Does Defense Industry Really Need 'Welfare'?

Eliminating 'recoupment' fees on arms sold abroad could cost US Treasury hundreds of millions

WHEN a defense contractor wins a contract to produce a weapon for Uncle Sam, American taxpayers pay for all the research, development, and production costs. When the company exports the weapon, it thus makes a handsome profit. Uncle Sam charges the contractor ''recoupment'' fees, from 5 to 25 percent of the sales value of the exported items, depending on the quantity procured by United States forces. The rationale is that the taxpayers, not Company X, paid to develop the weapon. These fees generate hundreds of millions of dollars annually.

Would taxpayers want to lose this money by ending the recoupment payments? The House of Representatives is proposing to eliminate a tax on foreign arms sales, currently required by law. HR 1038, the Federal Acquisition Reform Act of 1995, was introduced by Rep. William Clinger (R) of Pennsylvania, chairman of the Government Oversight Committee, in February. The bill would end the recoupment tax on foreign military sales (FMS), direct government-to-government transactions accounting for about half of US arms sales.

Who do you suppose is pushing for this? Defense industry lobbyists. And their argument? ''Leveling the playing field'' with direct commercial sales.

There are two avenues for exporting US arms. One is the government-to-government, or FMS, route and the other is commercial sales -- direct sales by a US defense company to a foreign country or company. Each avenue accounts for roughly half of total US military sales. Until June 1992 recoupment fees were levied on all US weapons exports, both direct commercial and FMS sales. But the recoupment policy on commercial sales was embodied only in Pentagon regulations that the Bush administration, in an election year ploy, repealed without legislation.

First we need to ask, why would we want the playing field to be leveled between FMS and commercial sales? What difference does it make whether US arms are exported via one program or the other? Historically, the playing field was never level. Until 1989, FMS accounted for about three-fourths of total sales. Only in recent years have commercial sales approximated FMS sales. If Congress and the administration only wanted to level the playing field, the best remedy from the taxpayer's point of view would be to reinstate recoupment fees on commercial sales.

The Congressional Budget Office estimates those payments would reduce the deficit by $110 million in fiscal year 1996 and by $920 million over five years. Of course, keeping the present recoupment fees on FMS sales would further reduce the deficit. Undaunted by all the talk of belt-tightening, the defense industry is busy lobbying to abolish these fees.

According to the latest Arms Sales Monitor, the defense industry has lobbied against all recoupment fees since at least 1991. Its major argument is that the fees make US weapons uncompetitive on the international market. However, the US dominates the international arms market; it accounted for 73 percent of all new sales agreements with developing countries in 1993. The Department of Defense estimates that through the year 2000, the US portion of worldwide arms sales will be about 65 percent.

Nevertheless, both the Bush and Clinton administrations have worked with the defense industry to eliminate the fees. In September 1993 the Clinton administration sent Congress a bill to repeal the recoupment fee law. Congress did not act, but defense industry lobbyists inserted the same language into last year's federal acquisition reform bill. Rep. Ron Dellums (D) of California, House Armed Services Committee chairman, then eliminated it. Now, however, both the Republican and administration versions of this year's acquisition reform bill contain a section to repeal the recoupment provision.

Repealing recoupment fees would in effect grant US arms manufacturers a new subsidy worth hundreds of millions of dollars annually.

While hundreds of millions in a deficit of more than $200 billion may not sound like much, as they say, ''a hundred million here and a hundred million there, and pretty soon you are talking about real money.'' Is this really the time to initiate a welfare program for the defense industry?

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