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Virginia Doubles-Down on PPP, Potentially Harming Black-Owned Businesses

Data map of Virginia
A map showing where PPP loan money went in Virginia. Urban areas, particularly those in Northern Virginian, dominated PPP borrowing in the state. (Graph: Connor Scribner/ Made with Datawrapper)

Over the weekend, the General Assembly approved legislation to allow businesses across the commonwealth to deduct up to $100,000 of forgiven
Paycheck Protection Program loans from their state taxes. While that will certainly come as welcome news for businesses that received PPP money in the state, it could deepen the inequities already faced by Virginia’s Black-owned businesses.

Businesses across the country struggled in the wake of the COVID-19 pandemic’s onset and the resulting lockdowns, forcing the federal government to step in, guaranteeing loans to help companies cover expenses such as payroll. In Virginia, the federal government backed nearly 130,000 loans, doling out over $14 billion dollars in the state. 

But as the federal government rushed to get money into companies’ bank accounts, they left behind many Black-owned businesses. According to Sifan Liu and Joseph Parilla from the Brookings Institute, that’s because PPP was carried out through traditional lending firms.

“To move capital at a very large scale very quickly, the Small Business Administration and the Treasury and [Congress] decided to work through traditional banks,” Parilla said. “It disfavored much smaller small business, what we would call microbusinesses, those with fewer than 10 employees, nonemployer businesses and Black or Hispanic-owned businesses.”

According to the SBA, Black-owned businesses are about 5 times more likely to be nonemployer firms than white-owned businesses. They’re also far more likely to be smaller firms. While 9.5% of U.S. businesses were owned by Black entrepreneurs in 2012, those firms only accounted for 1.3% of sales and 1.7% of employment.

The banking system has consolidated over the past decade, with banks merging to reduce operating expenses. Parilla says that’s made it more difficult for small businesses to access loans, because small loans aren’t as profitable for banks. 

That's created an obstacle for Black business owners looking for capital, fraying their relationships with financial institutions. When banks started lending out money for PPP, they turned to existing customers first, leaving Black-owned businesses on the outside looking in, he said.

But it’s not just structural forces that hampered Black-owned businesses from getting PPP loans. According to Parilla, explicit racism played a role as well.

“There appears to be, based on studies in Washington, D.C., outright lending discrimination by race,” he said. “[They] found that Black business owners who had the same or similar application profiles to white business owners were more likely to be denied PPP loans by financial institutions.”

Liu and Parilla’s research focused on how long it took businesses to get PPP loans. They found that small businesses in majority-minority neighborhoods had to wait one week more on average than those from majority-white neighborhoods. While that may not sound like much, Liu says that week is crucial for businesses. 

“Small businesses on average only have a two-week cash buffer, so a seven-day delay could be a matter of life and death for a lot of the small businesses that didn’t receive the relief when they needed it the most.” she said.

It’s difficult to say exactly how much PPP advantaged white-owned businesses, due to poor data collection. In Virginia, over 90% of PPP loans contain no information on the race of the applicant. But, according to a VPM analysis of SBA data, Virginia localities where less than 20% of residents were Black, roughly the percentage of Black residents statewide, received about 23% more per capita in PPP loans than those with a greater proportion of Black residents.

Chris Wodicka, a senior policy analyst with the progressive Commonwealth Institute for Fiscal Analysis, worries that by allowing businesses to deduct forgiven PPP loans, the state is doubling-down on a program widening racial disparities.

“Only some businesses received PPP loans to begin with, and we know that many struggling small businesses were left out of that process,” he said. “We know that that is particularly the case for businesses owned by people of color.”

Wodicka also notes PPP was one of the least effective stimulus measures undertaken during the COVID-19 pandemic. According to the nonpartisan Congressional Budget Office, every dollar spent on PPP loans generated an additional 36 cents in economic activity. In comparison, direct payments to state and local governments generated an additional 88 cents per dollar spent.

Allowing companies to deduct $100,000 in forgiven PPP loans will cost the state roughly $100 million. While that’s only a quarter what it would cost if they could deduct their entire loans, Wodicka says that’s still significant, given the state is constitutionally obligated to keep a balanced budget. He argues Virginia should instead use that money to provide stimulus in other ways, such as grants targeted to reach women and minority-owned businesses or direct stimulus payments.

“Providing more support to families who are really facing a lot of hardship right now would do a lot to just stimulate the economy in general. And doing it that way would also help a lot of small businesses,” he said. 

Del. Kirk Cox (R-Colonial Heights), who is running for governor, has proposed the state use its unexpected $730 million dollar surplus to provide a tax rebate to Virginians: $190 for individuals and $380 for families. It wouldn’t be the first time the state tried something similar; in 2019, the state provided rebates of $110 for individuals or $220 for families following changes in tax policy that were precipitated by former Presidents Donald Trump’s 2017 tax bill. 

Wodicka has reservations about Cox’s proposal, however, noting that when the 2019 rebate checks went out, over 1 million Virginians were left out, because they had not paid enough in taxes to qualify or they filed their state taxes after receiving an extension, among other reasons.

“Without having enough detail [about Cox’s proposal] at this point, I would just be concerned that it might not reach those families who are really struggling and who also would be most likely to spend the money immediately,” he said.

The federal government is currently accepting applications for another round of PPP loans, which both Wodicka and Parilla said they hoped would be more equitably distributed. They both noted, however, that it will be hard to know until after the loans are doled out.