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Small Businesses Dislike State Economic Development Subsidies

Written by Tim Morral
Published: 9/29/2015

New study from a DC-based think tank finds that many small businesses don't think state incentive programs for big companies are a good idea.

It's no secret that many states dole out tons of money to attract and retain big employers.

State Economic Incentive Programs for Big Companies

Just this past week, for example, Volvo broke ground on its first auto manufacturing plant in North America, choosing to locate the facility in South Carolina in part because the state provided $212 million in economic incentives to Volvo.

But might states be better off giving that money to small businesses instead? And would small businesses prefer that state agencies focus on them, rather than small businesses?

Good Jobs First, a nonpartisan think tank, decided to conduct a survey to see what small businesses think about state economic development incentives.

They found that:

  • 72 percent of respondents say their state's incentive policies don't effectively promote economic growth.
  • 92 percent of respondents feel their state's economic development programs are biased against small business.
  • 79 percent of respondents indicated they they think states are giving away too much to big companies.
  • 85 percent of respondents believe that their state's economic development incentives don't address the needs of growing small businesses

In short, the study concludes that state policies favor big business and that current incentive policies are not effective in promoting economic growth.

Big Bets for Questionable Gains?

Good Jobs First isn't alone in this perspective. Many experts have suggested that state economic programs suffer from "winner's curse" syndrome -- a scenario in which the winner of a competitive auction is often a loser because they must overpay in order to win.

So how much should a state give a Dell, a Google or a Tesla to incentivize site location in the state?

It's a tricky question, but there are ways that states can improve how they allocate incentives. Writing for Popular Government, Jonathan Morgan recommends the following best practices for state development agencies:

  • More enforceable contracts
  • Greater transparency and disclosure
  • More rigorous cost-benefit analysis
  • Better state-local and regional collaboration
  • Improved opportunities and support for hiring local residents and the unemployed
  • A greater focus on small businesses, existing industry, and job training

However, regardless of how states decide to allocate tax breaks and other incentives to big companies, it's important that they not neglect their small business owners.

As one respondent to the Good Jobs First survey indicated, "We have nothing against big businesses, but we want fairness for everybody."

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