Unveiling the Problem of Tax Expenditures in Iowa

Iowa has been making significant investments in economic development over the years through programs like the Iowa Values Fund and tax breaks like the research activities credit. However, evaluating the effectiveness of these investments has proven to be difficult, as there are minimal reporting requirements and the beneficiaries of the tax breaks remain confidential. Despite the fact that some Iowa businesses have received significant benefits through these tax breaks, policymakers and the public lack insight into the benefits and costs of these tax incentives.

One particular instance that highlights the lack of transparency around these tax breaks is the case of an anonymous Iowa firm that received $11 million from the state treasury as part of a claim for a research activities tax credit in 2002. The cost of this tax credit to the state was initially projected to be minimal. Similarly, in 2004, the General Assembly adopted tax provisions that allowed businesses retroactive eligibility for bonus depreciation on previous investments. The cost of this provision could potentially reach tens of millions of dollars. However, the beneficiaries of these tax breaks are not disclosed to the public, and there is no ongoing review to determine whether these breaks have generated any public benefits.

The lack of scrutiny applied to tax expenditures stands in stark contrast to the process for reviewing state government expenditures. The annual budget process for the state begins with state departments submitting appropriations requests to the governor, who then prepares and submits a budget to the General Assembly. These requests are thoroughly reviewed and studied by various budget appropriations subcommittees, and legislators question state departments about these requests. In contrast, tax expenditures for economic development do not go through the appropriations process.

The Iowa Department of Revenue defines tax expenditures as preferential provisions in tax law that reduce taxes from what would be imposed without the provision. These provisions can take the form of exclusions, exemptions, deductions, credits, and deferrals, and are often targeted at a specific group of taxpayers. While the revenue impacts of these tax provisions are estimated by the Iowa Department of Revenue during legislative deliberations in a Fiscal Note issued by the Legislative Services Agency Fiscal Division, once enacted, these tax provisions are rarely reviewed to determine if they are costing more than expected or if they are achieving their economic development goals.

In conclusion, while the Iowa government has spent a considerable amount of money on economic development programs and tax incentives, evaluating their effectiveness is challenging due to the lack of transparency and accountability around tax expenditures. Tax expenditures for economic development do not go through the same level of scrutiny as state government expenditures, and once enacted, they continue indefinitely. Without sufficient information to determine whether these tax incentives are generating the desired economic activity and whether they are worth the cost to taxpayers, it is vital to increase transparency and accountability regarding tax expenditures for economic development. This can be done through measures like public disclosure of beneficiaries and ongoing reviews to ensure that these tax breaks are producing the intended benefits.

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