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Millions more of the same

Big companies erase taxes — take millions in state subsidy checks 
Latest Research Activities Credit annual report shows big, profitable companies keep gaining

IOWA CITY, Iowa (Feb. 15, 2017) — Iowa’s lucrative research subsidy provided as much in 2016 to very large companies that do not pay Iowa state income tax as legislators recently approved as an increase in state school aid.

The Department of Revenue’s annual report on the Research Activities Credit (RAC), released Wednesday, showed that in 2016 the corporate share of the subsidy cost Iowa taxpayers a total of $49.1 million — with 82 percent, or $40.4 million, in 207 checks to companies that paid no state income tax.

Most of those so-called “refunds” — not of taxes paid but of tax credits not needed to erase tax liability — went to very large companies that had over $500,000 in research credit claims. Of every $10 in RAC checks, $9 went to those large companies.

“Put another way, less than 6 percent of the corporate claimants for this credit took 90 percent of the benefit,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project. “It is really time to examine whether this is a wise use of what legislators tell us are scarce resources.

“The number of companies taking advantage of this program is sharply rising — up 11 percent in one year. There were 160 companies using the RAC in 2010; in 2016, the number of claims reached a high of 305.”

The report shows that in 2016:

  • Companies made 305 claims totaling $49.1 million for the RAC and the related supplemental RAC for which some claimants are eligible, down $1 million from the previous year.
  • Of those claims, 207 (68 percent) were paid in whole or in part as checks to companies that paid no state corporate income tax.
  • Eighty-two percent of the value of those tax credits were paid as checks to companies.
  • Very large claimants — companies with over $500,000 in RAC claims — had at least 88 percent of those corporate checks ($35.6 million) while paying no income tax.
  • The large claimants accounted for 90 percent of the corporate claims.
  • Rockwell Collins, Dupont, Deere & Co. and John Deere Construction — the largest four corporate beneficiaries over the previous six years — were joined in the top five for 2016 by Golden Grain Energy LLC, which had $5.2 million in claims. Rockwell Collins led with $12.1 million, followed by Deere at $8 million, Golden Grain at $5.2 million, Dupont at $5.1 million and John Deere Construction at $2.6 million. (See table below and attached)

“This report illustrates a budget choice,” Owen said. “Legislators this month approved about $40 million in additional state aid to local schools for next budget year. This report suggests they could have doubled that if they were willing to cut back this tax break to simply excusing taxes owed.

“This is spending outside the budget process. Advocates of schools, clean water, human services and public safety do not have that luxury. They have to work for appropriations every year.”

Overall, the credit program cost $58.4 million in calendar year 2016, with $49.1 million of that in claims by corporations and the rest by individuals. The credit is refundable, which means that if a company has more tax credits available than it owes in taxes, the state makes a payment for the difference.

The report is available on the Department of Revenue website at https://tax.iowa.gov/sites/files/idr/RAC Annual Report 2016.pdf.

The Iowa Fiscal Partnership (IFP), a joint initiative of the Iowa Policy Project and another nonpartisan organization, the Child & Family Policy Center in Des Moines, has reported on the RAC for many years.

Owen noted that Iowans have access to more information about this credit than they did years ago because of the annual report, which was ordered by the Legislature in 2009.

All of the state annual reports on the RAC are available on the Iowa Department of Revenue website at https://tax.iowa.gov/report/Reports?combine=Research%20Activities.

Those reports show that the number of corporate claimants has grown from 160 in 2010, the first full year covered by the annual reports, to 248 in both 2014 and 2015. The number of claimants receiving the credit as checks, rather than to only erase tax liability, rose from 133 in 2010 to 181 in 2014 and 186 in 2015.

A special tax credit review panel recommended in 2010 that the state curtail some spending on business tax credits. Among its proposals were to scale back “refunds” of the research credit, and to impose a five-year sunset on all tax credits to assure that the Legislature would have to vote to continue them.

For more information about the Research Activities Credit and other Iowa tax credit issues, see the Iowa Fiscal Partnership website at www.iowafiscal.org.

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