SUPPORTING SMALL BUSINESSES IN PLACE.

• Author: Barbieri, Edward W. De

Introduction 1108 I. Defining the Need for Government Intervention 1115 A. Market Failures 1115 B. Crises 1118 i. Public Health 1118 ii. Econimic 1119 II. Government Intervention to Solve Geographic Inequality Among Small Business Owners 1120 A. People-Based Strategies for Economic Development 1120 B. Place-Based Strategies for Economic Development 1122 III. Approaching Government Economic Development Through Place-Based and People-Based Strategies 1123 A. Supporting Small Businesses in Place 1124 B. Implementing the Opportunity Zone Incentive and Paycheck Protection Program to Reduce Small Business Geographic Inequality 1124 Conclusion 1128 INTRODUCTION

When elected officials seek to intervene in the economies of particular industries, or particular places, there are several tools available. At the federal level, the Small Business Administration, for instance, was created to serve the needs of small businesses following the proliferation of large retail chain stores. (1) The Small Business Administration provides capital assistance--grants and loans--to eligible borrowers presumably denied credit at affordable prices in private markets. (2)

The need for federal action to support small businesses as a deserving group of private industry is indicative of popular support and acknowledgment of the important role small employers play in the economy. Small businesses comprise and develop local economies. One goal of the federal government's form of capital access intervention is ensuring strong small businesses and thriving local economies. Recently, the White House has announced efforts to invest in businesses owned by marginalized individuals as a way to address the racial wealth gap.

In June 2021, on the 100th anniversary of the Tulsa Race Riot, (3) for instance, President Biden announced plans to reduce the racial wealth gap by, among other policy tools, investing $100 billion in federal contracts to so-called small disadvantaged businesses. (4) This commitment amounts to a 50% increase in contracting with small disadvantaged businesses. (5) However, it is noteworthy that the President is already required by statute to set annual procurement goals for the federal government to purchase goods and services from small disadvantaged businesses. (6)

The Biden Administration did not release details on how exactly it would achieve this goal in increasing procurement dollars to businesses owned by marginalized individuals. (7) What is more, it can be costly for the government to provide data sufficient to survive strict scrutiny review of race-based preferences in procurements One southwestern city, for example, planned to spend up to $250,000 obtaining an update to a prior disparity study. (9) A major U.S. city defines the term "disparity study" as a tool that determines whether a governmental entity is engaging or has engaged in exclusionary procurement practices in failing to contract with minority-owned, women-owned, and disadvantaged businesses. (10) Other studies suggest that disparity studies themselves lack efficacy and may play a greater role in increasing, not resolving, governmental ability to remedy economic inequality and inclusion. (11)

Another significant economic development lever available to government at all levels is the tax code. While the types and rates of taxes are frequently studied because of their connections to social movements, (12) tax abatements and incentives are the main drivers of social and economic policy. (13) In particular, the lengthiest section of the Internal Revenue Code covers the issuance of the Low-Income Housing Tax Credit--the country's most successful affordable housing construction finance tool. (14)

During economic and other disasters, democratically-responsive government actors use capital allocation and tax incentives to influence industrial policy. (15) For instance, during the height of the pandemic shutdown, Congress turned to a little-known Small Business Administration loan program to quickly disburse funding to assist businesses in keeping their workers on the payroll. (16) Similarly, following the Great Recession, when particular urban and rural places were left without the recovery that much of the overall economy enjoyed, Congress turned to the tax code to offer a capital gains tax cut and other tax incentives for investors who located funds in designated zones. (17)

Both the Paycheck Protection Program and the Opportunity Zone incentive faced and continue to face problems. The Author has offered his own critiques of each law in previous works. (18) With respect to the Paycheck Protection Program, small businesses, including those owned by marginalized owners, faced significant obstacles in terms of accessing government funds. In some cases, businesses lacked relationships with financial institutions that could connect to the Small Business Administration's portal. (14) In other cases, businesses owned by individuals with certain criminal backgrounds were excluded from accessing funds. (20) Ultimately, however, recent evidence suggests that for Black business owners, recovery from the financial crisis brought on by the COVID-19 pandemic was significantly limited because of the pre-existing business environment and existing inequality. (21) In particular, a recent National Community Reinvestment Coalition report concluded that Black America was in economic crisis pre-pandemic, the growth in Black entrepreneurship was not corresponding to increased economic growth, and that additional public and private funds should flow to Black-owned businesses. (22)

In the case of Opportunity Zones, the growing evidence suggests that spatial inequality is only increasing in light of the new tax incentive. For instance, a recent paper presenting electronically filed tax return data indicates that only 16%, or less than one in five, of designated Opportunity Zones received any investment. (23) In other words, greater than every four out of five designated Opportunity Zones have received no additional capital investment. (24) The authors of this study suggest high levels of capital investment in very spatially concentrated areas. Specifically, areas experiencing Opportunity Zone fund investment are areas with relatively higher incomes, greater property values, and better-educated populations, and are already experiencing income and population growth. (25) Such findings lead one to question the value of an incentive that is driving capital to neighborhoods where capital is already flowing. (26)

Kresge Foundation's Aaron Seybert, among others, has continued to offer positive proposals for Opportunity Zone reform. "Nothing good grows in the dark," Seybert wrote in a June 10, 2021 piece, "especially as it relates to low-income people and communities." (27) He went on to write, "[The] Opportunity] Z[one] is just the latest example of policymakers and investors doing something to low-income communities rather than with them." (28) Seybert's critique of the Opportunity Zone as lacking transparency and participation is a criticism that the Biden Administration will need to respond to.

While different and designed to respond to different crises, this Essay argues that there is value in making a head-to-head comparison between the Paycheck Protection Program and the Opportunity Zone incentive. In each case, Congress legislated a national economic development mandate. Such bills brought the possibility of a consistent application of economic development law across all states. (29) And where each law falls short, perhaps there is room to learn from the other's successes and strengths.

This research has implications for state and local government scholars, lawmakers, and policy advocates for two reasons. First, with respect to the COVID-19 pandemic response, states and cities have in many instances supplemented Paycheck Protection Program funds with their own grants or loan programs. (30) State and local elected officials and policymakers can benefit from an understanding of how they can design such capital interventions to reach the most disadvantaged businesses in the most hard-hit areas.

Second, with respect to the Opportunity Zone incentive, a movement is afoot for states to limit the state tax benefits of the federal incentive. For example, a number of states have "decoupled" the federal benefits of the Opportunity Zone incentive from their state, and in some cases local, income and capital gains tax laws. (31) The process of tax decoupling is when a state protects particular aspects of its tax laws from lost revenue caused by a change in federal law. (32) Currently, five states have decoupled their state personal income taxes from federal Opportunity Zone incentives. (33) It is too early to tell if this effort to limit state tax benefits may or may not be effective in crafting incentives to reach disadvantaged businesses in core urban and rural areas of high poverty.

This Essay contributes to the growing Paycheck Protection Program and Opportunity Zone literature by offering an additional layer of critique and comparison not previously explored. (34) Specifically, it extends the analysis of place-based and people-based programs to current efforts to boost the economy during the COVID-19 pandemic and improve economic life in areas that failed to recover following the Great Recession.

Further, it adds to the legal academic discussion about place-based and people-based economic development strategies. Generally, place-based strategies direct capital and resources to locales through a selection or designation process. On the other hand, people-based strategies involve establishing criteria for eligible individuals and families. A central framework implemented in this Essay is that both place-based and people-based strategies have merit and their respective strengths ought to be evaluated and implemented by lawmakers.

This Essay is organized in the following way. First...