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A $40 Million Budget Hole: Persistent and Growing

IFP Backgrounder — Research Activities Credit: Poster Program for Reform

Read backgrounder (2-pg PDF) February 25, 2013

rac boxEach year, Iowans learn a little bit more about the use of the state’s most lucrative business tax credit program, the Research Activities Credit (RAC). And each year, they also learn a little more about what they do not know — but could know, with better accounting in a public format.

As the Iowa Fiscal Partnership has reported for years, Iowa’s RAC is in practice a far different benefit from the one envisioned when it originally passed, in 1985. Designed to support start-up companies to do research, this increasingly costly program primarily benefits very large companies, with little scrutiny. Since 2009 more information has been available about the RAC, because a new law requires a state report by each February 15 on both individual and corporate claims against income tax.

The reports show this tax credit is used relatively little in the way one might expect of a tax credit: to reduce taxes. Rather, 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 annual reports filed as a result of the 2009 law are on the Department of Revenue’s Tax Credits Tracking and Analysis System page, at http://www.iowa.gov/tax/taxlaw/creditstudy.html. The first report was for a partial year; reports for calendar year 2010 and after offer full-year information. The tables below provide a summary of the full-year reports.

In summary, the 2012 report showed that 178 corporations claimed a total of $46.1 million from the RAC — covering both the regular RAC and the supplemental credit. Of those credits, $32.5 million was paid to 130 claimants as refunds, which means the recipients 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 provides information from the 2010[1], 2011[2] and 2012[3] annual reports disclosing big claimants and amounts claimed. A stronger disclosure would also state how much of each of those large claims was paid as a “refund,” (a check). It also would require corporations to report on changes in economic activities and investments in the state (the primary purpose for any business subsidy). These large claimants are highly profitable companies. Rockwell Collins, for example, had $609 million in profits in 2012, while Deere posted over $3 billion in profits and Dupont $2.8 billion.[4] This raises serious questions about the need for state help to cover what may be considered normal expenses, and whether the credits have resulted in any benefits to Iowa.

According to the Department of Revenue, the cost of this program — about $50.5 million for individual and corporate claims in 2012 — is projected to push above $70 million by FY2017.[5]

[1] http://www.iowa.gov/tax/taxlaw/RACreport10.pdf
[2] http://www.iowa.gov/tax/taxlaw/RACreport11.pdf
[3] http://www.iowa.gov/tax/taxlaw/RACReport12.pdf
[4] Profits posted for 2012 by companies. Rockwell Collins: http://investor.rockwellcollins.com/phoenix.zhtml?c=129998&p=irol-reportsannual
Deere: http://tinyurl.com/aha5jdh; Dupont: http://investors.dupont.com/phoenix.zhtml?c=73320&p=irol-irhome.
[5] Tax Credits Contingent Liabilities Report, December 2012, Iowa Department of Revenue. http://www.iowa.gov/tax/taxlaw/1212RECReport.pdf; Table 9.

 

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