Washington Report on Middle East Affairs, April 1996, pgs. 7, 49-52

The Cost of Israel to U.S. Taxpayers

A Comprehensive Guide to U.S. Aid to Israel

By Shawn L. Twing

Few aspects of U.S. foreign policy are as elusive as U.S. aid to Israel. Despite severe budgetary constraints and an ongoing battle between congressional Republicans and the White House over the terms of a balanced U.S. budget, there is one thing on which both sides agree: U.S. aid to Israel will not be reduced.

To understand the magnitude of U.S. aid to Israel it is necessary to look past the economic and military components of the U.S. foreign aid budget, of which Israel receives more than one-quarter of the worldwide total ($12.1 billion for fiscal year 1996), to additional amounts disbursed through the budgets of other departments and agencies scattered throughout the U.S. government. It also is important to understand the terms of these aid components, which include preferential treatment for Israel, exemption from certain U.S. laws and also from the oversight applied to every other U.S. aid recipient, and even disregard of Israeli abuses when they are revealed. Finally, Israel's current economic profile suggests that it no longer needs U.S. financial largess. Nevertheless, a pattern has developed whereby neither Congress nor the White House dares dismantle what Indiana Democratic Representative Lee Hamilton has referred to as Israel's "aid industry."

ECONOMIC AID

Since 1949, U.S. taxpayers have provided Israel $23.122 billion in grant Economic Support Funds (ESF) and $1.517 billion in ESF loans. An additional $94 million in economic grants and $588.5 million in loans were given to Israel from 1952 through 1974 under the "Food for Peace" program. Prior to 1971, ESF aid was given for program-specific uses which were intended only to purchase U.S.-made products. After 1971, ESF funds were provided on a direct-transfer basis to be spent at the discretion of the Israeli government without any U.S. government oversight.

In each fiscal year since 1994, Israel has used approximately $1 billion of its $1.2 billion in ESF to cover the interest and principal due on its outstanding loans from the United States government. Ever since 1984, the Cranston Amendment, named after its Senate sponsor, California Democrat Alan Cranston, has been attached to every U.S. foreign aid bill. It compels the U.S. government to provide Israel enough ESF funds to meet its debt burden to the United States. The Cranston Amendment reads, in part: "It is the policy and the intention of the United States that the funds provided in annual appropriations for the Economic Support Fund[s]which are allocated to Israel shall not be less than the annual debt repayment (interest and principal) from Israel to the United States Government in recognition that such a principle serves United States interests in the region."

The Cranston Amendment guaranteeing that the amount of Economic Support Funds going to Israel will not fall below the amount of money needed by Israel to repay its loans from the United States government has led to some interesting justifications for continued ESF economic assistance. Lobbyists for Israel and their sympathizers in Washington argue that current ESF grants really don't cost American taxpayers anything. They maintain that providing U.S. taxpayer funds to Israel to pay off debts owed to the U.S. government simply moves money around without actually giving it to Israel. Anyone who has ever borrowed money from a bank or used a credit card knows that this is nonsense. Two decades ago the U.S. government borrowed money to lend to Israel on the assumption that the Israelis would pay it back and the U.S. then could use the repayments to repay its own debts. Now the U.S. government continues to pay interest on the money it originally borrowed to lend to Israel, and also pays the interest on the money Israel borrowed from the U.S.

In January 1992, after months of heated debate between the administration of President George Bush and the Israeli government and its supporters in American Jewish groups and in Congress, Congress and the White House agreed to provide Israel with $10 billion in loan guarantees to be distributed at the rate of $2 billion a year over five years. The legislation accompanying the loan guarantees stipulated that Israel could not use the money to settle Jews in the Israeli-occupied territories. It provided that the loan guarantees would be reduced by whatever amount the Israeli government spent on Jewish settlements in the West Bank and Gaza. As a result, the $2 billion sum was reduced by $437 million in FY94 and $216.8 million in FY95 based on U.S. government estimates of Israel's illegal construction in the territories during the previous fiscal year. In each case, however, President Clinton increased the actual amount of aid to Israel for that year to help offset the reductions in the loan guarantees, thus keeping a promise he made to Israel's late Prime Minister Yitzhak Rabin that he would not allow the total amount of aid to Israel to drop below the level provided to Israel in fiscal year 1993.

Israeli officials and lobbyists argue that the $10 billion in loan guarantees will not cost the United States anything because the Israeli government borrows the money from private financial institutions. The U.S. government, however, guarantees the full value of the loans in the event that Israel defaults on repayment, which gives Israel considerable leverage if it asks for U.S. financial assistance to help repay the loans. Israel has achieved a good international credit rating, thanks to the congressional practice of providing Israel with new grants to cover "repayment" of its loans from the United States government. This track record makes it likely that the U.S. government actually will absorb some or all of the costs of repaying both the principal and interest on Israel's new $10 billion in U.S.-government-guaranteed debts. This would involve a cost to the U.S. taxpayers of far more than the original $10 billion in U.S. loan guarantees to Israel.

MILITARY AID

At present the largest component of U.S. grant aid to Israel is the annual $1.8 billion military aid package. Since the U.S. military aid program to Israel began in 1959, the U.S. government has provided Israel $40.28 billion in military aid. Of this, $29.065 billion has been in grants and $11.213 billion has been in loans which U.S. taxpayers repay each year. Since 1985, however, all of the U.S. military aid component of U.S. foreign aid to Israel has been in the form of grants rather than loans, exactly as has been the case with the economic component of U.S. foreign aid to Israel. U.S. military aid to Israel reached the $1.8 billion annual level in 1987 and, according to pending legislation and congressional and White House promises, it will continue at this level at least through FY97 (which ends on Sept. 30, 1997).

The purpose of the military aid package, as elaborated by the administration of Ronald Reagan and both of its successors, is to maintain Israel's "qualitative military superiority" over any combination of its Arab neighbors. Proponents of this massive U.S. military subsidy to Israel argue that it is not a total loss for the United States because much of it subsidizes America's defense industry, especially in the current post-Cold War period when defense contractors are faced with declining orders for military hardware.

The reality, however, is that the $1.8 billion foreign military sales (FMS) grant to Israel could instead be used to procure defense items needed for U.S. forces. Consider this: one year of U.S. military aid to Israel could purchase 18 of the much-needed F-22 next generation fighter aircraft for American pilots, at the staggering price of $100 million apiece. The Pentagon plans to procure for U.S. use more than 400 of the F-22s over the next two decades. Eliminating Israel's annual aid subsidy during that same time frame would accomplish just that, without the additional cost to U.S. taxpayers.

Also ignored by proponents of Israel's military aid program is the clause written into the grant since 1991 stating that $475 million of that $1.8 billion package "shall be available only for procurement in Israel of defense articles and defense services, including research and development." Normally military aid components of U.S. foreign aid may be used only for purchases of U.S. weapons or training. Exceptions in the case of military aid to Israel began in fiscal year 1977, when Israel asked for a "one-time-only" provision to use $107 million of U.S. FMS assistance for its Merkava main battle tank. Congress approved a similar measure in 1983 for $300 million for the Lavi fighter. Since FY91, the U.S. government has allowed Israel to use $475 million each year for investment or purchases from its own defense industry. Such exceptions, which are not made for other countries receiving U.S. military aid, enable Israel to expand its defense industries, which compete on the international market with U.S. defense firms. The exceptions for Israel are completely contrary to the original intent of the foreign military sales program.

OTHER BUDGETED ITEMS

Aside from the $3 billion given to Israel each year from the foreign aid budget for economic ($1.2 billion) and military ($1.8 billion) aid, significant amounts of American tax dollars are channeled to Israel through other means. These additional expenditures are included in the budgets of the State, Defense and Commerce departments and other federal agencies, and are not included in official estimates of U.S. foreign aid.

In the State Department's budget for FY96 an additional $93.5 million in grants to Israel were allocated as follows: $80 million to resettle in Israel Jewish refugees from the former Soviet Union; $3.5 million for a regional cooperation agreement with Egypt; and $10 million to pay for Israel's own foreign aid program. This brings to $993.4 million the total of additional grants provided to Israel from the State Department's budget since FY73, when the first refugee resettlement payment was given to Israel. None of these grants are included in Economic Support Fund or Foreign Military Sales calculations of U.S. foreign aid totals.

The Defense Department also is a major supplier of money, equipment and training to Israel outside the regular foreign aid budget. In FY90, $100 million worth of hardware was added to the existing $100 million U.S. military equipment stockpile in Israel, which is available to Israeli forces in case of a military emergency. During FY95, an additional $200 million worth of equipment was added, for a total of $400 million.

Justification for the placement of the equipment in Israel rests on the assertion that Israel is a U.S. "strategic asset" in the Middle East. Few, if any, of the Pentagon's contingency planners and commanders would agree. In fact, the U.S. Central Command (CENTCOM), the division of the U.S. military charged with protecting U.S. interests in East Africa, the Arabian Peninsula, the Persian/Arabian Gulf, and Southwest Asia, doesn't include Israel within its area of responsibility. Because of the unsettled dispute with the Palestinians, other American allies among the Arab states in the region would refuse to participate in any coalition or regional defense scheme which included Israel.

Evidence of the hollow nature of the "Israel as a strategic asset" justification for U.S. foreign aid came during the Gulf war. After Iraqi Scud missiles landed in Tel Aviv, Israel insisted that it would use its own air force to destroy the missile launchers in Iraq. U.S. defense officials feared that Israel's involvement in the war would rupture the 37-nation coalition aligned against Iraq. The Israelis maintain that they eventually agreed not to attack Iraq because of the damage that would have caused the coalition. In reality, it's an open secret that the United States refused to give Israel the Identification Friend or Foe (IFF) signals that identify friendly aircraft during U.S. military operations. The truth is, had Israeli aircraft attacked the Iraqis without these codes, the Israeli aircraft probably would have been shot down by coalition aircraft. The forced diversion of coalition aircraft from the main attack on Iraqi forces to find and destroy mobile missile launchers targeting Israel, and the danger to the coalition posed by Israel's behavior during the Gulf war exposed the emptiness of the claim by lobbyists for Israel that their client is a U.S. "strategic asset" in the Middle East.

Congressional decisions in 1991 to grant Israel $700 million in drawdown authority from U.S. military stocks in Western Europe, followed by an additional $75 million drawdown in FY95, were not well received in the Pentagon. The drawdown authority was used by Israel to obtain used F-16 multi-role aircraft, but their categorization as "excess" was false. The F-16s given to Israel were not collecting dust in Air Force hangers, they were protecting American national security interests in Western Europe.

Nor was this the first time that U.S. defenses in Europe were jeopardized to protect Israel. The sharp drawdowns of U.S. equipment in use by American forces in Europe and the U.S. to re-arm Israeli forces during and after the October 1973 war left U.S. components of NATO forces dangerously unprepared for possible Soviet attack for many months. Significant resentment remains among members of the U.S. armed forces who believe Congress twice put their own and the nation's safety at risk on behalf of Israel.

Israel's Arrow anti-tactical ballistic missile is another program of little or no benefit to the United States. It doesn't show up in U.S. foreign aid totals, but it is funded by American taxpayers. Since its inception in 1988, the Arrow program has cost the United States over $653 million, and U.S. officials have promised Israel at least another $711.3 million through FY2001. (For a complete breakdown of U.S. aid to Israel's Arrow program, see the October/November 1995 Washington Report on Middle East Affairs, p. 12.) The money comes from the budgets of the U.S. Air Force and the Ballistic Missile Defense Organization and, with the exception of $97.9 million of Israel's "share" paid with U.S. FMS aid money, all of the Arrow's costs to the United States are in addition to Israel's portion of the U.S. foreign aid budget.

Israel's lobbyists argue that the Arrow should not be considered "foreign aid" because it is an example of U.S.-Israeli "strategic cooperation" and both sides benefit from the project. That is nonsense. The Pentagon has made it clear that it has no intention of buying the Arrow, a relatively low-technology ATBM unsuited for U.S. defense needs.

Further, the transfer of technology in the Arrow program is decidedly one-way: from the United States to Israel. It took significant amounts of U.S.-origin technology and technical guidance to get the Arrow off the ground. Arrow advocates maintain that the technology developed by Israel for use in the Arrow's seeker, the device which tracks ballistic missiles, aided in the development of the U.S. Army's high-technology Theater High Altitude Area Defense (THAAD) system. No one, however, is willing to argue that the money spent in Israel on the Arrow program produced better results for U.S. theater missile defense systems than would have been produced by the same amount of U.S. money spent in the United States.

Pentagon funds also go to Israel via U.S. purchases of Israeli-produced or co-produced military hardware. If these American purchases from Israel were used to offset the cost of Israeli military purchases from the U.S., it might be considered a normal two-way relationship. Instead, Israel uses its FMS appropriations from the U.S. foreign aid budget for its purchases from the U.S., and the U.S. uses Department of Defense funds for its purchases from Israel. U.S. taxpayers foot the bill for both sides of the two-way trade, but only the Israeli purchases show up in the published totals of U.S. taxpayer-funded foreign aid. Thus U.S. taxpayers fund the export of U.S. jobs to Israel, since all of the military equipment the U.S. government purchases there also could be purchased from U.S. manufacturers.

Over the past decade the Pentagon has provided funds for research and development and/or purchase of Israeli-made mortar shells, external fuel tanks for CH-53 helicopters, night-vision equipment, external fuel tanks for F-15 fighter aircraft, rear stabilizers for F-16 multi-role aircraft, unmanned aerial vehicles (UAVs), tank armor upgrades, air-to-ground missiles, attack helicopter targeting systems, a television weapons sighting system, communications equipment and two experimental laser programs. The Pentagon's FY96 appropriations bill, for example, authorizes $20 million for the Hunter UAV (co-produced by Israel); $39 million for the AGM-142 HAVE-NAP air-to-ground missile; $14 million for reactive tank armor upgrades; $38 million for AH-1 Cobra attack helicopter night-targeting systems; an unspecified amount for the Single Channel Ground and Airborne Radio System (SINCGARS) and $5 million for the Nautilus laser program. Congress's decision to include these items in the Pentagon's funding authorization earned it praise from Israel's principal Washington, D.C. lobby, the American Israel Public Affairs Committee (AIPAC). The Aug. 14, 1995 Near East Report, a biweekly newsletter published by AIPAC, praised individual congressional committee members by name for their role in promoting this Pentagon-funded "U.S.-Israeli Strategic Cooperation."

The Immigration and Naturalization Service also purchases equipment from an Israeli company. In November 1995, INS officials announced that the Israeli Elbit firm will supply the U.S. border patrol with 500 long-range infrared surveillance systems over five years for a total cost of $17 million. This contract, which is similar to those arranged by the Pentagon, would have to be placed with American companies if the U.S. "Buy American" act were enforced. Instead, Israeli firms have been exempted by Congress from that piece of U.S. legislation and therefore are allowed to compete with American companies for U.S. government contracts.

The Department of Commerce budget also contains funds for Israel's use which appear nowhere in U.S. foreign aid totals. One example is joint sponsorship of the U.S.-Israeli Science and Technology Commission for which, in FY95, the Department of Commerce provided $5 million. Pending legislation for FY96 requests an additional $2.5 million. This money funds joint technological research by the U.S. and Israeli private sectors.

PREFERENTIAL TREATMENT FOR ISRAEL

Not only has tiny Israel been the recipient of the largest share of U.S. foreign aid for many years, it also receives its aid from the United States on uniquely friendly terms. Many congressionally mandated benefits to Israel are applicable to no other recipient nation in the world. One example is in the way its ESF funds are disbursed. Unlike all other U.S. foreign aid recipient countries, which receive their funds on a quarterly basis, since 1982 Israel has received its annual foreign aid in one lump sum, usually paid by the end of the first month of the U.S. fiscal year. In order to provide the full amount to Israel in this manner, the United States government pays between $50 and $60 million in additional bank charges, which are not deducted from the money given to Israel. Israel then reinvests the aid money in U.S. Treasury notes, earning between $80 and $90 million in interest paid by U.S. taxpayers.

The importance to Israel of this unique advance distribution arrangement was highlighted during the recent dispute over anti-abortion language added to the foreign aid bill by pro-life members of Congress. Because President Clinton refused to sign the bill as it was submitted to him, the impasse held up the distribution of Israel's aid money. This led Israeli Ambassador to the United States Itamar Rabinovich to complain about the delay. "The longer we have the money the more interest we earn," he explained. No one in the U.S. government dared to point out that "the longer the U.S. delays in providing the money to Israel the less the U.S. taxpayer has to pay in interest."

Another benefit Israel receives, along with several other FMS recipients including Egypt, is cash flow financing, which allows Israel to pay only the current-year charges for multi-year FMS contracts. Other countries that purchase defense items over an extended period of time are required to set the total amount of the contract aside in their FMS account. Israel pays only the required installment for that year, which analysts say creates a commitment on the part of the United States government to furnish more aid during the following years to pay for the already agreed-to contracts.

Israel also enjoys considerable latitude in its FMS account. In purely commercial contracts it is common for purchasers to negotiate price offsets based on the incorporation of technology from the purchasing country into the foreign item to be purchased. In FMS contracts, however, the intention is to provide customers for U.S. defense companies, and offsets are not allowed in items purchased with FMS funds,except, of course, in the case of Israel. Unlike any other country receiving U.S. FMS credits, Israel can negotiate with U.S. defense companies for offsets from its own (and largely U.S.-subsidized) defense industry, thereby lowering the cost of the items it purchases and providing jobs for Israelis by reducing jobs in the American companies providing military goods and services to Israel.

ISRAELI VIOLATIONS OF U.S. LAW

Despite the remarkably generous treatment given to Israel by the United States government, Israel consistently has abused its relationship with Washington and has shown blatant disregard for U.S. laws. There are two important conditions for receiving U.S. military aid that Israel has violated repeatedly. Under the Arms Export Control Act, military hardware provided by FMS funds can be used only for defensive purposes or to maintain internal security. Israel violated this agreement during its 1982 invasion of Lebanon when it used U.S.-made cluster bombs against both military and civilian targets in Lebanon. In response, Congress suspended the sale of cluster bombs to Israel, a ban that remains in effect today. In reality, however, Congress suspended only the sale of cluster bomb casings to Israel, not the bomb components themselves. Now Israel manufactures its own casings, and procures the rest of the cluster bomb components from the United States. So far this circumvention of U.S. law has not been challenged.

The most egregious allegations of abuse of the U.S.-Israeli relationship by Israel have arisen from illegal transfers of U.S. technology from Israel to third countries. According to the Arms Export Control Act, Israel is forbidden from retransferring U.S.-origin defense items to third parties without the permission of the United States government. However, according to officials in the U.S. intelligence community, the Pentagon and the State Department, Israel has or may have retransferred sensitive U.S. technology to Ethiopia (during the reign of a communist government there), South Africa (during the apartheid era), Chile, Venezuela and communist China. Among the items allegedly transferred were the Patriot theater ballistic missile defense system and the largely U.S.-funded Lavi next generation fighter (see the January 1996 Washington Report on Middle East Affairs, p. 12, for the Lavi; September 1995 Washington Report on Middle East Affairs, p. 8, for Israel's retransfer of U.S. technology).

Israel's retransfer of U.S. defense technology, virtually all of which is provided to Israel by U.S. taxpayers, threatens U.S. national security, creates unfair competition for U.S. defense firms, and has strengthened regimes guilty of serious human rights abuses or actively working against U.S. national interests. Israel's supporters in Congress, however, do not seem to care.

At least nine reports of Israel's illegal retransfer of U.S. defense items have been given to Congress, including two in January 1995. None has had a discernible impact on Israel's retransfer policies. Israel continues to receive massive amounts of U.S. aid and then derives additional profits from that aid by breaking the conditions of U.S. aid agreements in ways that export more U.S. jobs and threaten the security interests of the United States.

ISRAEL'S ECONOMY

Supporters of foreign aid in general and aid to Israel in particular argue that America's foreign aid program is a necessary component of its foreign policy. In many cases foreign aid can be justified either on the basis of the recipient's need, the benefits to the United States from providing that aid, or both. Israel, however, does not meet either of these criteria. In 1995, Israel's per capita Gross Domestic Product (GDP), the value of a nation's annual production divided by the number of its citizens, exceeded $14,000, placing it above that of Spain and approaching that of England. Israel, as Israeli minister without portfolio Yossi Beilin recently pointed out, "is not a poor country."

Why so much aid then? Since Israel is not a needy country, the secondary justification for aid, that a country or countries are so valuable to the donor that aid is justified, generally is invoked in the case of Israel. Israel's lobbyists and supporters emphasize Israel's role as a "strategic asset" and its importance to the United States based on their "special relationship." The former argument was not valid even during the Cold War, when U.S. support of Israel was exploited by the Soviet Union to garner allies throughout the Middle East among countries that had no conflict with the U.S. but were bitterly opposed to Israeli occupation of Arab lands. That Israel remains a strategic liability in the Middle East was vividly demonstrated during the Gulf war. Then and now U.S. government officials privately expressed anger over the economic and military bonuses demanded by Israel for staying out of the war. These included $700 million in military hardware, a $300 million addition to the U.S. military stockpile in Israel and $650 million in extra economic support funds for FY91.

The so-called "special relationship" between the United States and Israel is, in fact, a domestic political arrangement whereby lobbying organizations in the United States, directed by the Israeli government, and a network of political action committees established and, to a large extent, directed by that lobby, reward presidential candidates and members of Congress for continuing massive amounts of U.S. aid to Israel while simultaneously ignoring massive violations of U.S. laws.

At the same time that Congress and the president are locked in a titanic struggle over the size, shape and direction of the federal budget, they have openly agreed, without debate, that in the 1996 fiscal year alone, American taxpayers will provide Israel $3.5053 billion ($3,505,300,000) in U.S. grants and $2 billion in loan guarantees (see table), and they have quietly pledged continued aid at similar levels in the future.