Helping Companies Grab All They Can Get

By Charles M. Sennott, 07/07/96

WESTBOROUGH - A secluded, hilltop campus here was once a state reform school for boys.

Now the institutional brick buildings house the Massachusetts Technology Collaborative - a quasi-state agency that critics say is a classic example of entrenched corporate welfare.

Supporters call the collaborative an innovative ``partnership'' between business and government. But while it is clear that the companies and those who run the collaborative benefit, it's less clear how the taxpayers do.

Some high-tech companies that rely on federal subsidies for product research and development, end up shipping the resulting manufacturing jobs overseas. Other companies that create new technology, often are takeover targets of Fortune 500 corporations. That can mean sizable profits for entrepreneurs, but few new jobs.

Collaborative officials say these federal programs promise long-term results and taxpayers should be patient. But for now, some of these programs are at best high-risk investments. Take for example the Technology Reinvestment Project, under which Massachusetts companies received about $500 million during 1993 and 1994. According to the collaborative's own accounting, the project ``directly'' created about 100 jobs. That comes out to about $5 million per job.

The collaborative is an initiative of Massachusetts Technology Park Corp., an independent state authority created in 1982. It has a powerful board of directors and the strong support of William F. Weld, who has praised the collaborative for playing a ``vital role'' in assisting the high technology community.

The collaborative gets its funding by leasing to Taunton-based Kopin Corp. a 70,000-square-foot technology lab and fabrication facility, built by the state in the early 1980s. The $1 million-a-year lease of the state-owned facility is considered far below market value and a total savings of as much as $400 million in construction costs to Kopin, which uses the space to do advanced development and some production of its flat panel displays for portable computers and virtual reality headsets.

Lease money pays the salaries of collaborative executive director Joseph Alviani, who earns $140,000 a year, and a dozen other executives who help Massachusetts companies access millions of dollars in federal funding.

Amid this partnership between government and business are some puzzling relationships. Consider the collaborative's Robert Kispert. He heads a division called FEDTech, designed to help companies tap the $1 billion a year Small Business Innovative Research program. But Kispert admits he also has consulting contracts from Foster Miller Inc., a Waltham company that is the leading recipient of SBIR money in the country. Foster Miller has received more than $40 million over the last 10 years to develop a variety of products which it, in turn, sells.

Kispert sees no conflict of interest in his dual role as a representative of a quasi-state agency and a paid consultant to a company that stands to benefit from that agency.

But Ann Markusen, director of Rutgers University's Project on Regional and Industrial Economics, which has done extensive research on the issue of government assistance to the high tech and defense industries, says: ``It all sounds like a kind of corporate welfare ponzi scheme.''

``In a lot of states this has become a racket. It makes me furious that politicians, from in-state and in Washington, are doing everything they can to help companies feed on corporate welfare,'' Markusen says. ``They all want to make sure the businesses in their districts get their share, and in the meantime the country as a whole has to make tough decisions like cutting more programs for poor people.''

In addition to its discounted lease, Kopin also receives roughly $10 million a year through various federal programs, some of which the collaborative has helped it access. Despite this sizable public investment in the company, Kopin's chief executive concedes he will be shipping a larger and larger percentage of its jobs overseas.

John Fan said the state and federal funding ``formed the underpinnings for us to grow our commercial activities.''

Still, he acknowledges Kopin already has shifted roughly 30 percent of its manufacturing to Taiwan and Thailand. ``As we grow, the ratio will increase because the manufacturing costs are better there.

``It is a global economy now, and we are going to be competitive. The brainpower is here. So we can pay $18 an hour for someone's brain ... and much less for someone to work with their hands over there.''

When asked if he feels a responsibility to keep manufacturing jobs in the community that has helped his company flourish, Fann replied: ``Nobody wants to be tied down. But if it's good for us, we'll stay. That is natural, right?''

Lionel S. Johns, deputy director of the US Office of Science and Technology, concedes the lack of loyalty by companies that rely on government funding is ``a tough issue.''

But as one of the White House's leading specialists on federal technology transfer, Johns believes the Advanced Technology Program and others like it are essential. The US, he says, is going to have to find ways to keep companies here through incentives, not by getting angry that they go to Taiwan.

``This is a very complicated worldwide game in which this country's economic prosperity is at risk. These guys (Taiwan and other nations offering incentives to lure American businesses) are playing hardball and we are playing sandlot,'' Johns says. ``We end up playing a politicized game with the words `corporate welfare.' If we continue to cut federal R&D,we are going to undermine the technology infrastructure of our economy and then we will ultimately undermine our entire economy.''

But critics like Richard Kogan, a senior analyst for the Washington-based Center on Budget and Policy Priorities, which has tracked federal subsidies to high-tech companies, says: ``I tend to be skeptical of the investment, because the federal money is mostly going to companies that already have a lot of their own money to invest in product development.''

The collaborative's Alviani, who served as Secretary for Economic Affairs under Gov. Michael Dukakis, disagrees. He points out that many recipients of Adanced Technology Program money are small companies. But he concedes that many larger corporations, such as Digital and Raytheon, have benefited from direct funding and partnerships with smaller companies.

The collaborative has helped Massachusetts companies win millions of federal dollars through ``how-to'' seminars and brochures on Washington's maze of programs.

Some federal programs have had questionable results in terms of job creation. The Technology Reinvestment Project, for one, has done so poorly that Congress plans to phase it out. In another, the Advanced Technology Program, the collaborative estimates Massachusetts businesses either led or participated in projects worth $90 million from 1990 to 1994. Nearly 15 percent of the program's money goes to Massachusetts companies, second only to California.

A June 1995 report by the collaborative to assess ``ATP and Its Impact on the Economy'' stated: ``The most promising benefit of the program is undoubtedly the number of potential hires resulting from successful ATP projects.''

But if that is the gauge of success, then by its own estimation it would appear to be failing. The report states that ``on average, companies increased employment by 8 people. Over 150 jobs have been (directly) created as a result of the awards. Several hundred jobs have been indirectly created.''

That comes out to $600,000 for each job directly created by ATP. Asked if that is a sound investment in the economy, Alviani replied: ``It's a fair question. It's very hard to monitor the return on these investments. But you have to keep in mind the fact that there has not been a sufficient amount of time to reach the concrete return on investments. ... We are investing money up front for the long-term growth of the economy.''

This story ran on page 8 of the Boston Globe on 07/07/96.

The $150 Billion `Welfare' Recipients: U.S. Corporations: First of three parts

By Charles M. Sennott, 07/07/96

It comes down to priorities.

And to understand the choices made every day by the federal government on who should benefit from taxpayers' money, consider these stark examples:

Walt Disney Corp., whose profits in 1995 exceeded $1 billion, received $300,000 in federal assistance last year to perfect fireworks displays. But Joseph and Phyllis Fagone of East Boston, who are in their mid-80s and struggling on a fixed income, were among 1,000 state residents whose federally funded fuel assistance ran out before Christmas.

Kopin Corp., a Massachusetts technology company, has received $30 million in federal subsidies the last four years and tens of millions more in savings through the lease of a state-owned laboratory. Despite this huge public investment, the company plans to send more and more of its new manufacturing jobs overseas. Meanwhile, it looks like Derek Davis, 17, of Roxbury will be among the thousands of Boston youths who won't get summer jobs due to limited federal and state funding. He was hoping to save money for college.

Every year, an estimated $150 billion - in the form of direct federal subsidies and tax breaks that specifically benefit businesses - is funneled to American companies. Critics call it ``corporate welfare.''

The $150 billion for corporate subsidies and tax benefits eclipses the annual budget deficit of $130 billion. It's more than the $145 billion paid out annually for the core programs of the social welfare state: Aid to Families with Dependent Children (AFDC), student aid, housing, food and nutrition, and all direct public assistance (excluding Social Security and medical care).

Now, a growing number of voices from both ends of the political spectrum question whether it is fair to provide such help to businesses while cutting back on aid to poor people - questions which at a minimum seek to frame corporate assistance as the missing piece of the national debate on welfare reform.

Stirrings on the corporate welfare issue have been set in motion by an unlikely coalition of politicians, policy makers and think tanks, ranging from Labor Secretary Robert Reich to Republican presidential candidate Pat Buchanan; from liberal Democrat Sen. Edward Kennedy to conservative Republican Sen. John McCain; and from the libertarian Cato Institute to the Progressive Policy Institute.

They feel that if the White House and Congress were sincere about achieving a balanced budget, they could begin by cutting billions of dollars in direct subsidies to giant multinational companies. The subsidies range from $1.4 billion annually in price supports for large sugar farming interests; to nearly $2 million to help McDonald's market Chicken McNuggets in the Third World; to $20,000 for golf balls that defense manufacturer Lockheed Martin billed the federal government as an ``entertainment'' expense.

``Americans have been asked to tighten their belts across the board, from families who receive food stamps to our men and women in uniform,'' said McCain of Arizona, who has challenged fellow Republicans on the issue. ``We are morally obliged to ensure that the corporate sector shares in the sacrifice. The public cannot understand why we are shelling out billions of dollars to powerful corporate interests when we simply cannot afford such largesse.''

Robert Shapiro, an analyst for the Progressive Policy Institute, a think tank of the centrist Democratic Leadership Conference, said, ``The hypocrisy on corporate welfare is glaring. We are in an era in which the Congress was able to find nearly a trillion dollars in cuts over seven years, the bulk of it from social services to the poor. But less than 2 percent of those cuts came from subsidies to industry.''

``I don't blame the businesses for trying to get whatever they can. But I do blame the government for being willing to sacrifice the tax dollars of average people to satisfy these well-heeled and well-organized special pleaders,'' adds Shapiro, who has researched federal subsidies. ``We have encrusted the economy with layer upon layer of these subsidies to the point where it is having a profound impact on the economy and the allocation of limited resources.''

Said Gloria Larsen, who until recently was Gov. William F. Weld's secretary of economic affairs and served as deputy director of the Federal Trade Commission under President Bush: ``The personal responsibility argument is so readily tied to social welfare. Now it is time that it is tied to corporate welfare.''

Talk, but little action.

Despite such sentiments to cut back, corporate assistance continues. President Clinton's administration, through Labor Secretary Reich, has used the bully pulpit against these expenditures, but done relatively little to actually prevent them. In some instances, Clinton has even sought to increase subsidies. The Republican-controlled Congress has been equally recalcitrant about any proposed changes to tax provisions that steer billions of dollars to big business. And in Massachusetts, Weld has endorsed an active policy of subsidizing business through trade missions, support services, tax breaks and state offices that guide businesses, big and small, on how to tap federal money.

Corporate welfare goes virtually unmentioned in political campaigns, where candidates like Clinton and Bob Dole square off on how to reform social welfare. Neither has proposed ``two years and out'' for corporations receiving federal assistance. And only recently has there been any policy debate on ``personal responsibility'' of corporations to the communities where they profit and receive public money.

Corporate welfare persists largely because of parochial politics. State by state, politicians are applauded for bringing home corporate pork with little regard for its drain on the national economy.

``Corporate welfare is a fashionable phrase inside the Beltway,'' says Sheila Krumholz, research director for the Washington-based Center for Responsive Politics, which tracks campaign finance issues. ``But when it comes to biting the hand that feeds them, politician after politician is walking away from their rhetoric. They cave in to each individual subsidy, every one of which ... can be defended and rationalized.''

A Boston Globe examination of the issue has found:

A host of questionable federal giveaways, such as the $200 million a year Market Promotion Program which over the last two years gave Massachusetts-based Ocean Spray some $700,000 and California-based Gallo about $4 million to market ``Cranapple'' juice and wine all over the world. Hundreds of thousands of dollars more were given to Concord-based Welch's and a Lynn-based company that makes marshmallow Fluff.

While many federal programs have the stated purpose of creating jobs, some subsidized companies are downsizing. AT&T,General Electric, Raytheon and Digital - among many large companies receiving federal assistance - have laid off about 100,000 workers among them. And defense contractor Lockheed Martin is expected to receive $1 billion to help defray the cost of its $10 billion merger, including more than $16 million in pay and performance bonuses for top executives while nearly 50,000 of the conglomerate's employees have been laid off in the last five years.

Government subsidies to high-tech industries have resulted in tens of thousands of jobs going overseas. Federal officials and corporate chiefs boast about the promise of high-paying jobs created by ``partnerships'' with government. But they say little or nothing about the fact that many of the jobs created end up in Ireland, Malaysia, Singapore or Thailand because of low labor costs and taxes. The roughly $100 million a year Sematech consortium helped Digital Equipment Corp. and other semiconductor companies, but Digital still has shifted part of its workforce and capital to Ireland and Singapore.

There is little hard data and even less oversight of many federal programs, especially in the technology and science industries, to assess whether they are accomplishing their stated goals of creating jobs and stimulating the economy. In the Advanced Technology Program, for example, Massachusetts companies participated in $90 million worth of projects. But a state-funded study found that only 150 jobs were directly created as a result of the projects.

A rush by the federal government and states to accommodate business with favorable tax rates has created a historic shift in America's tax burden. After World War II, the nation's tax bill was roughly split between corporations and individuals. But after years of changes in the federal tax code and international economy, the corporate share of taxes has declined to a fourth the amount individuals pay, according to the US Office of Management and Budget. A parallel trend has occurred at the state level. In Massachusetts, corporations pay $900 million, or 8 percent, of the $13 billion in state tax revenue annually.

Many business leaders defend the tax breaks and subsidies they receive as necessary to create a ``level playing field'' in the global marketplace. Industries in most of Europe and Asia, they note, are heavily subsidized by their governments. Proponents of government partnerships argue that not just big business, but thousands of small startup companies rely on federal dollars to research and develop products with potential for great public benefit, products that would otherwise go unfunded. It is an issue of great import to Massachusetts, which by many accounts is the most dependent of all 50 states on federal research dollars. The hundreds of millions of dollars that pour into the state every year are the lifeblood of the commonwealth's universities, hospitals and high tech firms.

Culture of dependency

Defenders of corporate subsidies and tax benefits also point to technological breakthroughs, such as the Internet, created through federal research and development programs and largely paid for by the US Defense Department. Others point out that because of agribusiness subsidies, Americans pay less for food than citizens of most other industrialized countries.

Joel Johnson, vice president of the Aerospace Industries Association and a top lobbyist for a business sector which every year receives billions of dollars in subsidies and tax breaks, defends the flow of public money to profitable companies.

``There are business leaders and political leaders who recognize that the only way the government - whether it is the Defense Department or the Energy Department - can afford the new technology is if it works with business,'' he says. ``But that is a partnership, not welfare.''

Still, critics insist that if social welfare has created a ``culture of dependency,'' so too has corporate America grown reliant on federal help. Many benefits seem to remain entrenched in legislation for decades, even though their purpose has become anachronistic. Many agriculture subsidies, for example, were adopted as post-Depression safeguards against famine.

Putting a precise dollar figure on corporate welfare depends on how it is defined. The Cato Institute considers corporate welfare to be the 125 Cabinet-level programs that provide direct subsidies to individual industries. Cato's estimate, generally regarded as conservative, is that such subsidies total $75 billion in 1996.

Ralph Nader's Center for the Study of Responsive Law offers a more expansive defnition that includes federal tax breaks, many of which are designed to funnel money to specific industries. The center estimates total corporate aid at $167 billion annually, a figure most experts consider high.

The big money in corporate welfare comes in the subsidies to agribusiness, the oil industry and energy plants. Comparatively, Massachusetts companies are smaller players, but the commonwealth is considered the leading recipient per capita of federal research and development money, specifically subsidies to the defense, technology, science and medical industries.

Historically, the movement of technology from federal laboratory to the marketplace was commercial kismet. It was often a byproduct of defense research, but the government played a passive role. Market forces and competitive corporations took the federal research and turned it into everything from television to Tang.

But there has been a profound change in the seven years since the end of the Cold War. Now, Washington wants to play an active role in bringing government research into the marketplace. This has spawned an array of programs, including Small Business Innovative Research, the Advanced Technology Program and the Technology Reinvestment Program - all aimed at creating partnerships with business. In total, these partnerships with government provide an estimated $6 billion a year to industry giants in what critics have dubbed ``techno-pork.''

Some programs, such as Cooperative Research and Development Grants, go largely unregulated, with little expert evaluation of the validity of the proposed work and great criticism of the process used to select commercial partners. Although the Office of Science and Technology keeps track of the number of projects, critics point out there is almost no accounting of the return on this investment, or whether it is in the public interest.

The Department of Energy's own advisory board reported in February 1995 that Cooperative Research and Development Grants, while valuable, leave federal laboratories ``vulnerable to charges that the selection process is flawed and that the competitive playing field is unfairly titled toward the labs' chosen partners.''

In other words, the government ends up picking winners and losers in the marketplace. Tom Glynn, president of Maine-based Lighthouse Software is angry that the federal government has given about $40 million to help Icon Industrial Controls Corp. of Louisiana develop a product that Lighthouse already manufactures.

Says Glynn, whose company makes software to control robots in the machine tool industry, a growing international market: ``I'm furious as a businessman and I'm furious as a taxpayer that the federal government is funding my competition.''

An incentive to leave

Corporate dependence on federal dollars may be distorting the free-market system. Many critics, including conservative economists and free-marketeer chief executives, believe some tax-code loopholes and many subsidies have created damaging incentives for companies to send jobs and capital overseas. They have kept management focused on maintaining federal funding rather than increasing market share.

Says Stephen Moore, who has written a series of reports on corporate welfare for the Cato Institute: ``The point is, we have very efficient capital markets in this country. The government has never been good at picking winners and losers. The Commerce Department and Congress are influenced by lobbying more than the market. That makes for a corruption of the market. And this in the long run is bad for the national economy.''

Moore says he knows the growing attack on corporate welfare has struck a raw nerve within American business. Since he wrote a much-discussed and controversial report on the issue last year in response to a challenge by Secretary Reich, he says, ``IBM and the big guys want to have lunch with us a lot lately. They are dying to tell us how important these programs are.''

``But what people need to know is who gets hurt. And that is the small business owners, who don't have lobbyists in Washington and trade associations bringing them billions of federal dollars. And they certainly aren't in Washington taking us out to lunch.''

This story ran on page 1 of the Boston Globe on 07/07/96.

Tax code gives companies a lift

By Aaron Zitner, Globe Staff, 07/08/96

WASHINGTON - When Robert M. Silva's job moved to Singapore two years ago, his company flew him overseas so he could train his replacement. Then the company closed its North Reading factory, laid off Silva and 119 co-workers and began importing from its Asian plant medical products once made in Massachusetts.

Moving jobs to Singapore had obvious advantages for Baxter International Inc. Taxes are low, and Silva's $26,000 salary was far higher than what the company pays his replacement.

But Baxter reaped another reward for moving overseas: a tax break, courtesy of the United States government. In the name of boosting US business, the tax code offers a special benefit to companies that move jobs offshore, a gift also accepted by Massachusetts employers such as Stratus Computer Inc. of Marlborough (500 layoffs last year), Augat Inc. of Mansfield (260 layoffs) and the Shrewsbury division of Quantum Corp. (85 layoffs), among others.

It is one of many tax breaks that ripple perversely through the economy - favoring multinationals over small firms, investors over average taxpayers and foreign workers over those at home.

The federal government gives up about $70 billion each year through corporate tax breaks, enough to cover the IRS bill for every Massachusetts resident two times over. Corporate tax breaks carry a lower political profile than direct subsidies to businesses for programs such as the one that helps McDonald's Corp. sell Chicken McNuggets overseas. But they cost about as much. For a nation trying to balance its budget and pay for social services, tax benefits to businesses are a gold mine.

``The tax code is a major source of corporate welfare,'' says US Rep. Lane Evans, an Illinois Democrat. ``Not only that, but we are using our tax dollars in a way that hurts our own economy. It drains our treasury. It forces average Americans to bear a larger share of the tax burden.''

The Clinton administration says that closing some tax breaks may force companies to raise prices and lose customers, and therefore pay less taxes. ``There are two sides to every part of this,'' says Leslie Samuels, until recently the Treasury Department's tax policy chief. ``If you're thinking that there's hundreds of billions of dollars, it's not there.''

Republican lawmakers have actually moved to widen some tax breaks. A 1993 law, for example, narrowed the provision that benefited Baxter International, Stratus and Augut, but a GOP bill scheduled for debate on the Senate floor today would fully restore the loophole.

Other lawmakers and analysts disagree with that approach. At a time when Medicare, Medicaid and other social welfare programs are being curtailed, they say, many tax policies which explicitly benefit corporations cannot be justified. These critics argue:

The US should not give tax breaks for breaking the law. For example, after testing faulty medical products on unwitting hospital patients, C.R. Bard Inc. paid $61 million in penalties in 1993. But the pain was tempered by the tax code, which allowed Bard to take half the fine as a tax deduction.

Tax breaks to boost exports are not worth the cost. Companies naturally will try to sell their products overseas, so export incentives worth at least $7 billion a year are a waste of money.

Too many companies pay no taxes at all. Nearly 60 percent of US-controlled corporations and 74 percent of foreign firms doing business here paid no federal tax in 1991, the last year figures were available. Critics say the US is not tough enough on companies that use illegal accounting maneuvers to shift profits to low-tax nations. The amount lost to the Treasury each year: as much as $40 billion over and above the $70 billion in legal tax breaks.

Congress must stop the bidding war among the states for jobs, in which companies win ever-greater tax breaks to relocate. It should not let states use federal tax dollars when ``poaching'' jobs from other states. Labor Secretary Robert Reich calls it ``one of the most egregious forms of corporate welfare.''

Congress and the Clinton administration have cut some tax concessions to businesses. They curtailed deductions for meals, sports tickets and country club dues, raising $3 billion a year in tax revenue. They also banned write-offs for ``excessive'' executive salaries, those over $1 million, raising $70 million annually. And they have worked out a deal - not yet final - to phase out a tax break for companies that build plants in Puerto Rico, which costs $2.6 billion a year in tax revenue.

But as a presidential candidate, Clinton promised more. He vowed to make foreign companies, widely accused of underpaying US taxes, pay $45 billion more over four years. Clinton has taken steps in this direction, but Treasury officials cannot show how much money has been gained. Moreover, the president has done little to fulfill another promise in his 232-page campaign platform, called ``Putting People First,'' to ``end tax breaks for American companies that shut down their plants here and ship American jobs overseas.''

Incentive to leave

A 33-year-old father of two, Silva spent six years at the C.R. Bard plant in North Reading. He assembled and tested infusion pumps, devices that allow patients to receive regular injections without a nurse or traditional needle. In 1993, the Bard unit was bought by Illinois-based Baxter. ``They promised us the world. Then they moved the plant to Singapore after telling us they wouldn't,'' says Silva of Nashua. About 130 people lost their jobs. ``It was quite the shock. People were in tears that day.''

One incentive for Baxter's move, critics say, was a tax break known as the ``runaway plant loophole,'' which accounts for $1.7 billion each year in lost tax revenue. Here's how it works:

The US taxes the worldwide profits of American companies. A million dollars earned in Ireland, for example, will be taxed at the US rate of 35 percent, minus the 10 percent tax the company must pay to the Irish government.

But Baxter, or any other company, is not required to pay the US tax bill unless it moves the money home to give to shareholders or to reinvest in the business here. As long as the money remains overseas - invested in foreign plants or banks - Baxter will pay only a small tax to Singapore. That is a total $191 million tax on its overseas profits over the years that the company has no intention of paying.

``The tax code literally says, `Move your plant overseas and we'll give you a tax break,''' says Sen. Byron Dorgan, a North Dakota Democrat.

The ``runaway plant loophole'' also has saved millions of dollars for Stratus, Quantum, Digital Equipment Corp. of Maynard and many others that have moved New England jobs overseas while deferring US taxes on overseas profits.

``Closing it would discourage further investment in growing our business,'' said Mark Fredrickson, a spokesman for EMC Corp. of Hopkinton, a computer equipment maker that has accumulated $388 million in untaxed overseas profits over the years. ``It helps our profitability and helps secure the local jobs we have. The bigger we become, the more people have to be employed here at corporate headquarters.''

Many companies take advantage of two other tax breaks designed to encourage exports. By creating a ``foreign sales corporation,'' which often exists only on paper, a firm can claim a tax exemption on some of its export sales. For example, Zoom Telephonics Inc. of Mansfield said recently it lowered its tax rate by selling more products through its foreign sales corporation. These tax rules, created in 1971 and refined in 1984, cost the government $1.5 billion a year.

The US Treasury also forfeits $3.6 billion annually through the ``title passage loophole,'' as Sen. Edward M. Kennedy has dubbed it, which allows companies to claim that some US sales were actually made on foreign soil. Companies do this because they sometimes have foreign tax credits they cannot use unless they show more foreign income.

A break for lawbreakers

While the tax code causes pain for some US workers, it provides comfort to some companies that break the law. Last year, for example, three former executives of C.R. Bard Inc. were convicted of conspiring to conceal flaws in medical catheters manufactured in Billerica and Haverhill. Two deaths allegedly were linked to the catheters, and prosecutors said the faulty devices caused 21 emergency surgeries. Bard's $61 million legal settlement with the government was the largest ever for violations of Food and Drug Administration rules.

But the tax code cushioned the New Jersey-based company. Half of the settlement - $30.5 million - could be used as a tax write-off against earnings. That was the amount Bard paid to settle civil charges. The money was meant to reimburse the Medicare program for buying catheters that should not have been on the market. ``When they earned the money they should not have earned from the catheters, they paid taxes on it. So when they give up those earnings, they should get the taxes back,'' said Michael Loucks, the assistant US attorney who prosecuted Bard.

After agreeing last year to pay the second-largest amount ever in a health-care fraud case - $161 million - Caremark International Inc. plans to take a $110 million charge against earnings, on top of a write-off to cover its legal costs.

Tax law prevents companies from deducting criminal penalties, avoiding an incentive to commit criminal acts. Loucks said Bard did not negotiate with the Justice Department over what portion of the settlement would be a civil penalty, and therefore tax-deductible. But some companies try to. ``Part of the reason companies would rather do civil settlements is because they are deductible,'' he said.

Zero-tax accounting

Some companies have gone beyond shielding profits from taxes. By stretching or even breaking US accounting rules, they pay no tax at all. Their goal is to shift profits out of the country into low-tax nations like Bermuda, Ireland or Honk Kong. Their tool is the accounting ledger, and critics of the tax code say it is effective. International Business Machines Corp., for example, paid virtually no tax in 1987, despite $25 billion in US sales. Sen. Kennedy says IBM shifted an undue amount of its worldwide research costs onto its US operation. That raised its American expenses, he says, and lowered its profits. IBM says its accounting practices are legal, but will not comment further.

Similarly, Nissan Motor Corp. of Japan overcharged its US subsidiary for cars, the IRS charged several years ago, lowering its US profits and tax bill. Nissan agreed to pay the IRS $160 million, one of several settlements with the agency the automaker signed between 1987 and 1993.

Both US and foreign companies cut their taxes by profit shifting, but many lawmakers and tax analysts believe the practice is particularly widespread among foreign companies. More than 70 percent of foreign firms paid no tax each year between 1987 and 1991, the IRS reports, compared to about 60 percent of US companies. Clearly, some paid no tax because they did not make a profit, but many lawmakers believe others are illegally shifting profits overseas.

Estimates on the tax revenue loss range from $10 billion to $40 billion a year. Treasury officials say the figure will decrease over time because of tighter regulations created under the Clinton administration.

Will the new rules raise the $45 billion that Clinton said he would draw from foreign companies over four years? ``It would be nice to say, `Here's what's going to happen,' but I don't think anyone in the trenches can reliably say that,'' said Samuels, the former Treasury tax policy chief.

One group of lawmakers says the transfer-pricing system must be scrapped. In its place, they propose a formula similar to what the states use now to determine what portion of a company's profits can be taxed. The formula bases the tax on what portion of a company's sales, property and personnel are in each state.

The Treasury Department, under pressure from Sen. Dorgan, is holding a conference this year to consider how such a formula might be created.

A $143 million jolt

Every year, the US government spends $143 million to help generate electricity and run recreation programs for Tennessee and six neighboring states. Now 63 years old, the Tennessee Valley Authority keeps the region's electricity rates low. By contrast, electric rates in Massachusetts are high. And that is a key reason Lexington-based Raytheon Co. last year threatened to take 15,000 jobs out of state unless it won $40 million in tax and electric rate relief. Had it left, Raytheon's likely new home would have been in Tennessee. In other words, says US Rep. Martin T. Meehan, a Lowell Democrat, Washington collected tax dollars from Massachusetts, then sent them to Tennessee, effectively helping to lure Massachusetts jobs.

Now, Fidelity Investments of Boston and the mutual fund industry, as well as life insurance companies, are demanding similar tax relief. Increasingly, other states find themselves being forced to offer tax breaks to businesses that threaten to leave town.

``This is one of the most egregious forms of corporate welfare, because the company essentially holds the state up to ransom,'' Labor Secretary Reich says. ``It's bad, because it's a zero-sum game. No new jobs are created. ... From the national standpoint, this is money that is subsidizing companies with no net benefit whatsoever.''

Furthermore, tax breaks don't always save jobs. Raytheon this year is trying to buy out 4,400 workers whose jobs the tax relief intended to save. In 1993, Digital Equipment Corp. angered Boston officials when it closed its Roxbury factory and laid off 190 workers after taking $7 million from the city in financing, tax cuts and other subsidies.

Now, some are calling for the federal government to step in. Last year, Massachusetts delegates to an annual small business conference at the White House urged the president to ban the use of federal money in interstate bidding wars.

Congress could tax businesses on the value of the incentives they receive from states, or it could deny federal funding to states that get into bidding wars. It also could bar states from using federal grant money or government-backed loans in incentive packages.

Massachusetts at times has used federal dollars to lure businesses. Springfield, for example, this year beat out sites in six other states to be the home of a new customer service center for First Notice Systems of Medford, which could employ as many as 900 people. As an incentive, the city offered federal funds to train company workers. It also borrowed money from the federal government and used the cash, in essence, to give First Notice a low-interest loan for building renovations.

Corporate darlings

Businesses like tax breaks because, unlike spending programs and direct subsidies, they are outside the federal budget and therefore not subject to annual review by Congress. Between 1913 and the major tax overhaul of 1986, Congress killed only 13 of the scores of tax breaks on the books, according to Congress' watchdog agency, the General Accounting Office. Moreover, they sometimes go to already prosperous industries. The oil and energy industry gets $2.4 billion in tax breaks each year, while $1.4 billion goes to timber and natural resources companies, and billions more go to insurance, agriculture, real estate and other concerns.

Tax benefits are sometimes applied in unforseen ways. A credit meant to boost research investment, for example, became the center of controversy recently as several defense companies sued the Internal Revenue Service for tax rebates on weapons programs that date to the early 1980s. The IRS says the tax credits are not deserved, since the Pentagon paid for the weapons research and usually covers the costs even of failed weapons programs. But the companies have won an early round in the courts, arguing that the Pentagon paid for the weapons, not the research that produced them. The tax refunds could total billions of dollars.

Each tax break is a choice, favoring one group of taxpayers over another. Export rules, for example, favor exporters over companies that sell in the US. The ``runaway plant loophole'' favors companies that hire foreign workers over companies that strive for the ``Made in the USA'' label.

Most broadly, corporate tax breaks generally favor wealthy Americans over the less-well off. Tax benefits are designed to help businesses create jobs, but when corporations win a tax break it is the owners of the company who gain most.

Last December, with Republicans and Democrats deadlocked over a plan to end a 21-day shutdown of the federal government, 91 corporate chief executives signed a two-page newspaper advertisement that urged Congress to balance the budget. ``Without a balanced budget, the party's over. No matter which party you're in,'' the ad said.

Seven of the CEOs were from companies that take advantage of a major tax break for purchasing new equipment, which costs the US $26 billion a year. Exxon saved $760 million because of the so-called accelerated depreciation rules, according to calculations by the Center for the Study of Responsive Law, a Washington-based Ralph Nader group. Ford Motor Co., Chrysler Corp., DuPont and others that signed the ad saved hundreds of millions dollars more.

General Motors is a major recipient of federal technology grants. Kodak claimed $37 million in export and manufacturing tax credits last year. In 1994, IBM paid no US taxes on $11 billion in profits it earned overseas, while the US Labor Department reported that 1,755 IBM jobs were moved abroad.

``How can you demand that the budget be balanced when you're taking tax breaks like this?'' asked Janice Shields, a former accounting professor now with the watchdog group. ``These things save the companies from going into debt, but it's causing the country to do that.''

This story ran on page 1 of the Boston Globe on 07/08/96.

Business' clout keeps the government breaks coming

By Aaron Zitner and Charles M. Sennott, Globe Staff, 07/09/96

WASHINGTON - Two weeks after his party was swamped in the mid-term elections of 1994, Robert B. Reich issued a simple dare. You Republicans won control of Congress by attacking welfare, the US labor secretary asserted. Why not cut "corporate welfare" and move business off the dole as well?

But Reich's own colleagues were uneasy with the challenge. Treasury Secretary Lloyd M. Bentsen and Commerce Secretary Ronald H. Brown quickly distanced themselves. And President Clinton, while calling it an ``attractive idea,'' made it clear he had not endorsed cutbacks in benefits to business.

While Democratic party leaders cringed at Reich's gambit and most Republicans dismissed it as liberal rhetoric, Reich got a warm phone call from a key GOP congressman: John R. Kasich of Ohio, chairman of the House Budget Committee. The two men could not be more different - Reich, a classic liberal from Harvard University, and Kasich, the son of a mailman and a leading light in Speaker Newt Gingrich's ``Republican revolution.''

``You're on to something,'' Kasich said, urging Reich to keep pushing the idea and promising to do his best to put corporate welfare on the Republican agenda as well.

It was a unique meeting of minds at opposite ends of the political spectrum to take on the labyrinth of subsidies and tax breaks for businesses that cost the government about $150 billion a year. More lawmakers, buttressed by key Washington think tanks that provide the ideological underpinning for political action, later lined up against this underwriting of corporations.

But over the course of a year, the resolve to root out corporate welfare would dissipate. First it would falter, and then it would sink amid parochial politics, big-money lobbying and a campaign finance system that together conspire to keep corporate welfare as constant as the tide.

By March of this year, after most of his subsidy cutbacks had been rejected in a brutal two-month budget negotiation, an exasperated Kasich said at a hearing: ``I think it is an absolute outrage that some of this crap is still in this budget, and it just infuriates me every day when I think about it.''

By May, the Cato Institute, a libertarian think tank which rode the crest of the bipartisan wave last year by challenging Congress to cut $85 billion in corporate welfare programs - declared the battle all but over in a report titled ``How Corporate Welfare Won.''

The story of how Reich, Kasich and their allies lost the battle begins after the 1994 elections with both parties claiming they wanted to balance the federal budget. It lingers into last winter, when snow blanketed Washington through December and January, and the government shut down twice over how to cut costs. Within both parties, key figures like Reich, Kasich, Republican Sen. John McCain of Arizona, Democrat Edward M. Kennedy of Massachusetts - even centrist Colin Powell - pointed again and again to corporate welfare.

They attacked the sugar and peanut price-support programs that raise food prices for consumers. They attacked the Export Enhancement Program, which gives $800 million a year to giant agriculture firms to sell wheat and grains at a discount overseas. While no two lists of targets were identical, nearly all cited the Market Promotion Program, which gives $100 million annually to Gallo, McDonald's, Ocean Spray and other food companies for international advertising.

Moreover, the Republican plan for reining in Medicare and welfare gave lawmakers of both parties ammunition to argue that cutting corporate subsidies was only fair and moral. For awhile, it seemed like deep cuts were inevitable. But corporate welfare, it became clear, is not a partisan issue. Rather, Republican is set against Republican, Democrat against Democrat when programs in a politician's home state are threatened.

Not enough lawmakers were willing to vote against home-state businesses and jobs. ``One person's pork is another person's prize,'' said Sen. Fred Thompson, a Republican from Tennessee. ``No one wants to give up their prize if there isn't shared sacrifice.''

An administration divided

For Reich, the 50-year-old longtime friend and economic adviser to Clinton, the corporate welfare fight began long before he joined the Cabinet. As a lecturer at Harvard, he chastized policy makers for confusing aid to American workers with aid to American companies. US firms were sending more jobs overseas, while foreign companies were creating jobs here. ``Our primary concern should be the training and development of the American workforce, not the protection of the American-owned corporation,'' he wrote in 1990. Four years later, Reich replayed that theme with a twist. Voters rebuked Clinton and the Democrats, he told an influential Democratic policy group just after the 1994 elections, because many Americans feared their paychecks were shrinking.

``The middle class has become an anxious class,'' he said. The solution: invest in jobs and training. Give people the skills to move from welfare to work, as the Republican rhetoric argues. Help them move from low-paying jobs to more lucrative ones. How to pay for it? Cut corporate welfare. Ask business, not just welfare recipients, to become more self-sufficient.

Reich's theme struck a chord across the ideological spectrum. Answering his challenge, the Cato Institute issued its report on the 125 corporate welfare subsidy programs worth $85 billion. The Progressive Policy Institute, allied with the centrist Democratic Leadership Council, found $265 billion in savings over five years. To the right, the Heritage Foundation came up with its own plan to eliminate, not just shave, unnecessary spending. And to the left, the Ralph Nader group, Essential Information, identified 153 sources of subsidies as well as tax breaks costing $167 billion a year.

Vice President Al Gore weighed in with approval for Reich's ideas. But Treasury Secretary Bentsen, a Texan whose home-state oil and energy industries take millions of dollars each year in tax breaks, opposed cutbacks on business assistance. And Robert E. Rubin, who replaced Bentsen in January 1995, also was reluctant. After fighting to shed the Democrats' anti-business image, many in the party worried Reich would undo their work.

The gulf was between classic liberals and the more centrist, pro-business ``New Democrats.'' Clinton initially wanted to make a strong statement on corporate welfare but backed away, an administration source said. He eschewed the words ``corporate welfare'' in public, the source said, adding: ``He uses the phrase in private and Cabinet meetings, but the phrase is too combative for him.''

Kasich, still boyish-looking at age 43, was one of the populist upstarts who helped make Gingrich speaker of the House. Now, with the Republican takeover of Congress, the six-term representative had been named chairman of the important Budget Committee. It was no small task.

Kasich had to find $200 billion to pay for tax cuts in the ``Contract With America.'' On top of that, he had to design a federal budget to eliminate the deficit by 2002. Corporate welfare seemed one place to start looking for money.

But there was little question Kasich was bound to clash with Ways and Means chairman Bill Archer. As representative of a wealthy Texas district, Archer long had argued that tax breaks helped keep the nation and economy strong. No tax break, he says, meets the definition of pork. ``Corporate welfare'' was not in Archer's lexicon.

Kasich believed business subsidies and tax breaks were more than a source of savings. If Republicans truly wanted to balance the budget, he argued, they had to do more than tap Medicaid, welfare and other social programs. While some Democrats feared that attacking corporate welfare would hurt them politically, there were Republicans who worried that if business did not share the pain of budget cuts, voters would accuse them of unfairness.

Archer, on the other hand, argued that eliminating tax breaks amounted to a tax increase. Supporting him were many Republicans who have backed big business, a longtime GOP constituency.

Republican showdown

The showdown came at a GOP retreat in May 1995 in Leesburg, Va. It was the first time House Republicans saw Kasich's plan to balance the budget. Proposing ways to save money, Kasich said tax breaks for business ought to be cut or modified by $25 billion over seven years. Kasich cited tax concessions to energy, timber and other interests that he said did not benefit the public. Some were the very tax breaks Archer had championed. Archer spoke against Kasich's plan, and his argument that repealing such inducements would be, in effect, a tax increase for businesses was persuasive. Two weeks later, when Kasich's budget hit the House floor, corporate welfare savings were all but gone.

But that was not the end of the issue. As Republicans moved further into details of how to balance the budget, it became harder to ignore the money that could be recouped from corporate tax breaks and subsidies. Equally important was the GOP's image. Polls showed the public hated corporate welfare, said Frank Luntz, a Republican pollster. They may even hate it more than social welfare, he said, adding: ``Republicans don't want to appear to be in bed with big business.''

In November, two Republicans brought the issue to the Senate. McCain and Thompson proposed a ``dirty dozen'' list of programs to be eliminated. From agriculture, they selected the Market Promotion Program. From the defense budget, the B-2 bomber and military export subsidies. From transportation, they chose highway demonstration projects.

McCain and Thompson won support from conservative Republican Phil Gramm from Texas, along with Democrats Kennedy and John F. Kerry of Massachusetts, and Bill Bradley of New Jersey.

But they lost, 74-25. Voting to uphold the subsidies were such progressives as Barbara Boxer and Dianne Feinstein, the California Democrats, whose state benefits from millions of dollars in subsidies to the Gallo and Wente Brothers wineries, Sunkist orange cooperative, almond growers and others.

As Republicans pushed for a balanced budget and limits on social service programs, the annual budget process continued long past its deadline. By fall, the authority for most government agencies to spend money expired. In November and December, the GOP and Clinton administration chose to let most of the government shut down because they could not agree on a budget. Within the Democratic Party, meanwhile, debate continued over how much corporate welfare should be redirected to social programs and how much to deficit-cutting.

At times, Clinton professed great interest in corporate welfare. On Dec. 16, the first day of what would be a three-week government shutdown, he met with top advisers and Democratic congressional leaders at Blair House, the historic guest house steps from the White House. Dressed in sweaters and clutching cups of hot coffee, they tried to develop a strategy to balance the budget.

Liberal standard-bearers, like Sen. Kennedy, believed corporate welfare was the place to start. He argued for a plan to save $50 billion to $60 billion by eliminating many tax breaks. He gave them names like the ``runaway plant loophole,'' which he said encourages companies to send US jobs overseas, and the ``billionaires' loophole,'' which allows people to renounce US citizenship as a tax ploy.

Clinton was interested. At the end of the session, he buttonholed Kennedy and asked him to send details to the White House, a source at the meeting said. But the next afternoon, as administration and congressional leaders met at the Capitol without the president, it was clear the White House had backtracked.

When Kennedy again argued to close tax breaks, aides to Secretary Rubin and Laura Tyson, the president's chief economic adviser, were working the room, talking privately with lawmakers. ``They were arguing, `Don't touch corporate welfare,''' recalled one person who was there.

At one point Lawrence Summers, Rubin's deputy secretary for tax policy, leaned over the table and argued against Kennedy's plan to cut the ``runaway plant loophole,'' the ``title passage loophole'' that allows companies to shift profits overseas and a third tax break for exports. Summers said those provisions helped the leading employers in their states.

According to several people at the meeting, Sen. Boxer responded: ``We've got to raise revenue and this is the way to do it. If we can't abolish them, then we should at least change them or alter them.'' Summers answered: ``Barbara, do you have any idea how Silicon Valley will react to this?''

In an interview, Kennedy accused Rubin and Tyson of intentionally obscuring the corporate welfare debate to make sure nothing gets done. ``They don't want to do it because they basically are a spokesman for many of these industries,'' he said. ``I would like Bob Rubin to tell me the best ones to cut. I would like him to tell me, and tell the president, how to do it. But he is representing a different kind of constituency. He knows it. I know it. The president sort of knows it. So that makes it a political issue.''

In time, the Democrats did nudge Clinton. After starting with a proposal last December to end $28 billion worth of tax breaks for businesses, the president later increased the number to $62 billion for the 1997 budget, which begins in October. But the budget was equally noteworthy for what it allowed to survive including: sugar and peanut subsidies, tax breaks for the ethanol industry and the Advanced Technology program, which grants money to companies for research and development.

``If the Congress' performance was a disappointment, the Clinton administration's was dismal,'' Stephen Moore and Dean Stansel of the Cato Institute wrote in May. ``With few exceptions, the administration has shown itself hostile to even the modest corporate welfare cutbacks proposed by Congress.''

The sugar industry, which gave $5.5 million to federal campaigns in the last seven years, managed to kill a bipartisan attack on price supports mounted by Reps. Charles Schumer, a New York Democrat, and Dan Miller, a Republican from Florida. And Congress, bowing to the wine industry, actually increased funding for the Market Promotion Program, which supports overseas advertising.

Archer Daniels Midland Co. of Illinois beat back an attempt to kill a tax break for ethanol, an alcohol-based fuel. ADM controls about 80 percent of the ethanol market. Killing the subsidy would save $3.6 billion over five years. According to Common Cause, the government watchdog group, ADM gave more than $480,000 to the Democratic Party and more than $345,000 to the Republican Party in the 1994 elections, on top of donations to individual candidates. The company and the family of its chairman have given more than $250,000 to former Sen. Bob Dole's campaign committees over the years. ADM chairman Dwayne O. Andreas has raised money for Clinton as well.

Even Kennedy, who criticizes the subsidies to sugar and peanut farmers or federal support of giant power companies in the Southwest, speaks quite differently when it comes to programs that help high-tech companies in Massachusetts. Virtually all of these so-called ``high-tech handout'' programs - the Advanced Technology Program, the Technology Reinvestment Project and the Small Business Innovative Research program - have been in the cross hairs of conservatives, especially Kasich and the Cato Institute. ``These programs, are modest in size in comparison to the others,'' Kennedy said.

The campaign connection

Overall, Robert J. Shapiro of the Progressive Policy Institute calculates Congress was ready to cut $300 billion from social programs like Head Start and welfare, but only $30 billion in corporate welfare. Those cuts would have become law had Clinton not vetoed the Republicans' budget for 1996 and general spending plans through 2002. Instead, the president and Republican leaders fought for so many months over the budget that corporate welfare cuts and other long-term spending decisions were put off until later this year. ``Each of these cuts is a knockdown, drag-out fight,'' Reich said in a recent interview. ``Why? Because the issue of corporate welfare is intimately tied to campaign finance. Why do we have so many targeted subsidies and tax breaks with no public justification or the thinnest justification? It's because companies and industries have managed to effectively lobby for their little piece of public largesse. Why have they been so effective? Because they support campaigns.''

In short, many argue, Congress cannot cut subsidies and raise campaign funds at the same time. And changes to the campaign finance system do not appear to be coming soon. The Senate killed a campaign spending reform plan pushed, among others, by senators McCain and Thompson, who also targeted the ``dirty dozen'' corporate subsidies.

Recently McCain, Thompson, Kerry, Bradley, Kennedy and others have been pushing a new approach on corporate welfare: a bipartisan commission that would draw up a list of subsidy programs to cut. After approval by the president, Congress would vote on the list - all or nothing. The idea is patterned after the commission that chose what military bases to close, another politically sensitive problem that called for shared sacrifice.

``I don't know any other way that we can attack this issue,'' McCain said this year at a hearing on the proposal. An independent commission ``would depoliticize the process, guarantee that the pain is shared, and might be the only realistic means of achieving a meaningful reform, which the public and our dire fiscal circumstances demand.''