New study finds state subsidies go overwhelmingly to large companies
Good Jobs First has just issued a new report analyzing state investment incentive programs open to small and large businesses alike. With the financial support of the Surdna Foundation and the Ewing Marion Kauffman Foundation, Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives finds that 70% of the awards and 90% of the money goes to large companies. This is a big deal: The justification for many major incentive programs is that they benefit small business. This study is the first in a planned series of reports which show that this claim does not stand up.
If subsidy programs disproportionately benefit large businesses, they reduce market competition and thereby make the economy less efficient. As I discussed in Competing for Capital, subsidies to capital exacerbate income inequality (post-tax, post-subsidy). This effect will be magnified if the incentives are flowing primarily to large firms rather than smaller ones, as this new study suggests to be the case. The report’s findings are relevant to the European Commission’s ruling last week on Starbucks and Fiat, that subsidies created by tax havens harm the ability of small- and medium-sized enterprises (SMEs) to compete.
Shortchanging Small Business looks at 15 incentive programs in 13 states that are well-documented in Good Jobs First’s Subsidy Tracker database, plus one Missouri program that is highly transparent online (and will soon be included in Subsidy Tracker), for a total of 16 programs in 14 states. Overall, these programs account for 4228 individual awards allocating over $3.2 billion.
Note that these are not one-off deals for a large company: For example, as I showed in my special report on North Carolina incentive packages, the deal Google received from the state in 2007 was worth $140.6 million at present value to the company. This dwarfs the $26.4 million over six years given by the One NC Fund, included in this Good Jobs First report, and is only one of a number of megadeals in North Carolina.
Moreover, neither are they apparently open programs with criteria that in fact rule out small companies through the use of large job creation or investment requirements. No, the 16 programs considered in this report are all genuinely available to large and small firms alike; that is what makes this such an important study. This report excludes programs directed solely to small businesses, but Good Jobs First has promised a separate analysis of those generally poorly funded measures.
What, then, is a small company? For the purposes of this study, it has to have fewer than 100 employees, it has to be an independently owned local firm, and it must have fewer than 10 establishments. If a company does not meet all three criteria, it is classified as a large company. Note that this cutoff is considerably below that of the U.S. Small Business Administration, which for most industries is 500 employees. On the other hand it is larger than the European Union definition of a small enterprise (50 workers) but smaller than the EU definition of a medium-sized enterprise (250 workers).
Despite the fact that small companies are theoretically eligible for the 16 programs analyzed, they receive only 30% of the awards and 10% of the money available through them. As I pointed out earlier, combined with one-off megadeals, programs that only appear to be open to small firms, and tiny programs specifically for small business, this adds up to a large bias in favor of big business, with all the consequences noted above.
What should be done? The report notes that many small businesses cannot benefit from the tax credit or tax abatement involved in the programs analyzed and, in a separate survey, many small business leaders said they would benefit more from public goods like job training, education, and transportation. Therefore, Good Jobs First proposes a reduction in incentive spending going to large companies, to be effected by using hard caps on each program’s spending, on cost per job, and on the total amount any one company can receive under a given subsidy policy. While such caps are unusual in the United States, they are the main basis for the European Union’s successful control over incentive spending there, elaborated further to have higher caps in poorer regions and a cap of 0 in the richest EU regions. In addition, the caps proposed by Good Jobs First could be augmented by using an EU metric known as aid intensity, which is simply the subsidy divided by the investment. While a cost per job cap is useful at resisting excessive capital intensity, an aid intensity cap is a valuable metric when substantial jobs are created but the government is paying for virtually the entire cost of the project (for example, Electrolux in Memphis).
I’m looking forward to further extensions of this research, and you should, too.
Cross-posted from Middle Class Political Economist.
Ken:
There is no doubt the Big three dominate Michigan and get the most subsidies from state government directly and indirectly and in a state which has trouble funding the repair of infrastructure (roads, bridges, etc.) without taxing constituents. The latest proposal includes taxing constituents directly and incorporates a cut in the income tax. Who might this benefit from this offer even with a flat income tax rate? The upper 10% income brackets.
TPC’s TaxvVox has a nice article on the Michigan Mega deals (100 percent of the state’s personal income tax rate multiplied by the actual wages and employer-paid health care costs on qualifying new or retained jobs) initiated by Engler and added to by Granholm. ~$5.5 billion of $9.4 billion is to be paid out over the next 20 years to the big three. http://taxvox.taxpolicycenter.org/2015/07/01/mega-tax-credits-will-michigan-bust-a-deal-or-will-residents-face-the-wheel/
Meanwhile, Michigan is using the Federal Medicaid funding in its general fund instead of setting it aside as the State Senate Commission recommended to fund Medicaid till 2027 at the level the Federal Gov recommends. The state Repubs who control the Governorship and the legislature will eventually decide they have to cut Medicaid due to a lack of funding they spent for other things such as paying out Mega deals made with large companies.
Thank you Mr. Thomas for the most prescient post. As a retired senior I’m very concerned, frustrated and interested in the politics of big money in Lansing. I think sneaky Snyder is up to his old tricks of playing “what shell is the money under” again. I’m not sure if this topic has been cover by the Frank Beckman Show yet but it should be. People do not like rude surprises especially with their tax dollars. If the big three don’t really need the money to stay in Michigan then we should take the gamble and take the Mega tax money back. They will not leave the state once the variable rate tariff is put in place nationally… We should also not be funding Wall St. with anymore TARP bailouts for their high stakes gambling on derivatives. Reenacting Glass-Steagal should be the top order of the day in congress if we ever get a speaker especially from (what does it matter) Mrs. Clinton whose husband repealed it. IMHO.
William:
Actually I wrote about Michigan and the Engler created and Grandholm enhanced subsidies.
I just find it hilarious that they had to do a study to figure that out.
Warren, I don’t think anyone is surprised by the result, but to date there was no research that could pin down the magnitude of disparity.
William, as run75441 pointed out, MEGA dates back to the previous administrations. What Snyder has done is make some cutbacks to the discretionary subsidy programs but then more than offsetting that savings with huge across-the-board business tax cuts.
Ken:
I am probably repeating myself . . .
I have been arguing this in Michigan quite a bit with the state reps and senators and the news media. The state literally owes $billions in subsidies to the Big-3 for job creation and staying in the state. It was reported only a fraction of the jobs were created and even fewer projects succeeded since Engler’s creation of this subsidy. The collectible total is somewhere in the $5 billion of ~$10 billion range coming out of the General Fund. Yet, the only way the state can repair roads is to raise taxpayer fees while the Repub legislature cuts the income tax??? Where does any of this make sense?
Nice article at TaxVox http://taxvox.taxpolicycenter.org/2015/07/01/mega-tax-credits-will-michigan-bust-a-deal-or-will-residents-face-the-wheel/