[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]




                               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


57-748 CC                   WASHINGTON : 1999

                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel

                            C O N T E N T S

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



                        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.
    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 
    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 
    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 
    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 
    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 subsidized 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.
    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.
    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, 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 
    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


    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 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 
    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 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 
    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 
    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.
    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 
    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 
    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 
    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 
    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.
    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 
    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 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 
    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 
invented 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 
    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 
    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 
    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, from massive government research and development and other 
subsidies 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 
    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.
    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 
    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 
obligation 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 decision-making concerning the location of business 
activity, therefore, constitute an unconstitutional 
infringement on Congress's power to regulate interstate 
    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 a crusade over his years, Mr. Chairman, against corporate 
subsidies for private commercial weapons exports to foreign 
government. 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 
    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 
    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 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 
    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, 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-and-you-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 
every corporate beneficiary of these subsidies above a certain 
diminished 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 
    What about government properties, real or intangible, that 
should be presumptively sold, leased, or rented at market 
    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 
    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 
    There is a nascent, national consumer-taxpayer-
environmental-worker-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.
    As you know well, Mr. Chairman, the myriad of corporate welfare 
programs generally 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 create, 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 
     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 
    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 a program is considered corporate 
welfare if its public cost outweighs its public benefits. 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 
corporations 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 requirements 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 systems 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, pro-worker, anti-corporate welfare agenda.


    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 
    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 
    Under the terms of the giveaway, the broadcasters will pay nothing 
for the exclusive 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 not-yet-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 conceivable 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), 
    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 
    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 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 

                          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 giveaways--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 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 royalty-free, nonexclusive 
    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 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 
    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. Bristol-Myers 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 exclusivity 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 Government 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 
    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 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.


    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.


    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 company 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 require 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, specifically 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 
Glass-Steagall 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 too-big-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 
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 
    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.
    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 individual, 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 encourage 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 justified 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 legend. It represents one of the worst distortions of our 
political democracy. Well-heeled 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 
    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 
    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 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 
    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, 
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 
    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 work-out 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.
    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 
    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 countries 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 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 accountability, 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, the situation is in some respects similar to what it was when 
Congress saw the need for enactment of the original Price-Anderson 
    (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 worst-case 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 
    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 
    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.
    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 

                   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 
    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 one-sided 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 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 officials 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 

  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 permits 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 
    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 anti-corporate welfare 
    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 
    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.)
    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 

                       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 high-tech 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

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 
    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 less able to deploy one of 
its most powerful sanctions against contractor wrongdoers--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 
    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 open-
minded 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.


    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 legislative 
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, 
pluri-centered 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 

                      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-market-rate 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.
    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 requiring 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 below-market-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 
    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-lowest-paid-
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.
    9. Reciprocal Obligations. The government should seek nonmonetary 
reciprocal obligations 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 

                     Insurance, Loans and Bailouts

    15. No Discount Insurance. The Congress should consider a 
legislative presumption 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 
    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.
    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.
    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 
    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 
    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.
    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.
    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 
    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.
    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 
    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 another 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 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.
    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 
    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.
    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 
    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.
    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 
    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 
    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 
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 
you open up this rather complicated subject which we do need to 
attend to, and I appreciate the Chairman for scheduling these 
    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 
    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 
    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 
    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.
    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 
    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.
    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 
    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 
    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, 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 
    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.
    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 across-
the-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 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.

                   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 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 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 
    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 production 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.
    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 multi-millionaires. 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 non-cash 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 
    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?
    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 

    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

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 


    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.


    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 taxation 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 
    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.
    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 
    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, non-Federal 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 
    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 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 
    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, 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 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 
    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 
    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 
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 
    Under legislation I introduced in the 105th Congress, privatization 
would accomplish 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 
    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.
    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 ``diminishing 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 
     ``* * * 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 
    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.
    Chairman Kasich. The gentleman from New Hampshire is 


    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 
    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 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 well-being, their own economic development, 
economic future that is competitiveness that is driven by free 
    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 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 directly 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 ``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 
    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 
    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 
    In Japan, HDTV was transmitted by satellite. The picture quality 
was only marginally better than their standard signal and special 
televisions were required to receive HDTV. The Japanese people 
responded to this massively subsidized technology by doing nothing; 
they refused to purchase the televisions required to receive the 
    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 
    Economic growth and technical innovations are not a result of 
selective government subsidies; they are the result of the genius and 
insight of the American people operating in the free market.
    High taxes and large subsidies fuel the growth of one another. In 
1993, the largest 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 subsidies * * * winners and losers selected by non-market 
forces * * * simply distort the market. This is not just a waste; it is 
just plain wrong. The government's job should be to let the market do 
its job. The best thing bureaucrats and politicians can do is leave us 
    Agencies like the Department of Commerce distort and harm the 
relationship between 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 government-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 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 
    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 

                           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.
    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 reduction. 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 
    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 
     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 commission, 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

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 

                        INCOME TAXES THEN AND NOW
                                            1914       1994     (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%  .........

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

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 subsidies, 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 Congress 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 billion-per-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 
    The synopses of ATP programs dazzle us with possibilities: ``next-
generation video compression,'' ``high-definition television (HDTV) 
studio,'' ``new generation laser-based welding,'' ``less polluting, 
more cost efficient painting process,'' ``super-hard coatings of boron 
nitride,'' and so forth. All of these ostensibly compelling and cost-
effective 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.
    I believe that the ``high-risk'' argument used by the Commerce 
Department is usually 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 
    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 
    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 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 six-inch 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 
    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.

         Unfair Competition: The ATP Video Compression Program

    Video compression is the technology that enables digital TV and 
small-dish satellites. 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.''
    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 several 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 

 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 
    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 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 simply 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 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 companies? 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 ``roadmap'' 
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 
    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 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 
    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 
    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 co-opted 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, 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.


    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 
    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 epithets 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 voluntarily 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 
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 
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
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 
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 so-called 
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 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 
    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 
     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 
     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 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 meat-packing 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 Federal 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.
    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 

    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

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 security-
seeking ``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 
    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 

                     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 undermined 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 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 businessman 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.

    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 compa-

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 surrounded 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 

     Do Not Normalize Silicon Valley's Relationship With Washington

    By the very way it works, Washington undermines the free minds and 
free markets 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 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 objectives 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 advantage 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 
``industry-government 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 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 
    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 

          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 
    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 anti-Proposition 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 

          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 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 

    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 K-12 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 
    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 

                     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.
          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. 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 
    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 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 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 
    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 
    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. 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 functions of 
NOAA and preserve the functions of the National Weather 
    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 
    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 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 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 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 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 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 
    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 
    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. 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 
    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 problems. 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 
    [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.


    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 Maryland 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.
    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 
    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 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 
    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.

                  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 
    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 
    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 
    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.


    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.


    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 
    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 

           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 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 targeted 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 
          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 available 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 targeted 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 
    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.
     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.


    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 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 
    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 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 
    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 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 
    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, 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 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 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 
    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 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?
    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 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 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.
    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 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 


    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.
    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 
    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 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 
introduced 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 
    [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 Committee 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 
    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 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 
    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 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 
    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 
    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.
    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 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?



    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 
    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.
    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 
    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 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 
    We formed this coalition and we killed the Clinch River 
Breeder reactor when it was going to be built in the State of 
    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 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 
    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 
    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 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 
    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 company 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. Taxpayers 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 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 spotlight 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.


    In August 1996, anger at America's public welfare system culminated 
in the passage 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 
    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 taxpayers 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 expropriation, 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 unnecessary 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 
                 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.


    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 
recommendations 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 through American ingenuity, not with 
the government's help. The company spends $3 billion a year on 
    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 $17\1/2\ 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 
    [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 
    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.
    Among the most disturbing recommendations in Prime Cuts are the 
business subsidy 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 
    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 industry 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 
    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 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 provide 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 
    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, 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.


    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.
    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 
    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 terrific 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 
unfortunately, 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 

    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 engage 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\
    \1\ Congressional Budget Office, Federal Financial Support of 
Business, Oct. 1995.
    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 billion\2\--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.
    \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 life-insurance 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.
    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 
    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 

                         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

    expenditures are most similar to those direct spending programs 
which have no spending limits, and which are available as 
    \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).

    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 
    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 
    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 

    The budget advantages that tax entitlements enjoy over most direct 
spending programs 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 
    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 
    To be sure, handing a program to the IRS to run has advantages. The 
bureaucratic 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 
    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 
    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\
    \4\ Ways 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.

    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 tax-disadvantaged.\5\
    \5\ Joint Committee on Taxation, General Explanation of the Tax 
Reform Act of 1986 (May 4, 1987), p. 98.

    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 

    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 
     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 
                      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 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 well-known 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 (R-Tex.) and endorsed by 
presidential candidate Malcolm S. Forbes, Jr. and former Rep. Jack 
    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 companies 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.
    \6\ See 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.
    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 
Congressional 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 
     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 billion 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.
    \7\ The 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.
    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. Exactly 
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 multinational 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 ill-advised 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 foreign 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 
    \8\ Some 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' long-
term 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, 
    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?
    \9\ See BNA Daily Tax Report, Apr. 28, 1999, p. G-5.
    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 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\
    \10\ Lobbyists 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.''

                            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.


    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.
    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 
    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.
    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:]

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.
    \1\ Stephen Moore and Dean Stansel, ``Ending Corporate Welfare as 
We Know It,'' Cato Institute Policy Analysis, 1995.
    \2\ Fortune, April 27, 1998, p. 216.
    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.

                            THE GOP CONGRESS
                          (Millions of dollars)
          Program/Agency           1998 Actual      1999      change 98-
                                                 Estimated        99
Agriculture Department:
    Agricultural Credit Insurance       $638.0       $353.0         -45%
    Agricultural Marketing                41.0         43.0           5%
    Agricultural Research Service        768.0        874.0          14%
    Commodity Credit Corporation         263.0        449.0          71%
     Export Loans Program........
    Conservation Reserve Program.      1,760.0      1,576.0         -10%
    Cooperative State Research,          904.0        928.0           3%
     Education, and Extension
    Economic Research Service....         55.0         55.0           0%
    Export Enhancement Program...        350.0        550.0          57%
    Federal Crop Insurance             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                124.0        102.0         -18%
     Statistics Service..........
    Public Law 480 Grants........        794.0        932.0          17%
    Rural Community Advancement          580.0        759.0          31%
    Rural Business-Cooperative            65.0         77.0          18%
     Service (RBCS)..............
Commerce Department:
    Economic Development                 385.0        438.0          14%
    Advanced Technology Program          193.0        231.0          20%
     (Budget Authority)..........
    Manufacturing Extension              114.0        128.0          12%
     Partnership (Budget
    International Trade                  303.0        273.0         -10%
    Minority Business Development         28.0         32.0          14%
    National Oceanic and               1,047.0      1,076.0           3%
     Atmospheric Administration:
     nonweather activities.......
Defense Department:
    Army Corps of Engineers......      3,845.0      4,209.0           9%
    Research, Development, Test,
     and Evaluation: applied R&D
        Advanced Electronics             299.0        264.0         -12%
         Technologies R&D \1\....
        Commercial Technology             20.0          0.0        -100%
         Insertion Program \1\...
        Computing Systems and            327.6        331.3           1%
         Technology R&D \1\......
        Dual Use Applications            125.0         36.0         -71%
         programs \1\............
        Electric Vehicles \1\....          0.0          9.0         100%
        Materials and Electronics        237.7        278.0          17%
         Technology R&D \1\......
        Next Generation Internet          42.0         50.0          19%
Energy Department:
    Energy Conservation programs.        621.0        560.0         -10%
    Energy Information                    63.0         70.0          11%
    Energy Supply Research             1,241.0        883.0         -29%
    Fossil Energy Research and           351.0        370.0           5%
    Science programs.............      2,239.0      2,534.0          13%
    Power Marketing                       70.0        185.0         164%
Interior Department:
    Bureau of Reclamation........        786.0      1,143.0          45%
Transportation Department:
    Commercial Space                       6.0          7.0          17%
     Transportation Office.......
    Federal Highway                      405.0        450.0          11%
     Administration: earmarked
     demonstration projects......
    Grants-in-Aid for Airports...      1,511.0      1,670.0          11%
    Maritime Administration:              13.0         60.0          33%
     Guaranteed Loan Program.....
    Maritime Administration:              37.0         19.0         -49%
    Maritime Administration:              19.0         24.0          26%
     Ocean Freight Differential..
    Maritime Security Program....         81.0         98.0          21%
    Essential Air Service program         37.0         50.0          35%
     (Payments to Air Carriers)..
Independent Agencies and Other:
    Appalachian Regional                 188.0        151.0         -20%
    Export-Import Bank...........        718.0        799.0          11%
    NASA/Aeronautical Research           920.0        786.0         -15%
     and Technology activities...
    National Science Foundation:         265.0        301.0          14%
     HIgh Performance Computing
     and Communications..........
    Overseas Private Investment          105.0        127.0          21%
    Partnership for a New                220.0        240.0           9%
     Generation of Vehicles......
    Small Business Administration      1,066.0         12.0         -99%
    Tennessee Valley Authority--          94.0         53.0         -44%
     Area and Regional
    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: 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 

             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\
    \3\ Theodore J. Forstmann, ``The Paradox of the Statist 
Businessman,'' Speech before the Cato Institute, February, 1995.
    \4\ ibid.
    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, since 1992 this one family has contributed 
more than $350,000 to political campaigns.\5\
    \5\ Rich Lowry, ``The Undeserving Rich,'' National Review, December 
31, 1994, pp. 21-22.
    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 
    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.
    \6\ U.S. General Accounting Office, ``Debt Collection: Information 
on the Amount of Debts Owed the Federal Government,'' December, 1985.
    \7\ David 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.
    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 
    \8\ Stephen Moore, Slashing the Deficit, The Heritage Foundation, 
Washington, D.C., 1990.
    \9\ For a critique of the Federal farm subsidies, see: Jim Bovard, 
The Farm Fiasco, 1991.
    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 
    \8\ Stephen Moore, Government: America's #1 Growth Industry, 
(Lewisville, Texas: Institute for Policy Innovation, 1995), p. 92.
    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\
    \11\ Associations Yellow Book, Winter 1994, Vol. 3, No. 2, (New 
York: Monitor Leadership Directories, Inc., 1994), p. 692.
    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.
    \12\ Jeffrey Gerlach, ``Politics and the National Defense: The 1993 
Defense Bill,'' Cato Institute, Foreign Policy Briefing No. 22, January 
20, 1993, p. 5.
    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
                                    Campaign          1994 Grant awards
                                  contributions        (millions \1\)
           Company           -------------------------------------------
                                 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\ 150,0  .........       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 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 
    \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.
    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\
    \16\ Gilbert Gaul and Susan Stranahan, ``How Billions in Taxes 
Failed to Create Jobs,'' The Philadelphia Inquirer, June 4, 1995, p. 1.

                     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 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 
    \17\ Associations Yellow Book, Winter 1994, Vol. 3, No. 2, (New 
York: Monitor Leadership Directories, Inc., 1994), p. 692.
    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                    Technology     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.

                      TABLE 4.--CASH-IN, CASH-OUT?
                         [Dollars in thousands]
                                               1996 Contributions to
        ATP award winners 1992-95        -------------------------------
                                                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.
     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 welfare 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 
     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 
Administration'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 corporate welfare's best friend.
    And the unfortunate result is that the corporate social safety net 
remains largely intact after 18 months of the ``Republican 
    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.

                          [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
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 
    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 obnoxious 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 
    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.


    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 
    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 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 

    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 
    What is Corporate Welfare?
    Americans for Tax Reform defines ``corporate welfare spending'' as 
all direct government 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 
    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 
    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 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 run-away 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 
    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 
    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 made the Republicans unhappy 
because it wasn't a spending cut. It is a strange world we live 
    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 write-off 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 
    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 two-step 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 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 
    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 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 
    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 
    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?
    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 
    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 
    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 
    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.
    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 
    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.
    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.]