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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.