US Corporate Welfare: 1. What Is It? Where Is The Money Going? How Big Is It?

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“Corporate Welfare” refers to government subsidies given to businesses. There are many hundreds of corporate and business subsidy programs provided by the federal government as well as local and state governments.

Generally speaking, these subsidy programs can be classified into five categories, as follows:

  1. Cash Handouts: The federal government provides a vast number of grants and/or direct subsidy payments to for-profit enterprises around the country.
  2. Risk Absorption: The government also has a wide variety of loan and loan guaranty programs available to US businesses. Here, the government is either assuming the risk of a project or transaction via a government guarantee or subsidizing the cost of capital through a below-market interest rate loan.
  3. Tax Breaks: The US tax code contains hundreds of tax credits, exemptions, exclusions, deductions and accounting gimmicks that serve to reduce the taxes of businesses.
  4. Trade Restrictions: Trade restrictions permit producers of one product or commodity to charge higher prices than they otherwise could. These producers benefit and every consumer of the protected product or commodity pays the cost.
  5. State and Local Government Subsidies: These business handouts typically take the form of tax credits or tax abatements. Property tax abatements, pursuant to which property taxes are reduced or eliminated for some period of time, are common across the country.

Limited Transparency

If you want to know how much the government is spending on the Food Stamp, Temporary Assistance for Needy Families or Medicaid programs, the information is easy to find. If you want to know the total value of subsidies handed out every year to US businesses, you are out of luck. However, the situation is improving a bit.

USASpending.Gov, a government sponsored website, reports all contracts, grants, loans and direct payments. You can review the data by state, by government department, by recipient and by type of recipient (for example, “for profit entities”). Unfortunately, there remain many faults with the available information. First, there is no attempt to tally up the totals, so getting a handle on total cost for any category is difficult at best. Also, there is no mapping of subsidiaries and parent companies. Unless you know the name of every subsidiary of Cargill or General Motors, you cannot get an accurate assessment of the volume of grants, direct payments and loans going to these companies in the aggregate.

Another good primary source of information regarding corporate financial assistance is the annual Tax Expenditure Report prepared by the Treasury Department. This report estimates the cost of every tax exemption, credit, exclusion and deduction contained in the US tax code. Unfortunately, while this provides the annual cost of the Intangible Drilling Oil & Gas Deduction, for example, it does not let you know which companies are benefiting.

Who’s Getting the Money?

Government subsidies to businesses are not paid out equally. First and foremost, certain industries are definitely favored over other industries. Secondly, the bulk of the money is going to very large businesses.

Some of the key subsidized industries in the US are as follows:

  1. Farming: In 2014, a new Farm Act was passed. This bill eliminated most of the programs that provided direct subsidy payments to farms and replaced them with several crop protection insurance programs. Instead of paying farmers directly, there is now a highly subsidized crop protection insurance scheme with private insurance company intermediaries. The government pays a subsidy of 60% of the insurance premium cost, pays certain of the administrative costs of the insurance companies and even shares the cost of insurance claims. Corn, wheat, soy and rice dominate the program and the top 10% of producers receive 77% of the subsidies. Estimated annual cost is circa $20 billion, depending on weather.
  2. Fossil Fuels: A comprehensive study conducted by Oil Change International in 2017 estimated total annual subsidies to the fossil fuel industry to be $14.7 billion plus $5.8 billion from state governments. The oil & gas sector received 80% of the total with the coal industry getting 20%. Subsidies consist of a wide variety of tax exemptions and deductions as well as “royalty free” federal government leases on certain oil, gas and coal properties.
  3. Electric Energy: According to the U.S. Energy Information Administration, total federal subsidies to the power industry in fiscal year 2016 were $15 billion. This was comprised of $8.8 billion of tax expenditures, $4.7 billion of direct payments and $ 1.5 billion of Research and Development grants. Low-income energy assistance and conservation accounted for about $4 billion. Subsidies for biofuels, solar, wind, coal, transmission, nuclear and other renewables made up most of the balance, pretty much in the order presented here.
  4. Big Pharma: The National Health Institute spends in excess of $30 billion annually on Research and Development. About 10% is expended directly by the NHI’s own research staff. The balance is handed out as grants to universities and drug companies. Many of the drugs sold by major pharmaceutical companies were in fact developed by the NHI or with NHI money. Guess where the profits are going.
  5. Defense: The defense industry may be the single biggest beneficiary of federal government subsidies. In fiscal year 2017, for example, the Department of Defense spent over $70 billion on Research and Development. Most of this money is provided to major defense contractors under multi-year R&D contracts.

Much of the money doled out to corporations takes the form of R&D grants. The research being financed by the government runs from pure science to applied research to commercialization. While some portion of this federal R&D spending is probably a complete waste of money, much of it also results in very valuable new discoveries and technologies.

From a taxpayer’s perspective, government R&D grants are asymmetrical. Taxpayers take all or a significant portion of the risk and the corporate beneficiaries get all or most of the upside from successful projects. In the case of new drugs and new weapons systems, the government is also the largest customer.  This looks like win/win for the corporations and lose/lose for the taxpayer.

How Big Is It?

No one in the federal government is keeping track of the total amount of money being given to for-profit enterprises every year.   The sum of grants, direct subsidy payments and loans to for-profit entities is certainly measured in the tens of billions and the total amount of tax loopholes is over $250 billion. In total, something like $300 billion per year is a decent educated guess.

While the exact numbers remain uncertain, there is a great deal of anecdotal information that helps to define the scale of “corporate welfare”. The next article will provide a number of case studies on grants and loans provided to sample corporations and industries. After that, The Informed Vermonter will take a look at corporate tax expenditures.

 

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