Posted tagged ‘research activities credit’

Leveling the playing field

December 11, 2014

Small business owners get it: They follow the rules, but preferential treatment for giant companies puts them at a disadvantage.

Case in point: Lora Fraracci, who had an excellent guest opinion in today’s Cedar Rapids Gazette about practices big companies use to avoid paying U.S. taxes. The problem is not exclusively an issue with the lax U.S. tax code. It is a big problem at the state level as well.

Ms. Fraracci runs a residential and commercial cleaning business. As she noted:

“As a small-business owner in Des Moines, I play by the rules and pay my taxes to support our American economy. I create jobs that will continue to support our local economy. When the playing field is so uneven it makes it hard to realize this dream.”

The issue has been receiving some national attention, but many may not realize the prevalence of this problem and its extension to state taxes. While Ms. Fraracci and other small businesses, or Iowa focused businesses, follow the rules, large companies they may serve can find a way to either (1) avoid the rules, or (2) block stronger rules.

The Iowa Fiscal Partnership has written about these issues for some time, and the reports are on our website.

The biggest Iowa breaks come in two ways: tax loopholes and tax credits.

Tax loopholes have been estimated to cost the state between $60 million and $100 million a year. Loosely written law is an invitation to big companies’ lawyers and accountants to find ways to lower their firms’ taxes. Multistate firms can shift profits to tax-haven states and avoid taxes they otherwise would be paying in Iowa. That creates the uneven playing field Ms. Fraracci sees.

Iowa could fix this by adopting something called “combined reporting,” which the business lobby has fought tooth and nail when proposed in the past by Governors Tom Vilsack and Chet Culver. Many states — including almost all our neighbors (Illinois, Wisconsin, Minnesota, Kansas and Nebraska) — already do this. See our 2007 report, which remains relevant because Iowa has refused to act.

Tax credits are particularly costly, rarely reviewed with any sense that they will be reformed. This is illustrated best with the Research Activities Credit, which provides a refundable credit to big companies to do something they are likely to anyway: research to keep their businesses relevant and competitive.

In 2013, that credit cost $53 million, with $36 million of that going to companies that paid no state income tax in Iowa. The default position must be that this is wasted money, because it is never reviewed in the regular budget process the way other spending is examined every year — on schools, law enforcement, worker protection and environmental quality. In Iowa, spending on tax credits is spending on autopilot.

Read here about Iowa’s accountability gap on tax-credit spending.

Looking ahead, as a new legislative session approaches and we hear repeatedly that things are tight, keep these points in mind to better understand the real fiscal picture facing Iowa. The more small-business owners understand this, the more likely pressure can build for real reform.

Owen-2013-57  Posted by Mike Owen, Executive Director, Iowa Policy Project

Job 1 for Day 1 — putting Iowa families first

November 6, 2014

As election dust settles, priorities remain clear for Iowa families

Now that the votes are counted, the real work begins. Job 1? It could be any of a number of areas where solid research and analysis have shown better public policy could make a difference for a more prosperous, healthier Iowa. Take a step back from the TV ads and “gotcha” politics and these issues come clearly in focus.

In Iowa, research shows solid approaches to economic prosperity for working families include:

In Iowa, research shows a fiscally responsible approach to both find revenues and do better with what we have includes:

  • Stopping tax giveaways to companies that pay no income tax — which occurs at a cost of between $32 million and $45 million a year through one research subsidy program alone, even though there is nothing to show this spending boosts the Iowa economy or produces activity that would not occur anyway. http://www.iowafiscal.org/big-money-big-companies-whose-benefit/
  • Reining in unnecessary “tax expenditures” — tax breaks, tax credits and other spending done through the tax code — could bring in tens or hundreds of millions of dollars for public services. A five-year sunset on all tax credits would force lawmakers to review and formally pass renewals of this kind of spending, now on autopilot. The last attempt at real reform fell woefully short. http://www.iowafiscal.org/tax-credit-reform-glass-half-full-maybe-some-moisture/
  • Plugging tax loopholes — a $60 to $100 million problem — would pay for a 2 or 3 percent annual increase in state per-pupil funding of K-12 schools. Twenty-three states, including 4 of 6 Iowa neighbors, don’t permit multistate corporations to shift profits out of state to avoid Iowa income tax and contribute their fair share to local education and other state services. http://iowapolicypoints.org/2013/05/22/will-outrage-translate-into-policy/
  • Reforming TIF — tax-increment financing, which is overused and often abused by cities around the state, has caught lawmakers’ attention in the past and should again. Like many tools that provide subsidies to private companies and developers, it should be redesigned to assure subsidies only go to projects with a public benefit and only where the project could not otherwise occur. Further, it should be designed to assure that only the taxpayers who benefit are the ones footing the bill, which is a problem with current TIF practice. http://www.iowafiscal.org/category/research/taxes/tax-increment-financing-tif/

In Iowa, research shows a healthy environment and smart energy choices for Iowa’s future includes:

  • Putting teeth into pollution law — which means reforms in Iowa’s Nutrient Reduction Strategy to eliminate pollution in waterways. http://www.iowapolicyproject.org/2014Research/140717-nutrient.html
  • Allowing local government to regulate frac sand mining — When it comes to cigarettes, guns and large hog facilities the Iowa Legislature took away the right of local government to listen to citizen desires. The General Assembly and the Governor should let democracy thrive and not take away local control of sand mining.
  • Encouraging more use of solar electricity in Iowa — Jobs are created while we confront climate change if we build better solar policy in Iowa. http://www.iowapolicyproject.org/110325-solar-release.html
  • Promoting local food and good food choices with school gardens — and a pilot project to offer stipends to Iowa school districts could encourage both learning and better nutrition. http://www.iowapolicyproject.org/2014Research/140514-school_gardens.html

None of these issues are new and it’s not an exhaustive list. But these were big issues for our state before the election and remain so, no matter who is in charge.

Together, we can build on the solid research cited above and lay the foundation for better public policy to support those priorities.

Owen-2013-57   Posted by Mike Owen, Executive Director of the Iowa Policy Project

Beware the “business climateers”

August 18, 2014

Fisher-GradingPlacesIowa’s business lobby appears to be preparing a new assault on the ability of our state to provide public services.

It would be the latest in a long campaign, in which lobbyists target one tax at a time under a general — and inaccurate — message about taxes that we will not repeat here.

Suffice to say, Iowa taxes on business are low already. Many breaks provided to businesses are rarely reviewed in any meaningful way to make sure that taxpayers are getting value for those dollars spent, ostensibly, to encourage economic growth. Rarely can success be demonstrated.

The Iowa Taxpayers Association is holding a “policy summit” this week and promoting a new report by the Tax Foundation to recycle old arguments that are no better now than they have been for the last decade.

Fortunately in Iowa, we know where to turn to understand claims from the Tax Foundation, and that resource is Peter Fisher, our research director at the Iowa Policy Project. Fisher has written two books on the so-called “business climate” rankings by the Tax Foundation and others, and is a widely acknowledged authority on the faults in various measures of supposed “business climates” in the states.

Fisher, in this guest opinion in the Cedar Rapids Gazette, noted weaknesses in the Tax Foundation’s claims, not the least of which is that the anti-tax messages are not supported by the foundation’s own report. Fisher notes this about the Tax Foundation’s “State Business Tax Climate Index”:

It is a mish-mash of 118 tax features … weighted arbitrarily and combined into a single number for the index.

This number has no real meaning. It produces wacky results because it gives great weight to some minor tax features (such as the number of tax brackets) while leaving out completely two things that have a huge impact on corporate income taxes in Iowa: single sales factor, and federal deductibility.

This past spring, this Iowa Fiscal Partnership two-pager noted:

A variety of factors influence the decisions businesses make about whether they want to locate or expand within a given state. These factors include available infrastructure, the proximity to materials and customers, the skill of its workforce, and whether the state has good schools, roads, hospitals, and public safety. As we have shown elsewhere, state taxes play at best a minor role.

In Iowa, we constantly hear the same old argument … used to enact large tax cuts for commercial and industrial property this past year and continues to be an excuse used to justify giving away large tax credits to businesses throughout the state.

But this argument just isn’t true…

Whether we are looking at the entire range of taxes that fall on businesses or just the corporate income tax, the fact is that business taxes in Iowa are low.

Only if Iowa policy makers and the public ignore the reality on Iowa business taxes will these special interests get their way again.

Owen-2013-57 Posted by Mike Owen, Executive Director of the Iowa Policy Project

*View Peter Fisher’s reports for Good Jobs First on business climate rankings:

 

Two numbers say so much

March 6, 2014

Two numbers say so much: 140 and $36 million.

Last year, 140 companies paid no income taxes in Iowa but — through the tax code — received $36 million in research checks.

Those two numbers alone tell us two things: We have a problem with transparency, and we have a problem setting priorities.

We know those two numbers because Iowa’s Department of Revenue is required every February to report on the use of the state’s Research Activities Credit.

We don’t know enough about what’s behind those two numbers — the problem of transparency. As it’s public money, the assumption should be that we are owed full information about where every dollar is spent (a case made well by The Des Moines Register in a recent editorial). Cities, schools and counties are required to disclose this routinely.

In fairness, some lawmakers worked hard in 2009 to assure the transparency that we do have, passing a good law that required the annual reports. Before that, we had even less information. Big business fought hard to stop the law, and failed. And because we have the law, we can make several noteworthy observations that are detailed in this Iowa Fiscal Partnership backgrounder, and get some insights on who benefits, as in the table below.

Table3-RACrecipients-w

But the annual reports do not tell us — or indicate with certainty — which companies receive the benefit as checks, how much each receives or how the money is used. There is no evidence of jobs created. There is no evidence of need or of public benefit, or return on the public investment.

There is no point where we say, “Enough already. You know, Company X, you had $200 million in profits last year — we don’t really think your shareholders need Iowa taxpayers’ help when our schools can’t keep up with costs and our city water systems need updates and our roads have potholes. And, by the way, your company and your employees are better off if we take care of those priorities before we give money to you.”

This exposes the problem with budget priorities: This spending is done outside the budget process. Spending on the RAC is decided before the Legislature even convenes. It’s automatic. The decision has already been made for 2015, and 2016, and so on, and we don’t even know for sure how much it will cost — though the Revenue Department projects it to grow precipitously.

State law provides that companies are entitled to that money regardless of any other pressures on state budget choices — including cuts to education. Example: In 2013, Iowa spent that $36 million to help companies that contributed no income tax, but for the current fiscal year that started in July 2013, the state reneged on its commitment to the school funding formula. The state fell more than $60 million short of its share, leaving property taxpayers to pay it — in the same year, by the way, that legislators boasted about property-tax reform.

I think I know where we could have found $36 million of that lost school funding.

A special state panel that reviewed all Iowa tax credits in 2009 singled out the so-called “refundability” of the RAC as a special problem. It recommended eliminating refundability for big companies, which have dominated the spending on this credit. And it also recommended putting a sunset — an automatic elimination — on all tax credits after five years. To keep them going, the Legislature would actually have to take a vote on them. That is accountability.

As it stands, our Legislature does not touch this issue. Meanwhile, big and immensely profitable companies are sucking dollars away from our local schools, state universities, community colleges, local police, county mental health services, environmental quality programs and enforcement, wage and hour enforcement … well, you get the idea.

That is the budget choice being made, because our state is happily spending on autopilot with no proof of a public benefit.

Owen-2013-57Posted by Mike Owen, Executive Director

A taste of transparency

February 11, 2014

This week we will get a taste of what transparency could look like for the hundreds of millions of dollars that Iowa spends through the tax code.

We’ll only get a taste, to be sure, as what we’ll see won’t be enough. But, thanks to a law that passed against difficult and powerful lobbying interests in 2009, we do get that taste — a glimpse into who benefits from Iowa’s largest and most generous business tax credit.

It’s the Research Activities Credit (RAC), a costly little gem that has provided big companies some big checks from the state — in some cases even when they pay nothing in income tax. The Iowa Department of Revenue projects the cost of this credit to grow by more than half in the next five years, from $52.4 million to $80.3 million.[1]

projected growth of RACCould this be a shrewd investment for the state? Not likely, or at least that must be the presumption, as the beneficiaries have neither shown nor had to show the state’s real taxpayers what they get in return for the giveaway. Click here for a look at the recent history on this credit.

Projected RAC costs tableThe economic development gurus defend the RAC with little more than a “trust us” argument, which of course is not a strong enough argument for public schools, or state universities, or community colleges, or cities with law enforcement and infrastructure challenges, or counties with mental health services and emergency response challenges.

And the costs just keep rising for the RAC and many other business tax credits, with virtually no public accountability. What little that is available will come in the Department of Revenue report that is due yet this week. It will show the total amount of claims, the total amount paid as checks to companies that do not pay state income tax, and will identify companies with over half-a-million dollars in claims. Stay tuned.

[1] Iowa Department of Revenue, Tax Credits Contingent Liabilities Report, December 2013, http://www.iowa.gov/tax/taxlaw/1213RECReport.pdf

Mike OwenPosted by Mike Owen, Executive Director

Accountability is good for tax breaks, too

January 4, 2013
Mike Owen

Mike Owen

The Des Moines Register has an interesting editorial today about the state’s voluntary preschool program. The Register is asking for accountability:

“Before lawmakers consider any new education reforms, they should ensure that the changes they made a few years ago are helping.”

Hard for anyone to argue with that. Advocates of preschool surely would not fear a legitimate review. And what better time to review and adjust a program than its early years?

Now, wouldn’t it be interesting to see the same concept applied to Iowa’s many tax breaks for corporations? Do they do any good? There is no evidence that they do for the most part, a fact ignored routinely by the Iowa General Assembly and our Governors past and present, but they just keep on going. The idea of a review of tax breaks only gets lip service from most lawmakers; there are no serious reviews and no teeth in state law to require them.

The Research Activities Credit alone is a program crying out for this kind of scrutiny, a point clear from the few details that are available (See http://www.iowafiscal.org/2012research/120221-IFP-RAC.html). Unlike the preschool program, in which 9 out of 10 Iowa school districts participate, the RAC is used by a relative handful of companies in Iowa, well under 200, and is dominated by less than 10.

The money is not all that different: $58 million in 2011-12 for preschool through the state formula vs. almost $48 million for the RAC in 2011 — with $45 million of that paid in “refund checks.” These are not refunds of taxes paid, and they don’t even reduce taxes. Instead, millions go to big corporations such as Rockwell Collins, Deere and DuPont that owe so little in income tax that their tax credits are far above the amount of taxes they owe.

What’s good for the goose of preschool is certainly good for the gander of tax breaks.

//EDITOR’S NOTE: The next annual report on the use of the Research Activities Credit is due Feb. 15 from the Iowa Department of Revenue. Stay tuned!//

Posted by Mike Owen, Assistant Director

Corporate giveaways: Running like a Deere

March 25, 2011
Mike Owen

Mike Owen

News item: IFP: Research credit showers benefits on non-taxpaying companies:

Rockwell Collins, John Deere and Dupont … were among 133 corporations that paid no state income tax but received checks from the state totaling approximately $43 million. (Newton Independent, Feb. 11, 2011)

News item Feb. 16: Deere reports doubled earnings:

Deere & Co., Iowa’s largest manufacturing employer,  doubled its first quarter profits to $513.7 million, or $1.20 per share from $243.2 million, or $0.57 per share, for the same period last year. (Des Moines Register, Dan Piller blog, Feb. 16, 2011)

The first story cited a report from the Iowa Department of Revenue that shows Deere & Co. clearly reaped a windfall from the Research Activities Credit (RAC). Deere received at least $10.6 million, and quite possibly more, from the State of Iowa in 2010 above what it owed in income tax to Iowa. Deere was among 133 companies that paid no income tax to Iowa but still received checks from the state because their research credits were so large. Over 95 percent of corporate RAC claims were used not to offset taxes, but were paid out as checks to companies with no taxes owed — over $43 million in checks.

Deere has done nothing wrong. It has only taken advantage of special breaks offered by Iowa law. But this raises seemingly unavoidable questions of public policy, of priorities in spending. Somehow, lawmakers have avoided those questions.

Deere’s windfall in 2010 came without any review by the Iowa General Assembly or the Governor. This spending was done through the tax code. At the same time, Iowa school districts dealt with budget cuts, as did other agencies throughout state government. In some cases, property taxes rose because there were — we were told — insufficient state revenues.

The RAC report shows more revenues are available if lawmakers choose to seek them by cutting spending through the tax code. In the case of “tax credit refunds” like the $10 million-plus received by Deere and the $43 million spread across 133 companies, they could be eliminated, the money saved, and not one dime raised in taxes. Even if they were only scaled back, it would save money and cause no tax increase.

And that’s only one “tax credit” program that drains money from the treasury. There are others, and there also are loopholes that lawmakers have refused to plug.

But lawmakers’ choice, to this point, has been to leave that spending alone.

Posted by Mike Owen, Assistant Director


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