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Last week (and, honestly, in a lot of pieces around here), I lamented that misguided economic development policies favor dominant corporations over local small businesses, showering the former in public funds and regulatory relief such that they’re able to bury their smaller competitors.
But that does beg a question: What exactly is a “small” business and what differentiates it from a large one? The technical answer is more complicated than you might think.
That question also took on an added importance recently, because the Trump administration proposed changing many of the thresholds that determine what defines a small business for purposes of accessing federal loans, contracts, and assistance programs. In some instances, those new thresholds would dramatically increase.
Because many of those standards are also adopted and applied at the state and local level, the trickle-down effect will be many larger firms accessing public program and contracting dollars than had been able to previously, in ways that will likely be bad for competition and local economic development.
Backing up, Americans tend to have a very positive association with small businesses, with significant amounts of polling showing that they view small businesses as beneficial to their communities, as opposed to large corporations, which they tend to associate with greed and profit.
Small businesses as an entity, according to Gallup polling, consistently receive approval ratings above 90 percent, and voters always say they want leaders to do more to promote them. Framing issues, and even individual bills, as positive for small business makes them more politically palatable, as I’ve explained before.
But what kind of businesses are people thinking of when they give those responses? A 2024 survey showed that 90 percent of the public thinks a small business has under 100 employees, while the median response was 20 employees. About 80 percent of Americans set the annual revenue of a small business at below $1 million, while a majority said it should be below $100,000. The top words Americans associate with small businesses are “mom and pop,” “family-owned,” “local,” and “entrepreneur.”
These perceptions are utterly detached from the reality embedded in government policy. While it’s popularly claimed on the internet that the official federal Small Business Administration definition of “small business” is fewer than 500 employees (which itself would be a wild departure from what Americans believe), the real policy is even more nuanced than that: Every industry has its own revenue and/or employment levels below which a firm can qualify as a small business.
For many industries, those revenue thresholds currently reach tens of millions of dollars, topping out at about $50 million (to be clear, that’s revenue, not profits), while the employee thresholds can climb as high as 1,500. For example, a commercial bakery can have 1,000 employees and still be “small,” while a “small” poultry processing plant can have 1,250 employees, and a “small” courier/express delivery service can have 1,500.
A title insurance firm, car rental agency, or parking garage that makes $47 million in revenue annually is “small,” as is a residential remodeling firm that makes $45 million or an air conditioning supply firm that makes $30 million. (You can see the whole current SBA threshold list here.)
Back during the COVID pandemic, I noted that a lot of the outrage — both real and politically manufactured — regarding alleged abuse of small business relief programs stemmed from this chasm between the popular perception of what a small business is and what the government generally defines as a small business. Firms that don’t look at all like what the vast majority of Americans think of when they picture a small, local business — which is akin to a small restaurant or a hardware store, not a meat processing plant with more than 1,000 workers — are nonetheless easily eligible for a vast array of public resources.
The Trump administration’s proposed changes would make this chasm into an abyss. For example, if adopted, many farms and agricultural producers with 2,500-3,500 employees would be redefined into small businesses, as would housing contractors with up to 600 workers. Employee thresholds across the manufacturing sector would double or triple, while for merchant and food wholesalers they would in many instances septuple or more, rising from 100-150 to 750-1,800.
Car and tire dealers would switch from about $40 million in annual receipts to 500 employees, while caterers would move from $9 million annually to 700 employees. Taxi services would jump from $19 million in revenue to $53 million, car rental agencies from the aforementioned $47 million to $84 million, and casinos from $40 million to more than $744 million. Bed and breakfast inns would jump from $9 million to $503 million. The threshold for direct mail advertising would go from a current threshold of $28.5 million to $543 million.
You can view the full list of proposed changes here, and I bet I missed some wild ones, so feel free to flag any others in the comments.
The stated rationale for these changes is that businesses should be able to receive support as they’re growing, not just when they’re starting up. And sure, some of these changes on an individual level may be defensible,. Encouraging more domestic manufacturing is also a worthwhile goal, so opening up more resources to those firms, which are capital and labor intensive, may make sense on a case by case basis. And any line is going to, in some way, be arbitrary and could justifiably be drawn somewhere else.
But in the aggregate, I fear these changes are going to supercharge consolidation, empowering more dominant businesses to bury their smaller competitors, with the help of the federal government, and by extension any states or localities that adopt those same standards and thus direct funding toward those same larger firms. The result will be fewer startups, more local development money flowing out of communities, and more leverage for big business concerns over government policy.
And for sure, these changes are going to cause more confusion and misunderstanding among the general populace, further widening the gap between what’s sold to people as a small, local business worthy of financial support, and to whom and what government money actually flows.
The SBA changes are still just at the proposal stage and have to go through a formal comment and review period before they become law. But if they are enacted, I would highly recommend that states and localities comb their own programs, laws, ordinances, and regulations, and disconnect from the new thresholds where it makes sense, lest they end up inadvertently driving a bunch of money to a bunch of larger businesses that don’t need the help. They should focus on ensuring public resources go to truly locally owned businesses, with a low cap on the number of employees and/or revenue, alongside guarantees that the money stays in the community, whether via local workers or local supply chains.
And as an added bonus: State policy then might conform, at least a little bit more, to the notion most constituents have in their minds when the words “small business” are uttered by political leaders.
SIMPLY STATED: Here are links to a few stories that caught my eye this week.
Kentucky Gov. Andy Beshear is the latest to call for an end to data center subsidies. (More on this here.)
31 Louisiana public officials signed nondisclosure agreements with SpaceX regarding development of a spaceport.
Amazon is challenging the valuation of some of its Mississippi data centers, potentially lowering its tax bill by millions of dollars.
The California legislature approved a bill to ban restrictive land contracts large grocers use to block competition. If signed by Gov. Gavin Newsom, California would be the third state with such a ban, after Washington and Rhode Island approved them earlier this year. (More on this issue here.)
Several PC-based video game companies have been accused of price fixing.
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— Pat Garofalo
People sympathize with "small businesses" because they lack the political power of large corporations. The latter operates by manipulating cash flows to itself while "small businesses" as Americans perceive it, are players fighting in the competitive laissez-faire market. It's crazy how wide the gap is between how Americans perceive small business and what the legal definition is.