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RAC: Biggest players win big

IFP BACKGROUNDER — 
Big firms take the most with lucrative research credit 
•  As lawmakers consider corporate taxes, spotlight on Research Activities Credit  

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Iowa’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 (up to 244 in 2017[1]) either owe no income tax or reduce it to zero with the RAC, and have tax credits left over. They then can receive state checks as a “refund” — $43.7 million last year.

The RAC was established in 1985. To make it helpful to start-up firms, which would have little or no profit in their early years and thus owe no or little tax, it was made “refundable” — a “refund” payment for unused tax credits would assure they get the full benefit of the credit. The “refund” term is unfortunate because most associate it with taxes overpaid — not unused tax credits. In this program, receipt of a refund means the company paid no Iowa state income tax. Moreover, refunds are most of the cost — and both the credit and refunds primarily benefit very large companies, according to official annual state reports. The reports have been required since 2009 on both individual and corporate claims for the previous tax year.[2]

As illustrated in Table 1, little of this tax credit is used to reduce taxes for its recipients. Rather, the credit and a supplemental awarded credit are used mostly to provide subsidies worth sometimes millions of dollars to corporations that pay no income tax.

Table 1. Most of the corporate RAC and supplemental RAC is paid in checks — not to reduce taxes

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The amount of the corporate claims under the RAC has ranged from about $45.2 million to $54.8 million over the eight years covered by the full-year annual reports (since 2010). The 2017 report showed 373 corporate claims, covering both the regular RAC and the supplemental credit. Another 3,334 individual claims totaling $11.3 million brought the total cost of the RAC in tax year 2017 to $66.1 million. The number of RAC claims has more than doubled since 2010, from 160 claims to the 373 claims last year. (Table 1.) Likewise, the share of claims paid as checks has risen from 133 to 244 — an 83 percent increase.

Another trend is that large claimants (over $500,000 in claims) take about $9 out of every $10 from the corporate credit. Recalling that the credit represents 6.5 percent of the increase in Iowa research spending above an established base level (box, page 1) this means a company with $500,000 in claims has Iowa research expenses of at least $7.7 million — not a small company. It is reasonable to ask whether the subsidy is necessary for a company already devoting such sizable resources to research.

The annual reports by law must identify the largest corporate claimants, those with claims of more than $500,000. The largest claimants have looked similar at the top year to year, but the number of large corporate claimants has grown, from nine in 2010 to more than twice that — 21 — last year. (Table 2.)

Table 2. Top claimants differ little year by year, while number of big claimants grows
Research Activities Credit beneficiaries above 500,000 in claims, 2010-2017
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Source: Iowa Department of Revenue annual reports on the use of the Research Activities Credit.

A stronger law would disclose how much of each of those large claims was paid as a “refund,” or check, illustrating which companies received state assistance but did not pay Iowa income tax. It also would require corporations to report on their economic activities and investments in the state. There is no bidding process for this state expenditure, and no public disclosure of a public benefit.

These large claimants are highly profitable companies. Rockwell Collins, which reported $705 million in profits in fiscal 2017,[3] was the biggest recipient of the Iowa credit every year but one. Deere & Co. had $7.56 million in research costs offset — yet reported $2.16 billion in 2017 profits.[4] Table 2 shows Rockwell Collins and Deere/John Deere Construction have both benefited from more than $100 million in RAC claims over the last eight years, and Dupont from about $53 million. Do these highly profitable companies need subsidies from the state of Iowa? Would legislators make this budget choice if these subsidies were part of the normal appropriations process — put up against funding for education, human services and public safety that are traditional roles of state government? After all, research and development keep these companies competitive in their fields and they make far more in profit than the state provides. While company shareholders might benefit, Iowa taxpayers are shown no return on their investment.

A Special Tax Credit Review Panel appointed by Governor Chet Culver in 2009 examined all Iowa tax credits in the wake of a scandal in the Film Tax Credit Program. That committee came back in January 2010 with several strong recommendations. These included a five-year sunset for all tax credits so that lawmakers would have to review them and affirmatively vote to continue them, and specific recommendations on the Research Activities Credit. Among those recommendations: eliminate refundability of the RAC for companies with gross receipts in excess of $20 million yearly, but permit a five-year carry-forward. “It seems unreasonable for the State to be providing successful, larger corporations refund checks for amounts of the Research Activities Tax Credit over its tax due to the State.”[5]

After a spike in the current fiscal year, state revenue experts predict the RAC to grow well ahead of its pace of FY2017 and earlier. (Figure 1.) The Department of Revenue projects the cost of the RAC and the supplemental RAC together to stay well above $70 million a year for individual and corporate claims through FY2022.[6]

Figure 1. RAC claims projected to stay above recent levels
Official and historical claims on the Research Activities Credit, FY2015 through FY2022

Basic RGBSource: Iowa Department of Revenue Contingent Liabilities Report, Table 9, March 2018.


[1] Annual reports for the Research Activities Credit compiled by the Iowa Department of Revenue list the number and amounts of claims filed and refunds of credits; the number of claims does not necessarily correspond to the number of companies, as some companies may file more than one claim.
[2] All annual reports filed as a result of the 2009 law are on the Department of Revenue website, at https://tax.iowa.gov/report/Reports?combine=Research Activities. Reports for calendar year 2010 and after offer full-year information; the 2009 report was for a partial year. Our tables summarize the corporate claims in those full-year reports.
[3] Rockwell Collins Annual Report 2017, http://www3.rockwellcollins.com/annualreport/2017/financial-highlights.html
[4] Deere & Co. 2017 annual report, https://s2.q4cdn.com/329009547/files/doc_financials/quarterly_earnings/2015/Q4-2015/Q4_2015_Media-Release-and-Financials.pdf
[5] State of Iowa Tax Credit Review Report, Jan. 8, 2010, p. 8, http://iowapolicyproject.org/2010docs/1001-TaxCreditReview.pdf
[6] Iowa Department of Revenue,Tax Credits Contingent Liabilities Report, December 2015, https://tax.iowa.gov/sites/files/idr/Contingent Liabilities Report 1215.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 1-3 in this report only show corporate claims. (Corporate claims have represented 90 percent of the amount of all claims in the six years covered by the full-year RAC reports under the 2009 disclosure law.)