Commentary: The Budget: How To Whack $10 Billion Nowby
Trimming "corporate welfare" is back in vogue. The budget plan President Clinton unveiled on June 13 cuts business tax breaks and spending subsidies by $3.5 billion a year. House Budget Committee Chairman John R. Kasich (R-Ohio) wants to save that much just by closing corporate tax loopholes.
Clinton and Kasich are on the right track, but they don't go far enough. At a time when federal subsidies of all kinds are on the block, Washington can't justify preserving costly tax breaks that give specific companies or industries an unfair edge in the marketplace. Congress could easily trim these giveaways by more than $10 billion a year.
Here's a hit list: The $2 billion a year in special-interest tax subsidies that go to oil and mining interests, the $1 billion that credit unions receive, the nearly $4 billion enjoyed by big drugmakers operating in Puerto Rico, and the $1.5 billion that U.S. companies get by exporting through paper subsidiaries called foreign sales corporations. Add to that the $1 billion federal subsidy for state and local tax-exempt bonds used to finance privately owned facilities, such as manufacturing and wastewater treatment plants, and the $400 million or so that goes to Christmas-tree growers, windmill makers, and U.S. shipbuilders. Here's another: Because drivers in nine big cities are required to use special gas to cut air pollution, corn-based ethanol refiners get a $500 million tax break--most of which goes to one company, Archer Daniels Midland Co. A competing product, made from natural gas, gets no such benefit.
CREDIBILITY BOOST. These subsidies are among the most egregious of the hundreds of billions of dollars in tax breaks and cash subsidies that Washington showers on Corporate America. Outrageous tax incentives have spawned a backlash against all business deductions, even depreciation, a normal cost of doing business that companies should be able to write off. There are simple ways to define handouts that should be scrapped: Tax breaks targeted to a specific industry or transaction ought to be dumped, and so should deductions that exceed the cost of producing goods.
Eliminating these subsidies is both good politics and sound economics. The move would strengthen the GOP's credibility when it vows that everyone must share the pain for the budget to be balanced. And it would better allow markets, rather than government, to decide the fate of products and companies.
Many giveaways don't even provide the intended benefits. For instance, a shift of a few dollars in the world price of oil has more impact on production than tax write-offs. In truth, notes Robert J. Shapiro, vice-president of the Progressive Policy Institute, a moderate Democratic think tank, these breaks hurt the economy: "Not only do they claim taxpayer resources, but they insulate subsidized industries from the full flow of competition."
Yet these sorts of tax breaks have been sacrosanct so far this year. Led by House Ways & Means Committee Chairman Bill Archer (R-Tex.), defenders argue that letting companies keep more of what they earn hardly amounts to a subsidy. Instead, they say, it's just a boon to the free-enterprise system.
FINAL STEP. But that argument is losing steam. Conservative think tanks such as the Cato Institute and the Progress & Freedom Foundation favor ending targeted tax preferences, which smack of industrial policy. And closing loopholes is really nothing new for the GOP. After all, in 1982 and 1984, President Ronald Reagan and Bob Dole (R-Kan.), then chairman of the Senate Finance Committee, cut back on business subsidies. Even the hottest fad in taxdom--replacing the income tax with a consumption tax--would eliminate most targeted business deductions.
Congressional Republicans are taking dramatic steps to end government-generated market inefficiencies. They've pushed regulatory and legal reform. They are moving to curb Washington's role in picking winners and losers through direct spending. Now they should take one final step--removing the tax code from economic decision-making.
Someday, tax reform may do that. But why wait? Congress--with Clinton's support--can start now by dumping the worst of the tax giveaways. It would be powerful evidence that the goal of the GOP really is reform--and not just protecting corporate fat cats.