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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.

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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]

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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.

Fisher: Commercial property taxes — reform first

Posted March 1st, 2013 to IFP in the News, Op-eds

Peter FisherBy Peter S. Fisher, Iowa Policy Project

The annual debate about commercial property taxes in Iowa is under way, and once again the discussion ignores the larger picture — that overall business taxes in Iowa are below average among states — and fails to consider reforms that should be addressed first.

It has become routine practice throughout Iowa, for example, to grant large property tax rebates to new commercial properties through Tax Increment Financing (TIF). Millions of dollars per year flow back to commercial projects, sometimes eliminating nearly all property taxes for 15 or 20 years — which can be to the disadvantage of an existing commercial project not in the TIF.

At the same time, some of Iowa’s largest and most profitable companies are paying no state corporate income tax due to the generosity of Iowa’s business tax credit programs. And many large multistate companies continue to exploit loopholes in Iowa’s corporate tax system to shift profits out of state and avoid paying their share of Iowa’s corporate tax, while instate business competitors cannot.

Rockwell-Collins has not paid any state corporate income tax for at least the last three years, and in fact, received state subsidy payments of as much as $13.8 million last year through the Research Activities Credit, yet it would benefit substantially from the property tax rollbacks and credits being discussed in the Legislature.

At the same time, local services could suffer from the loss of revenue, at least under some proposals. Similarly, Wal-Mart and its stores throughout Iowa, which exist because they are profitable, would receive a reduction on the $12 million in property taxes they currently pay to support state and local services.

Other national companies that use tax loopholes to escape Iowa income taxes would benefit as well. Nearly identical companies doing business in Iowa may have dramatically different property taxes based upon whether they are part of a TIF district, with TIFs often eroding local property taxes and playing one Iowa community off against another.

That violates a primary tax principle of fairness — that taxes should be based on ability to pay, and that those of similar standing and with similar ability to pay should have similar tax responsibilities.

Is Iowa really not competitive for new commercial investment, as some claim, given the ability of cities to reduce their property taxes to almost nothing? Should corporations not paying their share of the corporate income tax benefit from further state largesse in the form of property tax cuts?

TIF reform, caps on the refundability of tax credits, and measures to close the loopholes in Iowa’s corporate tax system (which could be corrected by combined reporting, as is done in the majority of states with corporate income taxes) should be undertaken before any further reduction in business taxes at a cost of cuts to local services.

Recent legislative proposals: In fiscal year 2009, property taxes levied amounted to $4,023 billion, with 31.2 percent, or $1.254 million, coming from commercial and industrial property. During the 2012 session, the Iowa House and Senate passed different versions of commercial and industrial property tax rollbacks — either of which could significantly affect the ability of both state and local governments to address health, education, and safety needs of Iowans (which make up 80 percent of the Iowa budget).

The House version, when fully phased in by FY2022, would have resulted in $486 million less in property tax collections and $237 million less in funding available to local governments, provided the state honored new commitments for $249 million in property tax replacement from state sources. The Senate version, when fully phased in by FY2022, would have resulted in $419 million less in property tax collections and $91 million less in funding available to local governments, provided the state honored new commitments of $328 million in property tax replacement funds from state sources. Since they did not reach agreement, neither version was enacted into law, but these issues are again before the General Assembly.

Iowa’s business taxes already are low. When one considers the whole range of state and local taxes that fall on businesses, Iowa is a low-tax state. In a report on overall taxes, including property taxes, paid by businesses, the nationally recognized accounting firm of Ernst and Young recently showed that only 15 states taxed businesses at a lower rate than Iowa as a percent of private-sector GDP.

Commercial property tax break will spur little or no growth. A state or local government’s tax rate — be it corporate income or commercial property or the combination of all taxes on business — is a tiny portion of a business’ overall costs. Taken together, state and local taxes on business are, on average, only about 1.8 percent of total business costs. The commercial property tax by itself would be an even tinier fraction of a business’ overall costs. The notion that cutting commercial property taxes further by reducing assessments will bring in new economic activity and new revenue is a pipe dream.

If Iowa is to make changes in its property tax treatment of commercial and industrial property, the first thing it should do is look to finance the cost of these changes through closing existing tax loopholes and subsidies. There are many provisions within Iowa’s tax code that are designed to stimulate economic activity but also substantially erode overall tax collections, often to the benefit of very narrow business interests. Because these credits are part of the tax code, they are not subject to annual appropriation or review. Before lawmakers consider changes to commercial and industrial property taxes or to corporate or individual income taxes, they need to review and consider reforms to and eliminations of special business tax exemptions and credits.

 

Peter Fisher is research director of the Iowa Policy Project, part of the Iowa Fiscal Partnership, a joint public policy research and analysis initiative of IPP in Iowa City and another nonpartisan, nonprofit organization, the Child & Family Policy Center in Des Moines.

This guest opinion ran in the March 1, 2013, Iowa City Press Citizen.

IFP News: Iowa Paid $33 Million in Research Checks in 2012

Posted February 15th, 2013 to Budget, Corporate Taxes, Tax Credits, Taxes

Rockwell Collins, Deere & Dupont Again Lead RAC Beneficiaries

Download this news release — 2-page PDF and Department of Revenue report 3-page PDF

IOWA CITY, Iowa (Feb. 15, 2013) — The largest recipients of a state research credit shared $28.5 million in subsidy checks as some or all paid no income tax in 2012, according to a new report from the Iowa Department of Revenue.

The report released Friday shows that overall, 178 corporations claimed a total of $46.1 million from the Research Activities Credit (RAC) in 2012, including both the regular RAC and a separate supplemental credit, but nine corporations claimed over 90 percent of those funds.

Of those credits, $32.5 million was paid to 130 claimants as “refunds,” the amount paid as checks because the claimants had more credits than income tax liability. Most of those “refunds” went to some or all of the nine largest beneficiaries of the credit.

“This report is the latest evidence of the need for reform of this poorly named ‘tax credit,’” said Charles Bruner, executive director of the Child & Family Policy Center. “The credit is used less to reduce taxes than to provide straight subsidies to big companies through the tax code, outside the budget process.

“It was never designed or promoted for huge subsidies for highly profitable businesses. These state reports are showing not only that the program is very expensive, but that most of the money — over 70 percent in 2012 — is paid out as checks to companies that already have wiped away all their income tax liability.”

A special tax-credit review panel appointed in 2009 by then-Governor Chet Culver urged lawmakers to eliminate the refundability of the credit for large companies, capping its cost and setting a five-year sunset that would require fresh approval to continue the credit. None of these proposals have been followed.

This latest state report shows that eliminating refundability in FY2012 would have cut the cost of corporate RAC credits from $46.1 million to $13.5 million.

“The difference would be enough to fund about 1 percent of allowable growth for K-12 schools in Iowa,” noted David Osterberg, executive director of the nonpartisan Iowa Policy Project.

The state, which spent $21.2 million on the credit in FY2010, is projected to spend $72.2 million on it in FY2017 if there are no changes.

Bruner noted that the RAC began as a way to support start-up companies to do research in Iowa, but that very large, profitable multinational companies dominate its use.

The biggest claimants in 2012, the same top three recipients as in the previous two years, were:
• Rockwell Collins Inc. and subsidiaries, $13.8 million;
• Deere and Co., $11.9 million; and
• Dupont, $8.5 million.

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As a group, the largest claimants — those with over $500,000 in claims — received credits of $42.1 million — $28.5 million of that in checks considered “refunds,” not as a return for an overpayment of taxes, but for tax credit value beyond their tax liability. The report further disclosed that 91 percent of the credits were claimed by only 5 percent of the corporations (nine).

This is the fourth annual report from the Department of Revenue as a result of a 2009 law requiring disclosure of the overall amount of individual and corporate RAC claims and refunds, and individual company claim amounts in excess of $500,000 for a year. While the law requires reporting of claims for large beneficiaries, it does not require that the amount of “refunds” be individually disclosed.

“The disclosure we have now is an improvement, but remains limited,” Bruner said, noting a stronger law would specify how much of individual corporate claims are paid out as checks, as opposed to credits that remove tax liability.

“Even with revenues coming in strong, the Research Activities Credit is expensive. What disclosure we have, and the limits on that disclosure, show that the RAC is a poster child for the need for accountability on the state’s corporate subsidies,” Bruner said.

Osterberg agreed.

“There simply can be no question that if we are going to spend over $40 million on these subsidies, they should be transparent in the budget process. These resources could be going toward education or water-quality enforcement,” Osterberg said.

“Why do we subsidize something that we know will happen anyway? Rockwell Collins, Deere and DuPont all need to do research to thrive; they will do what research is necessary for their business — they don’t need their taxes cut to persuade them of the need. But even if we think taxes should be reduced to encourage research, why do we send these companies a check on top of eliminating their taxes?

“Perhaps the biggest question is this: Why isn’t the Legislature asking more about it, and demanding answers on behalf of their constituents?”

Besides the top three claimants, John Deere Construction had $3.4 million in claims, Monsanto $1.7 million, with four other companies — Vermeer, CNH America, Kemin Industries and Skyworks — above $500,000.

In addition, the report showed 1,144 individuals claimed a total of $4.5 million from the RAC, with $1.7 million of that paid as refunds to 307 claimants. Individual claimants are not identified in the report.

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

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