How Corporate Subsidies Sink Small Businesses
The Alabama insurance market shows how tax breaks benefit dominant corporations.
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One of the more pernicious effects of states chucking huge sums of money at dominant corporations is that the lawmakers doing so are harming their own local businesses. Smaller outlets that already face an array of challenge when it comes to competing with the big guys have to just sit there while the state subsidizes their already-advantaged competition. It’s a real problem.
I’ve written before about particular instances of this: Amazon subsidies harming smaller retailers, for example, or subsidies for big food chains harming local eateries. But an example popped up recently that nicely illustrates the dynamic in a way that I think will resonate with most people.
Independent insurance agencies in Alabama recently asked the state legislature to get rid of the Alabama Insurance Offices Facilities Tax Credit, a tax break given to insurance corporations physically located within the state. It comes in two parts: One based on number of employees and one on real estate investments that exceed $1 million.
The latter part reportedly benefits just two corporations large enough to have enough real estate to qualify: State Farm and ALFA Insurance, which presumably also have more employees to staff their larger offices.
As Alabama Political Reporter noted, “This gives those two companies the ability to quote a lower premium on their insurance products.”
Indeed, explicitly designing tax credits so that larger firms receive all or most of the benefit means lawmakers are helping those larger firms entrench their dominance, making it easier for them to lower prices, expand operations, or make investments, because some portion of their costs are covered by the taxes paid by their competitors. And you can hardly blame the customers who go with the corporation that can charge them lower rates, even if they end up paying for that “discount” later when their state can’t make needed investments or jacks up other taxes to offset losses on silly corporate giveaways.
The overall cost of these insurance corporation handouts is nearly $40 million annually. So Alabama is losing real money to advantage a couple of insurance companies over all the others. (A recent report by Patricia Todd, a former Alabama state legislator who now works for Jobs to Move America, explained how pervasive corporate giveaways are in that state and how they “impact the state’s ability to invest adequately in critical public services and programs.” It’s worth a read.)
This is a pretty striking example — two large insurance companies are able to lower the cost of their product vis a vis their competitors because of a specific handout — but incentive programs that preference big and national or even multinational over small and local are everywhere.
As Professors Cailin Slattery and Owen Zidar found, “more than 30 percent of all establishments with over 1,000 employees receive discretionary subsidies, while the percentage is less than 0.2 percent for establishments with under 250 employees.” A 2015 study of incentives in 14 states by Good Jobs First found that 90 percent of the money spent went to large corporations.
Why does this happen? The reason, as is often the case, is politics: Lawmakers want big, splashy announcements with large job creation numbers, which providing incentives to large established firms is more likely to guarantee. Big numbers produce more reliable headlines and better sounding mailers and social media posts.
There’s also the potential that directing state investment toward a startup turns into a political attack ad if that startup fails, which most do. Remember the endless criticism (much of it deserved, to be clear) for the Obama administration directing a loan guarantee toward Solyndra, a solar panel startup that flopped after lying about its business metrics? No officeholder wants to be on the wrong end of a story like that.
Combined, then, those political dynamics result in a system that, instead of foregoing subsidies and handouts entirely, directs them toward already large, established firms whose subsequent failures can be blamed on other things, like global supply chains or whatever, when taxpayers inevitably don’t receive the promised benefits for their spending.
The sad part is that local businesses, and especially new local businesses, are really important: They circulate more money in the economy, weather downturns better, are linked to lower levels of poverty, and are more loyal and involved in the local community. As Victor Hwang, the founder of an organization called Right to Start, recently wrote, “More than ever, America needs new businesses to spur job growth and regenerate small businesses destroyed by the pandemic. … America's communities must stop being tempted by the ‘allure of big’ and instead focus on what they already have in their ecosystems.”
Alabama can start with repealing its insurance industry tax breaks, but the work for that state and many others surely doesn’t end there. As always, drop me a line if you’d like help figuring out who to contact in your state or city to deal with these sorts of problems.
ONE MORE THING: Lee Harris, the Democratic mayor of Shelby County, Tennessee, gave a really great interview last week about why corporate tax incentives are a failure. It was striking, because Tennessee in general, and Memphis and Shelby County, in particular, have produced a series of really terrible subsidy deals. (I wrote about some of them in my book.)
This was my favorite thing Harris said: “It’s just made up stuff. It’s a made-up theory about how the economy works. It’s a made-up theory about ‘if we do this, they’ll go somewhere else.’”
Watch it here:
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— Pat Garofalo