As the Iowa Fiscal Partnership has reported for years, Iowa’s Research Activities Credit (RAC) is a benefit that found a new mission somewhere after its creation in 1985. Designed as a way to support start-up companies to do research, it has become a costly program that benefits very large companies with little scrutiny. One check on that lack of scrutiny is a relatively new disclosure requirement. Under a law passed in 2009, the Iowa Department of Revenue reports by each February 15 about individual and corporate claims on the Iowa RAC.
Because of this law, there now is an element of transparency that did not exist before for this tax credit, which is not used frequently in the way one might expect, to reduce taxes. Rather, Iowans now can see that the credit is used mostly to provide subsidies, sometimes in the millions of dollars, to corporations that actually pay little or no income tax. All three of the annual reports filed as a result of the new disclosure law are on the Department’s Tax Credits Tracking and Analysis System page, available at this link: http://www.iowa.gov/tax/taxlaw/creditstudy.html. The first report was for a partial year; the 2010 and 2011 reports offer full-year information. The tables below provide a summary of those latest two reports.
In summary, the 2011 report showed that 181 corporations claimed a total of $47.6 million from the RAC in 2011. That figure includes both the regular RAC and the supplemental credit. Of those credits, according to the report, $44.9 million was paid to 131 claimants as refunds, which means they paid no state income tax because they had more credits than tax liability.
The law also requires reporting the identities of claimants of more than $500,000. Table 3 below illustrates the information from the 2010 and 2011 annual reports disclosing those claimants and amounts claimed. The “minimum check” column is a conservative estimate by the Iowa Fiscal Partnership based on the Department of Revenue figures.* A stronger disclosure would also state how much of each of those large claims was paid as a “refund,” or as a check. IFP also added sales/profit information for this table.
* For example, the Department of Revenue figures show that the amount of RAC used to erase taxes was $2,689,535 in 2011 for all 181 corporate claimants (amount of claims minus “refunds,” or checks). If that amount were applied to each of the large claimants, it illustrates at least three had greater claims than needed to reduce taxes, and thus, a “minimum check” number. The fact that 131 received “refunds” in 2011 (Table 1) shows that those companies did not pay any income tax to Iowa.