Posted tagged ‘research activities credit’

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

‘Shared sacrifice’ — for real?

December 29, 2010
Mike Owen

Mike Owen

Our incoming governor is talking about “shared sacrifice.” It’s an interesting choice of words, because it implies “balance” in the tough choices, disappointing people across the board, or more positively, expecting much from all.

But will that happen? As we saw with 10 percent state budget cuts back in 2009, “across the board” is not always as advertised. Spending on clearly stated priorities, such as education, law enforcement and environmental quality, is cut, while spending in the shadows is not.

Too easily left out of the equation is the spending Iowa does through the tax code. This kind of spending is in the form of tax credits, and also money lost through tax loopholes, the loose seams in the tax code through which big corporations shield profits from rightful taxation in our state. It is spending on autopilot, often behind a veil of secrecy, with little or no oversight — let alone review and approval — by our elected lawmakers.

So, will “shared sacrifice” in 2011 include that kind of spending — the kind of spending that actually reduces resources before elected officials get a chance to make decisions on whether, or how, to spend the funds?

This is one of the most critical decisions to be made as a new General Assembly convenes and the new governor is inaugurated.

Posted by Mike Owen, Assistant Director

Missing an opportunity for tax-credit reform?

March 18, 2010
Christine Ralston

Christine Ralston

Iowa is missing an opportunity to implement strong transparency measures and to recapture revenue that it has been allowing to slip away for years.

Legislation passed by the Senate and now before the House appears to make only small, cosmetic changes to a serious structural problem. Generous tax credits have been leaking revenue out of the state for many years. Considering the recent scandal in the film tax credit program and the fact that Iowa, like most other states, faces revenue shortfalls of historic proportions, the state very much needs meaningful reform.

The Governor’s Tax Credit Review Panel made promising recommendations, and the Governor supported those recommendations when he issued a call for action in his Condition of the State address. Yet, the legislative package falls far short of the panel’s recommendations. For example:

Table comparing tax-credit reform proposals

It is important to note that lowering a cap is not the same thing as “saving” money. When the sum of all business credit claims is not reaching that cap, then the state is only reducing its potential liability and not saving any actual dollars.

The proposal is also lacking in essential new transparency measures. No additional disclosures regarding tax credits and expenditures are proposed in the plan. Iowans should know who is getting their tax dollars.

And this bill is certainly not good news for the thousands of Iowans who are seeing important safety net programs and jobs disappear during this recession.

Does this bill do something? Yes. Does it do much? No. Nothing in this bill is objectionable when considering the principles of sound tax policy. That said, much more needs to be done to move Iowa forward and to solve Iowa’s budget problems using an approach that is truly balanced.

Posted by Christine Ralston, Research Associate

More transparency on biz handouts — eventually

January 27, 2010

While transparency is good, and will result from a new law passed last year, lawmakers made a mistake in not having the new legislation take effect immediately.

Effect of transparency law

Research credit claims spike just ahead of disclosure law effective date

Lawmakers ordered annual public disclosure of recipients of the Research Activities Credit with claims exceeding $500,000.

Instead of an immediate effective date, the law carried a July 1 effective date. That gave companies two months to get their claims filed before the information gathering would begin — a temporary window to avoid disclosure. Some jumped through that loophole, to the tune of an estimated $25 million.

The Iowa Department of Revenue reported on this in its December Contingent Liabilities report for the Revenue Estimating Conference. After estimating RAC claims for FY2009 at $45.5 million and $46.1 million in August and October reports, that number spiked to $70.8 million in the December report.

The DOR report itself attributed the spike in the estimate to the new transparency law:

There was also a dramatic increase in the amount of Research Activities Tax Credit claims in FY 2009. The majority of the increase in FY 2009 claims is a result of corporations filing claims early, before the July 1, 2010, effective date for a new disclosure requirement for Research Activities Tax Credit claims exceeding $500,000. As a result the estimate for FY 2010 was lowered to account for those claims moving forward a fiscal year. (emphasis added)

The graph above shows where the steady upward trend in RAC claims broke sharply with passage of the disclosure law, claims spiking just ahead of the law taking effect, and the projected one-year reduction before the trend returns.

Think opening the books on public business doesn’t bother corporations? Think again. When public business is tied too closely to private business, as we see with the RAC, taxpayer accountability suffers.

Posted by Mike Owen, Assistant Director

New peek at secret checks

February 25, 2009

The Iowa Department of Revenue has released its 2006 Tax Credit Claims Report.

According to the report, during tax year 2006, Research Activity Credit (RAC) claims were $30.5 million — with 70 percent of that in so-called “refunds.” Important to note: These “refunds” don’t “refund” anything. Rather, they are what the state pays companies that can’t use all of their tax credits because they don’t owe enough tax.

And, by the way, these payments are state secrets — secret checks to companies that don’t pay corporate income tax in Iowa. We only get to know the overall amount of them, but not who gets what. It would be different if these checks came from direct appropriations, through the regular budget process.

This is an example of spending through the tax code that is costing the state of Iowa many millions of dollars each year. By 2012, the RAC is expected to cost the state over $100 million – part of the growing problem of ballooning tax expenditures that have weakened Iowa’s revenue structure.

The new report from Revenue also notes that the supplemental RAC – separate awards provided by the Department of Economic Development – cost the state $13.4 million in 2006, with most of that ($13.1 million) in “refunds.” Governor Culver has proposed doing away with that spending to save the state $13 million in the FY2010 budget.

See the full Department of Revenue report.


Follow

Get every new post delivered to your Inbox.

Join 25 other followers