When making procurement decisions, many cities and states give preference to local businesses as a means to nurture small businesses and local economies.

A 2007 survey by the National Association of State Purchasing Officials, found that 26 states have preferences for in-state bidders or products grown or manufactured in-state.  These policies may apply broadly or only to certain types of goods and services or in certain situations.  They may be absolute preferences or, more commonly, percentage preferences  (i.e., if a bid from a local business is within a certain percentage of the lowest non-local bid, usually 5 percent but as high as 15 percent, then the contract goes to the local business).  Seven states have a preference for both local and small businesses.  The Virginia Department of General Services has compiled a nice table detailing state purchasing preferences in a document titled, Listing of States’ Absolute and Percentage Preferences.

Dozens of cities and towns have also adopted local business purchasing preferences.

Internationally,the Government of Western Australia has a Buy Local policy.

Economic Benefits

Giving preference to local suppliers, even if it means spending a little more, can actually benefit a city’s finances. Dollars spent locally generate additional economic activity even beyond the value of the initial contract as the local supplier in turn sources goods and services locally. Each additional dollar that circulates locally boosts local economic activity, employment, and ultimately tax revenue.

A study in Arizona found that using local independent suppliers for state contracts results in three times the economic benefit of bids fulfilled through national chains.

In Britain, a county council found that vendors based within the county spent 76 percent of their county contracts locally (on wages paid to local employees and goods and services purchased from local businesses), while vendors based outside the county spent only 36 percent locally. The council, which has an annual procurement budget of £ 245 million, concluded that, if it shifted just 10 percent of its current spending with non-local suppliers to local suppliers, it would generate an additional £ 34 million (about $ 65 million) for the local economy. (This example and many other case studies can be found in the New Economic Foundation’s excellent guide, Public Spending for Public Benefit: How the public sector can use its purchasing power to deliver local economic development.)

Legal Challenges

The constitutionality of state and/or local governments favoring local businesses in their procurement practices has been challenged in the courts. Out-of-state companies argue that such favoritism conflicts with the Commerce Clause of the Constitution (Article 1, §8), as well as the equal protection and due process clauses of the l4th Amendment.  But courts have generally upheld local preference statutes. This is especially true if the state or city can make a reasonable case that the statutes will achieve a legitimate state or local interest (e.g., expanding the local economy).

One case, for example, involved a South Carolina policy that allowed in-state firms to be awarded a contract even if their bid price was 5 percent higher.  Smith Setzer & Sons, a manufacturer of reinforced concrete pipes headquartered in North Carolina, was the lowest bidder on many South Carolina contracts that were awarded to in-state companies because of the preference statute. The company sued.

The Fourth Circuit Court of Appeals concluded that states could discriminate in favor of local or in-state firms when they act as “market participants” — that is, when they themselves were the customers. In this case, in reviewing the statute the “legislation is presumed to be valid and will be sustained if the classification drawn by the statute is rationally related to a legitimate state interest.” The Court went on to note, “rules stating a preference that such (tax) monies (generated from the citizens of the state) be recycled within the local economy, either through the purchase of locally-produced products or through purchases from local vendors, rather than funneled out of state, reflect legitimate state concerns.” And it pointed to an econometric study done by the state showing that although South Carolina could save $50,000 by purchasing Smith Seltzer’s product, the state’s economy would suffer an overall economic loss (in terms of lost jobs, tax revenue, etc.) of $2.1 million if it did so.

Reciprocal Laws

Some 35 states have enacted “reciprocal laws.” These require public contracting agencies, in determining the lowest responsible bidder, to add a percent increase to each out-of-state bidder’s bid price equal to the percent of preference given to local bidders in the bidder’s home state. Thus, if the low bidder is from a state that grants a 10 percent preference to its own in-state bidders, the procurement agency must add 10 percent to that bidder’s price when evaluating the bid.

More information:

• Nonprofit groups, educational institutions, faith organizations, and others can also adopt local purchasing preferences.  Here’s an example from the Evangelical Lutheran Church of America.
• Local Food for Local Government: Considerations in Giving Preference to Locally Grown Food – March 2012 report from Public Health Law & Policy.