When was the last time you took a member of your state legislature to lunch?
If you haven't yet, you probably should. Increasingly, if slowly, state representatives and officials are waking up to the fact that the health of their economies depends on a thriving small business sector -- and they're drafting the innovative legislation that's needed to spur its growth.
Indiana has come closest to proposing an integrated plan for helping its smaller companies. That state is one of those in the upper Midwest hardest hit by the current recession; in February, its unemployment rate stood at 13.3%. To revitalize the state's economy, Gov. Robert D. Orr and Lt. Gov. John M. Mutz put together a long-range program to encourage new, higher-risk enterprises.
The program's centerpiece, established by the 1981 General Assembly, is a state-chartered Corporation for Innovation Development (CID). The CID, capitalized by private investment, will create a central pool of venture capital, which may be used in two ways. First, it may help locally oriented financing organizations, which must be federally licensed as Small Business Investment Companies. These SBICs will also have the leverage of borrowed federal dollars.
The CID may also directly invest its own funds in new businesses that are unable to obtain capital through conventional channels. These may include very high risk ventures and established businesses too big to be eligible for SBIC funding.
To encourage investment in the CID and SBICs, the state has provided up to $5 million in tax credits over a five-year period. Indiana businesses, banks, or individuals can deduct from their state tax bills 30% of any investment they make in either the CID or the SBICs.
In addition, this year the Hoosier legislature established the Corporation for Science and Technology. The corporation will encourage technology transfer between Indiana's universities and its businesses and stimulate the expansion of technology-intensive business and industry. Already in place is a Computer-Aided Design and Manufacturing Assistance Center at Purdue University in West Lafayette.
Indiana is not alone in developing legislation to further small business growth.
The California Legislature has adopted three proposals to help its smaller firms. It's first-in-the-nation "two-tier" capital gains tax (see "The Right Way to Cut Taxes," INC., November 1981, page 14) rewards the risk takers who invest in California's growing companies. No state capital gains tax will now be levied on returns from small company stock if the investment has been held for at least three years.
A new "late payment" law will protect small companies doing business with the state. If California is more than 30 days behind in paying its bills, it will have to pay a penalty of.25% per day on the amount due.
Finally, an "equal access to justice" law gives a small company the right to sue California for legal costs when a state action against the company is held by a court to be without merit.
In Georgia, workers are breaking ground for a $5-million facility at Georgia Institute of Technology in Atlanta to house an Advanced Technology Development Center. While the center is under construction, more than 20 small firms are already receiving assistance at the university under the state's "new and small technology business incubator" program. The companies have access to research facilities and technical assistance and are able to get advice about financing and marketing.
Colorado is creating a secondary market for small business bank loans through the Colorado Housing Finance Authority (CHFA). This arrangement will permit banks to expand significantly the amount of credit they have available to lend to their small business customers. Essentially, the program is a unique state alternative to Small Business Administration-guaranteed loans -- except that the state doesn't guarantee them. Rather, the CHFA buys the loans made by banks, pools them, and packages them into multimillion-dollar, high-rated bonds for consumption by institutions throughout the country. The bonds are retired as the loans are paid off. Such cycles may double or triple the amount of credit available to small business in Colorado.
The state of Washington has enacted a "regulatory fairness" statute modeled after the Federal Regulatory Flexibility Act. Under its provisions, state regulations will be tailored to the ability of companies to comply with them. In other words, smaller firms will be burdened with less regulation than larger ones.
Arizona's legislature enacted the nation's first statute that expressly bars government agencies from competing with private enterprise. The legislature also set up a one-stop licensing service for smaller firms and enacted an equal-access-to-justice law.
North Carolina is one of a handful of states that has followed Congress's example and established small business committees in both branches of its legislature. It has also set up a statewide advocacy group to work with Gov. James Hunt, Jr., on small business issues. In addition, the state has appropriated $24 million to create a major microelectronic center in the Research Triangle Park of Raleigh-Durham-Chapel Hill. At first, large companies will use the facilities, but state officials talk confidently of the center becoming a magnet for smaller high-technology firms.
This list is neither exhaustive for programs in these states, nor does it include important initiatives taken by other states. As of August 1981, at least six other states had developed technology programs based on university and business cooperation in industrial research; at least nine others have programs for financing developing companies in high-tech areas.
These programs reflect a new sensitivity on the part of state officials to small business and entrepreneurship. This sensitivity is not merely political; it reflects official awareness of the new data underscoring the critical role of new and small firms in creating jobs.
The 1980 White House Conference on Small Business also sparked new state interest in encouraging smaller firms. The nation's governors, meeting after the conference in August 1980, adopted a resolution urging the states to put the expansion of small business at the center of their economic development plans.
The governors and other state officials are increasingly aware that economic planning does not have to begin and end in Washington. Indeed, they're realizing that state governments had better learn how to cushion the blows of inevitable federal failures or setbacks in the national economy.
All 50 of our states are big enough -- in area, or population, or both -- to be nations; each is unique in the mix of its natural resources, industries, and skills. Clearly, each must tailor programs to meet its own needs.
Nonetheless, the states can have a common economic strategy that is nationally significant. At their 1980 conference, the governors united in the pledge to expand small and mid-sized businesses. They can similarly unite in a partnership with entrepreneurs and small businesspeople throughout the country. This relationship would balance the ongoing (if sometimes troubled) partnership between the federal government and large companies.
Such a relationship between small businesses and the states is indispensable to long-term American prosperity and productivity. Neither Washington nor Wall Street, alone or together, can take us through the major revolution in technology and economic restructuring we now face. We simply have too much to do, too little time to do it, and too much that can and should be done at the grass roots.
Here are some of the items that should be on every governor's and state legislator's agenda:
* Skill expansion and modernization. How soon can most of the state's labor force -- both blue- and white-collar -- become computer literate? How soon can workers become competent in using the newer technologies? What special steps are being taken to retrain older workers, including retired people who want to work part-time?
* Education. Is education at each school level relevant to future needs? In addition to the normal school curricula, are there readily available extension programs to provide on-the-job, part-time, and full-time training in managerial skills? Do educational or apprenticeship programs exist for future entrepreneurs?
* Contingency economic development plans. Is the state prepared to anticipate shifting markets and other nationwide trends?
* Research and development. Are links being formed between basic academic science programs and small applied high-technology firms, paralleling the National Science Foundation and Defense Department small business innovation research programs? Is someone in state government responsible for identifying emerging industries and potentially crucial areas for future training?
* Credit supply. Is a community banking structure firmly in place to ensure that money remains at the grass-roots level? Are there tough regulations to prevent large regional or national banking institutions from draining savings from the states?
* State procurement. Does the government provide set-asides for in-state businesses that have proven they can be competitive? In order to encourage newer firms, is preference in state buying given to new cost-cutting technologies with general market applicability?
* Regulations. Is there a continuing war on paperwork, an effort to simplify and combine state, local, and federal reporting requirements? Has the state enacted regulatory flexibility and equal-access-to-justice laws? Does it insist on continuing cost-benefit reviews of all regulations?
* Taxes. Does the tax structure reward risk taking by newer firms? Are tax rates keyed to the size of a business? Are job tax credits at least equal to equipment depreciation benefits?
* Capital. Has the government made specific institutional efforts to create visible pools of seed capital for new businesses? Is expansion capital available for smaller companies that would not be attractive to venture capitalists?
* Commitment. Is there a constitutional and/or legal commitment on the part of the state to seek economic diversity, limit concentration in the private sector, and reduce the size of the government? Has the government legally protected the individual's right to self-employment?
* Accountability. Is the governor required to give an annual "state of small business" report, paralleling the President's new national report? Does an adequate state data base exist to measure the growth of the new and small business sector?
INC.'s second Report Card on the States will evaluate how well each state is performing in these and other areas. One thing is certain. Until the states pay continuing attention to the needs of their small businesses, their economies, as well as the national economy, will remain stagnant. It's true that many states will face tough times ahead. That fact is more, rather than less, reason to move in the directions we suggest. The future, as always, will go to those who anticipate it, and work for it.
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