The Obfuscation Report

Business' clout keeps the government breaks coming
By Aaron Zitner and Charles M. Sennott, Globe Staff, 07/09/96

WASHINGTON - Two weeks after his party was swamped in the mid-term elections of 1994, Robert B. Reich issued a simple dare. You Republicans won control of Congress by attacking welfare, the US labor secretary asserted. Why not cut "corporate welfare" and move business off the dole as well?

But Reich's own colleagues were uneasy with the challenge. Treasury Secretary Lloyd M. Bentsen and Commerce Secretary Ronald H. Brown quickly distanced themselves. And President Clinton, while calling it an ``attractive idea,'' made it clear he had not endorsed cutbacks in benefits to business.

While Democratic party leaders cringed at Reich's gambit and most Republicans dismissed it as liberal rhetoric, Reich got a warm phone call from a key GOP congressman: John R. Kasich of Ohio, chairman of the House Budget Committee. The two men could not be more different - Reich, a classic liberal from Harvard University, and Kasich, the son of a mailman and a leading light in Speaker Newt Gingrich's ``Republican revolution.''

``You're on to something,'' Kasich said, urging Reich to keep pushing the idea and promising to do his best to put corporate welfare on the Republican agenda as well.

It was a unique meeting of minds at opposite ends of the political spectrum to take on the labyrinth of subsidies and tax breaks for businesses that cost the government about $150 billion a year. More lawmakers, buttressed by key Washington think tanks that provide the ideological underpinning for political action, later lined up against this underwriting of corporations.

But over the course of a year, the resolve to root out corporate welfare would dissipate. First it would falter, and then it would sink amid parochial politics, big-money lobbying and a campaign finance system that together conspire to keep corporate welfare as constant as the tide.

By March of this year, after most of his subsidy cutbacks had been rejected in a brutal two-month budget negotiation, an exasperated Kasich said at a hearing: ``I think it is an absolute outrage that some of this crap is still in this budget, and it just infuriates me every day when I think about it.''

By May, the Cato Institute, a libertarian think tank which rode the crest of the bipartisan wave last year by challenging Congress to cut $85 billion in corporate welfare programs - declared the battle all but over in a report titled ``How Corporate Welfare Won.''

The story of how Reich, Kasich and their allies lost the battle begins after the 1994 elections with both parties claiming they wanted to balance the federal budget. It lingers into last winter, when snow blanketed Washington through December and January, and the government shut down twice over how to cut costs. Within both parties, key figures like Reich, Kasich, Republican Sen. John McCain of Arizona, Democrat Edward M. Kennedy of Massachusetts - even centrist Colin Powell - pointed again and again to corporate welfare.

They attacked the sugar and peanut price-support programs that raise food prices for consumers. They attacked the Export Enhancement Program, which gives $800 million a year to giant agriculture firms to sell wheat and grains at a discount overseas. While no two lists of targets were identical, nearly all cited the Market Promotion Program, which gives $100 million annually to Gallo, McDonald's, Ocean Spray and other food companies for international advertising.

Moreover, the Republican plan for reining in Medicare and welfare gave lawmakers of both parties ammunition to argue that cutting corporate subsidies was only fair and moral. For awhile, it seemed like deep cuts were inevitable. But corporate welfare, it became clear, is not a partisan issue. Rather, Republican is set against Republican, Democrat against Democrat when programs in a politician's home state are threatened.

Not enough lawmakers were willing to vote against home-state businesses and jobs. ``One person's pork is another person's prize,'' said Sen. Fred Thompson, a Republican from Tennessee. ``No one wants to give up their prize if there isn't shared sacrifice.''

An administration divided

For Reich, the 50-year-old longtime friend and economic adviser to Clinton, the corporate welfare fight began long before he joined the Cabinet. As a lecturer at Harvard, he chastized policy makers for confusing aid to American workers with aid to American companies. US firms were sending more jobs overseas, while foreign companies were creating jobs here. ``Our primary concern should be the training and development of the American workforce, not the protection of the American-owned corporation,'' he wrote in 1990. Four years later, Reich replayed that theme with a twist. Voters rebuked Clinton and the Democrats, he told an influential Democratic policy group just after the 1994 elections, because many Americans feared their paychecks were shrinking.

``The middle class has become an anxious class,'' he said. The solution: invest in jobs and training. Give people the skills to move from welfare to work, as the Republican rhetoric argues. Help them move from low-paying jobs to more lucrative ones. How to pay for it? Cut corporate welfare. Ask business, not just welfare recipients, to become more self-sufficient.

Reich's theme struck a chord across the ideological spectrum. Answering his challenge, the Cato Institute issued its report on the 125 corporate welfare subsidy programs worth $85 billion. The Progressive Policy Institute, allied with the centrist Democratic Leadership Council, found $265 billion in savings over five years. To the right, the Heritage Foundation came up with its own plan to eliminate, not just shave, unnecessary spending. And to the left, the Ralph Nader group, Essential Information, identified 153 sources of subsidies as well as tax breaks costing $167 billion a year.

Vice President Al Gore weighed in with approval for Reich's ideas. But Treasury Secretary Bentsen, a Texan whose home-state oil and energy industries take millions of dollars each year in tax breaks, opposed cutbacks on business assistance. And Robert E. Rubin, who replaced Bentsen in January 1995, also was reluctant. After fighting to shed the Democrats' anti-business image, many in the party worried Reich would undo their work.

The gulf was between classic liberals and the more centrist, pro-business ``New Democrats.'' Clinton initially wanted to make a strong statement on corporate welfare but backed away, an administration source said. He eschewed the words ``corporate welfare'' in public, the source said, adding: ``He uses the phrase in private and Cabinet meetings, but the phrase is too combative for him.''

Kasich, still boyish-looking at age 43, was one of the populist upstarts who helped make Gingrich speaker of the House. Now, with the Republican takeover of Congress, the six-term representative had been named chairman of the important Budget Committee. It was no small task.

Kasich had to find $200 billion to pay for tax cuts in the ``Contract With America.'' On top of that, he had to design a federal budget to eliminate the deficit by 2002. Corporate welfare seemed one place to start looking for money.

But there was little question Kasich was bound to clash with Ways and Means chairman Bill Archer. As representative of a wealthy Texas district, Archer long had argued that tax breaks helped keep the nation and economy strong. No tax break, he says, meets the definition of pork. ``Corporate welfare'' was not in Archer's lexicon.

Kasich believed business subsidies and tax breaks were more than a source of savings. If Republicans truly wanted to balance the budget, he argued, they had to do more than tap Medicaid, welfare and other social programs. While some Democrats feared that attacking corporate welfare would hurt them politically, there were Republicans who worried that if business did not share the pain of budget cuts, voters would accuse them of unfairness.

Archer, on the other hand, argued that eliminating tax breaks amounted to a tax increase. Supporting him were many Republicans who have backed big business, a longtime GOP constituency.

Republican showdown

The showdown came at a GOP retreat in May 1995 in Leesburg, Va. It was the first time House Republicans saw Kasich's plan to balance the budget. Proposing ways to save money, Kasich said tax breaks for business ought to be cut or modified by $25 billion over seven years. Kasich cited tax concessions to energy, timber and other interests that he said did not benefit the public. Some were the very tax breaks Archer had championed. Archer spoke against Kasich's plan, and his argument that repealing such inducements would be, in effect, a tax increase for businesses was persuasive. Two weeks later, when Kasich's budget hit the House floor, corporate welfare savings were all but gone.

But that was not the end of the issue. As Republicans moved further into details of how to balance the budget, it became harder to ignore the money that could be recouped from corporate tax breaks and subsidies. Equally important was the GOP's image. Polls showed the public hated corporate welfare, said Frank Luntz, a Republican pollster. They may even hate it more than social welfare, he said, adding: ``Republicans don't want to appear to be in bed with big business.''

In November, two Republicans brought the issue to the Senate. McCain and Thompson proposed a ``dirty dozen'' list of programs to be eliminated. From agriculture, they selected the Market Promotion Program. From the defense budget, the B-2 bomber and military export subsidies. From transportation, they chose highway demonstration projects.

McCain and Thompson won support from conservative Republican Phil Gramm from Texas, along with Democrats Kennedy and John F. Kerry of Massachusetts, and Bill Bradley of New Jersey.

But they lost, 74-25. Voting to uphold the subsidies were such progressives as Barbara Boxer and Dianne Feinstein, the California Democrats, whose state benefits from millions of dollars in subsidies to the Gallo and Wente Brothers wineries, Sunkist orange cooperative, almond growers and others.

As Republicans pushed for a balanced budget and limits on social service programs, the annual budget process continued long past its deadline. By fall, the authority for most government agencies to spend money expired. In November and December, the GOP and Clinton administration chose to let most of the government shut down because they could not agree on a budget. Within the Democratic Party, meanwhile, debate continued over how much corporate welfare should be redirected to social programs and how much to deficit-cutting.

At times, Clinton professed great interest in corporate welfare. On Dec. 16, the first day of what would be a three-week government shutdown, he met with top advisers and Democratic congressional leaders at Blair House, the historic guest house steps from the White House. Dressed in sweaters and clutching cups of hot coffee, they tried to develop a strategy to balance the budget.

Liberal standard-bearers, like Sen. Kennedy, believed corporate welfare was the place to start. He argued for a plan to save $50 billion to $60 billion by eliminating many tax breaks. He gave them names like the ``runaway plant loophole,'' which he said encourages companies to send US jobs overseas, and the ``billionaires' loophole,'' which allows people to renounce US citizenship as a tax ploy.

Clinton was interested. At the end of the session, he buttonholed Kennedy and asked him to send details to the White House, a source at the meeting said. But the next afternoon, as administration and congressional leaders met at the Capitol without the president, it was clear the White House had backtracked.

When Kennedy again argued to close tax breaks, aides to Secretary Rubin and Laura Tyson, the president's chief economic adviser, were working the room, talking privately with lawmakers. ``They were arguing, `Don't touch corporate welfare,''' recalled one person who was there.

At one point Lawrence Summers, Rubin's deputy secretary for tax policy, leaned over the table and argued against Kennedy's plan to cut the ``runaway plant loophole,'' the ``title passage loophole'' that allows companies to shift profits overseas and a third tax break for exports. Summers said those provisions helped the leading employers in their states.

According to several people at the meeting, Sen. Boxer responded: ``We've got to raise revenue and this is the way to do it. If we can't abolish them, then we should at least change them or alter them.'' Summers answered: ``Barbara, do you have any idea how Silicon Valley will react to this?''

In an interview, Kennedy accused Rubin and Tyson of intentionally obscuring the corporate welfare debate to make sure nothing gets done. ``They don't want to do it because they basically are a spokesman for many of these industries,'' he said. ``I would like Bob Rubin to tell me the best ones to cut. I would like him to tell me, and tell the president, how to do it. But he is representing a different kind of constituency. He knows it. I know it. The president sort of knows it. So that makes it a political issue.''

In time, the Democrats did nudge Clinton. After starting with a proposal last December to end $28 billion worth of tax breaks for businesses, the president later increased the number to $62 billion for the 1997 budget, which begins in October. But the budget was equally noteworthy for what it allowed to survive including: sugar and peanut subsidies, tax breaks for the ethanol industry and the Advanced Technology program, which grants money to companies for research and development.

``If the Congress' performance was a disappointment, the Clinton administration's was dismal,'' Stephen Moore and Dean Stansel of the Cato Institute wrote in May. ``With few exceptions, the administration has shown itself hostile to even the modest corporate welfare cutbacks proposed by Congress.''

The sugar industry, which gave $5.5 million to federal campaigns in the last seven years, managed to kill a bipartisan attack on price supports mounted by Reps. Charles Schumer, a New York Democrat, and Dan Miller, a Republican from Florida. And Congress, bowing to the wine industry, actually increased funding for the Market Promotion Program, which supports overseas advertising.

Archer Daniels Midland Co. of Illinois beat back an attempt to kill a tax break for ethanol, an alcohol-based fuel. ADM controls about 80 percent of the ethanol market. Killing the subsidy would save $3.6 billion over five years. According to Common Cause, the government watchdog group, ADM gave more than $480,000 to the Democratic Party and more than $345,000 to the Republican Party in the 1994 elections, on top of donations to individual candidates. The company and the family of its chairman have given more than $250,000 to former Sen. Bob Dole's campaign committees over the years. ADM chairman Dwayne O. Andreas has raised money for Clinton as well.

Even Kennedy, who criticizes the subsidies to sugar and peanut farmers or federal support of giant power companies in the Southwest, speaks quite differently when it comes to programs that help high-tech companies in Massachusetts. Virtually all of these so-called ``high-tech handout'' programs - the Advanced Technology Program, the Technology Reinvestment Project and the Small Business Innovative Research program - have been in the cross hairs of conservatives, especially Kasich and the Cato Institute. ``These programs, are modest in size in comparison to the others,'' Kennedy said.

The campaign connection

Overall, Robert J. Shapiro of the Progressive Policy Institute calculates Congress was ready to cut $300 billion from social programs like Head Start and welfare, but only $30 billion in corporate welfare. Those cuts would have become law had Clinton not vetoed the Republicans' budget for 1996 and general spending plans through 2002. Instead, the president and Republican leaders fought for so many months over the budget that corporate welfare cuts and other long-term spending decisions were put off until later this year. ``Each of these cuts is a knockdown, drag-out fight,'' Reich said in a recent interview. ``Why? Because the issue of corporate welfare is intimately tied to campaign finance. Why do we have so many targeted subsidies and tax breaks with no public justification or the thinnest justification? It's because companies and industries have managed to effectively lobby for their little piece of public largesse. Why have they been so effective? Because they support campaigns.''

In short, many argue, Congress cannot cut subsidies and raise campaign funds at the same time. And changes to the campaign finance system do not appear to be coming soon. The Senate killed a campaign spending reform plan pushed, among others, by senators McCain and Thompson, who also targeted the ``dirty dozen'' corporate subsidies.

Recently McCain, Thompson, Kerry, Bradley, Kennedy and others have been pushing a new approach on corporate welfare: a bipartisan commission that would draw up a list of subsidy programs to cut. After approval by the president, Congress would vote on the list - all or nothing. The idea is patterned after the commission that chose what military bases to close, another politically sensitive problem that called for shared sacrifice.

``I don't know any other way that we can attack this issue,'' McCain said this year at a hearing on the proposal. An independent commission ``would depoliticize the process, guarantee that the pain is shared, and might be the only realistic means of achieving a meaningful reform, which the public and our dire fiscal circumstances demand.''