Ending Corporate Welfare

Adoption of an annual budget is a core function of government. Both the federal and state governments have failed to get the job done. At the national level there has been no budget for years, as congress passes "continuing resolutions" that keep the money flowing. The budget impasse in Harrisburg is now in its third month, with Governor Tom Wolf rejecting the equivalent of a continuing resolution passed by legislative Republicans.

There are many reasons for this lack of agreement, but the bottom line is the age-old problem of too much demand for too few resources. Eating up a large portion of both federal and state budgets is entitlement spending. Taking away that which someone already receives is a near impossibility, yet neither budget crunch can be resolved until the spending side of the equation is addressed.

Republicans often point to social welfare as an area where spending can be cut, Democrats are adamantly opposed. Corporate welfare is a different story. Here there is bi-partisan agreement. Establishment Republicans love government hand-outs to big corporations. Despite lip service to the contrary, Democrats do too.

But, there is growing opposition among the GOP’s conservative base to continuing corporate welfare programs. After all, how can you morally justify cutting social welfare when voting to give taxpayer dollars to wealthy corporations? In order to address the systemic deficits present in both the federal and state budgets cuts in all such programs are needed.

At the federal level conservatives have been successful in closing down the Export-Import Bank. This happened largely because the bank was up for reauthorization, meaning all congress had to do was nothing to put it out of business. Congress is good at doing nothing, so the Export-Import Bank was allowed to expire. But, supporters of the bank – which gives large, risky taxpayer-backed loans to big corporations – are working hard behind the scenes to resuscitate it, meaning the battle is far from over.

Here in Penn’s Woods the vehicle for corporate welfare is a little-known entity called the Redevelopment Assistance Capital Program (RACP). Like most government programs it started small, with $400 million in borrowing authority in 1986. By 2010, the last year for which complete information is available, borrowing authority had ballooned to $4 billion.

Unlike the Export-Import bank which merely finances risky loans, RACP is a grant program. Meaning state government borrows money and then gives it to select businesses. That is correct: state government borrows money, gives it away, and then repays the loans plus interest with tax dollars. Worse, small businesses need not apply. The grant program is only available for projects exceeding $1 million.

There is a set of criteria for a business to obtain a RACP grant, but since the final list of recipients must be approved by the legislature the politically well-connected have an advantage. There is no escaping the fact the entire effort amounts to little more than government picking winners and losers.

A new study by the Mercatus Center at George Mason University finds the program is itself a loser. The study found: "The RACP is an inefficient and market-distorting program that mostly transfers economic activities from counties receiving less in RACP grants to counties receiving more of the grants." Another concern: the study found "RACP is likely to decrease economic growth in the long run since the market is ultimately skewed away from efficient investment and toward politically favored industries."

The program is not even popular in the business community. A recent Keystone Business Climate Survey conducted by the Lincoln Institute found 52% want the program eliminated entirely; another 40% think the amount spent on it should be reduced. Over the years, the survey has consistently found business owners/CEOs would rather have across-the-board business tax cuts than such targeted grant programs.

Clearly programs like the Export-Import Bank and the RACP are nothing more than government welfare for politically connected companies. The end result, at best, is government directing rather than expanding economic activity. As budget-makers look for ways to bring government spending under control, reducing welfare – both corporate and social – must be part of the equation.

(Lowman S. Henry is Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal. His e-mail address is [email protected].)

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