AI Can Improve US Small Business Productivity

Small and medium-sized enterprises (SMEs) employ more than half of the U.S. workforce but are just 47 percent as productive as their larger counterparts. Meanwhile, SMEs in other advanced economies are, on average, 60 percent as productive. U.S. small businesses need a productivity catalyst, and artificial intelligence (AI) can be just that.

The Census Bureau’s Annual Business Trends and Outlook Survey (BTOS) has gathered data on AI usage, including generative AI, since September 2023. Like all advanced technology adoption, AI usage is highly concentrated in the largest firms. However, more small businesses than ever are integrating AI into daily business functions. BTOS data indicate firms with 250 or more employees utilize AI the most, with an 11 percent usage rate as of February 2025. The smallest business class (those with one to four employees) are second at 7 percent. (See figure 1.)

Figure 1: AI use rates by business size in 2025 (average of first three 2025 surveys)

Small firms also have high expectations for AI adoption in the near future. According to the 2025 survey results, businesses with one to four employees have the second-highest expectations for AI use among business classes, with 10 percent anticipating the use of AI to produce goods or services within the next six months. Sixteen percent of large firms anticipate using AI for the same purpose.

Small businesses comprise the overwhelming majority of firms in the United States, accounting for 43.5 percent of GDP and over one-third of total goods exports. However, their low productivity levels hinder U.S. competitiveness by reducing potential revenue, diminishing R&D and capital investment, and slowing economic growth.

In tandem with other work automation processes, McKinsey & Company estimates that businesses' adoption of AI could add up to 3.4 percentage points to annual productivity growth. In the United States, where productivity is projected to grow at an annual rate of 1.4 percent over the next two decades, a boost of this magnitude could increase federal tax revenue by more than $6 billion, assuming federal revenue accounts for 16 percent of total GDP.

Critics of widespread AI adoption cite risks such as job displacement and the need for workforce reskilling, which could lead to increased unemployment, particularly in lower-skilled positions. However, data from the National Center for Science and Engineering Statistics reveals that 13.7 percent of firms using AI increased the size of their workforce, while just 6.9 percent experienced a decrease. AI has also had minimal impact on firm-wide skill levels, with more than 55 percent of firms reporting no effect. Other research, such as one measuring the impact of AI on wages and employment in Finland, found that workers most exposed to generative AI saw wage increases while employment levels remained stable.

To encourage AI adoption, Congress should prioritize policies that address the upfront challenges small businesses face. Targeted federal support—such as grants through the Small Business Administration (SBA) or tax credits for AI-integrated tools—would help lower the immediate financial and operational barriers that often prevent small firms from utilizing cutting-edge technologies at the same rate as large firms.

At the state level, policymakers should establish interest-bearing technology reinvestment accounts. Modeled after Connecticut’s Manufacturing Reinvestment Accounts, these would allow small businesses to invest up to $100,000 in pre-tax profits for five years, provided the investments are used solely for technology expenditures, such as AI software. These technology reinvestment accounts would catalyze AI-driven productivity gains by improving access to capital while mitigating financial risk.

If the U.S. wants to unlock the full potential of its small business sector, widespread AI adoption must become a policy priority. With targeted support from federal and state governments, AI can become a powerful tool for enhancing productivity and strengthening U.S. competitiveness against international rivals.