Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives

Abstract

An analysis of more than 4,200 economic development incentive awards in 14 states finds that large companies received dominant shares, ranging between 80 and 96 percent of their dollar values. The deals, worth more than $3.2 billion, were granted in recent years by programs that, on their faces, are equally accessible to small and large companies. Yet big businesses overall were awarded 90 percent of the dollars from the programs analyzed, indicating a profound bias against small businesses.The fact that there is a slight amount of variation in the degree of big-business dominance among the states is not meaningful, since the programs vary in their targeting as does the industrial composition of the states covered. The key finding is how consistently the programs favor big businesses. This study errs to the generous in counting small businesses by assuming every award is to a small business unless proven otherwise. It also uses a multiple-variable set of criteria to define large businesses, informed by the small business groups whose opinions we recently published. Those criteria account for employment size as well as total number of establishments and local or independent ownership. Given small businesses’ important role in the economy — and their still-lingering credit access problems coming out the Great Recession — this massive allocation of tax breaks to big businesses is wasteful and ineffective economic development policy. As a policy solution, we do not recommend a simple reallocation of deals and dollars. Incentives such as those analyzed here often mean little to small businesses. Small business leaders whom we surveyed in our recent report In Search of a Level Playing Field, say that public goods such as education, transportation and job training that benefit all employers deserve more support. They emphasized that the long-lingering credit crunch from the Great Recession is their greatest challenge. To fund these public investments and credit access needs, we recommend that states reform their incentive rules by narrowing eligibility to exclude large recipients. One could call it means testing corporate welfare. To do so is entirely consistent with the theory of incentives, which is to address “market imperfections,” or to “prime the pump” and then pull back when the market’s invisible hand takes over.At the very least, states should substantially reduce the total amount of subsidy dollars flowing to big businesses, using safeguards such as dollar caps per deal (to end the surge since 2008 in nine- and ten-figure “megadeals”), dollar caps per job (to prevent the astronomical subsidy rates associated with capital-intensive projects like micro-chip fabrication plants), and dollar caps per company (to prevent a dominant employer from distorting spending).