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Big Money — Whose Benefit?

 Designed to support start-up companies to do research, this costly program primarily benefits very large companies, with little scrutiny.

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IFP Backgrounder

Big Money, Big Companies — But Whose Benefit?

Official Report Exposes Continuing Issues with Iowa Research Activities Credit   

140306-RAC-boxIowa’s most lucrative business tax credit program is the Research Activities Credit (RAC). Through the RAC, some big companies receive big dollars from the state of Iowa, some as credits — effectively, discounts — on their taxes. But some as well (140 in 2013) either owe no income tax or reduce it to zero with the RAC, and have tax credits left over. In those cases they can receive state checks as a “refund” — $36.3 million in state spending last year.

As the Iowa Fiscal Partnership has noted, 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.[1]

Little of this tax credit goes to reduce taxes. Rather, the credit is used mostly to provide subsidies, sometimes millions of dollars, to corporations that pay little or no income tax.

Table 1. Most of Corporate RAC is Paid in Checks — Not to Reduce Taxes 

Table 1. Most of Corporate RAC is Paid in Checks — Not to Reduce Taxes

Table 2. Claimants Over $500,000 Receive Largest Share of Benefit 

Table 2. Claimants Over $500K Receive Largest Share of Benefit

The 2013 report showed 185 corporations claimed a total of $53.3 million from the RAC — covering both the regular RAC and the supplemental credit.  Of those credits, $36.3 million was paid to 140 claimants as “refunds”; in those cases recipients paid no state income tax as they claimed more credits than tax liability.

Table 3. Top Claimants Gain Year After Year, 2010-13

Table 3. Top RAC Recipients 2010-13

The law also requires reporting the identities of claimants of more than $500,000. Table 3 provides information from the 2010, 2011, 2012 and 2013[2] annual reports disclosing big claimants and amounts claimed. A stronger law would disclose how much of each of those large claims was paid as a “refund,” illustrating which companies not paying Iowa income tax also received state assistance. 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. The biggest recipient of the Iowa credit in 2013, Deere & Co., had $13.8 million in research costs offset — yet reported over $3.5 billion in 2013 profits.[3] Rockwell Collins reported $632 million in profits in 2013, while Dupont posted $4.8 billion.[4] As Table 3 indicates, Rockwell Collins and Deere have both benefited from more than $50 million in RAC claims over the last four years, and Dupont from more than $30 million. These figures raise serious questions about the need for state help to cover what may be considered normal expenses. After all, what keeps these companies competitive in their fields is their research and development work. Where there might be a benefit to company stockholders, there is no demonstration to Iowa taxpayers about a return on their investment in these companies’ operations.

The impact on resources available for public services is significant. The Department of Revenue projects the cost of this program to rise from about $51.5 million for individual and corporate claims in 2012 to more than $80 million by FY2018.[5] The increase in corporate claims of $7.3 million from 2012 to 2013 may be indicative of future drains in revenue, as Iowa continues to work its way back from the recession.


[1] 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. Reports for calendar year 2010 and after offer full-year information. Our tables summarize the corporate claims in those full-year reports.

[2] Iowa Department of Revenue, Tax Credits Tracking and Analysis System page: http://www.iowa.gov/tax/taxlaw/creditstudy.html

[4] Profits posted for 2013 by companies: Rockwell Collins (fiscal year ending Sept. 30, 2013)  http://investor.rockwellcollins.com/files/doc_financials/annual/RWC_2013AR_FINAL_r1.pdf, and Dupont (12 months ending Dec. 31, 2013) http://investors.dupont.com/phoenix.zhtml?c=73320&p=irol-newsArticle&ID=1894082&highlight=.

[5] Iowa Department of Revenue,Tax Credits Contingent Liabilities Report, December 2013, http://www.iowa.gov/tax/taxlaw/1213RECReport.pdf; Table 9. Note: These figures are fiscal-year costs and projections in reports provided by the Department for use by the Revenue Estimating Conference, as opposed to the calendar year reports provided by the Department as required by the Research Activities Credit disclosure law passed in 2009. They also include individual claims as well as corporate claims, while the tables only show corporate claims. (Corporate claims have represented more than 90 percent of the amount of all claims in each of the four years covered by the full-year RAC reports under the 2009 disclosure law. Individual claims represented 6.7 percent of the amount of the claimed credits in 2010, 7.8 percent in 2011, 8.9 percent in 2012 and 8.4 percent in 2013.).