Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He is a University Professor and Director of Cities at the University of Toronto’s Martin Prosperity Institute, and a Distinguished Fellow at New York University’s Schack Institute of Real Estate.
States say they want to help independent businesses, but large companies take the majority of the dollars.
It’s become a mantra across the United States: Attracting and growing small businesses is the key to creating jobs and powering economic development. Just this month, Hillary Clinton kicked off the first Democratic debate by saying, “When I think about capitalism, I think about all the small businesses that were started because we have the opportunity and the freedom in our country for people to do that.” Governors and mayors from both parties have designed programs ostensibly to help small business grow in their states and cities.
The degree to which small businesses add to the economy remains an open question. What’s without question, however, is that billions of state and local economic incentive dollars seemingly aimed at small businesses flow instead to a few large, well-established, and well-connected businesses. This is yet another example of how the rapidly growing economic-development incentive game remains a perverse and useless waste of taxpayer money.
A new study from Good Jobs First, a watchdog group that tracks economic development, estimates that 90 percent of state and local incentive dollars flow to large businesses instead. The study tracked more than 4,200 economic-development incentive awards (totaling $3.2 billion) aimed at small businesses across 14 states. The study defined small businesses as those with 100 employees or fewer that are independently and locally owned and have nine or fewer establishments. Large businesses are those that either have more than 100 employees, are not independently and locally owned, or have 10 or more establishments.
To identify companies that received economic incentives, the study drew from its Subsidy Tracker database, which includes information on 1,833 global corporate parent companies. The authors then matched these records to data from the 2012 National Establishment Time Series, as well as other data sources such as Duns Market Identifiers Plus, Reference USA, company websites, press releases, and more.
Ultimately, the study found that large companies captured between 80 and 96 percent of these small-business incentives, depending on the state in question.
In simple terms, these large companies have become sophisticated at gaming incentive dollars—including those explicitly aimed elsewhere. Previous Good Jobs First studies (as well as a detailed 2012 New York Times study I wrote about here) show that state economic development giveaways total between $50-80 billion annually, depending on how they are measured. The New York Times study also found that 48 large companies like General Motors (which alone took in a staggering $1.77 billion in incentives from 2007-2012), Ford, Amazon, Microsoft, IBM, and Google raked in more than $100 million each in incentives.
These incentive mega-deals—like the $1.25 billion one collected by Tesla for its gigafactory in Reno—have been rising rapidly as large companies have become increasingly adept at extracting incentives out of state and local governments and economic development agencies. Large companies with deep pockets are the least likely to need government assistance, but they have the resources, staff, and lobbyists to pressure state and local officials for these funds.
Adding insult to injury, Good Jobs First’s interviews and surveys with small businesses find that these businesses do not want or need these incentives, and that a majority of small businesses would prefer public investment flow to broader public goods that benefit all employers like job training, education, and transportation. A detailed report of small startups by Endeavor Insight said that talent was the key factor in the success of these fast-growing, tech-oriented small businesses. And, of course, better access to credit is an ongoing need for small businesses, as the Good Jobs First study points out:
Given small businesses’ important role in the economy—and their still-lingering credit access problems coming out [of] the Great Recession—this massive allocation of tax breaks to big businesses is wasteful and ineffective economic development policy.
Instead of offering tax breaks to large companies, the study concludes that it’s time to end this type of corporate welfare and completely exclude large companies from economic development incentives. The study further suggests that these savings then be redirected toward the kinds of broadly based public investments noted above. The eligibility rules for incentives should be changed so that subsidies flow toward areas with the greatest need, as opposed to going to affluent areas. The study also proposes “dollar caps” on subsidies to prevent large companies from walking away with huge sums.
At the end of the day, the small-business incentives game appears to be just another smokescreen for states and localities to funnel public money to big businesses that—according to nearly every study on this subject—simply do not need the cash. With this information in mind, it’s time to stop this useless and perverse waste of taxpayer money once and for all.