States are stiffing America's small businesses

Across $3.2 billion in state subsidies, 70 percent of the deals and 90 percent of the dollars went to large companies.

Politicians praise small businesses as habitually as they laud veterans and first responders. And they should: Local businesses generate better economic ripple effects than national chains.

As a review of academic research pointed out, young entrepreneurial firms account for an outsized share of new-job creation. But you'd never know that to watch state spending on big-ticket deals: The "economic war among the states" is still on steroids, and Florida Gov. Rick Scott has picked up where Texas Gov. Rick Perry left off, openly pirating jobs from other states. Yet as a little-known database has long revealed, interstate corporate relocations typically represent only 1 percent to 4 percent of total job creation each year.

Small business with American flag
Richard Cummins | Getty Images

Despite their knee-jerk praise of small businesses' contribution to the economy, state officials don't put their money where their mouths are — they are seriously shortchanging small local firms and entrepreneurs when it comes to economic development tax breaks.

That's the conclusion we at Good Jobs First came to after two recent studies looking at several thousand tax-break deals and many dozens of state budget items.

In our first study, Shortchanging Small Business, we analyzed which size of companies benefit the most from a shortlist of tax-break programs that are open to all comers. We looked at more than 4,200 economic development incentive awards in 14 states and found a surprisingly consistent pattern of bias in favor of large, usually multistate or even multinational firms.

These firms — defined as those with at least 100 employees (or those not independently or locally owned) or with at least 10 establishments — received a dominant share of subsidies: 70 percent of the deals and 90 percent of the dollars. The deals, worth more than $3.2 billion, were granted by programs that are, on their faces, accessible to both small and large companies.

For example, Kentucky's Business Incentive Program grants corporate income-tax credits for up to 15 years to manufacturers, agribusiness firms and headquarters facilities. Among its beneficiaries: Lockheed Martin, General Motors and subsidiaries of ConAgra Foods. All told, big businesses received 75 percent of the deals and 91 percent of the dollars.

The biggest state-subsidy deals

In the 14 states included in our Shortchanging Small Business study, these are the biggest subsidy deals given to large public companies in each state. More information is available through the Good Jobs First Subsidy Tracker.
Note: Dollar value may include multiple subsidy awards:

Florida: Northrop Grumman ($486 million)
Indiana: General Motors ($780 million)
Kansas: General Motors ($418 million)
Kentucky: Toyota ($564 million)
Louisiana: Sempra Energy ($2.3 billion)
Missouri: Cerner ($1.7 billion)
Nevada: Tesla ($2.4 billion)
New Mexico: Intel ($2.7 billion)
New York: Alcoa ($5.7 billion)
North Carolina: Apple ($348 million)
Pennsylvania: Royal Dutch Shell ($1.65 billion)
Vermont: General Electric ($13 million)
Virginia: Huntington Ingalls Industries ($98 million)
Wisconsin: Brunswick ($123 million)

Some skeptics (primarily state Commerce Departments) suggested that we cherry-picked the outcome in favor of large businesses (though in fact we'd excluded hundreds, going to great lengths to find valid programs open to companies large and small alike).

Programs selected for review needed to require no more than 10 new jobs, or $100,000 in investment, with a preference for programs that have no thresholds for participation. While there are hundreds of programs to choose from, the vast majority of programs have barriers to entry, handicapping small businesses. It was hard to find a subset of programs that was truly agnostic.

So to test that cherry-picked critique, we performed a second analysis using a different angle. In Slicing the Budget Pie, in three states that had sufficient spending disclosure, we looked at the entire states' economic development incentive budgets. Once again — in New Mexico, Florida and Missouri — we found a sharp and consistent bias against small businesses: They received only 19 percent of the total state investments (while large firms got 68 percent, and 13 percent of the spending could not be clearly assigned). This was true, even though we added on the entire administrative budgets of the states' small-business technical assistance programs (as well as the tax breaks).

Though many small-business networks welcomed and circulated our findings, few were surprised. Indeed, in a survey of 40 small-business organizations, with 24,000 member firms in 25 states, which we conducted prior to digging into the spending data, super-majorities of small business leaders told us they do not feel fairly treated or well served by state economic development incentive programs.

Correcting the imbalance

What can states do to rectify this imbalance? We recommend fixing the eligibility rules for the programs to intentionally disqualify big businesses. Why? Because, by definition, large firms have competitive "moats." They have access to credit, management depth and established markets, so they shouldn't need government assistance. Subsidizing them does not match the definition of "incentive," but rather "windfall."

Short of excluding big businesses, we recommend that states spend less on large companies by using safeguards, such as dollar caps per deal, dollar caps per job and dollar caps per company.

Some might quip that this is testing corporate welfare. We call it smarter investing of taxpayer dollars for a better return on jobs. The textbook definition of incentive is to cause something to happen that should happen but isn't, because it won't happen until public dollars reduce private risk. Does subsidizing a ConAgra or Boeing really move the needle? Or could the same dollars actually make a difference for dozens of small businesses with credit access, technology diffusion, customized training and export assistance?

By Greg LeRoy, executive director of Good Jobs First, a nonprofit, nonpartisan resource center promoting accountability in economic development. Founded in 1998, it is based in Washington D.C.

The Ewing Marion Kauffman Foundation and the Surdna Foundation provided support for the studies cited in this commentary.