Big Money, Big Companies — But Whose Benefit?

The most valuable company tax credit scheme in Iowa is the Research Activity Credit (RAC). The initiative, which was initially designed to assist start-up businesses in doing research, now predominantly benefits giant enterprises with no oversight. Some businesses obtain credits that essentially lower their taxes, while others owe no income tax or can get the RAC to decrease it to zero, giving them state checks in the form of “refunds.” With over $50 million in RAC claims over the past four years, companies like Deere & Co., Rockwell Collins, and Dupont have profited, and the program has grown to serve as a subsidy for extremely profitable businesses. The necessity for government assistance to pay for what may be seen as routine costs is seriously questioned by these businesses.

The impact on resources available for public services is significant, with the Department of Revenue projecting the cost of this program to rise from about $51.5 million for individual and corporate claims in 2012 to more than $80 million by FY2018. This increase in corporate claims from 2012 to 2013 may be indicative of future drains in revenue, as Iowa continues to work its way back from the recession. The law requires reporting the identities of claimants of more than $500,000, but a stronger law would disclose how much of each of those large claims was paid as a “refund,” illustrating which companies not paying Iowa income tax also received state assistance. It would also require corporations to report on changes in economic activities and investments in the state, the primary purpose of any business subsidy.

The majority of this tax credit is instead utilized to give subsidies, often in the millions of dollars, to businesses that pay little or no income tax. Very little of this tax credit is used to lower taxes. There are substantial concerns regarding the necessity for state assistance to pay for what would be seen as routine costs because the program has grown to serve as a subsidy for extremely profitable firms. Research and development efforts are what makes these businesses competitive in their industries, and Iowa taxpayers are not shown a return on their investment in the operations of these businesses.

In conclusion, Iowa’s RAC has become a far different benefit from the one envisioned when it was originally passed in 1985. While designed to support start-up companies to do research, the program has become a subsidy for highly profitable corporations that pay little or no income tax. The impact on resources available for public services is significant, and a stronger law is needed to disclose the identities of large claimants, how much of each of those large claims was paid as a “refund,” and require corporations to report on changes in economic activities and investments in the state.