armey (RTex.) and endorsed by presidential candidate Malcolm S. Forbes, Jr. and former

Rep. Jack Kemp.

Nevertheless, curbing or eliminating accelerated depreciation should be at the top

of the list for those who really believe in attacking corporate welfare and curbing

government waste.

2. TAX BREAKS FOR MULTINATIONAL CORPORATIONS

Multinational corporations, whether American- or foreign-owned, are supposed to

pay taxes on the profits they earn in the United States. In addition, American comVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00317 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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6See U.S. General Accounting Office, Foreign- and U.S.-Controlled Corporations That Did Not Pay U.S. Income Taxes, 1989-95 (March 1999). According to GAO’s analysis, the 15,363 large

American companies studied paid an average of $8.1 million in Federal income taxes in 1995.

In contrast, the 2,767 foreign-controlled corporations paid an average of only $4.2 million in Federal income taxes that year—only half what the U.S. companies paid. This was true even though

the average amount of gross receipts reported by the foreign-controlled companies was actually

slightly larger than the amount reported by the American firms. 7The official tax expenditure list also includes a tax exemption for most income earned by Americans working abroad. Although this item is treated as a personal tax expenditure, multinational companies say that it primarily benefits them by allowing them to pay lower wages.

panies and individuals aren’t supposed to gain tax advantages from moving their

operations or investments to low-tax offshore ‘‘tax havens.’’ But our tax laws often

fail miserably to achieve these goals. For example, IRS data show that foreign-owned corporations doing business here typically pay far less in U.S. income taxes than do purely American firms with comparable sales and assets.6 The same loopholes that foreign companies use are also utilized by U.S.-owned multinationals, and even provide incentives for American

companies to move plants and jobs overseas. The problems in our taxation of multinational companies stem mainly from the complicated, often unworkable approach we use to try to determine how much of

a corporation’s worldwide earnings relate to its U.S. activities, and therefore are

subject to U.S. tax. In essence, the IRS must try to scrutinize every movement of

goods and services between a multinational company’s domestic and foreign operations, and then attempt to assure that a fair, ‘‘arm’s length’’ ‘‘transfer price’’ was

assigned (on paper) to each real or notional transaction. But companies have a huge incentive to pretend that their American operations pay too much or charge too little to their foreign operations for goods and services

(for U.S. tax purposes only), thereby minimizing their U.S. taxable income. In other

words, companies try to set their ‘‘transfer prices’’ to shift income away from the

United States and shift deductible expenses into the United States. A 1992 Congres- sional Budget Office report found that ‘‘[i]ncreasingly aggressive transfer pricing by

* * * multinational corporations’’ may be one source of the shortfall in corporate tax

payments in recent years compared to what was predicted after the 1986 corporate

tax reforms. Variants on the transfer-pricing problem—such as ill-advised ‘‘source’’

rules and statutory misallocations of certain kinds of expenses—expand the tax

avoidance opportunities. • Let’s say a big American company has $10 billion in total sales—half in the U.S. and half in Germany—and $8 billion in total expenses—again half and half (in

reality). With $1 billion in actual U.S. profits and a 35 percent tax rate, the company ought to pay $350 million in U.S. income taxes. But suppose that for U.S. tax

purposes, the company is able to treat 5/8th of its expenses—or $5 billion—as U.S.-

related. If you do the arithmetic, you’ll see that leaves it with zero U.S. taxable profit. Although our tax system has rules to mitigate this kind of abuse, companies still

have plenty of room to maneuver. • Here’s a real-world example: In its 1987 annual report to its stockholders, IBM

said that a third of its worldwide profits were earned by its U.S. operations. But

on its Federal tax return, IBM treated so much of its R&D expenses as U.S.-related

that it reported almost no U.S. earnings—despite $25 billion in U.S. sales that year.

As a result, IBM’s Federal income taxes for 1987 were virtually wiped out. • A few years ago, Intel Corp. won a case in the Tax Court letting it treat millions of dollars in profits from selling U.S.-made computer chips as Japanese income for

U.S. tax purposes—and therefore exempt from U.S. tax—even though a tax treaty

between the U.S. and Japan requires Japan to treat the profits as American—and

therefore exempt from Japanese tax! As too often happens, the profits thus became

‘‘nowhere income’’—not taxable anywhere. The official list of tax expenditures in the international area—totaling $13.5 bil- lion in fiscal 2000—focuses on congressionally-enacted loopholes in the current

‘‘transfer pricing’’ approach. Thus, the list includes items such as indefinite ‘‘deferral’’ of tax on the profits of controlled foreign subsidiaries, misallocations of interest

expenses, ‘‘source’’ rules that treat certain kinds of U.S. profits as foreign, and the

Puerto Rican ‘‘possessions tax credit.’’7 This list understates the total tax subsidies

to multinational companies, however, because it does not challenge the basic, flawed

approach to taxing multinationals that we current use. To be sure, curbing the multinational tax breaks identified in the official list would be a good idea. But an even better approach would be to replace the current,

complex ‘‘transfer pricing’’ rules with a much simpler formula approach that taxes

international profits based on the share of a company’s worldwide sales, assets and

payroll in the United States, as Senator Byron Dorgan (D-N.D.) has suggested. ExVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00318 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
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8Some companies that take advantage of the R&E credit admit the obvious: that they would

do extensive R&E even without a subsidy. For example, Applied Materials, which is lobbying

for an extension of the R&E credit, notes in a filing with the SEC: ‘‘Applied Materials’ longterm growth strategy requires continued development of new semiconductor manufacturing

technology. The Company’s significant investment in research, development and engineering

(RD&E) has generally enabled it to deliver new products and technologies before the emergence

of strong competition.’’ The semiconductor maker reports $8 million in R&E tax credits in 1998.

See ‘‘Does high-tech research require a tax break? Multi-billion dollar firms get a tax break and

almost nobody is complaining,’’ by David Bowermaster, MSNBC, Mar. 12, 1999. 9See BNA Daily Tax Report, Apr. 28, 1999, p. G-5.

actly how much revenue could be gained by this kind of comprehensive international

tax reform is unclear, but some estimates are on the order of $20-35 billion annually. Yet when proposals are made for even modest changes in the tax breaks for multi- national corporations, Congress, in the face of overwhelming lobbying pressure from

multinational companies, has resisted. President Clinton pledged major international tax reforms in his 1992 campaign, but Congress rejected even the rather

timid changes he proposed in 1993. The President’s 1997 budget proposed $6.3 billion in international tax reforms over the 1997-2002 period, but most of these were

rejected as well. Likewise, when the Treasury Department discovered in late 1997

that it had itself inadvertently opened a major new multinational loophole by an illadvised tax regulation and proposed to correct its mistake, Congress barred implementation of the correction (at least temporarily). The very idea that our tax laws favor multinational corporations, including for- eign owned ones, over purely domestic U.S. businesses should upset all of us.

3. THE RESEARCH AND EXPERIMENTATION TAX CREDIT

The tax credit for research and experimentation was first enacted in 1981. It supplements the already extremely favorable tax treatment of research and development investments, which can be deducted immediately, rather than capitalized and

deducted over time, as is the case with business investments in tangible capital assets.

The stated purpose of the R&E credit is to encourage business research that would otherwise not be undertaken because other investment opportunities would

be more profitable. One has to wonder why Congress thinks it is appropriate to

interfere with marketplace decisions in this way. In any event, up until now, the

distorting effects of the R&E credit have been fairly small. That’s in part because,

due to budget constraints, over its lifetime, the R&E credit has mainly subsidized

research that was already planned or completed (that is, it has generally been extended for short periods, usually retroactively).8

The R&E tax credit has been modified many times over the years, in part to try to restrict its application to real scientific research (rather than, say, development

of an improved Chicken McNugget). Recently, the IRS proposed a regulation to implement congressional intent in this regard by requiring, among other things, documentation of scientific purpose and methods for ‘‘research’’ investments to qualify.

The proposed regulation has caused a firestorm of complaints from the affected companies.

Yet it is quite clear that when the government subsidizes basic scientific research

(which the market arguably does neglect) through direct spending programs it explicitly requires a showing by prospective grantees that a real scientific approach

and purpose will be utilized. Thus, lobbyists who argue for a looser standard for the

R&E tax credit and who argue that the IRS has ‘‘little understanding of the way

technology companies work’’9 are implicitly endorsing a common defect of tax-based subsidies: the lack of oversight by a qualified agency. We would not tolerate such

a lack of oversight in the case of direct spending. Why are we so tolerant in the

case of a tax-based subsidy? Useful business research is undeniably a good thing. But so are many other business activities. Research is also highly profitable, especially in our technology-dominated world. There is no reason why Congress should try to encourage such investments (at the expense of alternative investments) when they are not otherwise profitable.

4. BUSINESS MEALS AND ENTERTAINMENT SUBSIDIES

Under current law, spending on meals that bear a ‘‘reasonable and proximate relationship to a trade or business’’ and are ‘‘conducive to a business discussion’’ are

both 50 percent deductible and excluded from the income of the recipients. There’s

no requirement that business actually be discussed, either before, during or after

317

10Lobbyists for the business meals deduction have recently come up with a novel argument

for actually expanding their subsidy. They maintain that if the government decides to increase

the minimum wage for low-income workers, then it’s only fair to do something for better-off

business people, too. As the Washington Post (May 3, 1999, p. A2) reports, in connection with

the proposed increase in the minimum wage, ‘‘table-service restaurants want to increase the

business meal tax deduction from 50 percent to 80 percent. That change * * * would affect

eateries ranging from elegant Washington bistros to hotel and chain restaurants across the

country, could cost $3 billion.’’

the meal. Likewise, entertainment outlays—for golf, hockey tickets, etc.—are 50 percent deductible if the taxpayer has more than a general expectation of deriving income or a specific trade or business benefit (other than goodwill) from the activity,

or more liberally, if the entertainment is directly preceded or followed by a substantial and bona fide business discussion. Such a discussion does not have to occur on

the same day as the entertainment, nor does it have to last as long.

The problem is not merely that these rules are hopelessly open to abuse—although of course they are. The fundamental problem is that no matter what the

technical rules, the deduction/exclusion for meals and entertainment is considered

by almost every disinterested analyst as an abuse of good tax policy. Recognizing

this fact, defenders of write-offs for business meals and entertainment generally do

not focus on tax policy issues. Instead, they attempt to defend the $6.6 billion annual cost of these deductions as justifiable government subsidies to the restaurant,

resort and entertainment industries.

Now if one were to make a list of government spending priorities, a subsidy for

business men and women’s eating, drinking and entertainment would seem to be

very near, if not at, the bottom of the list. (Perhaps subsidizing business people’s

purchases of jewelry or furs would rank even lower.) So how can we possibly justify

higher taxes on the general public or reductions in important government services

to fund such a peculiar entitlement program?10

III. CONCLUSION

The notion that many of the provisions of the Internal Revenue Code are really

hidden spending programs is a well-known fact to the special interest groups that

lobby for the loopholes. Indeed, these interests usually prefer to get their subsidies

through the tax laws—not only because the benefits are disguised, but because once

enacted, they typically remain in the law as permanent entitlements.

At a time of intense, critical scrutiny on direct government programs, it’s especially important to focus on the hundreds of billions of dollars in ‘‘hidden entitlements’’ buried in the tax code. Far too many of these tax subsidies amount to welfare for corporations and the rich. They often involve the government in what it

usually does not do well—trying to make decisions for businesses, investors and consumers—and as a result, they harmfully distort private economic choices. Their

huge cost crowds out funds for what the government ought to be doing better—

building the roads, promoting education, stopping crime, protecting the environment

and so forth. And they make our tax laws much too complex.

In short, while not all ‘‘tax expenditures’’ are evil, many of them undermine tax

fairness, impede economic growth and divert scarce tax dollars away from better

uses. If we hope to ‘‘reinvent government’’ to make it more effective and less burdensome—in short, a better deal for ordinary American families—then scaling back

wasteful and pernicious tax loopholes should be at the top of the agenda.

Chairman KASICH. Thank you, Mr. McIntyre.

Mr. Moore is recognized.

STATEMENT OF STEPHEN MOORE

Mr. MOORE. Thank you, Chairman Kasich, and thank you for

your heroic efforts over the last several years in shrinking the corporate welfare safety net. You have been a warrior on this issue

with some of the others on this committee, and I want to commend

you for the service you have done for taxpayers on this issue. I also

want to applaud Mr. Nader for his astounding testimony. I believe

what his testimony shows is that there is a bipartisan on this issue

of cutting corporate welfare subsidies, and I look forward to working with him on this issue.

318

In keeping with the truth in testimony requirements, let me say

that neither I nor the CATO Institute receives a penny of government money nor do we want any of your money.

Let me start by making just a couple of observations about the

corporate welfare state and then give you some recommendations

about how we might try to win on this issue. First, we have found

in our studies at the CATO Institute that corporate welfare is an

enormous and growing component of the Federal budget. Our latest

study finds that there are about $75 billion in spending subsidies

per year. They are distributed through about 125 different programs through eight cabinet departments. You would unfortunately

be hard pressed these days to find a single Fortune 500 company

that is not a recipient of at least one of these programs.

Interestingly enough, about 90 percent of small businesses in

America receive none of this money. So this is really a David v. Goliath issue where all of the money is going to Goliath.

I believe that the problem is not tax loopholes, as the previous

commenter said. I believe the problem is the spending programs.

I don’t think that corporate America is undertaxed. I think corporate America is overtaxed. I think corporate America is paying

far too much taxes, $200 billion a year, and I think we would be

much better off if we let corporations spend their own money rather than sending it to Washington and then distributing it back to

them.

By the way, just in the last year’s budget, we found that corporate welfare was up 2 percent and if you look at President Clinton’s budget, unfortunately he proposes about a 9 to 10 percent increase in corporate welfare spending programs.

One other quick point on this is I know you are embroiled right

now in a big controversy about whether we have to bust these supposedly tight spending caps. It seems absurd to me that we would

be talking about busting spending caps when we have $75 billion,

and almost all of this program, Chairman Kasich, is in the domestic discretionary component of the budget. Some of it is also in the

defense budget. We should certainly be able to find a savings out

of the defense and domestic spending areas so that we don’t have

to bust these spending caps.

Second point, companies are double and triple dipping. Let me

give you some examples. We found that General Electric in 1995

received 15 different corporate welfare grants to the tune of $20

million. We found that Rockwell received 39 corporate welfare

grants to the tune of $25 million.

We found Westinghouse dipped 14 times into the public trough

to the tune of $26 million. These are all companies that had more

than $500 million in profits in the year that we were handing them

out, at least $20 million in grants.

By the way, you were asking about what we could do to improve

our ability to get rid of these programs. It is very hard to find out

how much various companies are getting in these corporate welfare

grants and we ought to have some type of procedure where companies are required if they are going to receive these grants to declare

to Congress how much money they are getting from all of these different sources.

319

A third point, corporate welfare cuts should offset pro growth tax

cuts. We have to bring down the enormous tax burden in this country. Proponents of corporate welfare say these programs create

jobs. They say these programs help industry. Now, I like to use the

example of someone like my father who was in the export business

for 40 years as a small businessman and you know how many

times in his 40-year business life that he came to Washington?

Zero. He never stepped foot in this town, as most small businessmen never do. Most small businessmen don’t have corporate lobbyists to chase down these grants for them and it is only the powerful

companies that get these kinds of money, and yet I think of someone like my father who paid a lot of taxes over his years as a businessman and he had to pay taxes so some of that money could be

used to essentially subsidize his competitors.

Interestingly enough, if you look at the kind of strategy that we

are pursuing when we pursue corporate welfare subsidies, this is

really the Japan and Europe model of industrial policy. I remember

5 or 6 years ago when we first started talking about this, people

were applauding the Japanese model as the model we ought to be

imitating. Clearly we want to do anything but imitate the Japan

model.

Finally, let me say that you were very interested in some kind

of strategies that we could use to eliminate corporate welfare and

I have come up with a few that I think that you will like.

First, I think that we ought to look at a program where we have

a corporate welfare commission, as the previous panel discussed.

You know in the past I have been opposed to this because I

thought Congress should be able to make these cuts themselves.

Unfortunately, the last 5 years have proven Congress will not

make these cuts themselves and I have come to the unfortunate

conclusion that we probably do need a corporate welfare elimination commission model modelled on the Base Closing Commission and we ought to tell that commission to come up with at least

$20 billion a year in savings.

Second of all, let’s eliminate double dipping. Let’s basically say

to General Electric and General Motors one per customer, one

grant per customer and that is it.

Third, time limits. As you know, Chairman Kasich, when we

passed welfare reform back in 1996, I believe it was, we basically

established a very sensible policy that said 2 years and then off.

You can stay on the dole for 2 years but then we expect you to become self-sufficient. Why can’t we do this with America’s largest

companies to say you can get these grants for 2 years but no more

than 2 years. If welfare moms can do it, big business can too.

Next, and I think this would be a very hard thing to resist, why

don’t we have a policy that says basically that any individual or

any business that has an income over $1 million is not eligible for

any government subsidy. I think that this would be something that

would be hard for anybody on the left or the right to resist.

So let me simply summarize by saying that I think cutting corporate welfare and getting business off the dole is pro fairness, is

pro growth, and is pro business and will make our industry stronger, not weaker. Thank you.

[The prepared statement of Mr. Moore follows:]

320

1Stephen Moore and Dean Stansel, ‘‘Ending Corporate Welfare as We Know It,’’ Cato Institute

Policy Analysis, 1995. 2Fortune, April 27, 1998, p. 216.

PREPARED STATEMENT OF STEPHEN MOORE, DIRECTOR OF FISCAL POLICY STUDIES,

THE CATO INSTITUTE

Thank you Chairman Kasich for the opportunity to testify before the Budget Committee on the issue of corporate welfare in the Federal budget. You and a handful

of other members on this Committee are among the few Members of Congress who

have made a valiant effort to reduce Federal taxpayers subsidies to business. 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.

I have divided my testimony on corporate welfare into 12 summary points: 6 observations of Congress and 6 recommendations regarding how Congress can reduce

the size of the corporate welfare state.

1. The corporate welfare state in Washington is a large and growing component

of the Federal budget. America’s most costly welfare recipients today are Fortune

500 companies.1 In 1997 the Fortune 500 corporations recorded best-ever earnings

of $325 billion, yet incredibly Uncle Sam doled out nearly $75 billion in taxpayer

subsidies.2 These welfare payments come in every conceivable shape and size, including government grants, contracts, cut rate insurance, loans, and loan guarantees. There are roughly 125 such 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 the corporate welfare subsidy programs finds that, although

congressional Republicans had pledged an attack against unwarranted business subsidies back in 1995, these programs have actually expanded by 10 percent on average over the past 4 years. The Table below shows the budgets for 60 of the most

egregious examples of corporate welfare in 1998 and 1999.

TABLE 1.—HOW SOME OF THE WORST CORPORATE WELFARE PROGRAMS FARED UNDER THE GOP

CONGRESS

(Millions of dollars)

Program/Agency 1998 Actual 1999 Estimated

Percent

change 98–99

Agriculture Department:

Agricultural Credit Insurance Fund ............................................................... $638.0 $353.0 ¥45%

Agricultural Marketing Service ...................................................................... 41.0 43.0 5%

Agricultural Research Service ........................................................................ 768.0 874.0 14%

Commodity Credit Corporation Export Loans Program .................................. 263.0 449.0 71%

Conservation Reserve Program ...................................................................... 1,760.0 1,576.0 ¥10%

Cooperative State Research, Education, and Extension Service .................. 904.0 928.0 3%

Economic Research Service ........................................................................... 55.0 55.0 0%

Export Enhancement Program ....................................................................... 350.0 550.0 57%

Federal Crop Insurance Corporation .............................................................. 1,031.0 1,303.0 26%

Foreign Agricultural Service ........................................................................... 157.0 137.0 ¥13%

Market Access Program ................................................................................. 92.0 89.0 ¥3%

National Agricultural Statistics Service ........................................................ 124.0 102.0 ¥18%

Public Law 480 Grants .................................................................................. 794.0 932.0 17%

Rural Community Advancement Program ...................................................... 580.0 759.0 31%

Rural Business-Cooperative Service (RBCS) ................................................. 65.0 77.0 18%

Commerce Department:

Economic Development Administration ......................................................... 385.0 438.0 14%

Advanced Technology Program (Budget Authority) ....................................... 193.0 231.0 20%

Manufacturing Extension Partnership (Budget Authority) ............................. 114.0 128.0 12%

International Trade Administration ................................................................ 303.0 273.0 ¥10%

Minority Business Development Agency ........................................................ 28.0 32.0 14%

National Oceanic and Atmospheric Administration: nonweather activities 1,047.0 1,076.0 3%

Defense Department:

Army Corps of Engineers ............................................................................... 3,845.0 4,209.0 9%

Research, Development, Test, and Evaluation: applied R&D program

Advanced Electronics Technologies R&D 1 ........................................... 299.0 264.0 ¥12%

Commercial Technology Insertion Program1 ........................................ 20.0 0.0 ¥100%

Computing Systems and Communications Technology R&D 1 ............. 327.6 331.3 1%

321

TABLE 1.—HOW SOME OF THE WORST CORPORATE WELFARE PROGRAMS FARED UNDER THE GOP

CONGRESS—Continued

(Millions of dollars)

Program/Agency 1998 Actual 1999 Estimated

Percent change 98–99

Dual Use Applications programs 1 ....................................................... 125.0 36.0 ¥71%

Electric Vehicles 1 ................................................................................. 0.0 9.0 100%

Materials and Electronics Technology R&D 1 ....................................... 237.7 278.0 17%

Next Generation Internet 1 .................................................................... 42.0 50.0 19%

Energy Department:

Energy Conservation programs ...................................................................... 621.0 560.0 ¥10%

Energy Information Administration ................................................................ 63.0 70.0 11%

Energy Supply Research programs ................................................................ 1,241.0 883.0 ¥29%

Fossil Energy Research and Development ..................................................... 351.0 370.0 5%

Science programs .......................................................................................... 2,239.0 2,534.0 13%

Power Marketing Administrations .................................................................. 70.0 185.0 164%

Interior Department:

Bureau of Reclamation .................................................................................. 786.0 1,143.0 45%

Transportation Department:

Commercial Space Transportation Office ...................................................... 6.0 7.0 17%

Federal Highway Administration: earmarked demonstration projects .......... 405.0 450.0 11%

Grants-in-Aid for Airports .............................................................................. 1,511.0 1,670.0 11%

Maritime Administration: Guaranteed Loan Program .................................... 13.0 60.0 33%

Maritime Administration: Operating-Differential Subsidies .......................... 37.0 19.0 ¥49%

Maritime Administration: Ocean Freight Differential .................................... 19.0 24.0 26%

Maritime Security Program ............................................................................ 81.0 98.0 21%

Essential Air Service program (Payments to Air Carriers) ........................... 37.0 50.0 35%

Independent Agencies and Other:

Appalachian Regional Commission ............................................................... 188.0 151.0 ¥20%

Export-Import Bank ........................................................................................ 718.0 799.0 11%

NASA/Aeronautical Research and Technology activities ............................... 920.0 786.0 ¥15%

National Science Foundation: HIgh Performance Computing and Communications .................................................................................................... 265.0 301.0 14%

Overseas Private Investment Corporation ..................................................... 105.0 127.0 21%

Partnership for a New Generation of Vehicles .............................................. 220.0 240.0 9%

Small Business Administration ..................................................................... 1,066.0 12.0 ¥99%

Tennessee Valley Authority—Area and Regional Development .................... 94.0 53.0 ¥44%

Trade and Development Agency .................................................................... 50.0 60.0 20%

Total .................................................................................................. $25,694.3 $26,234.9 2%

1 Numbers are from the respective appropriations bills.

Source: Budget of the U.S. Government, FY 2000.

Clearly, whatever strategies we have tried to employ to curtail corporate welfare

spending have not worked very successfully. New tactics to take on the corporate

beneficiaries of Federal subsidies are unquestionably necessary.

2. Almost all of the most egregious subsidies are in the forms of Federal expenditures, not tax loopholes. If Congress is serious about weaning businesses from Federal subsidies, it should concentrate on eliminating the Departments of Commerce

and Energy, the Export Import Bank, the International Monetary Fund and the

World Bank, farm subsidies, and OPIC. These spending programs not only cost taxpayers money directly, but also create an unhealthy corporate dependence on Federal subsidies. Yes, there are unfair provisions of the tax code that benefit some

businesses and industries more than others. Congress should overhaul the entire income tax system to eliminate those unjustified tax breaks.

3. Many Fortune 500 companies are double and triple dippers. All but a small

handful of America’s most profitable corporations have participated in the hunt for

Federal or state government subsidies. Most of these companies are double-, triple-

, and quadruple-dipping. 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.

4. There are no time limits for corporate welfare benefits. In the mid-1990’s Congress and the states—at the urging of the American people—enacted major reforms

in social welfare programs. There are now time limits on welfare benefits. Work,

training, or education is now typically required in exchange for benefits. The result:

322

3Theodore J. Forstmann, ‘‘The Paradox of the Statist Businessman,’’ Speech before the Cato

Institute, February, 1995. 4 ibid.

welfare rolls are down by 40 percent over the past 5 years and record levels of

former-recipients now working and paying taxes, not collecting them.

None of this reform ethic has taken root in the realm of corporate welfare. There

is no plan in Congress or the White House to attack business subsidies. In fact, the

business community has come to regard subsidy payments as de facto entitlements.

There is no ‘‘two years and off’’ time limit when it comes to corporate hand-outs.

5. If all corporate welfare were eliminated, the savings would be large enough to

entirely eliminate the capital gains tax or the death tax. Private industry recipients

of corporate welfare typically boast of the jobs that they create with their Federal

grant payments. It makes sense that if Congress gives General Electric a cash payment, they may use those dollars for socially useful purposes. But the real issue

with corporate welfare is what are the opportunity costs associated with the $75 billion a year in corporate subsidies. The Table below shows a sample of the types of

pro-growth tax reduction initiatives that Congress could afford to undertake without

adding a penny to the Federal debt, if corporate welfare were entirely ended.

• We could cut the personal income tax, the corporate income tax, or the payroll

tax.

• We could entirely abolish the capital gains tax or the death tax.

• We could help finance a flat tax at a rate of 20 percent for all Americans.

Those in the business community who contend that corporate subsidies add to

America’s competitiveness and industrial might, must answer the following question: Do you really believe that these programs add more wealth, jobs, or venture

financing for the American economy than would entirely eliminating the capital

gains tax or adopting a low-rate flat tax that ends all punitive tax treatment of savings? Very few could honestly answer that question in the affirmative.

TABLE 2.—WHAT $75 BILLION IN ANNUAL CORPORATE WELFARE SAVINGS WOULD BUY

Corporate welfare alternatives Annual cost

Eliminate Capital Gains Tax ................................................................................................................................ $70 billion

Eliminate the Death Tax ...................................................................................................................................... $25 billion

Cut Corporate Tax from 35 percent to 25 percent .............................................................................................. $65 billion

Cut All Personal Income Tax Rates by 10 Percent .............................................................................................. $74 billion

Establish 20 Percent Flat Tax .............................................................................................................................. $65 billion

3 Percentage Point Cut in Payroll Tax ................................................................................................................. $70 billion

Source: Budget of the United States Government, Fiscal Year 1999.

6. Corporate welfare corrupts the political process. A recent front page story in the

Washington Post notes that Microsoft, which until recently had no Washington office, now spends tens of millions of dollars a year on lobbyists, p.r. firms, and lawyers to protect itself from Washington. These millions of dollars would clearly benefit consumers, taxpayers, and Microsoft shareholders if they were used to build better software, not on lobbying Congress. Yet, one result of the modern corporate welfare state is that industries must almost all have a ‘‘presence’’ in Washington.

One perverse, but predictable outcome of a $100 billion-plus corporate welfare

state is that industry begins to view Congress, rather than consumers, as their real

customers. Firms begin to produce for government, not the market. Corporate welfare, notes Wall Street financier Theodore J. Forstmann, has led to the emergence

of the ‘‘statist businessman in America.’’3 The statist businessman is ‘‘a conservator,

not a creator; a caretaker, not a risk taker; an argument against capitalism even

though he is not a capitalist at all.’’4

Again, the sugar program is illustrative. In 1995 the program was under assault.

It appeared that the anti-corporate welfare forces, would finally win a high profile

fight on behalf of taxpayers and consumers. On the day of the vote on the House

floor, big sugar prevailed by just three votes. It turned that 4 Members of Congress

who were original co-sponsors of the legislation to kill the sugar subsidies voted

against their own bill! Big sugar had provided hundreds of thousands of dollars of

campaign contributions, with about a ten to one ratio going to members who voted

for the price supports versus those who voted against them. The Fanjul family, owners of several large sugar farms in the Florida Everglades, captures an estimated

$60 million a year in artificial profits thanks to price supports and import quotas.

The Fanjuls are fierce defenders of the sugar program and to protect the cash cow,

323

5 Rich Lowry, ‘‘The Undeserving Rich,’’ National Review, December 31, 1994, pp. 21-22.

6 U.S. General Accounting Office, ‘‘Debt Collection: Information on the Amount of Debts Owed

the Federal Government,’’ December, 1985. 7David F. Linowes, Privatization: Toward More Effective Government, Report of the President’s Commission on Privatization, (Urbana, Illinois: University of Illinois Press, 1988), pp. 41-

42.8Stephen Moore, Slashing the Deficit, The Heritage Foundation, Washington, D.C., 1990.

9For a critique of the Federal farm subsidies, see: Jim Bovard, The Farm Fiasco, 1991.

since 1992 this one family has contributed more than $350,000 to political campaigns.5

Myths of the Corporate Welfare State

Despite the quite substantial costs of Federal business subsidies, the efforts of a

wide ideological spectrum of organizations like PPI, Cato, the National Taxpayers

Union, some environmental groups, and even the Nader organizations to stop corporate welfare has been largely unsuccessful. As I told a Wall Street Journal reporter not long ago: ‘‘We fought a war against corporate welfare, and corporate welfare won.’’

The failure can be explained by the fact that the proponents of these subsidies

continue to perpetuate myths about the benefits of the government-industry partnership model. The following is a restatement and refutation of those prevalent

myths of corporate welfare:

1. The Federal Government can pick industrial winners and losers. The function

of private capital markets is to direct billions of dollars of capital to industries and

firms that offer the highest potential rate of return. The capital markets, in effect,

are in the business of selecting corporate winners and losers. Capitalists put at risk

their own money. With trillions of dollars now invested every year by Americans,

the U.S. now has the most efficient capital markets in the world.

The underlying premise of Federal business subsidies is that the government can

direct capital funds more effectively than can venture capitalists and private money

managers. But decades of historical experience prove that government agencies have

a much less successful track record than do private money managers of correctly

selecting winners. Example: the average delinquency rate is almost three times

higher for government loan programs (8 percent) than for commercial lenders (3 percent).6 The Small Business Administration delinquency rates reached over 20 percent in the 1980’s; the Farmers Home Administration delinquency rate has approached 50 percent.7 The Federal Housing Administration’s default rate is 8 percent versus a 3 percent industry-wide average for private mortgage insurers.

Corporate welfare supposedly offers a positive long-term economic return for taxpayers. But the evidence shows that government ‘‘investments’’ have a low or negative rate of return. In the late 1960’s the Federal Government spent nearly $1 billion on the Super Sonic Transport (SST), which experts in Washington expected

would revolutionize air travel. Instead the plane went bankrupt and never flew a

single passenger. In the late 1970’s the Federal Government spent more than $2 billion of taxpayer money on the Synthetic Fuels Corporation—a public-private project

that Department of Energy officials thought would provide new sources of energy

for America in the 1980’s. The SFC was closed down in the 1980’s, having never

produced a single kilowatt of electricity.

2. Corporate welfare promotes American competitiveness. Business subsidies,

which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense

of their less politically influential rivals. This is precisely what Japan has found

during it economic collapse over the past 6 years. In Japan the myth of industrial

policy as a competitiveness strategy has led to a 60 percent reduction in the value

of Japanese stock market since 1991.

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 Secretary Bill

Daley’s 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.8 Over 80 percent of the subsidies enrich farmers with a net worth of more

than half a million dollars.9

324

8Stephen Moore, Government: America’s #1 Growth Industry, (Lewisville, Texas: Institute for

Policy Innovation, 1995), p. 92. 11 Associations Yellow Book, Winter 1994, Vol. 3, No. 2, (New York: Monitor Leadership Directories, Inc., 1994), p. 692. 12 Jeffrey Gerlach, ‘‘Politics and the National Defense: The 1993 Defense Bill,’’ Cato Institute,

Foreign Policy Briefing No. 22, January 20, 1993, p. 5.

Given that there are more than 1 million small and large businesses in the U.S. today, the subsidies approach to prosperity is utterly futile. The only effective way

to enhance the competitiveness and productivity of American industry is to create

a level playing field, which minimizes government interference in the marketplace

and substantially reduces tax rates and regulatory burdens. All of the Federal Government’s efforts to promote the big three U.S. automobile companies are inconsequential compared with the regulatory burden on that industry, which now adds

an estimated $3,000 to the cost of a new car.10

3. Government and industry partnerships should be encouraged. Government and politics are, alas, inseparable. Much of what passes today as benign industrial policy

is little more than a political payoff to favored industries or businesses. Taxpayer

dollars that subsidize private firms are routinely rerouted to Washington in the

form of political contributions and lobbying activities to secure even more tax dollars. Cash-in; cash-out. For example, the outdated Rural Utility Services survives

primarily because of the lobbying efforts of the National Rural Electrical Cooperative Association in America. With a $78 million budget, that association is one of

the most influential and heavily financed lobbying groups in Washington.11

During the 1992 presidential campaign Vice President Dan Quayle traveled to Michigan to announce a $250 million plan to upgrade the M-1 tank—which happens

to be built by General Dynamics in Sterling Heights, Michigan.12 Before the campaign the Bush administration had argued convincingly that in the post-Cold War

era the more expensive tank was unnecessary. Many of the top recipients of technology research grants awarded by the Clinton administration were also substantial contributors to the Clinton-Gore campaign or

the Democratic National Committee. For example, Table 3 lists ten Fortune 500

firms that were multi-million dollar award winners of the Advanced Technology Program or the Technology Reinvestment Project in 1994 that were also large Democrat

and Republican campaign contributors, according to FEC data compiled by Common

Cause. (Almost all firms that chase corporate welfare dollars hedge their bets by

giving to both parties. In Washington, the way to gain a ‘‘seat at the table’’ is to

contribute bipartisanly. Industry learns the rules of engagement in Washington

quickly: giving to both parties is tolerated; giving to neither is not.) In sum, corporate welfare programs often put our government programs up to sale to the highest bidder.

TABLE 3.—CASH IN, CASH OUT

Company

Campaign contributions 1994 Grant awards (millions 1)

1992 1994 TRP ATP

AT&T 2 ............................................................................................................. $30,000 $60,000 $1.9 $8.2

Boeing ............................................................................................................ ................ 127,000 44.2 6.0

Chevron .......................................................................................................... 61,000 159,000 ................ 16.6

Exxon .............................................................................................................. ................ 60,000 ................ 16.6

General Electric .............................................................................................. 46,000 107,000 ................ 21.8

IBM ................................................................................................................. 3 150,000 ................ 78.5 9.4

McDonnell Douglas ........................................................................................ 43,000 59,000 1.5 5.3

Shell ............................................................................................................... 65,000 ................ ................ 16.6

Texaco ............................................................................................................. 22,000 ................ ................ 16.6

United Technology Corp. ................................................................................ 41,000 ................ 24.6 ................

Total .................................................................................................. 458,000 572,000 ................ ................

1 TRP stands for Technology Reinvestment Program. ATP stands for Advanced Technology Program. Grant award figures are total amount per contract. Some of the funds were distributed to subcontractors. 2 Includes grants to AT&T Bell Labs.

3 Given by Thomas J. Watson, Chair Emeritus, IBM.

Sources: ATP and TRP lists of 1994 award recipients; Common Cause reports, based on FEC data.

4. Corporate welfare benefits workers and consumers. One of the main effects of

many corporate subsidy programs is to raise prices to consumers. Trade restrictions,

often sought by politically powerful industries, are estimated to cost consumers $80

325

13 James Bovard, Fair Trade Fraud, (New York: St. Martin’s Press, 1991), p. 5. 14 U.S. Department of Commerce, United States Sugar Policy—An Analysis, 1988, p. v. 15 Ibid., p. 10. 16Gilbert Gaul and Susan Stranahan, ‘‘How Billions in Taxes Failed to Create Jobs,’’ The

Philadelphia Inquirer, June 4, 1995, p. 1.

billion a year.13 The sugar program alone is estimated to cost consumers more than

$3 billion a year, according to a U.S. Department of Commerce study.14 The Commerce study concluded, ‘‘Because sugar is an ingredient in many food items, the effect of the sugar program is similar to a regressive sales tax, which hits lower-income families harder than upper-income families.’’15

The Commerce Department’s ATP program is also advertized as a job saver. But

from 1990-94 the ATP provided more than $250 million to eight firms—Amoco

Corp., AT&T, Citicorp, DuPont, General Electric, General Motors, IBM, and Motorola. Over those 5 years, these firms reduced their total U.S. workforces by

329,000.16

THE POLITICS OF CORPORATE PORK

In its headier days of 1996 when Republicans still had a revolutionary fervor,

Congress abolished the wool and mohair subsidies—the much maligned handouts

that provided an annual payment of hundreds of thousands of dollars to each of

fewer than 200 sheep herders in the U.S. Finally, Congress had gotten rid of a business subsidy. But in 1998 Congress resurrected the Wool and Mohair subsidy and

the new version is just as absurd as the old.

Incredibly, between 1995 and 1998, with the most conservative Congress in half

a century, corporate welfare programs did not shrink, they grew. There is plenty

of blame to go around for this policy failure. The retreat has been bipartisan. And

the left and the right share in the hypocrisy on the issue, the left for claiming that

it cares for the ‘‘little guy’’ while funding the biggest bully on the block, and the

right for claiming it believes in free enterprise—except when it comes to subsidizing

corporate constituents.

But the Republican retreat on corporate welfare is more perplexing and laden

with hypocrisy than the Democrat’s. After all, the GOP is the party that describes

itself as anti-big government.

It is precisely the Republican’s skittishness when it comes to pushing big business

off of the dole that gives their budget plans so little credibility with the public. Liberals charge that Republicans want to cut school children off the dole, but not the

Fortune 500. The Washington Post assessed the budget plans by the Republican majorities by declaring, ‘‘Everything seems to get cut—but not corporate welfare.’’ Such

attacks are devastating to Republican credibility. Why? Because they ring true. ‘‘If

you can’t push AT&T and GE off the dole,’’ Silicon Valley venture capitalist Tim

Draper asked a group of Senate Republicans in 1997, ‘‘how can we ever expect to

get farmers, unions, artists, and seniors to give up their subsidies?’’ Exactly.

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. When

I once asked Newt Gingrich why the 105th Congress had not made a serious attempt to slice out corporate pork, he responded: ‘‘This really isn’t one of our top priorities....And I don’t like the term corporate welfare much anyway.’’ You can lead

an elephant to water, but you can’t make him drink.

Corporate subsidies should not be last on the GOP’s hit list: they should be first.

Americans want government downsizing if it is fair and balanced—meaning that the

budget knife does not spare the most politically well connected.

The Republican budget revolution will continue to fizzle as long as GOP leaders

ignore the corrosive impact that corporate subsidies have on the party and the government.

What seems clear from the policy failures of the past 5 years is that the corporate

welfare empire in Washington cannot be toppled until the left and the right forge

an alliance to purge the budget of corporate largesse. Rep. John Kasich has heroically attempted to do so in the past with his ‘‘Stop Corporate Welfare Coalition.’’

Only a handful of Republicans and Democrats would publicly enjoin the Kasich crusade, the rest went into hiding in the bushes like the terrified Muchkins in the

Wizzard of Oz.

Despite the conventional orthodoxy in Washington that the United States needs

to forge closer alliances between business and politics—so called government-industry partnerships—the truth is that both government and the marketplace would

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17 Associations Yellow Book, Winter 1994, Vol. 3, No. 2, (New York: Monitor Leadership Directories, Inc., 1994), p. 692.

work better if they kept a healthy distance apart. It’s in no one’s best interest for

the regulators and the regulated to get too chummy.

In Washington there seems to be a mighty fine line between too big to fail and

too big to succeed. At the very moment that the Federal Government is in litigation

with Microsoft, perhaps America’s most innovative and profitable high-technology

corporation in decades, Congress is spending hundreds of millions of dollars trying

to prop up the firm’s less efficient computer industry rivals. If the government succeeds in its quest to knock Microsoft from its lofty perch, no doubt it will have a

taxpayer funded safety net waiting to cushion its fall.

We now have an unhealthy policy regime in Washington through which Federal

regulatory and anti-trust policies are increasingly geared toward punishing success,

while Federal corporate welfare policies increasingly reward the losers.

5. Corporate welfare fosters an incestuous relationship between business and government. Government and politics are inseparable. Much of what passes today as

benign industrial policy is little more than a political payoff to favored industries

or businesses. Taxpayer dollars that are used to subsidize private firms are routinely returned to Washington in the form of political contributions and lobbying activities to secure even more tax dollars. For example, the outdated Rural Electrification Administration survives primarily because of the lobbying efforts of the National Rural Electrical Cooperative Association in America. With a $78 million budget, that association is one of the most influential and heavily financed lobbying

groups in Washington.17

6. the ATP and other Commerce Department corporate welfare programs put government up for sale to the highest bidder.

In the world of corporate welfare, big is beautiful. A preponderance of the high

technology subsidies are diverted to many of America’s largest companies, those

with K Street lobbyists that help chase down ‘‘free’’ Federal dollars. For example,

in 1995 the Philadelphia Inquirer monitored the largest beneficiaries of government

technology subsidies from 1990 to 1994. Eight of the largest recipients alone had

1994 profits of just below $25 billion. (Table 3 shows the lucky winners.) Can anyone reasonably argue that at a time when the United States government is running

$100 to $200 billion annual budget deficits, there is either equity or economy in having Uncle Sam sending out checks to billionaire companies? Can anyone argue that

these companies cannot fund vital R&D projects and product development strategies

without the help of Uncle Sam?

TABLE 3.—WELFARE TO THE WELL-OFF

[Dollars in millions]

Company 1990–94 Technology subsidies 1994 Profits

Amoco ...................................................................................................................................... $23.6 $1,800

AT&T ......................................................................................................................................... $35.6 $4,700

Citicorp .................................................................................................................................... $9.6 $3,400

DuPont ..................................................................................................................................... $15.2 $2,700

General Electric ....................................................................................................................... $25.4 $4,600

General Motors ......................................................................................................................... $110.6 $4,900

IBM ........................................................................................................................................... $58.0 $3,000

Motorola ................................................................................................................................... $15.1 $1,600

Source: Philadelphia Inquirer, ‘‘How Billions in Taxes Failed to Create Jobs,’’ June 4, 1995.

But what is even more insidious is that Commerce Department corporate welfare

grants appear to be closely tied to campaign donations. Table 4 lists 13 large ATP

award winners with the contributions made to the two parties—the DNC and the

RNC. ATP appears to be little more than a cash-in, cash-out system. The best way

to end this symbiotic relationship between industry and government is to shut down

the cash dispensing programs that invite corruption.

327

TABLE 4.—CASH-IN, CASH-OUT?

[Dollars in thousands]

ATP award winners 1992–95

1996 Contributions to

DNC RNC

General Electric ....................................................................................................................... $133 $130

BP America .............................................................................................................................. 57 218

Dow Chemical .......................................................................................................................... 91 268

AT&T ......................................................................................................................................... 422 552

BellSouth .................................................................................................................................. 115 276

BellAtlantic .............................................................................................................................. 160 251

Boeing Co. ............................................................................................................................... 148 313

Chevron Co. ............................................................................................................................. 176 526

United Technology Corp. .......................................................................................................... 231 239

MCI ........................................................................................................................................... 607 357

Time Warner ............................................................................................................................. 401 325

Textron Inc. .............................................................................................................................. 274 373

General Motors ......................................................................................................................... 77 426

Source: FEC and Department of Commerce, 1997.

Mr. Chairman, I do not come to this issue with the intention of denigrating the

contributions of these great and successful corporations. And I do not come to the

issue with an anti-business, or anti-big business motivation. To the contrary. I want

to see U.S. companies like MCI And General Motors dominating in global markets.

The good news is that American firms are out-competing their foreign competitors

today in industries across the board—from microchips to potato chips. Mostly these

U.S. firms are winning without the help of government ‘‘aid.’’

It is not pro-business for government to try to help businesses one at a time—

as seems to be the overriding mission of the Department of Commerce. It is not free

enterprise for the government to be picking winners and losers in high technology

markets—or in any industry. The way that the United States Senate can help create more Microsofts, more Intels, more Federal Express’s, and more MCI’s is not to

have government go searching for them. It is to cut taxes, cut government spending,

and streamline anti-business regulations that cause more problems than they solve.

A good way to start this crusade to keep American industry competitive is to abolish the ATP and the MEP and the rest of the corporate welfare state that impedes

the free market from functioning.

Last year I co-authored a Cato Institute report entitled ‘‘Ending Corporate Welfare as We Know It,’’ in which we estimated that the Federal Government now

spends roughly $75 billion each year on more than 125 programs that provide direct

taxpayer assistance to American businesses. This dollar estimate has been generally

substantiated by the General Accounting Office and other research organizations,

such as the Progressive Policy Institute.

To put the cost of these industry subsidies in perspective, if all Federal assistance

to business were purged from the budget, the budget deficit could be cut in half.

Alternatively, if Congress were to eliminate all these corporate spending subsidies,

this would generate enough savings to entirely eliminate the capital gains tax and

the Federal estate tax. Reducing the deficit or eliminating these anti-growth taxes

would do far more to benefit American industry and U.S. global competitiveness

than asking Congress to selectively pick industrial winners and losers.

Just what is corporate welfare? To some, it is like pornography: they can’t define

it, but they know it when they see it. Here is the definition that I have used in

my work on this subject: corporate welfare is the use of government authority to

confer special benefits to specific firms or industries where there is no corresponding

societal benefit.

Last year Chairman Kasich and the rest of the Republican leadership in Congress

pledged to ‘‘attack corporate welfare’’ as part of the quest for a 7-year balanced

budget plan. The Clinton administration also seemed eager to terminate unwarranted government handouts to business. The administration even challenged the

GOP Congress to identify and eliminate ‘‘aid to dependent corporations.’’

What progress have Congress and the Clinton administration made in cutting

back corporate welfare in the budget?

The attached table shows a list of 25 of the most egregious examples of corporate

welfare in the budget. These are programs that critics on the left and right have

identified as unwarranted give-aways to business.

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• Out of $16.4 billion in corporate subsidies through these 30 programs, Congress cut spending by just $2.6 billion in 1996. This was a 16 percent cut from the 1995

level. Eighty-four percent of the corporate welfare survived. • Congress did eliminate or substantially eliminate the following corporate wel- fare programs: the Travel and Tourism Administration; the Department of Commerce Advanced Technology Program; the Pentagon’s Technology Reinvestment

Project; Sematech; the Bureau of Mines; highway demonstration projects; and the

Pennsylvania Development Corporation. • Conversely, some very expensive corporate subsidy programs were reduced minimally, or not at all. These programs include: agriculture research service; the

International Trade Administration; the Federal Housing Administration; fossil energy R & D; the Bureau of Reclamation; the Office of Commercial Space Administration; the Overseas Private Investment Corporation (OPIC); and the Export Import

Bank. Spending was actually increased for the Agriculture Marketing Promotion

Program, which subsidizes the foreign advertising of U.S. corporations such as Pillsbury, Dole, and Jim Beam. I would rate Congress’s first-year performance on this issue as a disappointment. The size of the cutbacks were minimal. Some cuts were made—indeed, far more

than were ever enacted by previous Democrat Congresses—but huge amounts of the

corporate welfare state went untouched. Republican Rep. Scott Klug of Wisconsin

acknowledges that ‘‘we have not shown the same kind of fervor in cutting corporate

welfare as we have in the social area.’’

But if the Congress’s performance was a disappointment, the Clinton Administra- tion’s was dismal. With few exceptions, the administration has shown itself hostile

to even the modest corporate welfare cutbacks proposed by Congress. In fact, of the

25 corporate welfare programs examined in this study the administration’s 1996

budget actually requested a 4 percent increase in spending (versus the 16 percent

cut enacted by Congress). In addition, the president’s vetoes of the GOP budgets target corporate welfare cuts as being too deep. Clinton has, at least for now, helped

torpedo GOP efforts to shut down techno-grant programs, such as the Advanced

Technology Program; to make even minor reductions in agriculture price support

programs; to end costly and inefficient Department of Energy research projects; and

close agencies such as the Department of Commerce, the nerve center of the Federal

corporate welfare state.

Over the past eighteen months, the Clinton administration proved itself to be cor- porate welfare’s best friend.

And the unfortunate result is that the corporate social safety net remains largely intact after 18 months of the ‘‘Republican Revolution.’’

Why weren’t more cuts enacted, especially given the high profile attached to the

issue in 1996? The original House budget resolution passed in June 1995 and crafted by this committee contained courageous and substantial reductions in corporate

welfare. If implemented in full, the ‘‘Kasich Budget’’ would have constituted the

largest assault against the corporate social safety net in history. As the table below

shows, the list of business subsidy terminations Mr. Kasich compiled was impressive: the Tennessee Valley Authority, the Small Business Administration (SBA), the

Export Import Bank, the Rural Electrification Administration (REA), the economic

development administration (EDA), major farm programs, high technology pork

grants, and many others. Three cabinet agencies, including the Departments of

Commerce and Energy, were supposed to be terminated.

BUSINESS SUBSIDY CUTS IN THE FY 1996 HOUSE BUDGET RESOLUTION

[Dollars in millions]

7-year savings

Dept. Commerce Trade Promotion ........................................................................................................................ $1,500

Dept. Commerce Operations ................................................................................................................................. $11,000

OPIC privatization ................................................................................................................................................. $50

EXIM Bank reductions .......................................................................................................................................... $750

NASA restructuring ............................................................................................................................................... $12,500

Privatizing UEC ..................................................................................................................................................... $2,000

Dept. Energy programs ......................................................................................................................................... $6,200

Energy conservation ............................................................................................................................................. $1,300

P.L. 480 ................................................................................................................................................................ $2,100

Agriculture Research ............................................................................................................................................ $2,000

Farm subsidies ..................................................................................................................................................... $20,000

Penn. Ave. Devel. Corp. ........................................................................................................................................ $250

NTIA ...................................................................................................................................................................... $3,500

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BUSINESS SUBSIDY CUTS IN THE FY 1996 HOUSE BUDGET RESOLUTION—Continued

[Dollars in millions]

7-year savings

EDA ....................................................................................................................................................................... $2,000

SBA ....................................................................................................................................................................... $1,700

TVA ........................................................................................................................................................................ $900

Shipping subsidies ............................................................................................................................................... $1,000

Mass Transit ......................................................................................................................................................... $5,000

Local Freight Assistance ...................................................................................................................................... $150

Essential Air Services ........................................................................................................................................... $250

Travel and Tourism Admin. .................................................................................................................................. $150

Bureau of Mines ................................................................................................................................................... $400

Total Corporate Welfare cuts .................................................................................................................. $95 billion

Parochial concerns prevented many of these cuts. The Senate has been particularly hostile to getting business off the dole. But more important has been the Clinton veto pen.

Why is it so vitally important for Congress to cut corporate pork out of the budget? The short answer is that attacking corporate subsidies is both good politics and

good policy. It is good politics because it deflects the natural suspicion among voters

that Republican budget cutters want to cut school lunches for poor kids in order to

protect their rich corporate friends. Many Americans question the sincerity of Republican budget cutters who seem eager to end the dole for the poor, but not the

Fortune 500—General Electric, Texas Instruments, IBM, and Pillsbury—all of

which get several million dollars of grants from taxpayers each year. Cutting corporate welfare is good economics because very few of the industrial policy programs

run out of Washington have a credible track record in terms of creating jobs or

wealth.

I applaud this Committee’s commitment to redouble its efforts in the 1997 budget

to cut business subsidies.

But why wait until 1997? Why not cut corporate welfare right now?

Here is how this can and should be done. Congress should immediately enact a

budget recision spending bill that could be entitled ‘‘The Corporate Welfare Elimination Act.’’ This budget bill should terminate at least 20-25 business subsidy programs with a 6-year savings of at least $75 billion a year. The bill should target

programs that have been universally targeted for extinction by groups such as the

Cato Institute, the Heritage Foundation, the Progressive Policy Institute, and even

in some cases the Nader group Essential Information.

Spending programs included in this recision should include, but not be restricted

to:

• The Small Business Administration

• The Advanced Technology Program

• Forest Service Road Building

• Federal Housing Admin. subsidies to mortgage lenders

• The Agriculture Marketing Promotion Program

• Manufacturing Extension Program

• National Technical and Information Administration

• International Trade Administration

• Department of Energy R & D funding

• The Maritime Administration

• Overseas Private Investment Corp. (OPIC)

• Agriculture Research Service

• Minority Business Development Admin.

• The Export Import Bank

• Economic Development Administration

Congress should embark on a high profile national promotional campaign to sell

this large deficit reduction package to the public. Passage of the corporate welfare

cuts should be among the highest priorities in the remaining months of the 105th

Congress. Eliminating budget subsidies for the Fortune 500 adds credibility to

Congress’s equally vital cutbacks in failed in social welfare programs.

The corporate welfare reduction package should also be a central element of any

‘‘deficit downpayment budget’’ negotiations with the White House.

One final point. Corporate welfare cutbacks should be restricted to spending programs, not tax loophole closings. To be sure, there are at least $50 billion in obnoxVerDate 04-JAN-2000 08:41 Jan 10, 2000 Jkt 010199 PO 00000 Frm 00332 Fmt 6633 Sfmt 6621 E:\HEARINGS\57748.TXT txed02 PsN: txed02
330

ious special interest tax breaks in the internal revenue code carved out for corporate

special interests.

But there are compelling reasons why loophole closings should be left off the table—at least, for now. The principal one is that there are still at least $60 billion

a year in direct taxpayer subsidies that have not been terminated on the expenditure side of the budget. Since the direct spending of taxpayers’ dollars is the most

offensive feature of the corporate welfare state, the expenditure subsidies should be

the top priority of this Congress. More importantly, corporate welfare in the tax code should be eliminated in its entirety—all $50 billion worth—in the context of the revolutionary change in the tax

code that is expected in 1997. Majority Leader Dick Armey’s flat tax bill would

eliminate all corporate welfare from the tax code in exchange for a single low rate

tax system. Bill Archer’s proposal for a national consumption tax to replace the income tax would immediately and forever end income tax preferences for businesses.

Either of these proposals would lead to a far more equitable and efficient allocation

of economic resources in the economy. In sum, corporate loophole closings should be achieved in exchange for dollar for dollar reductions in tax rates applied to individuals and businesses. To the extent

corporate welfare is a deficit reduction theme, it should be in the context of cutting

business subsidy expenditures. Americans are demanding deficit reduction and government downsizing that is fairminded and balanced—meaning that the budget knife is not spared on the most

politically well-connected K Street special interests. Both the social welfare and corporate welfare states need to be reformed with equal urgency.

Chairman KASICH. Grover, you are up.

STATEMENT OF GROVER G. NORQUIST

Mr. NORQUIST. Thank you, Chairman Kasich. Thank you for the opportunity to testify here and also for your leadership on this

issue over the last several years. I am Grover Norquist. I run

Americans for Tax Reform. In keeping with truth in testimony,

Americans for Tax Reform does not and has never received any

money from any government at any level. I have testimony which I have submitted in writing to you. It is on our website at www.atr.org. I just want to make a couple of brief comments. First when we are looking at corporate welfare, let’s not just look at for profit corporations but also not for profit corporations. Some of the rural

utility services, the power marketing authorities give money to not

for profit corporations. They are corporations just the same and

people get rich working for them. So we are looking at all corporations, I hope.

Second, I do distinguish between government corporate welfare spending which are direct grants, checks written below market

loans given to companies and institutions. Those are different than

tax cuts or tax deductions or tax credits. I am in favor of in the

context of tax reform moving to a single rate that taxes income one

time and has a two-thirds requirement to raise taxes in the future.

If there is some parts deductions or credits that we ought to be

eliminating let’s do that in the context of overall tax reform getting

to a single rate tax. Otherwise, I do agree that May West’s observation on sex are true about tax cuts. All tax cuts are good tax cuts.

The examples, they have all been brought up, the Overseas Private Investment Corporation commends itself, the Export-Import

Bank, the milk, peanut and sugar complicated cross-subsidy programs, cargo preference, the Jones Act, the entire Commerce and

Energy Departments could be separated out from those parts that

are corporate welfare and those parts that you actually need. I

think it is time to shut down both of those departments.

331

The base closings idea that several people have brought up here

I think recommends itself. When we remember the history of Dick

Armey’s efforts to close bases, his effort was a miserable failure. It

backfired. He said here are 20 really unproductive military bases,

let’s eliminate them. And the Congressmen and the Senators who

represented those 20 ran out and each got five friends and they

said, look, I have got a really stupid spending program at my base

that I want you to help me protect and I will vote for your stupid

spending program if you will help protect mine. So we not only

didn’t get rid of the 10 but we had all these other votes tied up

which were traded for other bad spending programs. So it was

counterproductive even though Armey thought well, I will pick the

easiest 20, that would be easiest.

We have done this before in corporate welfare. We take a look

at OPEC and Eximbank and we figure, well, we will go after the

smaller ones or the weaker ones or the really stupid and evil ones

that everybody has got to see. But you just tell them you are coming, they go out, round up their friends and you get people swapping votes in a negative way on that. Therefore, the base closings

idea that Dick Armey put together with Congressman Sharp of Indiana which said, look, we are just going to get rid of X number

of bases, we will set up a commission and everybody in Congress

says, well, there aren’t any no good bases in my district so I am

perfectly willing to let the Pentagon come up with a list and then

we vote it up or down. Similarly, the people who get corporate welfare will look you in the eye and tell you they are not getting any

corporate welfare so they have nothing to fear and I think it would

be much easier to pass the commission idea with the target of $20

or $30 billion than to go after them one at a time. We just charge

up that hill a number of times and get beat back and people trade

votes.

The other model—the first model is base closings, which we saw

what happened when you tried to pick them off one at a time and

we saw the success when you did them in a group. The other is

the freedom to farm model. For years people were trying to get a

handle on farm subsidies, which is a form of corporate welfare. And

we just couldn’t do it going after, talking to people. But when we

said, look, farmers—there are a lot of regulations you don’t like and

there are some subsidies you do like; let us phase out the subsidies

and let us eliminate the regulations. If we went to the business

community and said we are going to take $20 billion of corporate

welfare off the table and we are going to do an across the board

tax cut of $20 billion, everybody who is not in the corporate welfare

gravy train will say this is a complete win for us and we have a

lot of allies. So sometimes if you are taking something away from

somebody, what is it that the government does to these people that

you could stop hurting them doing. And so a freedom to farm effort,

I certainly think that Steve Moore’s idea of requiring companies to

list the corporate welfare they do get would be a tremendous asset

in the public relations debate to reduce it.

And lastly, the reason to get rid of corporate welfare is not just

that it takes money from people who earned it and gives it to people who didn’t earn it, as important as that is. Corporate welfare

breeds corruption. If you have got people handing out tens and

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hundreds of millions of dollars, people will find ways to get that

and they are not pretty and they are not honest. You want campaign finance reform, get rid of corporate welfare. You would be

amazed how that will affect campaign financing trends. The other

is it is a tremendous misdirection of energy. People who are creating enterprises and employing people should be out in America

doing that, not here in Washington trying to get checks sent to

them.

Thank you very much.

[The prepared statement of Mr. Norquist follows:]

PREPARED STATEMENT OF GROVER G. NORQUIST, PRESIDENT, AMERICANS FOR TAX

REFORM

Chairman Kasich, other members of this committee, and ladies and gentlemen, thank you for the opportunity to address you this morning. My name is Grover

Norquist, and I am the President of Americans for Tax Reform, an organization of

over 90,000 individuals, corporations and associations that are concerned about the

high level of taxation. I come before you today to speak briefly about corporate welfare spending. What is Corporate Welfare?

Americans for Tax Reform defines ‘‘corporate welfare spending’’ as all direct gov- ernment payments to public and private companies and corporations where the Federal Government does not receive a good or a service in return—particularly where

the money goes to aid or assist a profit-making activity. Corporate Welfare may also

include regulations that limit competition and increase corporate profits, such as the

Davis-Bacon Act.

ATR does not include tax breaks or tax incentives in its definition of ‘‘corporate

welfare spending’’ because allowing taxpayers to keep more of their own money is

not welfare. Any tax breaks that give particular businesses or industries ‘‘unfair advantages’’ should be eliminated as part of overall tax reform, where the revenues

can be used to reduce tax rates.

ATR’s definition of ‘‘corporate welfare spending’’ consequently does not include government contracts derived through a competitive bidding process, where the government receives some product or service in exchange for the money expended.

Moreover, although there are a lot of wasteful and redundant Federal programs,

which should be eliminated, not all of them fall under the rubric of ‘‘corporate welfare spending.’’ This corporate welfare is harmful because it wastes taxpayers funds on profit- making corporations that should be paying their own way. It also distorts the private market, reducing economic efficiency and prosperity overall. In 1996, conservatives led the fight to restructure welfare for the poor, changing the system from a Federal handout program to one where recipients are given the

means and incentives to help themselves out of poverty and become productive

members of society. This year, Congress should take the next step to reign in wasteful, counterproductive government spending. ‘‘Corporate welfare’’ encompasses a broad range of government programs that give taxpayer funds to special interests to help them pad their bottom lines. In fact, ATR

compiled a list of over 70 corporate welfare programs costing taxpayers almost $50

billion in FY1997 alone. These programs range in size and scope from a $200,000

program to compensate damaged fishing vessels to $4.23 billion in Federal subsidies

to big agricultural companies like Dole and Archer Daniels Midland, increasing the

cost of food and adding to the profit margins of some of the world’s biggest and richest companies.

For example, every year, the Overseas Private Investment Corporation (OPIC)

and the Market Access Program (MAP) spend and risk billions of your hard-earned

tax dollars to subsidize risky overseas investments and foreign advertising of U.S.

products to make it easier for U.S. companies to export their products. These advertising subsidies and loan guarantees should be borne by the companies that are

lucky enough or well connected enough to receive them, not by the U.S. taxpayer,

who is forced to help increase the sales of these lucky companies.

While it strives to eliminate these taxpayer subsidies, however, Congress must

carefully define ‘‘corporate welfare’’ to include only those programs where the government sends a direct subsidy or payment to a company and receives nothing in

return, not including tax breaks or tax incentives in that list. We must beware of

those politicians who wish to raise taxes on the American people rather than cut

333

corporate welfare spending. Some politicians claim that by reducing or eliminating

some tax preferences, they are targeting corporate welfare. Tax cuts are not corporate welfare. Government spending is. The government’s failure to take your

money is not a subsidy. Your income belongs to you, not the government. Thus,

when Bill Clinton or Ted Kennedy claim that ‘‘rich corporations are not paying their

fair share’’ of taxes, they are not speaking about ‘‘corporate welfare,’’ but about tax

increases that they want to impose on these companies to help them fund more runaway government spending.

Congress should join the lead of Chairman John Kasich who has vigorously fought

to balance the budget on the backs of those who do not need or deserve Federal

handouts, getting the government out of the pocket of the taxpayer. Corporate welfare is just one example of this undeserved largess, but it represents a battle that

both left and right can cooperate on to halt the taxpayer subsidizing of businesses.

I have attached to my testimony a list of ten top corporate welfare targets. Let

me add that the Department of Commerce is an entire Cabinet Department devoted

to corporate welfare. The Department’s most basic mission is to use the power of

government and taxpayer funds to advance corporate business interests. As Robert

J. Shapiro, the Department’s Undersecretary of Economic Affairs, has written, ‘‘A

lot of the program’s in the Commerce [Department] are simply transferring resources from the taxpayers to influential companies.’’

Moreover, nearly all of the Commerce Dept.’s programs duplicate activites performed elsewhere in the Federal Government. Indeed, the GAO reports that the

Commerce Dept. duplicates the mission of at least 71 other Federal Departments,

agencies, and offices.

Consequently, this Dept. of Corporate Welfare should be abolished entirely. Any

essential activities of the Department can and should be transferred to other relevant Departments or agencies.

The Department of Energy deserves the same fate. Among its corporate welfare

programs are Energy Supply, Research, and Development, Fossil Energy Research

and Development, Uranium Supply and Enrichment, Energy Information Administration, Clean Coal Technology, the Power Marketing Administrations, and General

Science and Research Activities.

Both Energy and Commerce have been deeply plagued by scandal in recent years,

demonstrating their too easy potential for misuse as corporate honeypots and loopholes for foreign penetration. If the Congress cannot do the right thing now and

abolish these two corrupt and unpopular departments, then when can the taxpayers

count on it for wise and careful administration of their hard-earned tax dollars?

Chairman KASICH. Even though he didn’t directly attack me in

this testimony, Mr. McIntyre, I feel you have been—I don’t know

if you want to have a little retort to these guys. Is there anything

you would like to say?

Mr. MCINTYRE. Well, I must say I am sort of friendly with Steve,

and I know Grover, and I don’t really understand how they can

take the position that if the government writes a check to General

Motors with the green ink that is bad but if it writes it with blue

ink then that is just fine. The distinction between giving a company a tax abatement and giving it a check when you are paying

them to do the same thing, or you could be anyway, it is just beyond me to understand the distinction.

Now, these are very smart guys that I am sure they can explain

it to me some day. But I have been listening to them for years. As

best as I can tell, they are fascinated with the lines in the budget

that say spending and revenues—and if that is all that matters, I

suppose that is all that matters.

Back in the early eighties, the Members of Congress decided it

was necessary to cut Social Security benefits for upper income recipients. But to satisfy the Democrats, they did it with a tax increase rather than a benefit cut. So they raised taxes on Social Security benefits for upper-income beneficiaries. That made the

Democrats happy because it wasn’t a Social Security cut. But it

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made the Republicans unhappy because it wasn’t a spending cut.

It is a strange world we live in.

Mr. MOORE. Just to make one quick response to that. I did not

work for Ralph Nader so I am not as smart as my friend Bob McIntyre. But the fact is if you look at some of the listed programs that

Bob McIntyre says are corporate welfare, I simply don’t think that

they qualify. Look, if we give a capital gains tax cut for business,

that is a good thing, not a bad thing. I think the proper rate of capital gains is zero on our companies. If we allow companies a writeoff on the business expenses that they have to build new factories

and invest in technology and add factories that workers can work

in, this is good for America, not bad for America. I think we ought

to get rid of the deduction tables and allow immediate expensing.

Now, Bob would say that is corporate welfare probably. I would

say this is a good investment in America. It really depends how

you define what some of these things are. One last point. If we

want to get rid of some of the garbage in the Tax Code, and I believe with Bob there is a lot of it in there and corporations have

carved out special interest loopholes, let’s do that but let’s fix the

whole damn system at once.

Mr. NORQUIST. If the government didn’t cut your finger off, it

didn’t give you your finger. If the government doesn’t take your

money, it didn’t give it to you. There is a big difference here between the government’s failure to loot you and the government giving you something. And that is a distinction. There shouldn’t be a

capital gains tax. It is taxing income a second and third time. That

is not corporate welfare. That is tax policy. We should have expensing. I am all in favor of moving to a single rate tax that taxes income one time and requires a supermajority to raise taxes. That is

where I think over time we are heading to. But let’s, if there is a

deduction or a credit that got sneaked in because somebody was

doing something, let’s eliminate it without raising the total tax burden.

Chairman KASICH. Let me—I was trying to give you a chance

there, Bob. It didn’t work out so well. We are going to get started

into votes here. I have to say to you that, you know, I think the

commission idea is an interesting idea. You can put a bill in to create a commission. It is never going to pass; I mean, not for a while.

I can tell you it is not going to pass because these bills have been

put in before and what you are doing is you are asking somebody

to basically roll the dice when the Congress hasn’t been committed

to any notion of this anyway. So I would propose you have the twostep process.

Now, I can suggest to you and this is the last time I think I can

try this because I am frankly getting tired of this myself, turning

this over to a young buck like Saxby, but if we could get Tom and

Jill and Bob and Steve and Grover and Ralph to all sit down and

find like two items, I think you have all mentioned the Advanced

Technology Program except for Bob. And I know Ralph isn’t for it

so if we were to say let us show you, America, how silly this program is and we are going to spend some time this year charging

up our membership and our organizations to visit their Congressmen and their Senators and to say that we think this program is

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just flat out wrong and if we actually put some energy behind it,

we might get it done.

Now, I know you come out with a lot of lists because I work with

all of you and we know how painstakingly difficult it is to get anything on the list ever off the list because we keep putting them on

a list year after year because we never get rid of any of them and

it just seems to me as though it would be good for your base, it

would be good for all of our constituents, if we were to just focus

on two. I tried to get to 10 and that was a waste of my time. But

can’t we find two items where we can just give a little bit of our

effort to try to get something done and get behind whatever it is

you think we need to be behind. It should be a Republican and a

Democrat. And let’s just take really two ugly programs that we all

agree on and just get something done because then I think it will

give us an incentive to get more done.

I wondered what you think about that, Steve.

Mr. MOORE. I totally agree. I think two—I would like to see more

like 10.

Chairman KASICH. Yes, but we can’t get 10. We spent almost 1

year trying to get 10 items put on the table, and it was like dealing

with the fifth grade, and I mean, I am just being honest with you.

We couldn’t get anybody to agree with anybody else, and we can’t

do 10. So I think we have got to cut it smaller, and I don’t mean

just have a list because we have a list. That means nothing. Are

there two things that we can get a little bit fired up for that we

can actually be successful on?

I will tell you, the reason why the timber roads happened is because there was a constituency out in America that wanted it dealt

with. We have just simply got to create a constituency for getting

rid of something, and you know, if we got rid of it, it would be news

and then people would like at your organizations and our organizations in the Congress as something that, hey, that is a victory for

us. I am really begging you to help. I would just like to see us get

something done, and at the same time, if we want to pursue a commission we can pursue a commission.

Mr. NORQUIST. Let us do it.

Mr. SCHATZ. Let me just add something to that. I think one of

the things that we didn’t look at that closely when we were talking

about those 10 items was the politics of which one makes the most

sense, where you can get the votes and where you are going to get

the consensus? Look at our list here, our top 10 for the groups here

includes Market Access Program and Advanced Technology, almost

every one of those we will all agree on. So that is where you need

to look. Now where is the opposition? Who is going to come out

most strongly against it? The reason that OPIC was successful the

first time is because we did it and they weren’t really organized on

the other side.

Chairman KASICH. They weren’t organized, and we were, and

that is why it passed.

Mr. SCHATZ. Right, and that is something else to think about. We

have had votes on almost all of these over the years. Sometimes

we get even further away, like Economic Development Administration seemed to be getting fewer and fewer votes, but we did cut it

back. Now, ATP, the money is about 200 million less than it was

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a couple of years ago, but it just kind of stays there at the same

level every year, and the same with Market Access. We kind of

changed how the money goes out. So let us find something that we

can sit down and agree on the strategy, agree on the politics and

get a consensus and count some votes before we go out there.

Chairman KASICH. Although I will say in regard to ATP, and this

is a decision that I think has to be made jointly, but I think you

folks need to start figuring out which ones you are most comfortable with. In the era of the Internet, and I mean, if you had

the people from the Silicon Valley come in here who are really—

either the venture capitalists or the business owners, the CEOs

themselves, they won’t tell you they want any ATP money. I mean,

they think that is a joke out there. I mean, I have talked to them

about it. They have no interest in it. I am sure they could line a

couple people up to come in here, if the money is there, might as

well take advantage of it, but they instinctively don’t favor programs like that, and maybe you could even involve that part of the

business community to help to defeat that.

I mean, I think, Tom, you have hit on something, though, which

is we have to consider the politics of which ones are the most right

for plucking. Jill, you want to make a comment?

Ms. LANCELOT. Yeah, I do. I just want to say that the good news

is I think that I too would like to see more than two. I certainly

understand the problems that we had. I absolutely sympathize

with it, but this does not tell the whole story because we were only

allowed to have 10. Seven of these that are on here that my organization isn’t marked on, we support getting rid of. So there is even

more than what we have here in this list.

I just want to also say politics is a problem. We need to

strategize about that, but you mentioned it earlier, Mr. Chairman,

grassroots. If we get the public behind us, we can do this, and lots

of these organizations have enormous grassroots support, and we

need to be tapping into the grassroots. We need to organize them,

and that is the way to do it, and I am convinced that having bipartisan support from the House and the Senate and having organizations that are represented here today we can make that difference.

Chairman KASICH. Other questions for the panel?

Gentleman from Georgia.

Mr. COLLINS. Mr. Chairman, I just have one question. The Americans for Tax Reform, the CATO Institute, Citizens for Tax Justice,

Taxpayers for Common Sense, Citizens Against Government

Waste, are you a for profit or not for profit organization?

Ms. LANCELOT. I am not for profit, and in the disclosure, we take

no government grants.

Mr. SCHATZ. We are also not for profit. We also don’t take any

government funds.

Mr. MCINTYRE. We are not profit as well. We don’t make any

profit.

Mr. MOORE. Not for profit.

Mr. NORQUIST. Not for profit.

Mr. COLLINS. You don’t pay any taxes either?

Mr. MCINTYRE. We pay taxes on every penny we make.

Mr. COLLINS. Individually?

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Mr. MCINTYRE. No. The organization breaks even. So if we were

a for-profit business, Congressman, our taxes would still be zero.

In other words, we are happy if you treat us as a for profit or a

nonprofit because the tax will be identical.

Chairman KASICH. The gentleman from Pennsylvania is recognized.

Mr. HOEFFEL. Thank you, Mr. Chairman. If I can talk a little bit

more about remedies, we heard from Mr. Nader earlier today. His

primary remedy was a bill to eliminate all corporate welfare, to define it and then pass a bill eliminating it all based on the concept

of zero based budgeting for those of you who were here, with the

battle cry of let them start over again to justify any corporate

breaks, welfare breaks they might want, and it is a very legitimate

concept.

Mr. Moore and Mr. Norquist embrace the commission idea based

upon the Base Closure Commission with one up or down vote by

Congress, no picking and choosing.

My proposal is a commission but with the ability to amend—for

Congress to consider the recommendations of the commission but

be able to amend it and pick and choose a little bit. I think that

is a better process. I would be interested in the opinions of all five

but particularly the three that didn’t have an opportunity to address pro-commission, anti-commission or any other mechanism

that you think Congress should use.

Mr. MCINTYRE. Well, it seems to me that if you are going to

make something significant happen, rather than symbolic, and

symbols are nice but perhaps not as important as some people

think, then you have to give the nonbeneficiary public, in which I

include a lot of companies, a stake in it. So that means like in 1986

when we did tax reform—a big thing, very important—one of the

reasons it was enacted was that half the companies in American

were for it because they weren’t getting big tax breaks. And today

lots of American companies aren’t getting corporate welfare to a

significant degree. If you can offer them something as part of a

tradeoff, they will be for it. If you get a significant portion of the

business community on your side, you have a lot better chance of

moving forward on this than if you don’t have them, because they

have lots of lobbying clout.

So I think if there is going to be a major attack on corporate welfare you have to do it in a way that cuts the corporate rate a few

points or does something to bring other companies on board because otherwise, you know, the ones that get nothing won’t care

and the ones that lose something will.

Mr. MOORE. I like the Nader idea. I like this idea of putting—

you know, you and I, Mr. Chairman, have had this conversation for

years. I kind of think that if we put a big package together with

a big price tag on it, so the prize of getting rid of these things is

big enough, you know, and you have an up and down vote on are

you for corporate welfare or are you against it and every single

Member of Congress has to stand up and say I am for it or against

it, that is a tough vote. I know you disagree with me on this, but

I just would like to see that vote taken.

Mr. KASICH. If the gentlemen from Pennsylvania would just

yield.

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Mr. HOEFFEL. Yes.

Chairman KASICH. Let me just give you a perfect example. I

don’t know if you were in the room, but we had Dan Miller saying

we want to get rid of sugar, and then Mr. Chambliss comes in and

he says, no, you don’t understand, and so you put—I am just talking to you practically. You say, well, this is a vote up or down on

corporate welfare. He doesn’t have any problem voting against the

bill that knocks out sugar because he doesn’t think it is corporate

welfare.

So the rhetoric is, you know, the rhetoric is what does you in.

It is like pork. Pork is something that happens to somebody else’s

district. So that is why I think the big package idea—I mean if you

want to get something done, it is going to take everyone in this

room to sit down and pick out two items and spend 1 month before

a vote alerting your people to visit their congressman and doing a

campaign out here on the steps like the people do when they really

want something done, and then it gets done.

Now, Grover’s been very successful in the area of this tax pledge.

OK. Why? Because he drives people crazy, and he has people in his

organization that drive people crazy. Tom’s put out a terrific list.

His list is, you know, a hundred zillion dollars worth of savings.

So what? Nobody cares. They go, well, I hear you and the guy from

Citizens Against Government Waste announced this big list today.

I said, yeah, what about it? They say, just heard about it. OK.

Now, did the Yankees win today?

I mean, it just doesn’t have an impact unless you are going to

force something to a vote, and if you say you are going to get a discharge petition, you will never get the Members to sign the discharge petition. That is why you have to focus on a couple. All the

rest of the schemes, if you want to put a commission in, that is

fine. We can push for all that, but I just—I know the success that

you have when you go against certain things and how I think it

works.

Ms. LANCELOT. And I want to make a comment. I have to say

I totally agree with the chairman, although I would put a plug in

for the idea of a bill because that is a great organizing tool for

grass roots, and we can use that, and we can get steam, and then

we can come back, which is what my strategy has been on several

things, the gas cooled reactor and the advanced mill reactor, we

had a bill, we had something out there, came back and then zeroed

in on a few things, and we were able to eliminate some of these

programs, and I think that it is something to talk about.

Mr. SCHATZ. Since I was asked, let me address the commission

idea. The basis of the commission that Mr. Armey put together

came out of the Grace Commission’s concept and that is the predecessor to Citizens Against Government Waste. So we are a little bit

fond of the idea of an up or down vote, and I think the idea, and

I understand Mr. Kasich’s frustration and have worked with him

many years on this whole issue. The idea of having just what is,

quote, unquote, cover for the Members makes it a little bit more

difficult to vote no. In other words, you can pick this whole list and

say, well, I had to do something about corporate welfare, I am

sorry my program was in there, but I had to do something. If you

get to pick and choose, it gets political.

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Look at the base closing situation we are in now. The President

decided that the depots in California and Texas shouldn’t be closed

or should be kept open and to vote for him, and now the Congress

hasn’t gone back to the base closing idea when we really need to

close bases.

So I think it is worth continuing to discuss, but from our standpoint we like the idea of the up or down vote.

Mr. HOEFFEL. The difference between the two, though, in the

Base Closing Commission, everything under consideration is a military base, and if this corporate welfare commission were ever to be

established, it would be considering tax breaks, subsidies, below

market fees. It would be quite a mix of things that might make it

a little bit harder to deal with as one big lump sum or one big proposal.

Mr. SCHATZ. But if you did mix both, you would get Bob McIntyre and everyone else probably agreeing. If you had a cap like

Steve had suggested 20 to 30 billion, whatever it is, it makes it a

little more palatable to say, well, we are just taking a chunk of

this, we are going after some things that are the most egregious,

that this whole commission agreed on, and therefore, we should go

1 year at a time, where we do it every other year or something.

That at least allows Members to feel like they are not doing everything at once because I don’t think you want to take the whole

thing at one time.

Mr. HOEFFEL. It would be nice to get some victories, to actually

get something passed, get that momentum that the Chair has been

talking about.

Ms. LANCELOT. Can I just say one other thing, which is we have

been talking about corporate welfare for how many years?

Chairman KASICH. Not that many, maybe three or four, since

1995.

Ms. LANCELOT. We haven’t done much about it. So if we continue

to just talk about it, again, what you are talking about is going

after one or two and then we get rid of those, and then we go after

the three and four, and then we go, and it takes a long time, and

people think, oh, my goodness, it is much too long, but if we just

talk about it all the time and not really go after it, and really focus,

we are just—that is all it is going to be is talk—really believe that

we can make headway, and we can make a difference if we focus

in on one or two, three or four, up to 10 finally.

Chairman KASICH. Well, I think we are going to wrap up the

hearing. I am going to host a meeting for you five and Mr. Nader

when we come back after the Fourth of July break and see if we

can reach a couple of items. I am glad to support any effort. The

problem we ran into is we actually announced a list of 10 or whatever it was a few years ago and couldn’t get any Members to show

up at the press conference, and I begged Rob Andrews from New

Jersey to fly in. I couldn’t get anybody else to show up at it.

And then we offered—it sounds like we didn’t do anything. We

offered a number of amendments on the House floor where we got

blown out every time because I think it was you, Jill, and three

guys standing on the street corner shouting, you know, the world

is coming to an end. That is all the support we had, and we just

got killed.

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Although I have got to go back and talk about the one where we

were successful. I mean, frankly we were successful in scaling some

things back. Even with OPIC, we made some—what we thought

were some steps, not sure we did, the same with a couple other

areas of the government, but the one where we had the clear victory was in the area of the timber roads, and that was because that

constituency out there was very active, and if we could find a couple and try to turn our people on to this, and probably won’t be

able to get much done this year because of the advanced nature of

appropriations, maybe we can, we just have to see where we are,

but if we can reach some agreement, and I can have some Democrats join me, along with some Republicans, maybe we can get

somewhere.

Ms. LANCELOT. I would just like to make it clear from my point

of view that was absolutely a victory on timber roads. There is still

more to be done in the Forest Service. Forest Service still loses

money on money losing timber sales, and we are still building

roads.

Chairman KASICH. Well, I want to thank my many friends for

coming today and Mr. McIntyre—no, just kidding—so thank you all

for being here, and that will conclude today’s hearing.

[Whereupon, at 3:48 p.m., the committee was adjourned.]

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