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Posts tagged research activities credit

Tax credits: Just review them!

Posted November 11th, 2019 to Blog

Iowa lawmakers are making the issue of tax credit reform much more difficult than it needs to be.

Put another way, consider tax credit reform as a different task: If we were setting out to design the first wheel, no cars would be on the road today.

The latest foot-dragging came in late October, with the first meeting of a so-called “Tax Credit Review Committee,” which if not for the delay was a rare, promising nugget in an ill-conceived, expensive and inequitable income-tax cut bill in 2018.

It was 10 years ago this fall that a scandal in the Iowa Film Tax Credit program led Governor Chet Culver to order a review of all state tax credits. A special panel of state department heads went through the credits and offered a set of reforms in January 2010.

Virtually nothing was done in response. Tax credits, particularly those for business, have gone merrily along, rising to a projected $434 million for this budget year. Of that, about 7 out of every 10 dollars, or $314 million, is for businesses. State revenue analysts expect under current law for these numbers to be similar through FY2024.

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While the tax credits themselves can be complicated, the fundamental issues are not.

  • Tax credits are expensive.
  • Tax credits are regularly and extensively analyzed by the Department of Revenue, making plenty of information available.
  • Tax credits, like any spending of public money — and this is, in fact, spending ordered outside the budget process — demand accountability and a demonstration of a public benefit.
  • The Legislature creates these exceptions to our tax code; thus, it falls to the Legislature to review them to determine if they meet their expected purpose.
  • Even if a given credit may benefit the public, it must be shown to be a better public expenditure than something else, like education or health care services.

As it is, the 2020 legislative session will open without anything serious being done about a review ordered two years before.

Truly it is easier not to do anything, to keep the gravy train running for the corporate lobbyists who benefit from these credits. But if you’re going to talk the talk about accountability in public spending, you should walk the walk.

The low-hanging fruit that could start lawmakers on that path is the Research Activities Credit, or RAC. The RAC is a refundable credit, which means that if you have more credits than you owe in taxes, you get a check from the state for the balance. The annual cost of the RAC is about one-fifth of the cost of all business and family tax credits.

As we have shown repeatedly — using data from an annual state report by the Department of Revenue — most of the RAC is paid as so-called “refunds,” not of taxes owed, but of tax credits not needed, and most of the benefit goes to very large firms.

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DOR evaluations — here and here as examples — provide evidence that is at best sketchy on whether the RAC promotes significant new research in the state. Companies that benefit from the RAC have to do the research anyway, just to be in business, or they wouldn’t bother with it.

In the case of a small startup firm, a credit for some period of time might help the firm get established. For multinational corporations with hundreds of millions or billions in profit, good luck proving the need.

Think of it this way: You could reduce or even eliminate the refundability of the RAC and not raise taxes on a single company or individual. But you’d have $40 million more available to put into public schools, or clean water projects, or any number of public priorities.

Incoming House Speaker Pat Grassley said tax credit reform “is kind of a long process.” But if one never starts, one will never design that wheel.

These are budget choices, ultimately. Why are legislators so afraid to even start on them?

MMike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

Tax credits: Just review them!

Posted November 11th, 2019 to Blog

Iowa lawmakers are making the issue of tax credit reform much more difficult than it needs to be.

Put another way, consider tax credit reform as a different task: If we were setting out to design the first wheel, no cars would be on the road today.

The latest foot-dragging came in late October, with the first meeting of a so-called “Tax Credit Review Committee,” which if not for the delay was a rare, promising nugget in an ill-conceived, expensive and inequitable income-tax cut bill in 2018.

It was 10 years ago this fall that a scandal in the Iowa Film Tax Credit program led Governor Chet Culver to order a review of all state tax credits. A special panel of state department heads went through the credits and offered a set of reforms in January 2010.

Virtually nothing was done in response. Tax credits, particularly those for business, have gone merrily along, rising to a projected $434 million for this budget year. Of that, about 7 out of every 10 dollars, or $314 million, is for businesses. State revenue analysts expect under current law for these numbers to be similar through FY2024.

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While the tax credits themselves can be complicated, the fundamental issues are not.

  • Tax credits are expensive.
  • Tax credits are regularly and extensively analyzed by the Department of Revenue, making plenty of information available.
  • Tax credits, like any spending of public money — and this is, in fact, spending ordered outside the budget process — demand accountability and a demonstration of a public benefit.
  • The Legislature creates these exceptions to our tax code; thus, it falls to the Legislature to review them to determine if they meet their expected purpose.
  • Even if a given credit may benefit the public, it must be shown to be a better public expenditure than something else, like education or health care services.

As it is, the 2020 legislative session will open without anything serious being done about a review ordered two years before.

Truly it is easier not to do anything, to keep the gravy train running for the corporate lobbyists who benefit from these credits. But if you’re going to talk the talk about accountability in public spending, you should walk the walk.

The low-hanging fruit that could start lawmakers on that path is the Research Activities Credit, or RAC. The RAC is a refundable credit, which means that if you have more credits than you owe in taxes, you get a check from the state for the balance. The annual cost of the RAC is about one-fifth of the cost of all business and family tax credits.

As we have shown repeatedly — using data from an annual state report by the Department of Revenue — most of the RAC is paid as so-called “refunds,” not of taxes owed, but of tax credits not needed, and most of the benefit goes to very large firms.

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DOR evaluations — here and here as examples — provide evidence that is at best sketchy on whether the RAC promotes significant new research in the state. Companies that benefit from the RAC have to do the research anyway, just to be in business, or they wouldn’t bother with it.

In the case of a small startup firm, a credit for some period of time might help the firm get established. For multinational corporations with hundreds of millions or billions in profit, good luck proving the need.

Think of it this way: You could reduce or even eliminate the refundability of the RAC and not raise taxes on a single company or individual. But you’d have $40 million more available to put into public schools, or clean water projects, or any number of public priorities.

Incoming House Speaker Pat Grassley said tax credit reform “is kind of a long process.” But if one never starts, one will never design that wheel.

These are budget choices, ultimately. Why are legislators so afraid to even start on them?

MMike Owen is executive director of the nonpartisan Iowa Policy Project.

mikeowen@iowapolicyproject.org

Tax credits: Just review them!

Posted November 11th, 2019 to Blog
Iowa lawmakers are making the issue of tax credit reform much more difficult than it needs to be. Put another way, consider tax credit reform as a different task: If we were setting out to design the first wheel, no cars would be on the road today. The latest foot-dragging came in late October, with the first meeting of a so-called “Tax Credit Review Committee,” which if not for the delay was a rare, promising nugget in an ill-conceived, expensive and inequitable income-tax cut bill in 2018. It was 10 years ago this fall that a scandal in the Iowa Film Tax Credit program led Governor Chet Culver to order a review of all state tax credits. A special panel of state department heads went through the credits and offered a set of reforms in January 2010. Virtually nothing was done in response. Tax credits, particularly those for business, have gone merrily along, rising to a projected $434 million for this budget year. Of that, about 7 out of every 10 dollars, or $314 million, is for businesses. State revenue analysts expect under current law for these numbers to be similar through FY2024. Basic RGB While the tax credits themselves can be complicated, the fundamental issues are not.
  • Tax credits are expensive.
  • Tax credits are regularly and extensively analyzed by the Department of Revenue, making plenty of information available.
  • Tax credits, like any spending of public money — and this is, in fact, spending ordered outside the budget process — demand accountability and a demonstration of a public benefit.
  • The Legislature creates these exceptions to our tax code; thus, it falls to the Legislature to review them to determine if they meet their expected purpose.
  • Even if a given credit may benefit the public, it must be shown to be a better public expenditure than something else, like education or health care services.
As it is, the 2020 legislative session will open without anything serious being done about a review ordered two years before. Truly it is easier not to do anything, to keep the gravy train running for the corporate lobbyists who benefit from these credits. But if you’re going to talk the talk about accountability in public spending, you should walk the walk. The low-hanging fruit that could start lawmakers on that path is the Research Activities Credit, or RAC. The RAC is a refundable credit, which means that if you have more credits than you owe in taxes, you get a check from the state for the balance. The annual cost of the RAC is about one-fifth of the cost of all business and family tax credits. As we have shown repeatedly — using data from an annual state report by the Department of Revenue — most of the RAC is paid as so-called “refunds,” not of taxes owed, but of tax credits not needed, and most of the benefit goes to very large firms. Basic RGB DOR evaluations — here and here as examples — provide evidence that is at best sketchy on whether the RAC promotes significant new research in the state. Companies that benefit from the RAC have to do the research anyway, just to be in business, or they wouldn’t bother with it. In the case of a small startup firm, a credit for some period of time might help the firm get established. For multinational corporations with hundreds of millions or billions in profit, good luck proving the need. Think of it this way: You could reduce or even eliminate the refundability of the RAC and not raise taxes on a single company or individual. But you’d have $40 million more available to put into public schools, or clean water projects, or any number of public priorities. Incoming House Speaker Pat Grassley said tax credit reform “is kind of a long process.” But if one never starts, one will never design that wheel. These are budget choices, ultimately. Why are legislators so afraid to even start on them? MMike Owen is executive director of the nonpartisan Iowa Policy Project. mikeowen@iowapolicyproject.org

Transparency: Corporations see; we don’t

Posted August 23rd, 2019 to Blog

The transparency on tax breaks that we get in Iowa is merely a tease for the taxpayer, and for the folks who lobby the Legislature each year for their causes.

It’s not enough to really let Iowans compare the choices being made on the spending of public dollars.

Advocates for public-focused priorities push lawmakers to apply an adequate share of the state budget to real responsibilities: to educate children and young adults, care for those without the means to do so on their own, and to keep their natural environment clean and their streets safe.

They have to make a case, that a public investment is not only needed, but a responsible use of funds that benefits the greater good in Iowa.

Some in the lobby can afford to advocate differently. In the “We Got Ours” huddles of big-business advocates in the lobby, the high stakes business of protecting their special breaks, and expanding them, is often only evident in the results.

A Cedar Rapids Gazette story shows we can expect more of this for an expensive and unaccountable program long on the books, the Research Activities Credit, or RAC. The RAC, unlike most tax credits, often does not affect taxes at all, but is a straight and automatic subsidy provided to huge companies that pay little — and often nothing — in Iowa corporate income taxes. (Remember that next time you hear their  complaints about Iowa’s corporate tax rates.)

Much of the story offered weak defenses of this program by the state’s economic development director, Debi Durham, and a spokesperson for the biggest recipient of these subsidies. Neither of those two people offered a shred of evidence of a public return on the $60-plus million annual cost.

You see, we know the cost, because there is an annual report that lawmakers required for this program. (The lobby fought that requirement hard when it passed in 2009.) But what the report cannot show is how much of the subsidized research would have happened anyway.

RAC table ... large claims
The Research Activities Credit was set up to help small, entrepreneurial businesses get going. Instead, as official state reports have shown, very large companies with RAC claims above $500,000 account for between 80 and 90 percent of the cost every year.

In a deliberative budget process, everything is on the table — funds available, a clear and understandable process to apportion them, and the public benefit evident. But when $300 million in business credits are on autopilot, a large chunk of those funds is taken off the table before the rest of us even get to sit down.

Peter Fisher, IPP’s research director, notes in The Gazette story that the system gives all the advantages to the corporations.

“The corporations hold all the cards, which is why I think states and localities routinely spend way more than they need to,” Fisher told The Gazette. “It’s like playing poker where the other players know your hand but you don’t know theirs.”

To learn more about the RAC, see this Iowa Fiscal Partnership piece.

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Mike Owen is executive director of the nonpartisan Iowa Policy Project and director of the Iowa Fiscal Partnership.

mikeowen@iowapoicyproject.org

A spotlight, not a floodlight, on business breaks

Posted March 21st, 2017 to Blog

A bill in the Iowa House, HSB187, would cut a range of Iowa tax credits, eliminating refundability and capping overall spending on credits. There is significant opposition, because people like their tax breaks. But the issue is suddenly in the spotlight because these and other giveaways are responsible for Iowa’s serious revenue challenge.

There are solutions to the state’s rampant and often unaccountable spending on tax credits and other tax breaks. It is interesting that an interim committee that meets every year to examine a rotating set of tax credits has not produced any reforms. It’s not because reforms are not necessary. Rather, it’s a lack of resolve.

One of several strong recommendations in January 2010 by a Special Tax Credit Review Panel appointed by then-Gov. Culver in the wake of the film credit scandal was for a five-year sunset on all tax credits. This would require the Legislature to re-approve every tax credit.

That would be a start. Another option: Instead of eliminating refundability for all credits, which affects even credits where refundability makes sense (Earned Income Tax Credit), limit it where it does not. The Special Tax Credit Review Panel recommended eliminating refundability for big recipients of the Research Activities Credit (companies with gross receipts over $20 million). Another option would be to cap refundability for all credits at $250,000, which would not harm small players, either businesses or individuals, and would reduce the excessive checks to big businesses.

The scrutiny and demand for a return on investment on these credits would be too much for many of these special arrangements to withstand. Eliminating or capping wasteful credits would free up revenues for other priorities; some would invest more here or there — education, or public safety, or the environment — and some would simply use it to reduce overall spending. But either way, we would have the opportunity for a debate.

There is a danger in putting everything on the table at once. It presents a false equivalency of tax credits — that they are somehow all the same. It ignores the fact that some are for private gain and some for the common good, and some are a mixture. Some work, and some do not.

Some meet the purpose for which they were advertised (the Earned Income Tax Credit, for example, which benefits low-income working families), and some miss the mark with tens of millions of dollars every year (the Research Activities Credit, where most of the money goes to huge, profitable corporations that pay little or no income tax instead of to small start-ups as envisioned).

Iowa’s business tax credits will have risen by half from 2011 to 2021 under current official projections. That is where the spotlight needs to be.

Challenging all credits at the same time gets everyone’s backs up. That is a recipe to assure continued unwillingness to take on any of it. And that will not serve Iowa very well.

Posted by Mike Owen, Executive Director of the Iowa Policy Project

mikeowen@iowapolicyproject.org


Millions more of the same

Posted February 16th, 2017 to Budget, Corporate Taxes, Economic Security, Education

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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Oversight on the overseers of tax credits

Posted December 19th, 2016 to Blog
You might have heard about a big meeting at the State Capitol today.

No, not that one, about whose portrait will hang in the Iowa House and Senate behind the presiding officer.

The meetings where there’s always some mystery are the annual reviews of selected tax credits. Only a few credits are reviewed each year by a panel of legislators. One meeting was in November; the other is today.

One tax giveaway — er, tax credit — on the agenda for today is the Research Activities Credit, or RAC.
No such review since these sessions started has produced meaningful reform, but the exercise does put information on the table and does put a spotlight on spending choices being made outside the budget process.

What we already know from previous evaluations and annual reports about the RAC is that it is costly — over $50 million a year — and that routinely at least two-thirds of the cost (and usually over four-fifths) goes to companies as so-called “refunds.” These are not refunds of taxes owed, but of tax credits the companies didn’t need because they owe so little, or no, corporate income tax.

Remember that when you hear the Iowa Taxpayers Association and others bleating about Iowa’s corporate taxes, which are actually low.
For perspective on the RAC, the $42 million given away in tax credit refunds under this program in 2015 would have paid for about 1 percent more in school aid, at the same time schools were told we didn’t have the money for it. Of course we did. Our legislators just chose to give it away, mainly to huge, profitable corporations.
In Room 103 of the State Capitol, 1:15 p.m., the public and legislators can hear from the Department of Revenue about the Research Activities Credit. And the session that follows at 2:15 on the Earned Income Tax Credit may be worth listening to as well, for contrast, as the EITC is a demonstrated boost to the economy while the RAC has never been demonstrated to be more than a drain on revenue.

You never know what legislators at the table will have to say about these issues, but we may get some insights.
As for that other meeting, we all now how it will come out.
owen-2013-57Posted by Mike Owen
Executive Director of the Iowa Policy Project
Project Director of the Iowa Fiscal Partnership
mikeowen@iowapolicyproject.org

Big Money, Big Companies — But Whose Benefit?

IFP BACKGROUNDER

Official Report Exposes Continuing Issues with Iowa Research Activities Credit  

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160224-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 (186 in 2015) 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” — $42.1 million in state spending last year.

As the Iowa Fiscal Partnership has noted, Iowa’s RAC is far different from what was envisioned when it originally passed, in 1985. Designed to support start-up companies to do research, this program primarily benefits very large companies, with little scrutiny. More information has been available about the RAC since 2009, when state legislators ordered the Iowa Department of Revenue to provide an annual report by February 15 on both individual and corporate claims against income tax for the previous calendar year.[1]

As illustrated in Table 1 below, little of this tax credit is used to reduce taxes for its recipients. Rather, the credit is used mostly to provide subsidies, in state checks worth sometimes millions of dollars, to corporations that pay little or no income tax.

160217-RAC-Table1

The amount of the corporate claims under the RAC has ranged from about $45.2 million to $53.3 million over the six years covered by the full-year annual reports, from 2010 through 2015. The 2015 report showed 246 corporations claimed a total of $50.1 million from the RAC — covering both the regular RAC and the supplemental credit.

160224-RAC-Fig1The share of those claims provided as “refund” checks to corporations — meaning they had no corporate income tax in Iowa — has ranged from about two-thirds of the benefit to as much as 95 percent. After dipping below 70 percent in the previous two years, the share of research credits paid out as checks rose to 84 percent in 2015, with a cost to the treasury of $42.1 million. (Table 1.)

The number of companies claiming the credit has risen sharply — by 55 percent to 248 claims in each of the last two years compared to the 160 corporate claims in 2010. (Figure 1) Likewise, the share of claimants receiving checks has risen over that time from 133 to 186 — a 40 percent increase.

Another trend that has remained strong is that large claimants have taken $8 or $9 out of every $10 from the corporate credit. This is illustrated in Table 2 below. These are companies that have over $500,000 in corporate claims. Recalling that the credit represents 6.5 percent of the increase in Iowa research spending above an established base level (box, page 1) this effectively 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.

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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 — 20 — last year. Table 3 provides information from the six full-year 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,” 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.

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 a report making several recommendations, including 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.”[2]

160222-RAC-TopClaimants2

 

These large claimants are highly profitable companies. The biggest recipient of the Iowa credit in 2015, Rockwell Collins, reported $686 million in profits in fiscal 2015.[3] Deere & Co., had $7.5 million in research costs offset —yet reported over $1.9 billion in 2015 profits.[4] DuPont reported almost $2 billion in profits in 2015, but claimed $7.5 million from Iowa taxpayers for research.[5] As Table 3 indicates, Rockwell Collins and Deere have both benefited from more than $67 million in RAC claims over the last six years, and Dupont from more than $45 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.

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State fiscal experts predict will be a growing subsidy outside the budget process (Figure 2). The Department of Revenue projects the cost of this program to rise from about $54.9 million for individual and corporate claims in FY2013 to $64.4 million this year and more than $75 million by FY2020.[6]


[1] All annual reports filed as a result of the 2009 law are on the Department of  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.
[2] State of Iowa Tax Credit Review Report, Jan. 8, 2010, p. 8, http://iowapolicyproject.org/2010docs/1001-TaxCreditReview.pdf
[3] Rockwell Collins Annual Report 2015, http://s1.q4cdn.com/532426485/files/doc_financials/annual/2015/COL-ANNUAL-REPORT-FINAL.pdf
[4] Deere & Co. news release, https://s2.q4cdn.com/329009547/files/doc_financials/quarterly_earnings/2015/Q4-2015/Q4_2015_Media-Release-and-Financials.pdf
[5] DuPont news release http://investors.dupont.com/investor-relations/investor-news/investor-news-details/2016/DuPont-Reports-4Q-and-Full-Year-Operating-EPS-of-027-and-277/default.aspx
[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.)

News Release (Feb. 15, 2016)
Special Tax Credit Review Panel Report (Jan. 8, 2010)

Iowa Fiscal Partnership

The Iowa Fiscal Partnership (IFP) is a joint budget and tax policy initiative of two nonpartisan, Iowa-based organizations, the Iowa Policy Project in Iowa City and the Child & Family Policy Center in Des Moines. IFP is part of the State Priorities Partnership, a network of nonpartisan organizations in 41 states and the District of Columbia that share a commitment to rigorous policy analysis, responsible budget and tax policies, and a particular focus on the needs of low- and moderate-income families. IFP research is supported by the Stoneman Family Foundation and by the Annie E. Casey Foundation. Policy conclusions are the responsibility of the Iowa Policy Project and the Child & Family Policy Center and not necessarily the view of either the Stoneman Family Foundation or the Annie E. Casey Foundation. Iowa Fiscal Partnership reports are available to the public at http://www.iowafiscal.org.

A good deal if you can get it

Posted February 19th, 2016 to Blog

But research credit refund checks are poor fiscal stewardship

The millions Iowa gives to companies that do not pay state income tax is about the same amount of 1 percent in state school aid.

That’s one takeaway from the latest annual report from the state on Iowa’s Research Activities Credit (RAC). That tax credit is used far less to ease taxes than to shovel subsidies to big corporations outside the budget process, whether they pay taxes or not.

The report shows that in 2015, 248 companies had $50.1 in claims from this tax credit. Because the credit is refundable, companies get the full benefit no matter how much they owe (or don’t owe) in taxes. And the report shows that of those claims, 75 percent, or $42.1 million, were paid as checks to 186 companies that paid no corporate income tax to the state.

As we note in a summary by the Iowa Fiscal Partnership, each percentage-point increase in Supplemental State Aid for schools costs about $41 million to $43 million (Iowa Association of School Boards estimate).

160216-RAC-chksVclmsVsupp2b-line

What’s more, the largest claimants — 20 corporations receiving over $500,000 from this credit — took the lion’s share of the benefit with $43.9 million overall (about 88 percent).

Many millions are spent this way every year, outside the budget process. These companies don’t have to compete for what are supposedly scarce public dollars needed for critical public services such as education, health care, environmental protection and public safety. The latter types of spending must compete in the budget process.

The Research Activities Credit is only an entitlement. And except for the occasional lawmaker willing to stand up to restore some accountability, there is silence from the General Assembly.

This is perfectly legal. In fiscal policy terms, however, it’s a scandal, because it is legal. Lawmakers refuse to even consider whether to take this spending off autopilot.

When they claim the state is too strapped for money to provide more for school aid or human services, lawmakers should admit they let corporations take what they want first.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
Contact: mikeowen@iowapolicyproject.org
For more information about the Research Activities Credit, visit www.iowafiscal.org

No taxes, big checks

Iowa has choices: Keep giving millions to companies that don’t pay Iowa state income tax — OR add 1 percent in school aid.

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FOR IMMEDIATE RELEASE MONDAY, FEB. 15, 2016

Big companies erase taxes — take millions in state checks

Research Credit annual report shows big companies keep gaining

IOWA CITY, Iowa (Feb. 15, 2016) — A lucrative tax subsidy is providing as much in checks to companies that don’t pay income tax as the state could use to pay for 1 percent in state aid to schools.

A new annual report from the Department of Revenue outlines the use of the Research Activities Credit (RAC), which in 2015 provided $42.1 million — about the cost of an additional percentage point in school aid — to companies that paid no state income tax. Most of that went to very large companies.

The state report, released Monday, shows that in 2015:

  • Claims by 248 companies totaled $50.1 million for the RAC and the related supplemental RAC for which some claimants are eligible.
  • Of those, 186 (75 percent) are companies that not only owed no state corporate income tax after applying the credit, but received state checks in return.
  • Eighty-four percent of the tax credits were paid as checks to the companies.
  • Very large claimants — companies with over $500,000 in RAC claims — had at least 85 percent of those checks ($35.8 million) while paying no income tax.
  • Rockwell Collins, Dupont, Deere & Co., John Deere Construction and Monsanto were the largest corporate claimants, as they have been for the past six years. Together, those five companies have claimed nearly $218 million from the RAC program from 2010-15. (See table below.)

“This spending outside the budget process is distorting the choices now on the table as state lawmakers consider what is available for schools, clean water, human services and public safety,” said Mike Owen, executive director of the nonpartisan Iowa Policy Project.

“Is it a better use of taxpayers’ money to send millions in checks to profitable companies to do research they would do anyway, or to make sure schools can hire enough teachers next fall? That is the question that should be raised by this automatic spending on business tax breaks. To ignore it is a fiscal scandal.”

Overall, the credit program cost $57.1 million in calendar year 2015, with $50.1 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. These so-called “refunds” — not of taxes owed but of credits in excess of taxes owed — accounted for 84 percent of all of the corporate research credits in 2015, according to the new report from the Department of Revenue.

The report is available on the Department of Revenue website at https://tax.iowa.gov/sites/files/idr/RAC Annual Report 2015.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.

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Basic RGBAn IFP report last month showed that Department of Revenue forecasts indicate business tax breaks will grow by 13 percent from this budget year to the next, even though the debate over school aid focuses on numbers between 2 percent and 4 percent.

According to the Iowa Association of School Boards, each percentage point increase in Supplemental State Aid (SSA), costs about $41 million to $43 million.

“There is at least a legitimate question, one that lawmakers are refusing to consider, of why large, profitable corporations do not have to defend these millions of dollars in tax breaks and subsidies, when teachers and children’s advocates are going hat in hand to the Capitol for enough to keep up with basic costs,” Owen said.

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.

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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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The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit Iowa-based organizations, the Iowa Policy Project and the Child & Family Policy Center. Reports are at www.iowafiscal.org.