Corporate Welfare: Five Ways Out

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"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 Minneapolis, Minn. "Then there's no reason for a company to come knocking at your door. Some [public officials] have criticized [this idea], saying, 'We don't want another tax.' And we tell them, 'This is a tax you'll never have to collect.'"

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 New York law that provided for lower taxes on securities transactions processed by brokers in New York. The state pleaded that it needed the tax break to keep brokerages around. The court didn't buy it.

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 Raleigh, N.C., is a case in point. "We are a sort of right-of-center conservative organization, and what we are basically arguing is that the Federal Government should intervene," says John Hood, president of the foundation, which is readying a federal lawsuit to challenge state subsidies as violations of interstate commerce.

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 America every year.

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.