Editor’s Note: The Iowa House of Representatives now denies the ability of lawmakers to use visual aids in debate on the floor. To help Iowans visualize what kinds of graphics might be useful in these debates to illustrate facts, on several days this session we are offering examples. Here is today’s graphic, to illustrate the cost and nature of Iowa’s tax subsidies to companies to do research.
Iowa’s lucrative research subsidy provided as much in 2016 to companies that do not pay Iowa state income tax as legislators recently approved as an increase in state school aid.
Unlike the typical use of a tax credit, the Research Activities Credit (RAC) is refundable and provides a check to the recipient for the amount of the credit not needed to erase taxes. In other words, if the company does not owe income taxes and has a research credit, it gets a check for the amount of the credit remaining.
A new report from the Department of Revenue (DOR) shows that in 2016, 207 corporate refunds were issued totaling $40.4 million (see graph above). Corporate claimants used another $8.7 million from the credit to erase tax liability, leaving the total cost of the corporate credit at $49.1 million.
For context, Iowa lawmakers this session provided $40 million as an increase in state aid for local school districts, defending the 1.11 percent increase as all the state could afford.
In most cases, beneficiaries of this tax credit and the tax credit “refunds”* are very large companies, DOR reports show. The graph above shows the overall cost of corporate claims on the RAC (beige), with the blue share of the bars showing the share of corporate claims paid out in checks to companies that paid no corporate state income tax to Iowa.
For more information and a list of companies that benefited from over $500,000 in RAC claims in each of the last seven years, see this Iowa Fiscal Partnership news release.
* To refresh, these tax credit “refunds” are not refunds of taxes paid above what was owed, but of tax credits that exceed the amount of taxes owed. In 2016, the share of these research tax credits paid as “refunds” accounted for $4 out of every $5 of the cost of the credits.
For more information about Iowa tax credits and breaks for business, see this page on the Iowa Fiscal Partnership website: http://www.iowafiscal.org/category/research/taxes/tax-credits/
See also this related “Virtual House graphic” on Iowa’s growth in tax credit spending.