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Since 2000, Iowa lawmakers have created 24 new tax-credit programs and expanded a number of others.
Most of these tax credits are designed to stimulate business growth, sometimes through very complex
systems that involve selling or transferring of these credits as well as providing them for the firms
themselves. Few have received much public scrutiny. Most have been the result of significant lobbying
efforts by the groups most likely to make use of them.
In December 2007, the Iowa Department of Revenue released a 31-page report, Tax Credits and
Analysis Program 2007 Report to the General Assembly, that provides available information on the
impact of these tax credits on state and local revenue and also forecasts their future costs to the treasury.
Filled with a lot of fine print, the report still should be a “must read” for lawmakers, advocates,
researchers and reporters concerned about Iowa’s future fiscal capacity to meet ongoing obligations.
BEYOND THE FINE PRINT
The bottom line is that, even if the state experiences high rates of economic growth, state revenue likely
will fall far short of keeping pace and funding essential services, particularly if the use of these tax
credits continues to grow. The tax credits are creating an additional structural imbalance in the state
budget that could mean lawmakers will face chronic shortfalls annually in trying to simply maintain
current levels of funding commitments, over 60 percent of which is for education.
The following are among highlights of the report:
• From fiscal year 2001 through FY07, the state increased the number of tax credits it awarded
nearly fivefold – from $111 million to $516 million per year. These credits are not taken all at once, but
spread out over a number of years, so budget impacts are mostly felt in future years.
• The enterprise zone program tax credits and the high-quality job creation program tax credits [see
summary at bottom] accounted for the lion’s share of this increase, growing from $61 million in FY01 [1] to $417
million in FY07.
• Between 2000 and 2006, the costs to the state treasury in individual income-tax reductions from
business-related tax credits alone grew from $24 million to $86 million, partly as a transfer of the credits
to investors who then used them to reduce their taxes from other sources of income.
• Even if no new enterprise zone or high-quality job creation tax credits are offered from this day
forward, the state’s contingent liability for these tax-credit programs (the amount it is obligated to pay
out each year) is projected to grow from $304 million in FY08 to $437 million in FY11.
This $133 million built-in growth in tax-credit liability clearly leaves that much less state revenue to
fund education, health, human services, environmental, workforce development, and other economic
development programs, as well as address the impacts of inflation.
Because of their present and future costs to the state treasury, it is time to take a serious look at Iowa’s
use of tax credits to stimulate economic growth. Tax experts generally agree that credits should be used
sparingly, particularly as business incentives, with most research showing they have very limited
impacts on economic decisions, can distort normal market forces and provide unfair advantages to
certain businesses over others, and tend to grow in size and use away even from their intended
beneficiaries. This is because tax credits, unlike general fund appropriations, often have:
• No cap or upward limit on their size and cost to the treasury. This makes them open-ended drains
on the treasury.
• No public disclosure of the beneficiaries of the
credits. This thwarts an ability to determine whether
credits are being used as they were intended.
• No annual review or required reauthorization by
the General Assembly. This stands in contrast to the
review and affirmative action to continue required of
other state spending.
• Limited ability to target their use to businesses
where they are needed in order to grow and develop, as
opposed to businesses that would have grown and
developed without the credits. These become windfalls
rather than true incentives.
• No connection between who makes decisions on
awarding the credits and who will be expected to cover
their overall costs. This makes them appear as costless benefits to those who are making decisions about them.
Reviewing Iowa’s tax-credit programs requires considerable study, and the Iowa Department of Revenue is only beginning this process. Still, enough is
already known about these to suggest some immediate actions. In light of the department’s report and its implications, lawmakers should at least:
• Assure public scrutiny by enacting tax transparency legislation that provides for public
disclosure of the beneficiaries of all business-directed tax credits;
• Revise existing tax credits in all instances where there is evidence of their excess or wastefulness, and place some ceiling on the amount of credits that can be
awarded; and
• Establish a moratorium on the enactment of any additional tax credits.
The High Quality Job Creation Tax Credit Program
The Department of Economic Development is given the authority to award tax credits to
new investments that will produce “high quality” jobs, with a tax credit of from 1
percent to 10 percent of the investment made, depending upon the number of jobs created and their pay relative to median county
wages. DED makes these awards based upon the applications for the tax credits that it
receives. In FY2007, the department gave out $301 million in such awards.
In the case of limited liability corporations (LLC), where a group of investors get
together to finance a business, the credits are transferred to the individual investors. A
wealthy investor with a $1 million taxable annual income could make an investment of
$500,000 into a bio-fuels project that received a 10 percent credit. That investor would then
receive a state tax credit of $50,000, which would then be used to offset $10,000 in Iowa
individual income taxes owed for each of the next five tax years. The Department of
Revenue does not have reports on the beneficiaries of this credit by income level,
but it is likely that a large share of credits go to such high-income individuals, who both
have the most to invest and can make the most use of an income-tax credit. Much of the
$60 million in growth in business tax credit claims on the Iowa individual income tax
between 2000 and 2006 likely went to those in Iowa’s highest income-tax brackets.
[1] Figure includes the new jobs and income program, the predecessor to the high quality job creation program, for FY2001.
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