There’s no doubt you’ve heard it: state politicians praising small businesses for their role in job creation. In 2012, Governor Rick Scott declared that “small businesses are the backbone of Florida’s economy.” Last year, New Mexico Governor Susana Martinez said “when small business innovators and entrepreneurs thrive, our economy thrives.” The politicians are right: In fact, the Small Business Administration estimates that 99.7 percent of all firms are small businesses. Other research has shown that startups and firms already located in a state—not companies relocating there—create the vast majority of jobs.
So you’d think that politicians would go far to support small and entrepreneurial companies. Unfortunately, you’d be wrong.
“When small business innovators and entrepreneurs thrive, our economy thrives.”
Every state has an agency or two in charge of promoting job growth. For instance, Virginia has the Economic Development Partnership, Nevada has the Governor’s Office of Economic Development, and Florida has Enterprise Florida. Those agencies award and administer various businesses incentive programs, sometimes called “corporate welfare”—corporate income tax credits, upfront grants, sales-tax exemptions, free or cheap land, discounted energy for data centers. Kenneth P. Thomas, author of Investment Incentives and the Global Competition for Capital, estimates that state and local agencies spend about $70 billion a year in public money on economic development
Over the years, Good Jobs First, a national policy resource center that promotes transparency and accountability in economic development and where I work as a researcher, has observed that too often the $70 billion goes to large, out of state, publicly traded companies that don’t need public assistance to thrive. After years of surging nine- and ten-figure “megadeals” (that’s what we call incentive packages of $50 million or more), we decided to put our observation to the test.
We conducted three studies to find out if what we have suspected for years was true: that there is actually a profound bias against small business in the allocation of state economic development dollars, and that the amount of incentives to attract or retain large companies dwarfs resources dedicated to support small and locally grown companies.
In 2015, we interviewed 41 leaders of small business organizations in 25 states representing 24,000 member businesses. They told us they believed that spending on business incentives in their states favored large corporations and that the current incentive system was not fair to small companies. “We suffer from the paradigm that it’s always better to bring in a business from outside to bring new jobs rather than investing locally to grow the economy,” one leader told us.
On top of that, we found that there is a mismatch between what small businesses need and what is offered to them by state economic development agencies. “Small business owners don’t call for more tax breaks or fewer workplace standards,” another leader told us. “They … need more customers in their stores, purchasing the products and services that they sell.” What small businesses really need, we found, is investment in their communities and customers who felt economically secure and had stable, well-paid jobs that gave them extra money to spend. By supermajorities, small business leaders said state tax incentives aren’t useful to small or growing businesses.
That same year, we examined 16 economic development programs in 14 states. Those programs were officially open to companies of any size. In theory it didn’t matter if a firm had two or 2,000 workers—the playing field was supposed to be equal for everybody. But we found that 70 percent of the incentive awards and 90 percent of the dollars were going to big business.
In 2016, we examined overall economic development budgets in three diverse states—Florida, Missouri, and New Mexico. We again found that large recipients dominated: 68 percent of state economic development spending goes to large companies and programs that support those companies. Only about 19 percent of economic spending benefits small companies. (The rest couldn’t be clearly assigned.)
What small businesses really need, we found, is investment in their communities.
Those studies helped us conclude that to achieve a more just distribution of economic development resources, we need first to narrow eligibility to exclude large, multistate companies from accessing incentive programs. Those companies already have access to capital and markets and are less likely to need public support. At the very least, we need to put caps on the subsidies available to each company.
The idea is to limit and control the amount of public money companies receive for each job or deal. This would eliminate large awards associated with capital-intensive projects that create very few jobs, and would ensure that states do not overspend on each job. These reforms would save money that could be redirected to help small businesses overcome their persistent credit crunch. States would also have more resources to focus on bigger-picture priorities such as investing in Main Streets and communities, educating the workforce, and upgrading infrastructure.
Even though no states exclude large companies from their major subsidy programs and only very few programs have well-defined caps, some state governments have started to understand that economic development tax incentives can create revenue shortages for services that small businesses need and advocate for.
This year, for example, Louisiana has paid out more in tax credits to corporations than it has collected from corporate income and franchise taxes. Gov. John Bel Edwards, facing another year of budget deficit, wants to evaluate the effectiveness of major tax incentives in the state and advocates for trimming the amount of breaks available to companies.
Florida, too, has moved in the right direction. Gov. Rick Scott wanted to create a special “deal-closing” fund that would attract companies from other states. He asked for $250 million for that purpose, but the state legislature rejected his request and instead gave him nothing. This is unprecedented. Florida legislators were bold in advising the state’s privatized economic development agency what to do next: “Be creative,” they said.
Now Florida has a chance to focus on what truly matters in economic development.