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TIME
Special Report/Corporate Welfare
Corporate Welfare
A TIME investigation uncovers how hundreds of companies get on the dole--and why it costs every working American the equivalent of two weeks' pay every year
By Donald L. Barlett and James B. Steele
How would you like to pay only a quarter of the real estate taxes you owe on your home? And buy everything for the next 10 years without spending a single penny in sales tax? Keep a chunk of your paycheck free of income taxes? Have the city in which you live lend you money at rates cheaper than any bank charges? Then have the same city install free water and sewer lines to your house, offer you a perpetual discount on utility bills--and top it all off by landscaping your front yard at no charge?
Fat
chance. You can't get any of that, of course. But if you live almost
anywhere in
Two years after Congress reduced welfare for individuals and families, this other kind of welfare continues to expand, penetrating every corner of the American economy. It has turned politicians into bribery specialists, and smart business people into con artists. And most surprising of all, it has rarely created any new jobs.
While corporate welfare has attracted critics from both the left and the right, there is no uniform definition. By TIME's definition, it is this: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan or a government service. It can also be a tax break--a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay.
The rationale to curtail traditional welfare programs, such as Aid to Families with Dependent Children and food stamps, and to impose a lifetime limit on the amount of aid received, was compelling: the old system didn't work. It was unfair, destroyed incentive, perpetuated dependence and distorted the economy. An 18-month TIME investigation has found that the same indictment, almost to the word, applies to corporate welfare. In some ways, it represents pork-barrel legislation of the worst order. The difference, of course, is that instead of rewarding the poor, it rewards the powerful.
And it rewards them handsomely. The Federal Government alone shells out $125 billion a year in corporate welfare, this in the midst of one of the more robust economic periods in the nation's history. Indeed, thus far in the 1990s, corporate profits have totaled $4.5 trillion--a sum equal to the cumulative paychecks of 50 million working Americans who earned less than $25,000 a year, for those eight years.
That makes the Federal
Government America's biggest sugar daddy, dispensing a range of giveaways from
tax abatements to price supports for sugar itself. Companies get government
money to advertise their products; to help build new plants, offices and
stores; and to train their workers. They sell their goods to foreign buyers
that make the acquisitions with tax dollars supplied by the
The justification for
much of this welfare is that the
The picture is much the same at the state and local level, where a different kind of feeding frenzy is taking place. Politicians stumble over one another in the rush to arrange special deals for select corporations, fueling a growing economic war among the states. The result is that states keep throwing money at companies that in many cases are not serious about moving anyway. The companies are certainly not reluctant to take the money, though, which is available if they simply utter the word relocation. And why not? Corporate executives, after all, have a fiduciary duty to squeeze every dollar they can from every locality waving blandishments in their face.
State and local governments now give corporations money to move from one city to another--even from one building to another--and tax credits for hiring new employees. They supply funds to train workers or pay part of their wages while they are in training, and provide scientific and engineering assistance to solve workplace technical problems. They repave existing roads and build new ones. They lend money at bargain-basement interest rates to erect plants or buy equipment. They excuse corporations from paying sales and property taxes and relieve them from taxes on investment income.
There are no reasonably accurate estimates on the amount of money states shovel out. That's because few want you to know. Some say they maintain no records. Some say they don't know where the files are. Some say the information is not public. All that's certain is that the figure is in the many billions of dollars each year--and it is growing, when measured against the subsidy per job.
In 1989
In 1991
In 1993
And in 1997
This kind of arithmetic
seldom adds up. Let's say the
All this is in service of a system that may produce jobs in one city or state, thus fostering the illusion of an uptick in employment. But it does not create more jobs in the nation as a whole. Market forces do that, and that's why 10 million jobs have been created since 1990. But most of those jobs have been created by small- and medium-size companies, from high-tech start-ups to franchised cleaning services. FORTUNE 500 companies, on the other hand, have erased more jobs than they have created this past decade, and yet they are the biggest beneficiaries of corporate welfare.
To be sure, some economic incentives are handed out for a seemingly worthwhile public purpose. The tax breaks that companies receive to locate in inner cities come to mind. Without them, companies might not invest in those neighborhoods. However well intended, these subsidies rarely produce lasting results. They may provide short-term jobs but not long-term employment. And in the end, the costs outweigh any benefits.
And what are those
costs? The equivalent of nearly two weekly paychecks from
every working man and woman in
If corporate welfare is an unproductive end game, why does it keep growing in a period of intensive government cost cutting? For starters, it has good p.r. and an army of bureaucrats working to expand it. A corporate-welfare bureaucracy of an estimated 11,000 organizations and agencies has grown up, with access to city halls, statehouses, the Capitol and the White House. They conduct seminars, conferences and training sessions. They have their own trade associations. They publish their own journals and newsletters. They create attractive websites on the Internet. And they never call it "welfare." They call it "economic incentives" or "empowerment zones" or "enterprise zones."
Whatever the name, the result is the same. Some companies receive public services at reduced rates, while all others pay the full cost. Some companies are excused from paying all or a portion of their taxes due, while all others must pay the full amount imposed by law. Some companies receive grants, low-interest loans and other subsidies, while all others must fend for themselves.
In the end, that's corporate welfare's greatest flaw. It's unfair. One role of government is to help ensure a level playing field for people and businesses. Corporate welfare does just the opposite. It tilts the playing field in favor of the largest or the most politically influential or most aggressive businesses. In the next story, and those that follow in the coming weeks, you will meet the beneficiaries of corporate welfare--and the people who pay for it.
States At War
Shrewd companies are increasingly pitting politicians against one another in a quest for bigger and better tax breaks. Yet rarely do these subsidies create jobs, and the incentives sometimes rob government coffers of funds that could be used to improve services for you and your neighbors
By Donald L. Barlett; James B. Steele
With reporting by Laura Karmatz and Aisha Labi, and research by Joan Levinstein
Ever Try to Drink a Potato Chip?
The water in
The town sits smack atop
a geological formation where sulfur, natural gas and other petroleum products
mingle with the groundwater. The result is a nasty mix that is unusable to
residents. Many of the town's wells are also contaminated with potentially
deadly E. coli pollutants. So a commodity most Americans take for granted
simply does not exist in
City water in
TIME can. Based on
reports published when
Lynn Markley, a spokeswoman for Frito-Lay, says the company selects the general region where it wants to locate a new plant. It then prepares a sort of shopping list of requirements for the facility and contacts states about incentives.
"When we need
to...build a plant, say, in
Meanwhile, in
Christina Seward, mother of three small children, says her boys love to drink water. "But I don't have to tell them not to drink this water," she says. "The taste, the dirt--you wouldn't want to drink it. You put water in a glass, and you can see the dirt settle to the bottom. We don't know what's in it--we just know it's not safe."
Indeed, the Sewards' well was tested by the Arkansas Department of Health in 1996 and found to be contaminated with particles of fecal matter "too numerous to count." The Sewards use well water only to wash clothes, but not light-colored articles. The water turns "white things yellow," says Seward.
In order to drink, cook,
bathe and wash, residents haul bottled water from nearby towns or load up on barrels
from natural springs in the hills above
The Evansvilles
of America are growing in number as the job wars intensify. Since the 1980s,
states have added one economic-incentive program after another to retain
existing corporations and lure new ones. Even states that once refused to
compete are reversing course.
--Federal Express, the
global delivery service with headquarters in
--Nucor, a company based
in
Why has
And create them they do.
Said David N. Dinkins
(then mayor of
Said Jim Rout, mayor of
Said
Frank O'Bannon, Governor of Indiana, in March 1997, on a $1.7 million tax
abatement to Crown Equipment Corp. for a plant in
Said Christine Todd
Whitman, Governor of New Jersey, in May 1997, on millions of dollars passed
around to four large businesses under the state's new Business Employment Incentive
Program: "This is what the BEIP was meant to do, create jobs and increase
opportunities for
Don't believe it.
Jobs are created, of course, by the American economy--not by this process.
TIME's investigation has established that almost without exception, local and state politicians have doled out tens of billions of taxpayer dollars to businesses that are in fact eliminating rather than creating jobs. Some of the money has gone to prop up individual companies and avoid the consolidation within industries that an unfettered market would bring about. Some has been pumped into profitable companies, making them more profitable. Some has been awarded to companies that have threatened to move if they don't get it. Some has been diverted to businesses that local politicians have somehow divined will be more successful than their competitors. And last, some has gone to entire industries that are shrinking.
Witness a $300,000 grant to Anchor Glass Container Corp. last year, described by Pennsylvania Governor Tom Ridge's administration as part of an effort "to retain 275 existing jobs" at the firm's Connellsville, Pa., plant.
Retain 275 jobs?
A decade earlier, in 1987,
Anchor Glass employed 9,900 people nationwide--about 1,000 of them in
Cities go to extremes to
keep jobs in the manufacturing sector, partially because they pay more than
most service jobs. Here is how Edward G. Rendell, mayor of
True enough. But Rendell
cannot reverse the tide of economic forces. And no industry is a better example
of the futility of subsidies than American shipbuilding. It has not been a
vital
The Job Is Meaty; The Pay Is Not
Not long ago, the state
of
Well, when do you want
to go to the bathroom? In the morning or the afternoon?
Pick one or the other. Not both. That is your choice at Nebraska Beef Ltd., an
"We tell the
[supervisors], 'Hey, I want to use the rest room.' [They say,] 'O.K., 10 minutes. Go now.' [That's] only once a day [you
can go]... I have to think if I can go drink some water because I know I'm
going to have to go use the rest room." He continues: "We start at
Nebraska Beef is the entity that got the breaks. The jobs board awarded the company an estimated $7.5 million in tax credits in 1996, as well as a laundry list of other benefits. The award was all the more curious because the company had started work on its new plant before the board even existed. Other aid has pushed the total value of giveaways to Nebraska Beef to between $24 million and $31 million.
An exact total is not
available, since the state refuses to disclose the amount of taxpayer funds for
this or any other approved project. But
When state lawmakers
created the jobs board in 1995, they had in mind "major business expansion
and relocation projects needed to stimulate the growth of populations and
create better jobs for the citizens of
At Nebraska Beef, many of the workers are not citizens, in part because even hardworking Nebraskans aren't likely to come running for jobs that start at about $8 an hour for such grueling labor. Nebraska Beef employees can count on a raise of 25[cents] an hour every year they stay on the job, which means that in two years, a butcher is making $8.50. That is $17,680 a year for a 40-hr. week, about $1,200 above the poverty level for a family of four.
Not surprisingly,
Nebraska Beef goes through employees the way it does carcasses: at one point,
50% of the workers who completed state training for their jobs were gone within
10 months. A review by the state auditor of public accounts showed that
Nebraska Beef had used at least a million dollars in state funds in one year to
train workers who eventually left their jobs. The audit noted dryly, "It
would appear the number of employees no longer employed with the company and
amount of money spent for job training on these individuals was not in the best
interest of the state of
Nebraska Beef did not respond to our inquiries.
When Factories Become Fixer-Uppers
Defenders of economic
incentives like to say that safeguards can be built into the law, so that if
companies fail to deliver on the promised number of jobs, they can be required
to pay back the taxes that have been canceled. If you believe that, it might be
worth pondering the story of ABB Instrumentation Inc. in
In 1991, ABB applied to
the County of Monroe Industrial Development Agency, requesting tax breaks and
other incentives to move from its aging downtown
Nonetheless, the company
was quite blunt about what it would do if economic aid was not forthcoming:
relocate to
To secure a real estate-tax abatement, a company is required by
Then ABB cried poverty, telling the development agency, "If you rescind the tax exemption, we'll owe $1.2 million in taxes, which we can't afford."
To date,
ABB illustrates another
corporate-welfare story that TIME encountered repeatedly. After failing to keep
a facility up to date, a company claims a plant is "archaic" and
threatens to close it unless government officials come up with incentives to
help pay for modernization. That is what happened in
GE, which over the years had failed to update a washing-machine factory in Louisville--described as an "obsolete facility" that is "just one step above archaic"--threatened to close it unless state and local governments helped subsidize its modernization and 7,000 hourly employees agreed to cost-cutting work rules.
Faced with this threat,
It is not clear why the
state of
The tax break
notwithstanding, employment in
Intel's Billion-Dollar Bunny Suits
With ABB and GE, the threat of losing jobs often became too much for a community to bear. The workers, their families and local politicians wanted to keep the jobs at all costs.
Yet the same hysteria
flows when large, fast-growing high-tech companies start shopping around for new
plant locations. Intel Corp. invited six Western states--
And what a deal it got.
Since governments are not taxable, this arrangement enabled Intel to escape property and sales taxes. Then there is the investment-tax-credit deal, which allows Intel to pocket a portion of the state income taxes withheld from its bunny-suited tech workers' paychecks. In addition, the state provided money to train workers. These and other benefits add up to a third of a billion dollars in aid for Intel.
From Intel's vantage point, that is simply the way the system works. A company spokesperson said that states offer incentives "because they want to compete, and they obviously want the project in their jurisdiction rather than somebody else's... They try to develop their incentive package around those specific industries...that they want to build."
In any event, when some
local residents challenged the giveaways as too costly, a citizens group
supported by Intel commissioned a study to determine the company's impact. It
concluded that the incentives "resulted in a good deal for
But a TIME analysis of federal tax-return data raises questions. Let's look at two four-year periods, before and after Intel's massive Rio Rancho project.
Between 1989 and 1992, the number of federal income tax returns filed by New Mexico residents who showed wage income increased by 35,770--or 6.6%. Between 1993 and 1996, when the Intel-related jobs were created, wage returns rose 40,551, or 6.8%, a marginal increase.
More significantly, tax returns showing wages in three income groups ($30,000 to $50,000, $50,000 to $75,000 and $75,000 to $100,000) went up at a faster pace in the 1989-92 period than in the post-Intel era. Only two income groups increased faster in the later years: those at the bottom, with earnings of less than $30,000; and those at the top, with earnings in excess of $200,000.
Even more telling is the
jump in the number of federal tax returns from
And although Intel is one of the largest corporate income taxpayers in the state, it has fared well in recent years. Documents filed with the U.S. Securities and Exchange Commission show that in 1991, Intel paid corporate income taxes to state governments at an effective rate of 8.6%. By 1997, while the company's taxable income had spiraled upward 1,097%, its overall state tax rate had dropped to 4.8%.
Let's put those numbers in more personal terms. Suppose in 1991 you had a household income of $30,000. If your income had gone up at the same rate as Intel's, by 1997 you would have earned $359,100. Yet you would have saved $13,600 in state taxes. And you would owe it to the clout you exercise: the ability to demand and receive special tax treatment.
An Extra-Special Delivery for UPS
Among the variables that companies take into consideration in site selection is the labor pool. They are concerned not just with wage rates but also with the availability and quality of workers. So some states and municipalities, in partnership with business, have created industrial-education programs, mainly in community colleges. The schools' curriculums are often designed to train skilled workers for the area's most prominent industries.
The state of
Confronted with a need
to build an international air-hub facility and with a shrinking supply of
willing workers at existing pay rates, UPS advised
Government officials
complied. On top of the usual assortment of incentives, worth more than $80
million, they agreed to form a joint educational venture, a sort of
Most important, college
life will be designed to fit the needs of UPS. Student workers, the company
says, "will experience a daily schedule that will essentially reverse
their internal clocks. Class schedules, social activities and sleep patterns
will evolve around the hours of the night shift at UPS." This means
classes will be held between
To Kentucky Governor Paul Patton, this is one for the win column. "We will ensure that UPS has the workers it needs," he said. To fiscal conservatives, there is something wrong with this picture. If UPS wants to assure itself an adequate supply of labor, it might try raising wages. But with well-paying jobs now plentiful in the area, the company was having difficulty attracting a sufficient number of workers for part-time work, much of which is on the night shift. College students--the traditional source of night-shift workers for UPS--were not responding to the $8.50 an hour wage it offered, even with benefits. So the state will, in effect, create more college students.
Local authorities defend
the deal with a rosy economic forecast prepared for Greater Louisville Inc.,
the metropolitan area Chamber of Commerce. The chamber study predicts that
6,000 UPS jobs "will spawn nearly 8,000 additional jobs" throughout
the region. It is estimated that all those jobs in turn "will generate
more than $477 million annually in payroll growth." As is the case with
many economic-impact statements, the numbers are fuzzy. But whatever the case,
growth would have occurred somewhere in the
Singing Lessons from An Auto Company
There was no question
that like UPS, Mercedes-Benz was going to build a plant someplace in this
country. First of all, the
Lower
than Mercedes-Benz ever imagined.
The Mercedes-Benz plant illustrates a fundamental principle of corporate welfare: everyone else pays for economic incentives--either with higher taxes, fewer services or both.
To understand this, go
to the
To be sure, Mercedes is
not responsible for all these deficiencies.
Nevertheless, at the elementary school, principal David Thompson is an unabashed Benz booster. When the school needed extra buses to transport pupils to the ballet, Thompson said, Mercedes provided them. And when the car company learned the school was mounting a production of Hansel and Gretel, it dispatched several of its expats to help the pupils learn German songs. The experience made a lasting impression on the students. As Thompson put it, "They couldn't tell you your multiplication tables if you asked them. If you say, 'What's 9 times 7?', they probably have already forgotten it. But they can still sing those songs in German."
Does GM Mean General Movers?
Given the money politicians are willing to spend, it is no wonder companies have made their assets portable--game pieces that can be moved around the board of economic development. General Motors Corp. has played the game like a champion, a classic example of a company that has secured hundreds of millions of dollars in corporate welfare at the same time that it has eliminated thousands of jobs. And, according to business analysts, GM has to eliminate 50,000 more jobs if it wants to survive the next century.
In effect, the company
is in the process of auctioning its surviving jobs to the highest bidders in
the communities where it does business. Here's how it works: during the summer
of 1997, GM let it be known that it was considering a $355 million expansion of
an assembly plant in Moraine,
There was one problem. The story GM floated was not true. Company executives later apologized for any misunderstanding. Erroneous claims aside, Moraine agreed to exempt General Motors from taxes on $355 million worth of machinery, equipment and inventory for 10 years and to excuse the company from real estate taxes for 15 years on the planned $65 million building.
So how much did GM save? Moraine city officials will not say, but county officials estimate GM is off the hook for $30 million in real estate and personal property taxes. GM also put the touch on the county economic-development authority for a cash grant of $1 million.
GM extracted the
concessions at a time when the company's profits for 1995 and 1996 totaled
$11.8 billion. To put that figure in context, it would be enough money to run
the
One final twist: Moraine employees will be hired under a new, three-tiered wage scale, with workers starting at about $9 an hour. Once upon a time, the starting wage for such jobs was in the double digits. Nonetheless, Mayor Roger Matheny said that "this offers us job security and lets us know GM is going to be here for a long while."
Not necessarily. Other
communities have showered tax breaks on GM and its partners, assuming they
would create or at least retain jobs. They were wrong. Volvo-GM closed a
jointly owned plant (GM was the minority partner) in
In 1984 and 1988,
But in February 1992, GM
announced it intended to close Willow Run and move production to
In interviews with TIME,
GM executives say they merely do what everyone else does. Moreover, they say,
local and state governments often come calling on
them. As a GM official explained, when Saturn was conceived, it was a clean
sheet, a new type of plant representing a huge investment. Once it became
publicly known what GM was planning, he said, "we received proposals from
every state in the union except
Yet there had to be states that knew GM could not build there just for logistical reasons, he said. Nevertheless, government officials submitted formal proposals so they could tell their constituents they had at least tried. "[A politician] always wants to be perceived as someone who tried to bring home the bacon, even if the bacon doesn't arrive."
And that is where the real blame for corporate welfare rests.
As
--With reporting by Laura Karmatz and Aisha Labi, and research by Joan Levinstein
THE SCRAMBLE FOR JOBS
PLAYING THE ZERO-SUM GAME
If you have any doubt
that the war among the states to offer tax breaks and other economic incentives
is a zero-sum game that creates no jobs, consider the case of the Bagcraft Corp., based in
Six towns in
Neighboring
Not surprisingly, Baxter
Springs won out. In 1994, Bagcraft closed the
All this was cause for
celebration in Baxter Springs when, on
Let's hope not.
Baxter Springs did get
350 jobs, but Bagcraft did not create 350 jobs.
Roughly half the work force transferred from the
The bottom line for the company's payroll: in 1993 about 700 people were making bags and other paper products at four Bagcraft plants. According to a company spokesman, today that number is the same.
WHAT WAS PAID OUT
$15.8 million, including free real estate, a 10-year freeze on property taxes and a low-interest loan from HUD
HOW IT PAID OFF
It didn't. Bagcraft closed plants in
[SIDEBAR]
WHERE IT ALL BEGAN
In 1936, in the midst of
the great depression,
The first beneficiary was Real Silk Hosiery Mills Inc. The company, based in Indianapolis, Ind., employed 4,000 knitting-machine operators who turned out half a million pairs of hosiery weekly, which were peddled door to door across the nation by 11,000 sales reps. Hurt first by the Depression and then by a bitter strike in 1934, Real Silk was working its way back to solvency in 1936 when Mississippi came calling.
The town of Durant (pop. 2,500), a farming community with more sidewalks than paved streets, was offering to issue $25,000 in industrial-revenue bonds to buy land and erect a 15,000-sq.-ft. building, which it would lease to Real Silk for 25 years for all of $5 a year. In addition, Durant would waive five years of county taxes on the building and property taxes on the machinery. On top of that, the city would provide insurance, set up a training school and even erect housing for workers. In a front-page editorial that sounds eerily familiar, the Durant News crowed that the project was a great deal for the town. In a special election, the town's voters approved the bond issue, 330 to 19. The people of Durant were in the hosiery business.
At least for a while. Indeed, nine years later, in December 1946, Durant's citizens approved a second bond issue of $60,000 to expand the plant. At its peak, the Durant factory employed about 150 people. They worked three shifts daily, turning out 84,000 pairs of hosiery each week.
By the mid '50s, all that came to an end. Before the first bond was due to be paid off, Real Silk shut all its factories, including Durant, sold off the equipment and became an investment company. The lesson, one that has been lost on generations of mayors, Governors and Presidents, is that capital ultimately ignores such incentives. It seeks its highest reward as dictated by market forces, not political ones. The building that was to put Durant on the industrial map still stands--empty.
And
[SIDEBAR]
TIME WARNER
WE PLAY THE GAME TOO
Like most major corporations, Time Warner Inc., the parent company of TIME, has received millions of dollars in tax concessions or free services from federal, state and local governments over the years. The benefits include:
--A $2 million-a-year
exemption from
--A five-year freeze on
real and personal property taxes (a savings of $224,550) from
--A rebate of $168,800
from
Time Warner is based in
If Time Warner gets a
special deal from
And Other Perfectly
By Donald L. Barlett and James B. Steele
With reporting by Laura Karmatz and Aisha Labi, and research by Joan Levinstein
From her second-floor
offices bordering the sparkling
Sittig's
company represents hundreds of
It works like this:
A company sets up what
is called a foreign sales corporation. Companies can form FSCs
in 32 countries designated by Congress--among them
Just about every large
Like so many
corporate-welfare programs, this one isn't available to all companies. It goes
only to those that export. The truth is, most large corporations that use the
FSC break are already robust exporters and don't need much encouragement to
ship abroad. They would export with or without the tax break. In this decade
alone, this single corporate-welfare program has cost
FSCs
are but one of scores of corporate-welfare programs run
out of
Sometimes the welfare
benefits extend beyond the companies to include their executives. The next time
you fly and pay the 8% federal excise tax on airline tickets, plus a $2
surcharge to pay for air-traffic-control services, think of
Frequent passengers on company planes are members of the House and Senate, Democrats and Republicans both--the people who make corporate welfare possible. In fact, lawmakers seem to end up on the corporate jets of the very same businesses that contribute to their campaigns or seek regulatory favors. Like Jesse Helms, the five-term North Carolina Republican Senator, who flies about in R.J. Reynolds Tobacco Co. planes and often takes to the floor of the Senate to support the tobacco industry. Under congressional rules, House and Senate members are permitted to fly on company planes if they pay the equivalent of first-class airfare on a regularly scheduled airliner. That fee is but a fraction of the actual cost to fly a corporate jet. And even that does not begin to cover the air-traffic-control and other services provided by the Federal Government.
Not all the Federal Government's corporate-welfare programs started out as welfare. Some began as foreign aid and turned into long-term annuities for corporate beneficiaries. Typical is Bechtel Group Inc. (1997 revenues: $11.3 billion), the global construction and engineering giant owned by the Bechtel family. So far in the 1990s, Bechtel has received more than $2 billion in corporate welfare in the form of government insurance, loans and grants, in addition to foreign-aid contracts, one of which is now nearly 10 years old.
Contracts for what?
To assess the feasibility of using landfill gases to generate power in Brazil; to develop an electric-vehicle demonstration program for India; to improve energy efficiency in Egypt, according to a company brochure, by "encouraging Cairo's 2,500 bakeries to switch from filthy fuel oil to cleaner, more efficient natural gas." Nice, but should American taxpayers be paying for it?
Sometimes in its zeal to
dole out corporate welfare, the Federal Government finds itself working at
cross-purposes. In 1997 a government agency issued a $29 million insurance
policy to protect a new garment-manufacturing plant built in
Paying A Price
For Polluters
MANY OF
By Donald L. Barlett and James B. Steele
With reporting by Laura Karmatz and Aisha Labi, and research by Joan Levinstein
It was about 5 o'clock on Thursday afternoon in August 1996, when a dense gray cloud descended over Route 73, a two-lane road near Geismar, La., cutting visibility to zero and triggering a rear-end collision. As State Trooper Ross Johnson, a fresh-faced, 25-year-old Marine Corps veteran, drove toward the accident, he noted that every car headed his way had headlights on and windshield wipers flapping. When Johnson got out of his patrol car, he suddenly got hit by the heavy smell of ammonia. He ushered the drivers of the two cars out of the cloud and into a guard shack at an entrance to the Borden Chemicals and Plastics plant. "The fog was so dense I couldn't see the road," one driver told him. A plant safety officer had notified authorities about the chemical release, but had assured them "there was no off-site impact." By then, Johnson recalled, "there was a fog as far as the eye could [see]."
After Johnson left the scene, his "throat was really starting to clench, my eyes were starting to burn, and my skin was really starting to itch." Johnson later learned that the cloud was a witches' brew of toxic chemicals: ethylene dichloride, vinyl-chloride monomer and hydrogen chloride.
It had been just another day at the Borden Chemicals and Plastics plant. A month later, half a dozen similarly hazardous chemicals were released but remained on plant grounds. The following year, in July 1997, vinyl-chloride monomer and ammonia escaped from the plant and forced the closing of Route 73. In July 1998, a cloud of hydrochloric acid spewed out, shutting down roads in the area for about 20 minutes.
Back in 1994, at the
request of the U.S. Environmental Protection Agency (EPA), the Justice
Department filed a lawsuit against Borden Chemicals, accusing the company of a
series of environmental-law violations. Among the charges: the company stored
hazardous waste, sludges and solid wastes illegally;
failed to install containment systems; burned hazardous waste without a permit;
neglected to report the release of hazardous chemicals into the air;
contaminated groundwater beneath the plant site (thereby threatening an aquifer
that provides drinking water for residents of Louisiana and Texas); and shipped
toxic waste laced with mercury to South Africa without notifying the EPA, as
required by law. Last March, on the third day of what was expected to be a
three-week trial, the company signed a consent agreement to settle the case.
Without admitting any wrongdoing, Borden Chemicals agreed to pay a fine of $3.6
million--the largest in
Don't weep for Borden
Chemicals. It was able to pay the fine with just a couple of years' savings
from abated taxes. For over the past decade, while the plant has been fouling
the land, water and air in
And who are the real beneficiaries of this welfare? One is the Wall Street buyout firm of Kohlberg Kravis Roberts & Co., one of whose affiliates "manages and controls the activities of the company," according to filings with the U.S. Securities and Exchange Commission.
Borden Chemicals, which years
ago was part of Borden Inc., the milk-and-dairy-products company, is typical of
scores of companies in Louisiana that receive tax abatements at the same time
they contribute to the state's polluted environment. That pollution, in
The Federal Government,
for example, has spent $130 million so far to clean up the
As is
so often the case with environmental pollution, practices once deemed safe turn
out years later to be hazardous. So it was with the PCBs used by General
Electric Co. and other manufacturers of transformers. Now cost estimates for
cleaning up GE's pcb
contamination in the
Add to these cleanup bills yet another cost from pollution: the billions spent on health care to treat conditions ranging from black-lung disease to asbestosis. These costs are yet to be counted; it often takes years, even decades, to document links between chemicals and other products and deadly or debilitating diseases.
A LITTLE START-UP CALLED EXXON
To better understand the
link between corporate welfare and pollution, let's take a closer look at
Louisiana, a state that hands out tax breaks to companies that have been
repeatedly fined or cited for discharging hazardous chemicals or for generating
large amounts of toxic waste.
Thus far in the 1990s, a
TIME analysis shows, the state has wiped off the books $3.1 billion in property
taxes alone. That's 14 times the amount the state excused in the 1960s and
doesn't include all the other types of tax breaks granted to corporations. That
makes Louisiana No. 1 in terms of subsidies per capita. Some of the big
beneficiaries include Lucent Technologies, Uniroyal
Chemical, Willamette Industries, PPG Industries and Georgia Gulf Corp. Paul Templet, a professor of environmental studies at
Plenty of states pass
out tax breaks, of course, even to polluters whose mess taxpayers must later
clean up. But
So what are some of
these "beginning" businesses? Over the past 10 years the state
canceled $213 million in industrial property taxes owed by Exxon Corp., a
company that traces its origins back 116 years. It eliminated $140 million in
taxes owed by Shell Oil Co. affiliates, a business whose roots in the
While government
officials across the country publicly embrace tax-abatement programs like
But he is quick to say
that
TODAY'S LESSON: RATS DO BITE
When government
distributes handouts to select companies, someone else pays, either in higher
taxes or in reduced services. Among the nation's most innocent victims:
children who attend public schools. In some
Cindy Jones, an
assistant principal, says, "It's astonishing... that people actually have
to come to work and to learn in this kind of environment." Adds John
McCann, principal of the 1,000-student
Sometimes the flooding occurs at inopportune moments, like the time students sat down to take a state-required test that determines whether they will graduate. "We went to classrooms vacuuming out with those big wet vacs," McCann recalled. "The kids were supposed to be trying to take an exam to see if they can get out of school. Well, we had to stop [the test]...and we had to move some kids out of [the] classrooms."
McCann's school was built long ago on a geological fault and is now cracking--literally. The auditorium, band room and choir room are off limits because they have been condemned.
None of this is to
suggest that corporate welfare alone is responsible for the plight of the
state's schools. While it certainly is one of the contributing factors, there
are others. For example, at the same time the state passes out tax breaks
wholesale, it does not contribute one cent to building construction or other
capital needs of schools, as many other states do. All of which helps explain
why
As if conditions inside
"Certain schools are in wind patterns from chemical plants, and they have as part of their safety drill what's called shelter-in-place, where all the windows in the buildings must be shut, the doors sealed in a special way. No one can go outside. They stay right there until it's cleared.
"Well, we had a barge overturn up on the north end of the river last year that was about a three- or four-day emergency, and we had kids sheltered in place for hours and hours and hours and had to wait for the wind to shift so we would be permitted to take the buses in and get out as many children as we could before the wind pattern changed again. Amazing. I thought to myself, I didn't know when I took this job that I would be issued a hard hat and a gas mask."
VERY BLACKENED REDFISH, ANYONE?
Each year the EPA
compiles a catalog of the toxic chemicals discharged into the environment.
Congress ordered the accounting after a deadly cloud of chemicals escaped from
a Union Carbide plant in
Let's look at five companies in Louisiana that have earned spots on the EPA's list of the Top 50 companies measured in volume of chemical releases across the country. The five also happen to be beneficiaries of direct corporate welfare.
--Cytec Industries Inc.
ranked No. 1 in the release of toxic chemicals in
--IMC-Agrico Co., at 12.8 million lbs., placed No. 3 on the EPA
list of largest generators of toxic chemicals in
--Rubicon Inc., a Geismar,
--Monsanto Co., the
global chemical and pharmaceutical company, holds fifth place on the
--Angus Chemical Co.
placed No. 6 on the
In addition to saving $100 million in property taxes, the five companies--along with thousands of others--have profited from the failure of federal and local governments to impose more stringent controls on the release of lethal chemicals. Count it, at the very least, in the tens of millions of dollars.
TIME
Special Report/Corporate Welfare
Sweet Deal
WHY ARE THESE MEN SMILING? THE REASON IS
IN YOUR SUGAR BOWL
By Donald L. Barlett and James B. Steele
Occupying a breathtaking
spot on the southeast coast of the
A thousand miles to the northwest, in the Florida Everglades, the vista is much different. Chemical runoff from the corporate cultivation of sugar cane imperils vegetation and wildlife. Polluted water spills out of the glades into Florida Bay, forming a slimy, greenish brown stain where fishing once thrived.
Both sites are the by-product of corporate welfare.
In this case the beneficiaries are the Fanjul family of Palm Beach, Fla. The name means nothing to most Americans, but the Fanjuls might be considered the First Family of Corporate Welfare. They own Flo-Sun Inc., one of the nation's largest producers of raw sugar. As such, they benefit from federal policies that compel American consumers to pay artificially high prices for sugar.
Since the Fanjuls control about one-third of Florida's sugar-cane production, that means they collect at least $60 million a year in subsidies, according to an analysis of General Accounting Office calculations. It's the sweetest of deals, and it's made the family, the proprietors of Casa de Campo, one of America's richest.
The subsidy has had one other consequence: it has helped create an environmental catastrophe in the Everglades. Depending on whom you talk to, it will cost anywhere from $3 billion to $8 billion to repair the Everglades by building new dikes, rerouting canals and digging new lakes.
Growers are committed to pay up to $240 million over 20 years for the cleanup. Which means the industry that created much of the problem will have to pay only a fraction of the cost to correct it. Government will pay the rest. As for the Fanjuls, a spokesman says they are committed to pay about $4.5 million a year.
How did this disaster happen? With your tax dollars. How will it be fixed? With your tax dollars.
It is not news that sugar is richly subsidized, or that the Fanjuls have profited so handsomely. Even as recently as 1995, when Congress passed legislation to phase out price supports for a cornucopia of agricultural products, raw sugar was spared. Through a combination of loan guarantees and tariffs on imported sugar, domestic farmers like the Fanjuls are shielded from real-world prices. So in the U.S., raw sugar sells for about $22 a pound, more than double the price most of the world pays. The cost to Americans: at least $1.4 billion in the form of higher prices for candy, soda and other sweet things of life. A GAO study, moreover, has estimated that nearly half the subsidy goes to large sugar producers like the Fanjuls.
A spokesman for Flo-Sun, Jorge Dominicis, said the company disagrees with the GAO's estimate on the profits the Fanjuls and other growers derive from the program.
"That is supposed to imply somehow that our companies receive $60 million in guaranteed profits," he said, "and that is flat-out not true. Our companies don't make anywhere near that kind of profit."
Dominicis, like other proponents of the sugar program, contends that it doesn't cost taxpayers a penny and is not unlike government protection of other American industries. "If our [sugar policy] is corporate welfare, which I don't believe it is, then all trade policy is corporate welfare," he says.
Flo-Sun is run by four Fanjul brothers, Alfonso ("Alfie"), Jose ("Pepe"), Andres and Alexander. Their family dominated Cuba's sugar industry for decades, and they came to this country with their parents in 1959, after Fidel Castro seized power. The Fanjuls arrived just as a U.S. Army Corps of Engineers project to control the flow of water in the Florida Everglades made large-scale development possible. The total acreage planted in sugar cane there soared--from 50,000 acres in 1960 to more than 420,000 today.
Within that swampy paradise lies yet another subsidy. Each year, according to a 1997 estimate, the Army Corps of Engineers spends $63 million to control water flow in central and south Florida. This enables growers to obtain water when they need it or restrain the flow during heavy rains. Of the $63 million, the Corps estimates $52 million is spent on agriculture, mainly sugar-cane farmers, in the Everglades.
Even with the additional
production from the Glades, propped up by price supports, the U.S. can't
produce all the sugar it needs. The Federal Government rations access to the
lucrative U.S. market by assigning quotas to 40 sugar-producing nations, most
of them developing countries. And, remarkably, the Fanjuls
have found riches here too. Every year, the country that receives the largest
sugar quota is the Dominican Republic. With a per-capita income of $1,600 a
year and an unemployment rate hovering around 20%,
that
Whether they sell sugar from their holdings in the Everglades or from their mill in the Caribbean, the Fanjuls are guaranteed a U.S. price that is more than double anywhere else in the world. As might be expected, having it both ways has propelled the Fanjuls into the ranks of the richest Americans. Their wealth is counted in the hundreds of millions of dollars.
And although they appear frequently in the society pages, the Fanjuls won't be caught dead in the financial section. As Emilia Fanjul, the wife of Pepe, once confided to a society reporter, "We like to be private about the business."
Depending on the season, the Fanjuls can be found shooting game in Scotland, skiing in Switzerland or relaxing at their spectacular Casa de Campo. These 7,000 acres overlooking the sea have long been a favorite playground of the wealthy. But Palm Beach is still their real home, and Florida is still the heart of their financial empire. They now farm an estimated 180,000 acres of cane-producing land in the Everglades--43% of the total--making them one of the two-largest sugar growers in the state.
For decades, this region has been home to one of the worst jobs in America--hacking cane with a machete. Until the work was mechanized in the 1990s, the growers had to bring in thousands of cane cutters from the Caribbean every season. Yet in preserving the subsidy that has made millionaires of the Fanjuls, Congress has cited the fact that it saves American jobs.
Migrant-labor organizations and legal-aid groups in Florida have long waged an ongoing battle with the Fanjuls and other growers over the abysmal conditions. Greg Schell, an attorney with the Migrant Farmworkers Justice Project in Belle Glade, Fla., contends that of all the growers, the Fanjuls have treated their workers the worst. "They are in a class by themselves," he said. A lawsuit seeking back wages and benefits is expected to go to trial next spring.
Every few years, critics of the sugar program attempt to roll back the subsidy that has enriched the Fanjuls and kept sugar prices high. And every time they fail, largely because of the power of the sugar lobby, which includes not just large growers like the Fanjuls but thousands of small sugar-beet farmers in other parts of the nation.
Though by no means the largest special interest in Washington, the sugar lobby is one of the most well-heeled. And among growers, the Fanjuls are big givers. Family members and corporate executives have contributed nearly $1 million so far in this decade, dividing the money fairly evenly between political parties.
This knack for covering all political bases carries all the way to the top of the Fanjul empire. Alfonso Fanjul served as co-chairman of Bill Clinton's Florida campaign in 1992. His brother Pepe was national vice chairman of finance for Bob Dole's presidential campaign in 1996 and was host to a $1,000-a-head fund raiser for Dole at his Palm Beach mansion. After Clinton's 1992 victory, Alfie was a member of the select group invited by the Clinton camp to attend the President-elect's "economic summit" in Little Rock, Ark.
Careful readers of Kenneth Starr's impeachment report to Congress will note that on Feb. 19, 1996, Alfie called President Clinton while the President was closeted with Monica Lewinsky in an emotional meeting in the Oval Office. After breaking the news that "their intimate relationship" would have to end--temporarily, as it turned out--the President returned Fanjul's call; Lewinsky left. The two spoke for 22 minutes. The topic: a proposed tax on sugar farmers to pay for the Everglades cleanup. Fanjul reportedly told the President he and other growers opposed such a step, since it would cost them millions. Such a tax has never been passed.
That's access.
TIME
Special Report/Corporate Welfare
Five Ways Out
THERE ARE SOLUTIONS TO THE CORPORATE WELFARE MESS--BUT WHO GOES FIRST?
What's a mayor to do?
A major employer wants to expand or build anew. Rather than simply doing so, the corporation stirs up a bidding war to see which city and state will pony up the most cash, loans and tax breaks in the form of economic incentives. If you're the mayor and the facility means jobs and income for your town, do you play hardball and risk losing the plant and the jobs? Or do you give in and hand out tax money, only to face a never-ending string of similar demands from others?
Right now it's not much of a debate: the mayors cave.
The eagerness with which many states and cities routinely cancel taxes and distribute free services and grants to corporations puts enormous pressure on every other public official to do the same--even those who don't want to.
TIME has found many public officials deeply upset at the ultimate cost of the giveaways to their communities. Inevitably, tax rebates to a selected few lead to higher taxes for others and to cutbacks in essential services.
Can anything be done to stop the inequities? Absolutely.
But first, forget about
cooperative agreements among states to stop the war of incentives. They've been
tried, and they don't work. In October 1991,
Next, in January 1994,
But then, in September
of that year, in what a deputy of Giuliani's called a "shameless
raid,"
Today, seven years after
the first cease-fire, there isn't even a pretense of a truce. The latest poker
game revolves around the new home of the New York Stock Exchange. Now in
cramped quarters on Wall Street, the exchange has hinted that cheaper
Which brings us to:
Solution No. 1 for
ending corporate welfare at the state and local level: the levying of a federal
excise tax on incentives. Under this proposal, Congress would enact a law
imposing a tax equal to the value of the economic incentives granted to a
company. In other words, if
"You have to make
the tax confiscatory, a 100% tax, to take away the incentive," says Arthur
J. Rolnick, senior vice president of the Federal
Reserve Bank of
The Federal Government has the authority to impose such a tax under the commerce clause of the Constitution, which gives Congress the power "to regulate Commerce with foreign nations, and among the several states."
That doesn't mean it would be easy. There would be strong opposition from the corporate-welfare bureaucracy: the tens of thousands of economic-development specialists, consultants, lawyers, accountants, conference planners and others who earn their living by giving away taxpayer dollars. Accounting and consulting firms in particular, says Ohio State Senator Charles Horn, work "both sides of the fence." They help communities dream up incentive programs, then bring them clients to collect the incentives.
What happens if Congress lacks the will?
Solution No. 2 A lawsuit
to have incentives declared unconstitutional. Legal scholars believe the practice
violates the Constitution's commerce clause. Indeed, the Supreme Court has said
as much in several cases. In 1977, for example, the court struck down a
Even groups that usually
oppose federal oversight of local affairs are calling for it in this case. The
nonpartisan John Locke Foundation, a libertarian think tank in
Hood says it's personally "troublesome" for him to call for a federal solution, but he and others in the foundation have come to believe it's the only way to end state subsidies to favored businesses.
Corporate welfare at the
state and local level would end if either the Locke Foundation's proposed
lawsuit succeeded or Congress accepted the suggestion of the Minneapolis
Federal Reserve's Rolnick and enacted an excise tax.
But what about all the incentives the Federal Government passes out? Many
members of Congress, after all, build their careers on government handouts to
corporations, which add up to two weekly paychecks for every working person in
Solution No. 3 Creation of a special commission that would study federal programs and propose which should be scrapped. That list would go to Congress, which would be forced to vote either to kill or preserve the programs listed.
In 1997, Senator John
McCain of
Of course, any such effort will be greeted with stiff opposition from yet another entrenched bureaucracy. Those are the agencies, departments and special-interest groups that profit from the existing system. There would be a spirited fight led by large corporations to preserve the Exim Bank, the Overseas Private Investment Corp. and the Foreign Sales Corporations, to name just three.
Solution No. 4 Shut off
the flow of low-cost loans from the Department of Housing and Urban Development
that have helped fuel the competition to snag companies. These loans date from
the Housing and Community Development Act of 1974 and were aimed at
"eliminating slums and blight." Today, TIME has found, HUD loans help
bankroll such projects as a waterfront restaurant in
And if these four solutions are rejected?
Solution No. 5 is rooted
in what has become the American way of late: sue. That's the course advocated
by Dwight D. Brannon, a
The company is Hobart
Corp., part of an international conglomerate with sales of $2.4 billion in
1997.
During a hearing in the lawsuit pending in U.S. District Court in Dayton, the company's lawyer explained it this way: "Every action [Hobart] has taken is motivated by sound economic or operational rationale."
Exactly. And until governments figure out a way to end the practice, corporate welfare will flourish.