Subsidies leave small business growth untapped
Published June 23, 2016
by Sarah Chaney, special to WRAL, June 23, 2016.
Private firms receive a much smaller share of the taxpayer money designed to spur job growth in North Carolina than their larger, public counterparts, and critics say that tactic is leaving a major mechanism of growth behind.
A WRAL News analysis of awards from the state's largest incentive programs from January 2013 to June 2015 shows about 85 percent of the funding has been promised to public companies and their subsidiaries, even though they make up about 35 percent of all firms that state officials announced would create jobs.
The vast majority of these incentive dollars awarded to public companies under Gov. Pat McCrory were issued through the state's Job Development Investment Grant program. Others were issued through the One North Carolina Fund.
Although not all public companies are large and not all private companies are small, economists say the designation is a useful shorthand for categorizing the sizes of firms, which can often be hard to pin down by revenue or employment figures.
Department of Commerce spokeswoman Kim Genardo said the agency provides several programs besides JDIG and One North Carolina incentives to aid small businesses, including its rural economic development grants.
The monetary value of JDIG grants the state can give each year is $20 million for most projects, which means JDIG awards flow in greater numbers to public companies than grants from programs with lower capacities like One North Carolina, said Stewart Dickinson, Department of Commerce director of finance.
"Basically, the JDIG program was created to work with significant job generation projects," Dickinson said.
JDIG and One North Carolina shouldn't be grouped together in determining what percentage of all incentive dollars are promised to public firms, he said, because they serve different types of companies – with each program ultimately aiming to create jobs.
Data show One North Carolina Fund awards are mostly pledged to private firms. But awards under the program went to 30 public companies, five of which will also see funding from JDIG if they hit their job targets. Although these firms tend to have larger financial clout, some economic experts say bigger companies aren't necessarily better positioned to propel economic growth.
"Our North Carolina Department of Commerce has deliberately chosen to do larger companies," said Brent Lane, director of the Center for Competitive Economies at the University of North Carolina at Chapel Hill. "Larger companies have a smaller number of locations [they] might go. Those locations tend to be metro areas. Those tend to be the areas that are doing all right."
In fact, Lane's 2009 report on incentives outlines recommendations for maximizing benefits from incentive programs, which include tapping into companies in growth mode. These companies tend to be smaller, he said.
Policy, taxation means smaller firms benefit less
One reason awards are weighted toward larger, public firms is a practical one.
Small, private firms don't benefit from tax-incentive programs like public companies do because they are taxed far less, said Carolyn Fryberger, program coordinator at NCGrowth, which provides economic development services to clients in rural North Carolina.
"The way our incentive programs are structured, they're not as valuable to small companies," she said. "A lot of small firms – mom-and-pop shops or startups – they don't have a lot of taxable income, so they can't take advantage of those incentives."
Public-company dominance also relates to both their size and access to capital, said Sarah Curry, a policy director at the Platte Institute for Economic Research, a nonpartisan research organization in Nebraska that advocates for deregulation and lower state taxes.
Larger companies can draw from a deep pool of capital to create more jobs.
"We can argue and say, ‘Is that good because the state is giving money to these large companies?' But more people are employed by small businesses than anything else. Why aren't we supporting small businesses? Is it fair?" Curry said.
The Small Business Administration attributes about 2 million of the roughly 3 million private-sector jobs created in 2014 to small businesses – but these same firms might struggle with mobility.
"Small, private firms are less mobile, and when you're thinking about the mom-and-pop shops, they tend to grow up in the community where the proprietors lived, which means they're not going to be moving across state lines," Fryberger said.
The disproportionately high allocation of incentive money to large public firms in North Carolina mirrors a trend rippling across several other states.
Good Jobs First, a national nonprofit that tracks incentive programs, analyzed 4,200 economic development incentive awards in 14 states. The group found that 90 percent of the dollars and 70 percent of awards from the programs analyzed were granted to big businesses.
Good Jobs First defines a large business as one that has greater than 100 employees, one that is not independently or locally owned or one that has 10 or more establishments.
"Large companies by definition are less likely to need help: they have management depth, access to credit and established markets for their products or services," wrote Good Jobs First authors.
Lane said, instead of trying to get one company with 1,000 employees, economic developers could make a bigger impact with awards to 10 companies with 100 employees each. Not only would this strategy diversify North Carolina's business holdings, these smaller companies would have more room to grow than larger businesses. But it would require more effort on the part of the Commerce Department.
"The reason we use incentives is to help us do the hard jobs, not the easy jobs," Lane said. These "hard jobs" lead to economic growth in poor counties, he said.
Is bigger better?
Public companies generally receive much more money than private companies. About 50 percent of public companies and subsidiaries that received grants got more than $1 million, while most private companies that got grants received only $130,000.
In dollar terms, the biggest recipient among all companies awarded incentives by North Carolina was MetLife Group. The company could receive incentive grants totaling as much as $87.2 million over 12 years – the largest JDIG grant in state history, according to the Commerce Department.
In March 2013, McCrory announced MetLife intended to create 2,600 jobs in Charlotte and Cary by the end of 2015. MetLife celebrated in June 2015, as it met its statewide hiring goal six months ahead of schedule.
But hiring plans for big companies don't always pan out.
"Large firms are just as likely to close and move somewhere else," Lane said. "We've had plenty of instances when we gave big incentives to very large companies, and they left, and they failed."
Lane pointed to the example of Chiquita, which announced plans in early 2015 to move its Charlotte headquarters out of state.
Failed business deals are also common among larger firms. Take, for example, Sweden-based appliance maker Electrolux. The company announced an $85 million expansion in December 2013 that would add 810 jobs in Charlotte. Work was started in 2014 on a new six-story building linked to the headquarters of the University City campus. In January 2016, after General Electric pulled out of a $3.3 billion Electrolux acquisition, Electrolux canceled the expansion plans and decided to forgo the incentives.
Eloise Hale, an Electrolux spokeswoman, confirmed Electrolux nixed the expansion plans solely due to the GE deal falling through. Creating the 810 jobs was contingent upon the acquisition, she said.
Sarah Chaney is a financial journalist and graduate of the University of North Carolina at Chapel Hill. Follow her on Twitter as @sechaney.
Read more at http://www.wral.com/subsidies-leave-small-business-growth-untapped-critics-say/15798128/#rpgmqE3XWzIsAghL.99
June 23, 2016 at 3:51 pm
Bruce Stanley says:
Get rid of all incentives and keep lowering the corporate and personal income tax rates (for S Corps owners). That is what is driving the NC economy.