How local, state, and federal tax policies in the us undermine small business and fuel corporate concentration

The following article is from the “Tax and Monopoly” October 2022 issue of the Tax Justice Focus, an online magazine that explores boundary-pushing ideas in tax justice and revolutionary solutions to the most pressing challenges of our time. Each edition features articles from prominent experts and academics from around the world. The “Tax and monopoly” issue is co-published with the Balanced Economy Project and Roosevelt Institute.

For decades the United States’ tax system has favoured large corporates over locally embedded and competitive firms. The resulting social and economic costs of monopoly are artefacts of the political process and can be reversed by government action.

When Jeff Bezos launched Amazon in 1995, he made securing government favours a core part of his strategy. Chief among these were lucrative tax advantages largely unavailable to his competitors, especially small independent businesses. This disparate tax treatment gave Amazon a pivotal early edge over rivals in the online market. And it’s continued to finance Amazon’s dominance ever since, supplying billions of dollars in
free cash flow that the tech giant has used to fund predatory pricing (systematically selling key goods and services below cost, to monopolise markets) and acquisitions designed to thwart competition.

The opening salvo for Bezos’s tax strategy was locating Amazon’s first headquarters in Washington, instead of California, to avoid sales tax in a populous state. As Bezos explained in 1996, ‘It had to be in a small state. In he mail-order business, you must charge sales tax to customers who live in any state where you have a business presence…We thought about the Bay Area, which is the single best source for technical talent. But it didn’t pass the mall-state test.’

No matter how hard brick-and-mortar retailers competed with Amazon they were hamstrung by the sales taxes they had to collect from their customers. This tax disparity was due to a 1992 US Supreme Court ruling that blocked states from imposing sales tax collection on retailers that lacked ‘nexus’, or a physical presence, in the state. Independent booksellers, later joined by the big chains, campaigned vigorously for Congress to level the playing field, but time and again, Amazon’s lobbyists defeated their efforts.

How much did this tax rule bolster Amazon? A 2014 study of credit card
transactions found that, when a state extended sales tax to Amazon (because it had opened an in-state office or warehouse), households significantly reduced their spending with the tech giant, particularly for
high-priced items.

More telling evidence can be found in the extraordinary lengths Amazon took to preserve this tax advantage. Amazon had employees carry fake business cards to ensure their presence in a state would not trigger nexus.
In Texas, Amazon concealed that it was operating a warehouse from state tax officials. When the state sued for $269 million in back taxes, Amazon
threatened to shut down the facility. The state cancelled the tax bill. In South Carolina, Amazon made a deal with the governor to remain sales tax free despite building warehouses in the state. When the state legislature protested, Amazon halted construction until lawmakers backed down.

From sales tax-dodging to development subsidies and beyond

As Amazon’s logistics growth accelerated, it began building more warehouses in more places, which made it harder to sidestep sales tax.

In 2012, Amazon pivoted to a new strategy for getting the public to finance the company’s growth: development subsidies. As of July 2022, Amazon has been awarded at least $4.8 billion in local subsidies to help it undercut its competitors and fund its expansion.

Amazon has also skirted corporate income taxes in both the US and Europe by establishing a labyrinth of shell companies, which transfer profits to subsidiaries based in Luxembourg, a lucrative tax haven. In 2021, Amazon’s European operations generated 51 billion Euros in sales, but paid no income taxes. The European Commission has challenged Luxembourg’s tax arrangements with Amazon as a form of “illegal state aid” that violates competition policy by favouring one company over others.

However, the Commission has yet to make an effective case to the courts. Meanwhile, in the US, Amazon paid just 6% in federal corporate income tax on $35 billion in reported profits, meaning it avoided paying over $5 billion into federal coffers, according to the Institute on Taxation and Economic Policy.

Through their inaction policymakers have gifted Amazon billions of dollars, giving it a major advantage over smaller competitors that must shoulder fuller tax obligations. They’ve also provided a crucial source of funding for
Amazon’s predatory pricing schemes, enabling it to sell below cost to capsize competitors and lock-in online shoppers.

More recently, Amazon has used its prodigious subsidy-enhanced cash flow to acquire other companies, taking over pivotal technologies to cement its dominance of cloud computing, while buying its way into new industries with a string of acquisitions in groceries, health care, entertainment, and
more.

A Tax Code to Consolidate Corporate Power

Amazon’s strategy offers a road map of how to harness the tax system to
build a monopoly. But most of the giant corporations that now dominate their industries owe their market power in part to government handouts and tax favours. For decades, local and federal US policymakers have systematically structured the tax system to fuel the concentration of
corporate power, at the expense of small businesses, workers, communities, and the economy as a whole.

At every level the tax system works to concentrate economic power and
disadvantage small businesses. Take tax shelters, for example. We know US based multinationals – not just Amazon – deploy elaborate schemes to hide their federal and state tax obligations in places like Luxembourg and the Cayman Islands. But they also do this on US soil. Companies operating in multiple US states shield much of their income from state taxes by transferring in-state revenue as a payment (for rent or use of trademark, for example) to subsidiaries in states that don’t tax corporate income, like Delaware or South Dakota. This maneuvering is not an option for most small, independent businesses, who don’t have a fleet of tax attorneys on their payroll to set up out-of-state subsidiaries.

Local development incentives are another example. Corporations get almost all of the $65 billion to $90 billion a year that cities and states spend on tax breaks, economic development incentives, and other subsidies. In a 2015 study of 4,200 economic development incentive awards in 14 states, Good Jobs First found that large companies collected between 80 and 96% of the dollar value of the funds they analysed. Research indicates that these incentives generally don’t pay off, often failing to increase overall employment while saddling communities with new infrastructure costs.
Many of these deals do not provide a boost to the local economy, but rather undermine the small, independent businesses that are excluded from these tax breaks and incentives and left to finance their own expansion.

Many states have also allowed big corporations to systematically contest their property tax bills. Walmart and other large retailers have paid lawyers to implement a dubious ‘dark store’ theory of value, challenging the valuations of thousands of their stores in multiple states on the
basis that their properties would be nearly worthless if they were empty. This strategy – used against communities across the US
– involves upfront legal costs that large corporations, because of their scale, can easily absorb and are far outweighed by the payout. They have managed to sharply cut their tax bills, which has led directly to funding cuts for local schools, libraries, and other services.

Small is beautiful

Research shows that small, independent businesses often outperform in key
ways. Small banks are better at making productive community-based lending and were much more effective at distributing federal relief loans during the pandemic to independent businesses, for example. Small companies produce 13 times more patents per employee than large companies, and those patents tend to generate better industry impact and growth. The tax code and system of big-corporate handouts are sapping innovation, quality, and local resilience.

When we lose small businesses, we don’t just lose the innovations. A spate of new economic research shows that the high corporate consolidation we’re seeing across different industries is a main driver of declining real wages and job losses. A Harvard Law Review study calculates that a
2018 median US annual wage of $30,500 would be about a third higher – $41,000 – if it weren’t for monopsony concentration. Corporate dominance over our supply chains has also helped make them brittle, and opportunistic price gouging by megacorporations is a primary driver of the recent surge in inflation. Small businesses are integral to healthy
communities and our democracy. As locally owned businesses disappear,
communities of all kinds lose their sense of social connectedness and collective agency. Industrial agriculture, for example, has devastated rural communities in the US and is linked to higher rates of crime and declining social cohesion. When retail chains like Walmart dominate the local economy, they undermine civic participation and social capital. Monopolies of all kinds disproportionately harm Black and Brown communities. Fossil fuel conglomerates and the big electric utilities have hindered our ability to address climate change. Amazon and Comcast exert so much power over our political system that efforts to help our society are continually crushed by powerful lobbying efforts. On the other hand, small businesses disaggregate economic power, create a more equitable distribution of income and wealth, and nurture democracy by fostering community self-determination.

An Antimonopoly Tax Agenda: Politics and Policy

If pro-monopoly tax policy is bad economics, it’s even worse politics for progressives. Although long forgotten today, the Democratic Party once counted small business as a key constituency alongside workers, and steadfastly fought for their rights and welfare. This helped win New
Deal programs that secured, in the words of FDR, “economic freedom for the wage earner and the farmer and the smallbusiness man.”

But in the 1970s and 1980s, an ascendent faction of Democrats abandoned their party’s concern about concentrated economic power, and many liberals began distancing themselves from both labor and small business. This created a vacuum for the US Chamber of Commerce, which used small businesses’ frustration and lack of a political home to drive a right-wing agenda.

If US progressives advance an antimonopoly tax agenda, they can recover a populist politics, which would help them compete in rural areas and swing states, drawing in voters who are yearning for a fairer, more equitable economy. Stronger tax and spending policies, at every level of government, is an essential spoke on the wheel of strong antimonopoly reform. When
our tax system is built to foster fairness and justice in addition to vitality and economic growth, it can help to restructure economic power and more broadly distribute and boost prosperity.

Small business should be at the centre of an antimonopoly tax agenda. Yet it’s rarely brought under the tent of rebuilding our tax system to be fairer, despite that it is inherently good for small business – and small business is so good for a robust, resilient, vital economy. That means designing policies that close monopoly tax loopholes – in part, to eliminate global and state tax shelters – and redistribute tax obligations to level the playing field for small business and curtail corporate concentration. It also means helping small
business rebuild from the damage done by providing targeted support for smaller competitors.

Combatting monopoly power is not only a matter of reinvigorating antitrust policy. We must also address the many ways in which neoliberal policymaking has favoured corporate consolidation at the expense of local economies. Using tax policy to foster fair competition and decentralise economic power should be high on this list.

Antimonopoly Tax Reform: Policy examples

Implement a Progressive Corporate Tax Rate

One potent antimonopoly tax reform measure would be a progressive corporate tax rate. As Reuven S. Avi-Yonah argues in this issue of Tax and
Monopoly Focus, the primary reason we need a corporate tax is to limit the ‘power and regulate the behavior of our largest corporations,’ which is
the same reason the US first adopted the corporate tax in Instead of a flat tax, he proposes that the tax should be 0 for normal returns that reflect fair markets and increase sharply to target the high profits indicative of monopoly rents.

Raise Taxes on Shareholder Payouts

We need to more fairly tax where the bulk of profits of megacorporations go — shareholders. Shareholder payouts in the form of stock dividends and share repurchases are taxed at a lower rate than workers’ income tax. The tax preference for capital should be eliminated and these different forms of income treated as equivalent by the tax code. It is also important to unlock these tax revenues on a more timely basis, as the current system fails to impose a tax until the stock is realised. A mark-to-market capital gains system could release this revenue annually. (As a side note: The Inflation
Reduction Act, enacted into law in August 2022, imposes a 1% excise tax on some repurchases of corporate stock by publicly traded companies. While the tax provides a clear legislative signal that stock buybacks are problematic, progressive analysts generally agree it is not enough. In fact, economists William Lazonick and Lenore Palladino argue stock buybacks
should be banned altogether.)

Adopt Worldwide Combined Reporting to Close State and Federal Tax Loopholes

A simple way for states to address tax dodging is to implement a ‘Worldwide Combined Reporting’ system, which requires companies to
report their total global profits and pay a tax on the portion of those profits produced in a given state. For example, if 5% of a company’s global business occurs in Montana, then Montana’s corporate tax rate would apply to 5% of the company’s taxable profit. Only a few states – Idaho, Montana, and
North Dakota – currently utilize worldwide combined reporting, which ensures transparency on large companies, levels the competitive playing field for independent businesses, and can help generate public revenue.
Meanwhile, twenty-eight states and Washington, D.C. have adopted ‘water’s-edge’ combined reporting only, which applies the same principles but excludes affiliates of the conglomerate that are incorporated outside of the United States or that conduct most of their business outside the US implementing worldwide combined reporting
– at the state and federal level
– would buttress the current reporting system by building and synthesising transparency on the full extent of multinational corporations’ tax liabilities.

Close the Dark Store Tax Loophole

States should adopt legislation clarifying how tax assessors determine the property value of big-box stores. The dark store tactic has not only deprived
local governments of billions in revenue, but it has also forced local businesses and residents to pay higher taxes to maintain services. States can address this with a simple clarification that modern retail buildings
must be valued based on their current operations and not on a theoretical future in which they are decrepit.

Stop Subsidising Corporations and Invest in Small Business

Instead of giving subsidy deals to corporations that are channeling their profits to Wall Street, local municipalities and states can use those funds to
circulate dollars locally and drive long-term growth For example, local governments can invest in real estate for commercial use and public
goods like high-speed fiber networks, and provide carefully targeted loans to Black and Brown entrepreneurs to close the racial entrepreneurship gap.

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and analysis, and partners with a broad range of allies to design and implement policies to reverse corporate concentration and strengthen local economies.

Susan Holmberg is a political economist and the Senior Editor and researcher of the Independent Business Initiative at the Institute for Local Self-Reliance. She writes on corporate power and inequality.