The most important question to consider first is how to define “corporate welfare,” a phrase that is often used in discussions of state economic policymaking but is sometimes used too broadly or incorrectly. The Oxford Dictionary definition of corporate welfare is, “Government support or subsidy of private business, such as by tax incentives.” Though a very broad definition, it is essentially correct, although what constitutes “government support or subsidy” is itself up for some debate and often misidentified.
Corporate welfare is any financial benefit purposely granted by government to a specific business or class of businesses and that is not generally available to all businesses and taxpayers. Corporate welfare either lowers the costs of doing business or increases revenue for a business without its customers providing the revenue, relative to other similarly situated businesses, broadly speaking. It might even have both these effects. In short, corporate welfare increases the profitability of a select business or select class of businesses through government action at the cost of other taxpayers.
A policymaker can often evaluate if a policy proposal is corporate welfare by asking only two basic questions. First, does the proposal apply to every business in every industry, especially those that are similarly situated? If it does not, does the proposal put the affected business or industry on an equal footing with other similar firms? If the answer to the first question is “yes,” it is unlikely the proposal is corporate welfare. If the answer to the first question is “no” but the answer to the second question is “yes,” it is also unlikely to be corporate welfare, but if the answer to the first and second question is “no,” the proposal is likely to be corporate welfare.
Graphic 1: Determining if a Measure is Corporate Welfare
Examples will be provided later, but the key salient characteristic of corporate welfare is its targeted nature, best characterized as a form of cronyism. This is true even if there is no political quid pro quo, such as a kickback for a favored constituent or campaign donor. Indeed, those types of cases are actually rare. Yet, cronyism in a broader sense should include the softer form in which politicians favor one industry over another, sometimes with the best of intentions, even though doing so has the same economic effect as if kickbacks and straight-up corruption were involved.