Want to Strengthen Independent Businesses? Use These Policies (Episode 51)

My guests this week are Stacy Mitchell, a frequent host of this very podcast, co-director of ILSR and the director of our Community-Scaled Economy Initiative, and Oliva LaVecchia, a research associate and excellent writer for our Community-Scaled Economy Initiative.

Stacy and Olivia, welcome back to Building Local Power.

In each of these planks we have policy tools at the local, the state, and the federal level, so there are a lot of different places to start.

It also works on another level, which is it really speaks to ILSR’s overall thesis about what’s happening in the economy. As we’ve seen more and more consolidation, a handful of companies that have gained control of a lot of different industries, this loss of small businesses and the decline of local economies, growing inequality, our analysis shows is that those things didn’t happen by happenstance. They didn’t just come about. That these really are products of deliberate policy choices that have been made over the years that have favored big businesses over small, that have favored consolidation over local economies.

So this policy guide is a way of illustrating how that is. Of showing what are the big, major areas of policy that have driven consolidation and undermined local economies, and what would it look like if we made different decisions in each of those areas of policy?

So it works on both of these levels, both as a guide and as an explanation for what our research overall has found. The last thing I want to say about this is that this is really a living document, and so we’ll be adding to it over time and we’d love to hear from listeners. If you have ideas or things that you think are missing, let us know.

One the things that we’ve seen is that small business lending has declined sharply over the last 20 years and loans to large businesses and capital availability to very large companies has expanded dramatically. So this is one of the things that’s really fueling the structural changes that we’ve seen in the economy. Figuring out how to change that and open up more financing and get financing, get our collected capital really directed into the right places, is a key part of this plank, and we outline a number of different ways to do that.

What do you think one of the most exciting policy recommendations you have in here on this capital question is? I see a few of these things in here that are at some of the more federal level, but what can communities do?

I think one of the more exciting policy tools that we see out there is the idea of starting a public partnership bank. We’ve written a lot about the Bank of North Dakota, which is the only publicly owned bank in the country. It’s a wholesale bank you could say, it actually partners with local banks and makes local banks and credit unions much stronger as a result of that partnership.

North Dakota is a state where 83% of the deposits in the state are held by locally owned banks and credit unions. That’s compared to less than 25% nationally, so a really big difference. North Dakota also has much higher levels of small business lending and lending to farms than any other state does. It’s really quite remarkable.

This is a model in North Dakota that’s been around for decades and decades, it dates back to about 1919, but now what we’re seeing is a lot of cities are beginning to look at this and say, “If North Dakota can do this, than we can do this at the city level.”

We know Oakland is talking about this, Santa Fe is looking at it, and in fact this fall residents of Los Angeles are actually going to vote on whether or not to establish a city-owned bank. It’s a really great solution to basically taking control back from Wall Street and bringing our financial capacity back to our communities.

That transitions nicely into another plank of this, which is the built environment that supports these local businesses. You need a better development to enable small businesses, more walkable communities, those types of things. So maybe you could just give us a sense, Olivia, on what this built environment question looks like for small communities, and big communities as well?

Independent businesses, they generally do really well in a built environment that is varied, is diverse, is walkable, made up of a lot of storefronts of different sizes, and particularly small sizes. Cities can design an environment that looks like that.

In our guide we have a bunch of different examples of different tools to use here. There are policies that cities can use to encourage commercial diversity, so to say we want a lot of different types of businesses.

There are also policies they can use to ensure that new construction includes space that is appropriate for locally owned businesses, and not just the big spaces that are much more suited to a national chain and not accessible to them, both because those spaces are more expensive and because it’s a somewhat different kind of business model.

One thing about these built environment policies too is that they kind of work as solutions to a range of different problems. Some communities are trying to revitalize downtown’s and figure out ways to bring businesses into vacant storefronts, and others have a lot of development and rapid investment and are trying to figure out how to mitigate displacement, or ensure that that growth is distributed equitably. But a lot of the built environment tools that we talk about in this plank of the policy guide work for both situations and for a range of situations in between them.

I’ll note that for listeners of the podcast, we also interviewed AnMarie Rodgers, who is in San Francisco, that helped develop a [inaudible 00:12:04] business restriction, as well as Chuck Marohn of Strong Towns, who talks a lot about good, solid development in cities, and talks about maybe where people have gone wrong in the past.

So it seems to me as well that some of these development programs, they necessitate a little bit of an infusion of cash, some tax dollars that are going to be able to help build some of that new development program and those solid things for the community. So Stacey, can you get into the tax system? I know it seems like that’s a big question, but what can local communities do to improve their situation?

One of the consequences of these loopholes is that a lot of global companies are able to pay much lower tax rates than independent businesses are. Amazon, for example, benefits from what a Newsweek investigative reporter has described as an extremely advantageous tax rate by virtue of having subsidiaries in Europe and elsewhere where it shifts around its profits and thereby gets out of having to pay income taxes on those profits.

Over the last five years Amazon’s paid an average effective tax rate of 11%, which just to give you a sense is, a typical independent retailer without a subsidiary in Luxembourg or the Cayman Islands, they’re paying twice or three times as high a federal tax rate as Amazon is.

So it’s a very un-level playing field, and to just take a very different and very local kind of example of how this plays out, if you think about our property tax system. Property taxes supply a large share of the revenue that local governments rely on. How we structure our property tax system really has a lot of implications for the built environment and then ultimately independent businesses.

One example of this is that we typically don’t tax land at a very high rate, we tax the value of the building. So what that means is that a big box store with huge acres and acres of parking around it, that’s relatively low value. It’s a cheap building, parking lots are not expensive, so the amount of tax revenue that a typical big box store pays is quite low per acre. Whereas if you have a mixed use, multi-story, downtown building with either underground parking or no parking, that per acre is a lot of property tax revenue.

Likewise, there’s a disparity that a big box costs a lot more in terms of the services that you have to provide to it because it’s so sprawling, everything that it needs is a lot more intensive use of the services, whereas that compact downtown block doesn’t require nearly as much expenditure and services.

The result of this favorable treatment of the big box stores and the property tax system is that that type of development is essentially incentivized, and is cheaper to create. We could think about reversing this. Say we made service parking lots super expensive from a property tax standpoint. Say we actually valued land as a higher share of the overall property tax bill. That would change those dynamics, and it would make that kind of development less attractive, and it would make the mixed use, small scale, walkable development more attractive.

Those are a couple of examples. In our policy tool kit we talk more about this issue of how cities, states, and federal government can approach the issue of taxes, but that gives you a sense of why this matters and the landscape that’s out there.

I think that that’s a really useful thing for our audience to hear, because it almost inherently says you look at a local hardware store, or you look at a local printing shop, you know there are spillover benefits. You look at a local, I should say a not very local Best Buy store, or something like that, and you’re saying, “Well, I don’t really know what the spillover benefits are besides like if my nephew works there,” or something like that. I think that it’s a useful thing that those are not parts of the community in the ways that independent businesses are.

Along that same track of those big box stores, I’m wondering … there’s a plank in here about economic development incentives that I think fits nicely with this, and fits nicely with some of the conversations that we’ve been having on this podcast about what kinds of retail we preference. I’m hoping you can get into that a little bit, Olivia.

A lot of other research has found that on metrics like job creation and other really vital ways to measure these programs, they also aren’t even that effective. They don’t work that well. How do we rethink economic development? In the guide we go over a few ideas, and they cover sharply reducing incentives and subsidies that go to economic development, but in cases where they are still used making them a lot more transparent and more equitably available to different types of businesses. The ideas include ways to make economic development more about investing in the kinds of public goods that benefit all employers.

Then finally, some of the ideas here also include ways to make targeted public investments, particularly in communities that have been economically marginalized. One of the examples that we give in that area is a program in Pennsylvania, the Pennsylvania Fresh Food Financing Initiative. This was a loan program that was seeded with state funding that provided financing for more than 80 grocery stores in low income neighborhoods in both urban and rural parts of this state. It’s a great example of how public financing was involved here, but it worked to advance multiple goals that were in the public interest, along with economic development.

There’s a lot of downsides to trying to just attract these large companies, when in a lot of ways it’s choking out some of the really great things in independent businesses and retailers that could actually be improving the local economy and making it more resilient overall, because if that plant or if that larger company shuts down, leaves, decides that it’s more economic to do something somewhere else from a far away decision, than that community can be devastated. I think that’s something that, Stacey, you’ve written a lot about in terms of Walmart overbuilding and then retracting back as well as we see moving forward.

So I think that that’s a really useful plank for this, saying that if don’t do these local things, your community could really be harmed.

So yeah, you’re absolutely right. As we think about these policies it really is about how do you build a resilient community and how do you have a level of community self determination really about your future?

I think this is one of the most profound feelings that you encounter out in the country right now is that a lot of people and a lot of communities really feel that they’re at the mercy of these outside forces, and a big part of what we’re working on here at ILSR is what are the tools you need to take charge of your local economy, and to actually have ownership and decision making local, and have that control into the future?

We used to really embrace the idea through much of the 20th century that policy ought to work to decentralize economic power, to structure the economy in ways that opened up opportunity, that encouraged competition, that created more room for people to come in and find work, find jobs, that there was a greater diversity and dynamism. That was the goal.

Also, that we really wanted to have economic capacity dispersed across all the different regions and areas of the country, that having it highly centralized in specific companies in specific locations was not good for the country, and was not good for democracy. So that was the reigning thinking for many decades through the 20th century and that really shifted quite radically beginning in the 1970s.

So the last plank of our policy guide is really about how we need to reclaim competition policy, anti-trust, and really make this idea of an equitable, decentralized economy once again central to how we interpret these laws and how we make new laws in this area.

A big part of that, as I’ve already described, is that we need to reform anti-trust in a big way, and we’ve of course talked about that in a number of different episodes of this podcast, but there are other things too. Some of the kinds of ideas that we talk about at the state and local level include things like having a pharmacy ownership law, and we highlight North Dakota as a really innovative state that has prohibited pharmacies from being owned by corporations. If you want to operate a pharmacy in the State of North Dakota you have to be a pharmacist, and the result is that they have a pharmacy network that is entirely made up of locally owned independent pharmacies and our research has found deliver lower prices and better outcomes than what you see in other states.

We also highlight ways to approach this at the local level. We talked a little bit earlier about formula business ordinances. An example of that is in Jersey City, where the downtown area they have an ordinance that says that no more than 30% of the ground floor retail space can be inhabited by formula businesses or chains.

So they have a way of essentially saying, “We know that chains have a lot of advantages in this market. We know that real estate and financing all work to favor chains, and this is a law that ensures that there’s going to be ample room for independent businesses and that we really have a balanced, dynamic, open economy for those businesses to thrive.”

I think that it’s a really useful thing when you think about airlines, when you think about … one of our co-founders’ favorite example is toothpaste. When you think about beer. All these type of things are really ruled by monopolies, and pointing these things out and making people aware of them is really important from just the personal level.

I know I’ve had many conversations with people in my life where they had no idea that all these different … I’ll use a personal example, beers, are owned by the same company. It’s just useful to point out and say, “There is really something we can do about this. There is something that we can encourage our elected officials to do, encourage our local leaders to do, as well as people at the statehouses all throughout the country.”

I think that these are a number of really, really great recommendations for all of our listeners to print out, bring to their city councils, to their state legislature, their elected officials, on the federal level as well.

So we hope that this guide offers some ways to be hands on too, and to really get the tools you might need to start thinking about this or doing it in your own communities.

The really amazing thing about this is I went home and started to read more about this fish migration and it was actually interrupted for many years by dams along the river that I had gone out to. Reading about those dams and then the real local and grassroots efforts to remove those dams and to restore this fish migration, I thought it was a really good example, a hopeful example of local activism, and the kind of change that people can make on the local level.

It’s not just some spiders that fly, lots of spiders fly, and they fly for miles and they can cross oceans. They do it by extending this little piece of their silk thread, I’m probably explaining the physics wrong, but it’s kind of like a really good parachute so that they actually stay aloft and they can float for miles and miles and miles on currents of air. There’s this incredible video of it.

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Once again, please help us out by rating this podcast and sharing it with your friends on iTunes, or wherever you find your podcasts. This show is produced by Lisa Gonzalez and me, Nick Stumo-Langer. Our theme music is Funk Interlude by Dysfunkshunal.

For the Institute for Local Self-Reliance, I am Nick Stumo-Langer, and I hope you join us again in two weeks for the next episode of Building Local Power.