Posted tagged ‘research credit’

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

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

Watching your quarters — transparent state finances

January 22, 2010

Getting a handle on where corporate subsidies go can be slippery business.

When you put your money in, do you see where it goes?

It’s an important question for taxpayers, and it’s one the Iowa General Assembly may address further this spring.

The so-called “Research Activities Credit,” or RAC, has become an annual drain on the state Treasury of $30-40 million and is projected to reach past $60 million in a few years. But the biggest cost is not simply tax revenues lost to a credit against taxes owed. The biggest cost of the RAC is in its poorly named “refund” program. If a company can claim a credit larger than its taxes owed, it gets what’s called a “refund” — for taxes it never had to pay.

These “refunds” averaged about 92 percent of claims from 2000-05, and in 2005 averaged $3 million per recipient. That is money that never has to go through the regular budget process, scrutinized by legislative committees and weighed against the state’s priorities. If it were a grant, or a regular budget item, you would see where that money goes. But since it’s rewarded through the tax system, you don’t. The companies receive secret checks.

That’s business as usual in Iowa, where corporate giveaways are literally out of control.

Maybe this will start to change. A new law passed last year could be a critical first step toward transparency of subsidies to private corporations. Recipients of RAC claims above $500,000 will be named, with amounts received, in an upcoming report from the Department of Revenue.

You’ll be able to see where at least some of the money is going, and count your quarters — a half-million dollars at a time!

Posted by Mike Owen, Assistant Director

Still good advice — accountability and balance

December 14, 2009

It’s good to see more and more acceptance of the idea of accountability and balance to meet Iowa’s needs.

Everything must be on the table in budget decision-making, as Governor Culver insisted in his Condition of the State message earlier this year, and we have seen signs that this sensible, balanced approach could be taking hold in the Statehouse.

For many years, the budget hawks at the Iowa Fiscal Partnership have been making the pitch. One such report, in 2006, “Looking Behind the Curtain,” challenged Iowans to consider how to review the giant — and often secret — business subsidies that were draining the state of revenues needed to meet Iowans’ needs.

As noted then by the Des Moines Register, in a December 22, 2006, editorial:

Public dollars are the public’s business and should come with public accountability. Lawmakers should ensure that. They can get ideas about how to start by picking up a copy of the Iowa Fiscal Partnership report. [Click here for the executive summary of the report.

Late in the 2009 legislative session, lawmakers passed a measure to permit limited

Mike Owen

Mike Owen

public scrutiny of Iowa’s generous research subsidies that have allowed some of Iowa’s largest corporate operators not only to avoid income tax, but to receive state checks in the millions while school districts are facing cuts.

The scandal around the state’s film-credit program has contributed to the recognition by the Governor, legislative leaders and many in the media that all tax credits, not just the film credit, demand scrutiny heretofore ignored.

This has extended as well to business advocates. In fact, an economist for the business-oriented Tax Foundation succinctly made the point in a Register story on Sunday, that “the bottom line” is that these subsidies cost money.

“The big problem is that politicians and taxpayers tend to see them as a tax cut, but the correct way to look at them is that they are really government spending through the tax code.”

If a rose is a rose by any other name, a tax credit is spending whatever you call it. Like any spending, there should be a good reason for it, and with tax credits, it is not a given that they can be defended. It is long past time for review and reform.

The Governor has set up hearings for Tuesday in Cedar Rapids and Wednesday in Urbandale for advocates and experts to weigh in on the value — or lack of same — of many such subsidies. Click here for the agenda, time and location of each meeting.

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.


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