Playing Favorites: Corporate Welfare in Oregon

Policy Insight No. 115
January, 2001

Playing Favorites: Corporate Welfare in Oregon

By Zenon X. Zygmont, Ph.D.

Introduction

When reductions in government spending are discussed, opponents often suggest that essential public services such as education and public safety will be harmed.(1) Such are the claims in political budget battles, and the same arguments can be expected during the current legislative session while legislators grapple with a perceived budgetary challenge.

Unfortunately, those who oppose reductions in state government treat every $1 in spending as sacrosanct and fail to consider budget cuts that might have little or no adverse economic impact in the state. This paper indicates the state budget currently contains millions of dollars of non-essential expenditures, spending that could be reduced without any significant and prolonged adverse impact on Oregon's economy. The emphasis is on non-essential expenditures, in particular transfers to business and industry, which are commonly referred to as "corporate welfare."

The elimination of the transfers to business and industry discussed herein would reduce or offset at least $26.5 million to $32.5 million in the next biennium. This estimate is not based on a comprehensive analysis of the budget nor is it an exhaustive list of corporate welfare in Oregon. Nonetheless, it helps shine light on an area of state spending that should be scrutinized and reduced, if not eliminated.

Corporate welfare and the damage done

Corporate welfare - "government spending...that provides unique benefits or advantages to specific companies or industries" - is inherently unnecessary, wasteful, and costly.(2) It is an unnecessary expenditure because it results in businesses being paid to engage in activities they would conduct even without such transfers, for example, advertising. In addition, because businesses often view transfers from the government as "free money," it encourages them to gamble with tax dollars by engaging in riskier and less profitable investments. Finally, such transfers come at a cost; businesses and other special interests engage in lobbying and related activities to capture the transfers, and government bureaucracies must be funded to serve as pipelines for such transfers. Corporate welfare at the national level is estimated to be $75 billion to $167 billion or even more per year (roughly $600 to $1,400 per taxpayer per year).(3) Eliminating these expenditures allows taxes to be reduced or monies to be redirected to essential government services.

Classic examples of corporate welfare are price supports to the U.S. agriculture industry and trade restrictions on foreign agricultural products. These programs are estimated to cost U.S. taxpayers about $4.2 billion each year.(4) Defenders of such programs argue that these transfers are necessary to preserve small farmers and related businesses, but more often than not most of the transfers end up in the hands of large businesses such as Archer Daniels Midland.(5) Because corporate welfare represents nothing more than wealth transfers from taxpayers and consumers to special interest groups (often businesses earning significant profits) it draws the ire of individuals from all points along the ideological spectrum.

The Oregon Economic and Community Development Department

Critics of corporate welfare usually focus on transfers occurring at the federal level, but similar transfers occur at the state level as well. As an example, the Oregon Economic and Community Development Department (hereafter OECDD) is a state agency whose purpose is to promote economic growth in the state. The department is empowered by the legislature to invest "lottery, federal and other funds to help communities and regions build a healthy business climate that stimulates employment, enhances quality of life and sustains Oregon's long-term prosperity."(6) The main categories of investments by the OECDD are for community facilities, infrastructure, and business and industry development. The agency also "provides direct assistance to Oregon's businesses to help them expand, create new jobs, train and retrain employees, and to attract new businesses to Oregon."(7)

The OECDD claims the economic impact of its programs is substantial. It estimates that every $1 it invests is multiplied in the economy several times over: "for every dollar the department invested in the 1995-97 biennium, at least two and a half dollars will be returned to the General Fund as a result of increased economic activity...[I]n the 1997-98 fiscal year, the return is expected to be more than three dollars for every dollar invested."(8) But this kind of a claim fails to provide critical information: how much impact would that $1 have on the economy had it remained in the private sector? This information is important because it allows a comparison to be made between the economic impact of an additional $1 in public spending versus the impact of an additional $1 in private investment. If public investment always and everywhere has a greater economic impact than private expenditures, then Oregon taxpayers should welcome each and every new tax imposed upon them and the state budget should grow like Topsy. However, if investment of $1 by the private sector is estimated to have a greater economic impact than $1 invested via a public project, then the latter activity is clearly inferior and wasteful. Corporate welfare is such an example.(9)

The budget for the OECDD in the 1995-97 biennium was $335.3 million, $331.6 million in 1997-99, and an estimated $339.5 million in 1999-2001.(10) Out of this budget the department spends $12-15 million each year on business and industry development.(11) The lion's share of this money (e.g., $11 million in 1997-1998) is directed to "key industries" such as tourism, forest products, fisheries, high technology, and aerospace, through projects like "software marketing assistance," "agricultural industry marketing," creation of a "biotech business facility," and "promotion of Oregon wood products" to "help Oregon companies reach international markets."(12) The OECDD offers "gap financing" - a euphemism for a risky loan - to industries such as agriculture, seafood, and restaurants.(13) It subsidizes advertising for Oregon tourism and export businesses. And it provided $60,000 to help finance an airstrip in Paisley, which benefits primarily an agricultural corporation.(14)

There is no denying that the recipients of these transfers are better off, just as I am made better off if I can convince the state government to take a dollar away from you and give it to me. But are such transfers a wise use of public funds? A previous Cascade Policy Institute paper suggested the OECDD "does not provide essential services...[I]ts core function is corporate welfare, to provide money and tax breaks to businesses and ... to communities."(15) Indeed, legislative concerns about the net value of the department's activities led to funding reductions.(16) As a result, the department has shifted its focus from attracting new business to the state to regional development, "making sure the state and local business climate helps businesses compete and be successful both locally and globally."(17) Yet despite the legislatively mandated restructuring some corporate welfare still exists.(18)

Paying the advertising bills for business

One of the state agencies funded by the OECDD is the Tourism Commission. The commission's budget is currently estimated at $6.2 million and is financed by the lottery.(19) The money is primarily used to advertise and promote businesses in Oregon's private sector, for example, hotels, motels, and campgrounds. Tourism is an important industry for Oregon's economy, generating approximately $5 billion in tourist-related spending each year from trips to Spirit Mountain Casino, the Columbia River Gorge, and Mt. Hood.(20) The Commission mentions that each dollar it spends produces economic benefits; "expenditures in media advertising and marketing generate a new trip to Oregon for every $1.50 it spent to purchase advertising" and "promotional investments...generate state and local tax revenue in the form of personal, corporate, lodging and highway gas taxes at a rate greater than one to one."(21) But this claim begs the question of whether such an expenditure, by a state agency, is necessary in the first place. Is there an impediment preventing those businesses that benefit from tourism, hotels and motels, from paying for advertising with their own revenues?

Subsidized advertising and promotional activity is not a benefit restricted to the tourism industry. A similar program is provided by the OECDD's International Division, which receives a budget of approximately $3.7 million per biennium.(22) The Division's mission is "to support the commercial export interests of Oregon's non-agricultural businesses and industries in selected international markets."(23) This is accomplished through such activities as the Kyushu-Oregon Business Forum, which subsidizes business trips to Japan, and maintaining trade representative's offices in Seoul, Taipei, and Tokyo.(24) One example of this is the creation of two trade representative positions to "promote Oregon wood products."(25) To suggest that private industry is not capable of financing such positions is belied by information provided by the state itself, which indicates that a position "to increase overseas tourists from Asia" is being financed privately.(26) The same question should be applied to activities of the International Division, just as it was for the Tourism Division: why must the taxpayer bear part of the cost of a typical business activity?(27)

Oregon's agriculture industry also receives support in the form of marketing subsidies via the Oregon Department of Agricultural Development and Marketing Division. This assistance is designed "to increase sales in the United States and abroad."(28) Does the legislature need to provide funding, $2.5 million in 1997-1999, for a commonplace business activity: maximization of sales?(29) This program resembles one of the most blatant examples of corporate welfare: the USDA's Market Promotion Program, which subsidizes U.S. agriculture industry via advertising and other promotional activities, to the tune of $100 million each year.(30)

Conclusion

Critics will continue to argue that reductions in the Oregon state budget will have an adverse and prolonged economic impact on the state economy. What needs to be kept in perspective is that public expenditures are not all equal. Non-essential expenditures, in particular transfers to business and industry, should be trimmed from the budget. If business and industry development is reduced, and export assistance, tourism promotion and agricultural marketing subsidies eliminated, the impact on the budget will be $26.5 million to $32.5 million in reduced spending for the biennium.(31) These figures may be at the low end of the estimated range; a more comprehensive review of the state budget could find that the actual figure for corporate welfare spending is higher.

About the author

Dr. Zenon X. Zygmont is an assistant professor of economics at Western Oregon University, and an academic advisor to Cascade Policy Institute. Zygmont previously taught at Reed College in Portland, Oregon, and George Mason University in Fairfax, Virginia, where he earned his masters and doctorate in economics. Dr. Zygmont received his bachelor's degree in economics and geography at the University of California, Santa Barbara.

Notes

1. For example, in response to the tax reduction and spending cap initiatives on the Oregon ballot in November 2000, the American Federation of Teachers asked individuals to imagine an Oregon "where the state has to cut $2 billion -- not because it doesn't want to provide it, but because of a ballot initiative that threatens at least 25 percent of state funds that support public schools, community colleges and higher education and health care for Oregonians and their families" (www.pftce.org/challenge2000.htm).

2. This definition is from the Cato Institute's Handbook for Congress, 105th Congress, chapter 9, "Corporate Welfare" (http://www.cato.org//pubs/handbook/hb105-9.html). This publication mentions that corporate welfare "includes programs that provide direct grants to businesses, programs that provide research and other services for industries, and programs that provide subsidized loans or insurance to companies." It also mentions, "[s]ome analysts employ a broader definition of corporate welfare that includes targeted corporate tax loopholes. But allowing corporations to keep more of their own earnings is not a form of welfare." Corporate welfare, as used herein, does not refer to tax breaks to businesses.

3. The estimate of $75 billion is provided by the Cato Institute (see reference in endnote ii). The estimate of $167 billion is provided by Oregon Common Cause (www.commoncause.org/states/oregon/orarticle2.html). Another way to estimate corporate welfare is as a percentage of gross national product (GNP). In Jonathan Rauch's book Demosclerosis (New York: Times Books, Random House, 1994), the author summarizes the research results of economists interested in corporate welfare and similar forms of wealth transfers. Rauch (page 117) indicates "most estimates cluster in the range of 5 percent to 12 percent of GNP every year. In 1993, that would be $300 billion to $700 billion."

4. This estimate based on information provided by the Cato Institute. See "How Corporate Welfare Won: Clinton and Congress Retreat from Cutting Business Subsidies" by Stephen Moore and Dean Stansel, Cato Policy Analysis No. 254, May 15, 1996, Table 1, "How 35 Major Corporate Welfare Programs Fared in the FY 1996 Budget Process" (www.cato.org//pubs/pas/pa-254.html).
One set of beneficiaries is domestic producers of raw sugar. This industry receives an estimated $1.4 billion dollars in benefits from the federal government each year. For discussion of the sugar industry see: "Big Sugar Seeks Bailout, Gives Money to Help Get Way," Wall Street Journal, April 27, 2000, A28; the web site for the Coalition for Sugar Reform (www.sugar-reform.org); and a Time special report on corporate welfare, November 23, 1998 (www.time.com/time/magazine/1998/dom/981132/special_report.corporat8a.html).

5. See James Bovard, "Archer Daniels Midland: A Case Study in Corporate Welfare." Cato Policy Analysis No. 241, September 26, 1995 (www.cato.org/pubs/pas/pa241.html). It is also debatable whether transfers to smaller businesses are sensible because they encourage inefficient production practices, often delay inevitable business restructuring, and entail significant bureaucratic costs.

6. Oregon Economic Development Department, 1997-1999 Biennial Report, page 4 (www.econ.state.or.us/intro.pdf).

7. Oregon Economic and Community Development Department (hereafter OECDD), "1997-1999 Legislatively Adopted Budget," page 156.

8. Oregon Economic Development Department, 1997-1999 Biennial Report, page 12 (www.econ.state.or.us/intro.pdf).

9. Another way of expressing this idea is to compare the gross vs. net economic impact of public investment. Gross economic impact does not take into account reductions in private spending that occurs when taxes or other transfers are imposed on the private sector to fund public investment. Estimates of net economic impact are lower than gross impact estimates because they take into account these displacements. For a general discussion of economic impact estimates, see William J. Hunter, "Economic Impact Studies: Inaccurate, Misleading, and Unnecessary." Heartland Institute Policy Study No. 21, July 22, 1998 (www.heartland.org/studies/sports/hunter.pdf).

10. OECDD, "1999-2001 Legislatively Adopted Budget," page 90.

11. In the period July 1996-June 1997, $15.3 million; from July 1997-June 1998 $12.7 million. Source: OECDD, "1999-2001 Legislatively Adopted Budget," page 92.

12. OECDD, "1999-2001 Legislatively Adopted Budget," pages 6, 65, and 94. Sample projects listed are from the Oregon Economic Development Department, 1997-1999 Biennial Report, Appendix, pages ii, iii, and vi.

13. See, for example, the OECDD's Regional Investment Program (/www.econ.state.or.us/multiproj.htm) and the Oregon Economic Development Department, 1997-1999 Biennial Report, Appendix page ii.

14. See "State board helps pave Paisley airstrip" by Gordon Gregory in The Oregonian, Dec. 14, 1999 (www.oregonlive.com/news/99/12/st121418.html).

15. See Martin L. Buchanan, Finding Common Ground: Oregon State Government After Measure 47. Cascade Policy Institute, January 1997 (www.cascadepolicy.org/47.htm). A related analysis of the OECDD is William B. Conerly's "The Unseen Costs of Ribbon Cutting: Losses from Economic Development Programs." Cascade Policy Institute, February, 1995 (www.cascadepolicy.org/develop.htm).

16. "... [T]he legislature appointed a task force to oversee the department after an internal audit found some incentives paid to companies by OEDD to create jobs could not be proven to have accomplished their purposes. In addition, the department's budget, largely funded by lottery proceeds, was slashed by 26 percent after surviving an attempt to dismantle it by legislators uncomfortable with giving money to large corporations such as Intel and Wal Mart" (cited from the article by Clint Johnson, "Saving Trees, Debugging Code" in Plants Sites and Parks magazine, February/March 1998; accessed at: www.bizsites.com/PastPres/FM98/pacificor.html). Lottery contributions to the department were trimmed from $74.69 million in 1995-97 to $55.48 in 1997-98. Reductions were made in business and industry development of $43.4 million in 1995-97 to $12.7 in 1997-98 (information from OECDD publications; see www.econ.state.or.us/budget.pdf and www.econ.state.or.us/budget.pdf). Also, the name of the department was changed from the Oregon Economic Development Department (OEDD) to the Oregon Economic and Community Development Department (OECDD). See also the OEDD 1997-1999 Biennial Report, pages 5 and 7; and, Legislative Fiscal Office, "Detailed Analysis of the Legislatively Adopted 1999-2001 Budget by Agency and Program," page 183.

17. Oregon Economic Development Department, 1997-1999 Biennial Report, page 6.

18. Corporate welfare is unconstitutional in Oregon. Article XI, Section 7 of the Oregon Constitution begins, "The Legislative Assembly shall not lend the credit of the state..." Article XI, Section 9, reads, "No county, city, town or other munincipal corporation, by vote of its citizens, or otherwise, shall become a stockholder in any joint company, corporation or association, whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation or association." For further discussion of this point refer to Public Subsidies, Private Gain: Stop Violating the Oregon Constitution by Dale F. Rubin. Cascade Policy Institute, Fiscal Insight #13, September, 1996 (www.cascadepolicy.org/rubin.htm).

19. $6.2 million is the 1999-2001 legislatively adopted budget. Source: Legislative Fiscal Office, "Detailed Analysis of the Legislatively Adopted 1999-2001 Budget by Agency and Program," page 186.

20. This estimate is for 1998 (The Wall Street Journal, Northwest Edition, September 6, 2000, page NW1).

21. See OECDD, "1999-2001 Legislatively Adopted Budget," page 205; and its 1997-1999 Biennial Report, page 30. The commission spent $1.2 million on advertising in 1995-1997.

22. OECDD, "1999-2001 Legislatively Adopted Budget," page 158.

23. Reference: www.econ.state.or.us/oregontrade/govexass.htm.

24. Oregon Economic Development Department, 1997-1999 Biennial Report, page 24 and State of Oregon, Governor's Budget, 1999-2001, page E-5.

25. See OECDD, "1999-2001 Legislatively Adopted Budget," page 6.

26. State of Oregon, Governor's Budget, 1999-2001, page E-7.

27. Furthermore, if assistance from the International Division is not absolutely necessary, why is such assistance funded to begin with?

28. State of Oregon, Governor's Budget, 1999-2001, page F-7.

29. Legislative Fiscal Office, "Detailed Analysis of the Legislatively Adopted 1997-99 Budget by Agency and Program," page 181.

30. A USDA web site indicates, "The Market Access Program ... formerly the Market Promotion Program ... help[s] U.S. producers, exporters, private companies, and other trade organizations finance promotional activities for U.S. agricultural products" (www.fas.usda.gov/mos/programs/mapprog.html). The estimate of $100 million per year is provided by the Cato Institute (www.cato.org/pubs/handbook/hb105-9.html).

31. This number is based on expenditures of $12 million to $15 million per fiscal year by the OECDD for business and industry development plus spending by the Oregon Department of Agricultural Development and Marketing Division ($1.25 million per fiscal year). In reviewing state budget documents, I assumed that spending by the tourism and international divisions is included in the business and industry development amount.

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