Photo: Ribbon cutting at a Walmart expansion.

States Shower Big Companies with Economic Development Incentives, at Small Businesses’ Expense

Date: 21 Oct 2015 | posted in: Retail | 0 Facebooktwitterredditmail

Over the last decade, Kerry Olvera and her co-owners have expanded Supermercado Mexico near Grand Rapids, Mich., to three grocery stores and a commercial bakery. They’ve quadrupled the staff from 12 full-time equivalent employees to 50.

To finance all of this growth, they relied entirely on their own scraped-together capital and hard-won bank loans.

“We’re 100 percent invested in this, our houses, everything,” says Olvera.

While local entrepreneurs like Olvera finance their own growth, they’re largely cut off from a plentiful stream of public capital available to their larger competitors, according to a study released Tuesday by the research group Good Jobs First. The group looked at state economic development programs that purport to be open to businesses of any size, and found that they overwhelmingly favor large companies.

The study, titled Shortchanging Small Business, analyzes 4,200 economic development incentives awarded through programs in 14 states, and finds that 90 percent of a $3.2 billion total pot went to large firms, defined as those with 100 or more employees or 10 or more locations. In some states, that figure climbed as high as 96 percent.

“It’s really surprising, and it’s frustrating, and it’s angering,” says Olvera of the study’s findings. “We’re really working hard to make ends meet.”

Take a program like Nevada’s “Personal Property Tax Abatement,” which cuts the personal property taxes of companies locating or expanding in the state by as much as 50 percent over 10 years, if the projects meet two of three wage, job, and investment requirements. Between 2007 and 2011, the program awarded 73 deals valued at $56.1 million, with 96 percent of those dollars going to large companies.

The bias of programs like these is despite the fact that extensive research shows that small and locally owned businesses deliver out-sized benefits to local economies. New and growing small firms, for example, account for the majority of net job creation, and unlike the branches of global companies, they also create extensive local supply chains. By privileging large firms, these programs award taxpayers’ dollars where they’re least needed, and put another way, make it so that small businesses have to watch a portion of their tax dollars go to subsidize their biggest competitors.

States’ economic development programs are in need of policy reform. Good Jobs First urges states not to simply reallocate subsidy dollars to small businesses. Instead, the report recommends that states tighten their rules to exclude the largest companies from these giveaways and institute dollar caps per deal and per company. With the savings, states should invest in expanding credit access for small businesses and in the types of broad public goods, like transportation and job training, that benefit all employers.

Part of what’s held back reform so far is that the large sums states and cities spend subsidizing big companies are largely invisible to citizens. These public expenditures usually take the form of foregone tax revenue—i.e., tax breaks—rather than the direct outlays that show up in state budgets. Earlier this year, ILSR joined with Good Jobs First and our small business allies in a successful campaign to require that states and cities annually disclose the total value of these deals. The reform will take effect at the end of 2015.

Avatar photo
Follow Olivia LaVecchia:
Olivia LaVecchia

Olivia LaVecchia is a former senior researcher with ILSR’s Independent Business Initiative. Her work focused on building awareness and support for public policy tools that strengthen locally owned businesses and check concentrated economic power.