Arizona has pulled a $1m grant to help Nike build a new factory in a dispute over the firm's withdrawal of a trainer allegedly featuring racist symbolism.
The state's governor had condemned Nike's decision, which was prompted by complaints about its use of an old US flag embraced by white nationalists.
Nike-sponsored sportsman Colin Kaepernick had criticised the trainers, now selling on websites for $1,500.
But governor Doug Ducey said Nike had bowed to political correctness.
The special edition Air Max 1 Quick Strike Fourth of July trainer features the Betsy Ross flag.
With a circle of 13 stars representing the first US colonies, the flag was created during the American Revolution. Although opinion is divided over its origins, the flag was later adopted for use by the American Nazi party.
Nike said it withdrew the trainers "based on concerns that it could unintentionally offend and detract from the nation's patriotic holiday".
Earlier, Kaepernick, a former NFL star, reportedly told Nike that he found the flag offensive because of its connection to the era of slavery. Other critics also raised concerns with Nike.
Last year he became the face of Nike's advertisement marking the 30th anniversary of the company's "Just Do It" slogan.
The former American football quarterback had previously sparked a furore by kneeling during games to protest against police violence against African-Americans.