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S. 1376, the Corporate Subsidy Review, Reform, and Termination Act of 1995 : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, on S. 1376, to terminate unnecessary and inequitable federal corporate subsidies, March 5, 1996 online

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Online LibraryUnited States. Congress. Senate. Committee on GoveS. 1376, the Corporate Subsidy Review, Reform, and Termination Act of 1995 : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, on S. 1376, to terminate unnecessary and inequitable federal corporate subsidies, March 5, 1996 → online text (page 3 of 10)
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sels. In order to be involved in some of our trade, you must have
American-built vessels. In our Jones Act trade, you cannot take
goods from port to port in the United States except on an Amer-
ican-built ship with an American crew, and the differential operat-



23-121 - 96 - 2



14

ing subsidies really are related to the differential cost of construc-
tion and differential operation.

Now, I am not going to argue about the issue, but how do you
get in with this commission to looking at the cause of the program?
Or take essential air service. At the time that the CAB was elimi-
nated; which could require any airline to go and serve an area that
wanted service and we eliminated that. We put in a provision that
said a community that does, in fact, have at least three trips per
week, under the CAB mandate, if it loses its airline service, can
apply as a community base. The community gets the subsidy, but
it is paid to the airline.

Again, I don't want to argue on issues, but how do you get to the
underlying cause of the program to determine whether it is needed,
in the commission approach?

Mr. Moore. Well, first of all, I think this is exactly the kind of
issue that the commission needs to sort out. You are quite right
that not every program that provides money to a corporation is
necessarily corporate welfare. For example, when the Defense De-
partment buys airplanes from Boeing, that isn't necessary cor-
porate welfare if we actually need

Chairman Stevens. But I think they are on your list. These are
programs you have already — you have told us that you believe they
are corporate welfare. But knowing the background of it, I believe
they are compensatory programs to deal with other Government
decisions enacted by Congress, approved by the President. You can
only use an American ship with an American crew from port to
port in the United States.

Now, if you eliminate the subsidy, how are you going to get — you
are putting the burden of ship construction on the people who buy
the goods that are shipped port to port in the United States.

Mr. Moore. Well, in that case, I would recommend the repeal of
the Jones Act. I think it is nonsensical that we require

Chairman Stevens. Does your commission have the ability to do
that, though? Does it have the ability to come in and say you can
take this out if you do that? But if you take out the subsidy but
you don't take out the cause of the subsidy, then you have had a
discrimination, in my judgment, against one sector of the economy.
It is not corporate welfare in my judgment.

There is nothing in the commission suggestion here that says you
can look at the root cause of the problem.

Mr. Moore. Well, this is something that I — I mean, I think you
raise a very good point. Senator, and in this kind of case I would
recommend that the commission look at these kinds of root causes
and that it be able to recommend, for example, when you are talk-
ing about these shipping subsidies, that if the root cause of them
is a regulation like the Jones Act, that perhaps it be able to rec-
ommend the repeal of this act.

I am not familiar with every nuance of the shipping industry,
Senator, but I do think in this case it would make much more
sense if we got rid of the subsidy and then also got rid of the Jones
Act rather than continue our current system of subsidy.

Chairman Stevens. Well, I only offer the suggestion. I think one
of the reasons the initiative Senator McCain offered didn't get the
approval it probably should have in terms of the overall approach



15

to reducing unnecessary expenditures is that there was no mecha-
nism for getting rid of one side of the ledger. It is hke a double-
entry bookkeeping system, and you get rid of the credit but you
leave the debit.

Mr. Moore. Right.

Chairman Stevens. You know, how do you take care of some-
thing that has got to balance. I think we need to explore that.

Senator Thompson?

Senator Thompson. Thank you very much, Mr. Chairman. I
think you do point out a good question. Under the statute, the
members of the commission would represent a broad array of ex-
pertise covering, to the extent practical, all subject matter, pro-
grams, and policies the commission is likely to review.

I think it is very important that that criteria be followed, because
you are absolutely right, you know. In determining what is pork,
ask the question — and I think that you point out, Mr. Moore, in
your statement here that you define corporate welfare as the use
of Government authority to confer special benefits or privileges to
specific firms or industries where there is no corresponding societal
benefit. And the question is: What is that corresponding societal
benefit?

Some people put the oil and gas industry on the list, but yet in
the Foreign Relations Committee, we hear year after year wit-
nesses coming in and saying that our dependency on foreign oil is
not only bad, but it is affecting our national security. So how do
you balance that off?

Research and development, a lot of people are concerned that we
are not doing enough there. So I think the idea is we for sure are
not doing a decent job of balancing these considerations off now.
They are considered piecemeal in a reconciliation bill or something
like that. We are doing a terrible job now of weighing all that. At
least with a commission, it would be laid on the table, and people
with the proper background would consider these things not only
with some appreciation of all the benefits, but in relation to other
items so that no one sector would get the benefit without the other
sector getting the benefit or the cut or the detriment.

So I think that is a real challenge to do what this commission
is designed to do. And I think another question that we have got
to address is whether or not these agencies under the act will vol-
untarily submit these programs and come up with — it is going to
be interesting to see what list they come up with. It is going to be
even more important to the commission, if the agency does not
come up with a proper list, that the commission have the internal
expertise and knowledge to self-generate items that ought to be on
the list.

Do you have any comment on that? Is that a valid assessment,
do you think, of where we are?

Mr. Moore. Yes. It is. Let me

Senator McCain. Excuse me. Mr. Chairman, Mr. Shapiro is here,
and he is part of this. Could he respond also before his statement
if there are any comments like that? Would that be agreeable, Mr.
Chairman?



16

Chairman STEVENS. I was going to suggest now that Mr. Shapiro
is here that we might go to him, but I didn't want to cut you off.
Senator, do you want to hsten to Mr. Shapiro?

Senator THOMPSON. Sure.

Mr. Moore. Could I just answer the question and then

Chairman Stevens. You can answer the question first.

Mr. Moore. While it is fresh in my mind.

First of all, having worked for a year-and-a-half at the Office of
Management and Budget under President Reagan, I wouldn't hold
your breath waiting for agencies to come forward with suggestions.

The interesting thing about this issue is — you know, you have
Rob here from the Progressive Policy Institute. I am from Cato; we
are more on the right. We did press conferences last year with
Nader groups, and the amazing and surprising thing about this
issue is really how much agreement there is among groups on the
left, center, and right about what constitutes corporate welfare.

Now, you are certainly right. Senator Thompson. There are some
programs that are on the fringe. One group might consider it cor-
porate welfare; another might suggest that it is a valid subsidy.
But let's start with the easy things. I mean, there are probably 50
programs that Rob and I could agree on right here at this table
that I think most people in this room would agree are unjustified
subsidies that only persist because of the political muscle of cor-
porate lobbyists. And so it seems to me that if we start with the
easy things — and this is what the Base Commission did. I was in-
volved in that a little bit when I worked for Congressman Armey.
Yes, there were a lot of bases that were marginal, where some peo-
ple said it should stay open and others said it should stay closed.
But what we did with that Commission was we did the easy ones
first. And I think that is what I would recommend with this com-
mission, that it find a targeted amount, maybe 50 programs, where
there is general broad agreement. And I think Rob might probably
agree with that, that we could sit down with a group of left, right,
and center organizations and find a solid list that would provide
you with substantial budget savings.

Chairman Stevens. I will get back to you.

Go ahead, Mr. Shapiro.

TESTIMONY OF ROBERT J. SHAPIRO, FOUNDER AP^ VICE
PRESIDENT, PROGRESSIVE POLICY INSTITUTE

Mr. Shapiro. Thank you, Mr. Chairman and members of this
Committee. I want to thank you for the opportunity to discuss the
Corporate Subsidy Review, Reform and Termination Act.

First, I want to salute the chief sponsor. Senator McCain, and
his principal cosponsors, Senator Thompson, as well as Senators
Kerry, Feingold, Kennedy, and Coats. We at the Progressive Policy
Institute find this proposal very gratifying.

In 1991, we first urged Congress and the President to re-examine
industry-specific spending and tax subsidies and to phase out those
serving no compelling social or economic purpose. In January 1994,
we published a list of subsidies that we considered candidates for
repeal, with savings of $200 billion over 5 years. And at that time,
we also proposed that Congress create an independent commission,
modeled on the base-closing effort, to carry out this purpose. Since



17

then, we have expanded our hst and provided advice to staff pre-
paring the bill being considered today.

The current impasse over the deficit strongly reinforces the need
for just the kind of approach Senator McCain has proposed. It is
always hard to deny benefits to businesses that have long enjoyed
them, especially when the affected business has substantial influ-
ence with Congress. The very existence of most major spending and
tax subsidies demonstrates the influence of those benefiting from
them because they already have survived the numerous rounds of
budget cuts and tax reforms of the last 15 years. The commission
created by S. 1376 would enable Congress to finally repeal many
of these hardy survivors of past budget deficit reduction efforts.

The challenge presented here is not simply to cut the Govern-
ment or even to cut the deficit, however, but to do so in the specific
ways that can best help make the American economy more produc-
tive and more efficient.

Until Congress and the President are prepared to tackle broad
reforms for Medicare and Social Security, the best path to a
growth-oriented budget is to repeal these subsidies because they
tend to reduce the economy's productivity, efficiency, and growth.

First, these subsidies, acting much like trade protections, weaken
market incentives for firms to become more efficient and produc-
tive. This happens because subsidies artificially raise an industry's
rate of return, shielding the firm from normal competitive pres-
sures to upgrade their products and production methods.

Second, industry subsidies weaken the American economy by
placing every unsubsidized sector and firm at a disadvantage.
From farm supports and tax breaks for oil and gas firms, to tax-
payer financing for FAA services, and the business entertainment
deduction for professional sports tickets, these special industry en-
titlements force taxpayers, consumers, and businesses to transfer
more resources to an influential sector than the market would oth-
erwise require and consequently leave less capital and less labor
for everybody else who doesn't enjoy the subsidy.

And it is interesting to note that current subsidies largely ignore
the critical industries in an information-based economy. Nearly
two-thirds of spending subsidies, for example, are concentrated in
agriculture, energy, and transportation. Current subsidy policies, in
short, focus generally on sectors central to the commodity- and
manufacturing-based economy of the past.

Finally, these subsidies are socially regressive. The direct bene-
ficiaries are shareholders in the industries whose rates of return
have been artificially subsidized. Now, this policy may preserve
jobs in an industry, but any job gains are offset by job losses in
firms and industries forced to compete on an uneven playing field.
I have estimated that the $53 billion in average annual spending
and tax subsidies which we have proposed to repeal currently pro-
vide more than $16 billion a year in net benefits to the top 5 per-
cent of Americans, while costing the lower four-fifths of Americans
nearly $7 billion a year.

Cutting subsidies would end these regressive transfers, leave
each industry's full cost to be borne by its customers and by its
shareholders, who would earn a market return on their invest-
ments instead of a taxpayer-supported return. And if the resources



18

now claimed by subsidies were redirected to investment, most firms
and workers would stand to gain even more through a more pro-
ductive economy and lower interest rates.

In our judgment, the best way to begin this process now is to cre-
ate a base-closing-t3T)e commission empowered to systematically re-
consider the value and the expense of these policies, much as the
bill you are considering today would do.

Thank you.

[The prepared statement of Mr. Shapiro follows:]

PREPARED STATEMENT OF ROBERT J. SHAPIRO

Mr. Chairman and members of the Committee, thank you for this opportunity to
discuss with you S. 1376, the Corporate Subsidy Review, Reform, and Termination
Act. This legislation would create an independent commission authorized to review
Federal Government subsidies, tax benefits or other financial advantages provided
to profit-seeking individuals and businesses, and establish a process by which, on
the commission's recommendation, such subsidies, tax benefits or other advantages
would be reformed or terminated.

First, I want to salute the chief sponsor of S. 1376, Senator McCain, and his prin-
cipal co-sponsors, Senator Thompson, Senator Kerry, Senator Feingold, Senator
Kennedy and Senator Coats. We at the Progressive Policy Institute (PPI) find their
proposal very gratifying, in part because the legislation has been based on rec-
ommendations fashioned by PPI. In 1991, PPI first called on Congress and the
President to reexamine all industry-specific spending and tax subsidies and phase
out those which serve no overriding social or economic purpose. In January 1994,
PPI provided a list of such subsidies that we considered proper candidates for re-
form or repeal, at a savings of some $200 billion over 5 years. At that time, we also
proposed that Congress create an independent commission, modeled on the base-
closing commission, empowered to carry out this purpose. Subsequently, PPI has
further expanded the list of subsidies which we believe Congress should substan-
tially reform or repeal. In addition, we have provided advice to staff from the offices
of Senators McCain, Thompson, Feingold, Kerry, and Kennedy as they prepared the
legislation under consideration today.

The current impasse over deficit reduction only reinforces the pressing need for
the kind of fiscal-policy innovation represented by S. 1376. The process has stalled,
because it is always difficult to deny businesses benefits which they have long en-
joyed, especially when they receive the benefit as members of a specific industry and
that industry enjoys substantial influence with members of Congress. The fact that
the major spending-subsidy programs in the current budget, and the major tax-sub-
sidy provisions in the current tax code, generally benefit the most influential indus-
try interests is demonstrated by their very existence, for they have now survived
the numerous instances of broad budget reduction and substantial tax reform of the
last 15 years. The commission created by S. 1376 could enable Congress to finally
repeal many of these remaining subsidies, in effect, by reversing the presumption
that these subsidies will continue indefinitely. This would be accomplished by forc-
ing the President and the Congress to reexamine large numbers of subsidies all at
once and by requiring them to take positive steps in order for them to continue.

The challenge presented by the deficit is not simply to reduce it, but to figure out
how to reform fiscal policy in the specific ways that can help make the American
economy more productive and efficient, and ultimately, help restore income growth
for average Americans.

As a general proposition, the deficit debate has offered two approaches to a more
economically-productive budget. First, shift economic priorities away from support-
ing personal consumption and towards economic investment. In practice, that means
providing less health care and income support mainly to elderly people, by reform-
ing Medicare in ways that would reinforce competition and cost-containment in the
health-care industry, and Social Security in ways that would reduce benefits for
higher income people and perhaps over the long-term require everyone to save more
for themselves. We could do something of that sort as the Entitlement Commission
proposed, and I assume that eventually we will. But Congress and the President do
not yet seem ready to take such steps.

Until that occurs, the best path to a growth-oriented budget is to repeal scores
of special spending programs and tax provisions that today are narrowly targeted
to subsidize influential industries. This approach not only could provide substantial
resources for deficit reduction and therefore private investment; it also would make



19

the economy more efficient and strengthen the forces of market competition which
drive economic innovation and productivity.

There are serious reasons to be concerned about the efficiency, productivity and
innovative capacities of our economy. For a generation, the U.S. economy has been
stuck in a form of substandard equilibrium that precludes mass upward mobility.
When we look at how fast, on average, productivity, net investment, and overall out-
put have grown since the end of World War II, we find that over the last genera-
tion — the 1970s, 1980s and early 1990s — these average annual rates have ratcheted
down by one-third to one-half from their levels in the 1950s and 1960s. This devel-
opment has been systemic; it has persisted from business cycle to business cycle;
it has affected virtually every sector of the economy; and it has been largely unaf-
fected by changes in policy, even very major ones such as the 1981 tax cuts.

Here are the real results. From 1950 to 1970, the average American family dou-
bled its income, even after adjusting for inflation, by working hard for the 20 years.
But from 1970 to 1990, the average family that worked hard through that time in-
creased its family income by less than 15 percent, after inflation. That's the dif-
ference between real upward mobility and a stagnating standard of living.

To be sure, not everyone has been affected in this way. Professionals, entre-
preneurs, and managers — roughly the top 15 percent of the work force — continued
to score strong income gains through the 1970s and 1980s and into the 1990s. But
since overall average income gains were very modest, healthy income growth by
highly skilled people has left even less for everyone else.

That's the ultimate social policy reason behind the need for fiscal policy reform.
If the purpose of budget reforms is to lift incomes by driving higher productivity and
growth, we should begin by eliminating those specific spending and tax provisions
which tend to reduce productivity and growth.

Market economics identifies one particular class of spending and tax provisions
which meet this criterion: industry-specific subsidies.

In a world of international markets, global production, and worldwide trade —
where U.S. growth and incomes depends on our firms' and workers' capacities to in-
novate efficiently and upgrade their productivity — industry spending and tax sub-
sidies weaken our economy in four major ways.

First, these subsidies^ — much like trade protections — weaken market incentives for
firms to become more efficient and productive. This occurs because subsidies artifi-
cially raise an industry's rate of return, shielding its firms from normal competitive
pressures to upgrade their products and production methods. In this context, sub-
sidies and protections ultimately harm those they intend to benefit.

Second, industry subsidies weaken our economic prospects by placing every
unsubsidized sector and firm at a disadvantage. From farm supports and tax breaks
for oil and gas firms, to taxpayer financing of FAA services for airlines and air trav-
elers, and the business entertainment deduction for professional sports tickets and
skybox rentals, these special industry entitlements force taxpayers, consumers and
businesses to transfer more resources to influential sectors than markets would oth-
erwise require — and therefore leave less capital and labor for everyone else. The re-
sult is less efficient capital and labor markets, and lower growth and income gains.
And in a global economy, firms forced to operate at a disadvantage at home will
often move some of their operations abroad, reducing domestic employment.

Far from contracting the economy, then, spending restraints and tax reforms can
spur growth if they target those programs and provisions that weaken the economic
forces driving economic efficiency and productivity. Cutting spending and tax sub-
sidies can thus improve the quality as well as the quantity of private investment,
as intensified competitive pressures drive firms and workers to make the most of
the new resources for investment released by deficit reduction.

This analysis recognizes that some subsidies do serve compelling social purposes.
Growth policy does not necessarily dictate that government stop supporting the im-
munization of children, end all tax incentives for home ownership, and suspend
health and safety regulation. Becoming more productive requires phasing-out provi-
sions that artificially raise returns for industries with political clout, but for no over-
riding social purpose — and reforming social regulations protecting health, safety and
environmental quality, so their legitimate ends are achieved at the least cost to pro-
ductive investment.

Third, virtually all current subsidies come not from economic logic, but from polit-
ical influence first exercised long ago. It is an interesting side-note that current sub-
sidy policies largely ignore the industries and firms most critical to an information-
based economy. Nearly two thirds of all spending subsidies, for example, are con-
centrated in agriculture, energy, and transportation. Current subsidy policy, in
short, is antiquated as well as counterproductive, focusing government policy on in-
dustries central to the commodity- and manufacturing-based economy of the past.



20

Finally, subsidies are socially regressive. The direct beneficiaries are shareholders
in the industries whose rates of return have been artificially subsidized. These poli-
cies may also preserve jobs in an industry, but any such job gains are offset by job
losses in firms and industries forced to compete on an uneven playing field. I have
estimated that the $53 billion in average annual spending and tax subsidies which
PPI has proposed to eliminate or reform, currently provide more than $16 billion
a year in net benefits to the top 5 percent of Americans, while costing the lower
four-fifths of Americans nearly $7 billion a year.

By contrast, cutting subsidies would be genuinely progressive as well as economi-
cally-sound. It would end the regressive transfers embedded in current subsidies,
leaving each industry's full costs to be borne by its customers and by its sharehold-
ers, who would earn a market return on their investments instead of a taxpayer-
supported return. And if the resources now claimed by these subsidies are redi-
rected to investment, most firms and workers stand to gain more, through a more
productive economy and lower interest rates.

It is important to recognize that the imperative to reorient fiscal policy towards
the goals of economic productivity and efficiency is becoming more urgent, not less


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Online LibraryUnited States. Congress. Senate. Committee on GoveS. 1376, the Corporate Subsidy Review, Reform, and Termination Act of 1995 : hearing before the Committee on Governmental Affairs, United States Senate, One Hundred Fourth Congress, second session, on S. 1376, to terminate unnecessary and inequitable federal corporate subsidies, March 5, 1996 → online text (page 3 of 10)