A spotlight, not a floodlight, on business breaks

Iowa’s business tax credits will have grown by half from 2011 to 2021 under current official projections. That is where the spotlight needs to be.

A bill in the Iowa House, HSB187, would cut a range of Iowa tax credits, eliminating refundability and capping overall spending on credits. There is significant opposition, because people like their tax breaks. But the issue is suddenly in the spotlight because these and other giveaways are responsible for Iowa’s serious revenue challenge.

There are solutions to the state’s rampant and often unaccountable spending on tax credits and other tax breaks. It is interesting that an interim committee that meets every year to examine a rotating set of tax credits has not produced any reforms. It’s not because reforms are not necessary. Rather, it’s a lack of resolve.

One of several strong recommendations in January 2010 by a Special Tax Credit Review Panel appointed by then-Gov. Culver in the wake of the film credit scandal was for a five-year sunset on all tax credits. This would require the Legislature to re-approve every tax credit.

That would be a start. Another option: Instead of eliminating refundability for all credits, which affects even credits where refundability makes sense (Earned Income Tax Credit), limit it where it does not. The Special Tax Credit Review Panel recommended eliminating refundability for big recipients of the Research Activities Credit (companies with gross receipts over $20 million). Another option would be to cap refundability for all credits at $250,000, which would not harm small players, either businesses or individuals, and would reduce the excessive checks to big businesses.

The scrutiny and demand for a return on investment on these credits would be too much for many of these special arrangements to withstand. Eliminating or capping wasteful credits would free up revenues for other priorities; some would invest more here or there — education, or public safety, or the environment — and some would simply use it to reduce overall spending. But either way, we would have the opportunity for a debate.

There is a danger in putting everything on the table at once. It presents a false equivalency of tax credits — that they are somehow all the same. It ignores the fact that some are for private gain and some for the common good, and some are a mixture. Some work, and some do not.

Some meet the purpose for which they were advertised (the Earned Income Tax Credit, for example, which benefits low-income working families), and some miss the mark with tens of millions of dollars every year (the Research Activities Credit, where most of the money goes to huge, profitable corporations that pay little or no income tax instead of to small start-ups as envisioned).

Iowa’s business tax credits will have risen by half from 2011 to 2021 under current official projections. That is where the spotlight needs to be.

Challenging all credits at the same time gets everyone’s backs up. That is a recipe to assure continued unwillingness to take on any of it. And that will not serve Iowa very well.

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

mikeowen@iowapolicyproject.org

Oversight on the overseers of tax credits

These interim legislative meetings put a spotlight on spending choices being made outside the budget process.

You might have heard about a big meeting at the State Capitol today.

No, not that one, about whose portrait will hang in the Iowa House and Senate behind the presiding officer.

The meetings where there’s always some mystery are the annual reviews of selected tax credits. Only a few credits are reviewed each year by a panel of legislators. One meeting was in November; the other is today.

One tax giveaway — er, tax credit — on the agenda for today is the Research Activities Credit, or RAC.
No such review since these sessions started has produced meaningful reform, but the exercise does put information on the table and does put a spotlight on spending choices being made outside the budget process.

What we already know from previous evaluations and annual reports about the RAC is that it is costly — over $50 million a year — and that routinely at least two-thirds of the cost (and usually over four-fifths) goes to companies as so-called “refunds.” These are not refunds of taxes owed, but of tax credits the companies didn’t need because they owe so little, or no, corporate income tax.

Remember that when you hear the Iowa Taxpayers Association and others bleating about Iowa’s corporate taxes, which are actually low.
For perspective on the RAC, the $42 million given away in tax credit refunds under this program in 2015 would have paid for about 1 percent more in school aid, at the same time schools were told we didn’t have the money for it. Of course we did. Our legislators just chose to give it away, mainly to huge, profitable corporations.
In Room 103 of the State Capitol, 1:15 p.m., the public and legislators can hear from the Department of Revenue about the Research Activities Credit. And the session that follows at 2:15 on the Earned Income Tax Credit may be worth listening to as well, for contrast, as the EITC is a demonstrated boost to the economy while the RAC has never been demonstrated to be more than a drain on revenue.

You never know what legislators at the table will have to say about these issues, but we may get some insights.
As for that other meeting, we all now how it will come out.
owen-2013-57Posted by Mike Owen
Executive Director of the Iowa Policy Project
Project Director of the Iowa Fiscal Partnership
mikeowen@iowapolicyproject.org

A good deal if you can get it

This is perfectly legal. In fiscal policy terms it’s a scandal, because it is legal.

But research credit refund checks are poor fiscal stewardship

The millions Iowa gives to companies that do not pay state income tax is about the same amount of 1 percent in state school aid.

That’s one takeaway from the latest annual report from the state on Iowa’s Research Activities Credit (RAC). That tax credit is used far less to ease taxes than to shovel subsidies to big corporations outside the budget process, whether they pay taxes or not.

The report shows that in 2015, 248 companies had $50.1 in claims from this tax credit. Because the credit is refundable, companies get the full benefit no matter how much they owe (or don’t owe) in taxes. And the report shows that of those claims, 75 percent, or $42.1 million, were paid as checks to 186 companies that paid no corporate income tax to the state.

As we note in a summary by the Iowa Fiscal Partnership, each percentage-point increase in Supplemental State Aid for schools costs about $41 million to $43 million (Iowa Association of School Boards estimate).

160216-RAC-chksVclmsVsupp2b-line

What’s more, the largest claimants — 20 corporations receiving over $500,000 from this credit — took the lion’s share of the benefit with $43.9 million overall (about 88 percent).

Many millions are spent this way every year, outside the budget process. These companies don’t have to compete for what are supposedly scarce public dollars needed for critical public services such as education, health care, environmental protection and public safety. The latter types of spending must compete in the budget process.

The Research Activities Credit is only an entitlement. And except for the occasional lawmaker willing to stand up to restore some accountability, there is silence from the General Assembly.

This is perfectly legal. In fiscal policy terms, however, it’s a scandal, because it is legal. Lawmakers refuse to even consider whether to take this spending off autopilot.

When they claim the state is too strapped for money to provide more for school aid or human services, lawmakers should admit they let corporations take what they want first.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
Contact: mikeowen@iowapolicyproject.org
For more information about the Research Activities Credit, visit www.iowafiscal.org

State aid up 13 percent — for business breaks

The early scorecard gives business tax breaks the big edge, a 13 percent increase to between 2 and 4 percent for schools.

What do you expect would be the outcry if Iowa’s public schools asked for 13 percent growth in state aid?

Yet few bat an eye when this happens with business tax breaks, as we can expect for FY2017.*

The early scorecard gives business tax breaks the big edge, a 13 percent increase, vs. between 2 and 4 percent for schools.

The Senate approved 4 percent for FY2017 (covering next school year), but the Iowa House on Monday approved 2 percent — even though schools have averaged less than 2 percent for six years, from FY2011-16.

In fact, the Iowa Association of School Boards this year did not even ask for a specific growth number, but rather, that it be set in a timely manner (it’s almost a year late already), and “at a rate that adequately supports local districts’ efforts to plan, create and sustain world-class schools.”

That hasn’t happened for some time. Over the last six budgets, per-pupil growth has been held to 2 percent or below in all but one year. Depending on enrollment trends, some districts even see less.

Basic RGB

Business tax breaks do not face the same budget constraints — ironic, since the cost of those breaks limits what lawmakers permit themselves to spend on services that their constituents demand, not the least of which is education. Other areas — environmental quality, child care, health care and public safety — also are constrained.

A much greater percentage increase in business tax breaks is set in place, as shown below. The total increase of $71 million from this budget year to the one lawmakers are working on now actually may be understated. The $35 million for a new sales-tax exemption for manufacturers is considered a conservative estimate. Even at $71 million overall, however, it represents a 13 percent increase.

160108-IFP-Budget-Fig2FB

Spending on business tax breaks is rarely burdened by the public scrutiny and debate that comes with spending on schools and water programs, which must be approved annually.

Most business tax breaks, once passed, are never touched again unless they are expanded. And as shown by the sales-tax break for manufacturers scheduled to begin this summer, a break may never receive legislative approval but still become law. The Governor is implementing this one on his own, with a split legislature unable to stop him.

Budget choices? Instead of that $35 million in FY2017 for the new sales-tax break, the Legislature could provide about 1 percent growth in per-pupil school funding. We can expect to find another 1 percent in what we’ll spend in checks to companies that do not pay any state income tax, but have more research tax credits than they owe in taxes.

Perhaps one day we will treat all spending the same, whether the spending comes before or after revenues reach the state treasury. Then the wealthy corporations can compete directly for their tax breaks against education for the skilled people they want to work for them.

Owen-2013-57Posted by Mike Owen, Executive Director of the Iowa Policy Project
Mike Owen is a member of the school board in the West Branch Community School District, first elected in 2006.
* For more about Iowa tax breaks for business, see Peter Fisher’s report for the Iowa Fiscal Partnership, “Here a tax break, there a tax break, everywhere a tax break.” http://www.iowafiscal.org/here-a-tax-break-there-a-tax-break-everywhere-a-tax-break/

Start with ‘zero’ on credits

Maybe a part-time legislature could start with a zero base on tax credits before we talk about it for an entire state budget.

It was​ fascinating Tuesday to see Iowa lawmakers talking about zero-based budgeting — starting every budget from scratch — when they have refused to do the same with tax credits.

Spending on tax credits — including millions to companies that don’t pay any state income tax — just keeps going on and on.

And on.

And on.

Companies basically get to appropriate state money to themselves. Quite a deal if you can get it.

If the state were to sunset business tax credits, as recommended in 2010 by a special governor-appointed Tax Credit Review Panel, lawmakers could review each one and decide which are actually producing a public benefit, whether any of them are money well spent. If so, they could renew the credit. If not, we could put our resources where they make more sense for all Iowans.

Maybe a part-time legislature could start with a zero base on tax credits before we talk about it for an entire state budget.

Owen-2013-57Posted by Mike Owen, executive director of the Iowa Policy Project

A brief, shining moment

It is not too late for Iowa lawmakers to address these issues and include some water in the tax credit reform glass. We said that in 2010, and we can say it again in 2015.

It was a brief, shining moment for Iowa, and it came five years ago today.

A special Tax Credit Review Panel appointed by then-Governor Chet Culver, after an in-depth examination of all Iowa tax-credit programs, offered a 10-page review with some tough recommendations.

As the Iowa Fiscal Partnership* stated the day of the report’s release, Jan. 8, 2010, the panel “took an important step to make Iowa business subsidies more accountable and transparent.”

Major recommendations of the Tax Credit Review Panel were to:

•   Provide a five-year sunset on all tax credits;
•   Eliminate the refundability of the Research Activities Credit for large companies;
•   Eliminate the film tax credit;
•   Eliminate of the transferability of other credits;
•   Place all business credits under a $185 million cap;
•   Reduce the rate for the School Tuition Organization (STO) Tax Credit and lower the cap; and
•   Impose an income test for the Tuition and Textbook Tax Credit.

Action in the Legislature, unfortunately, fell well short of those bold proposals, as we noted in a report that spring. In their biggest moves, lawmakers set up a periodic review of tax credits but required no action to affirm the value of any credits, and they put light restrictions on some credits. Some of those limits already have been raised; the proposal to restrict the STO subsidy for private school tuition not only was ignored but the credit has been expanded.

In short, five years later, Iowa is as lax as ever in its treatment of these subsidies. Under the sunset clause recommended back then, we would in 2015 be preparing for a round of debate and action to keep, expand, limit or eliminate certain tax credits. Instead, we have no expectation of any debate, let alone any action. If the credits are working, we don’t know because beneficiaries are not forced to show it.

It is not too late for Iowa lawmakers to address these issues and include some water in the tax credit reform glass. We said that in 2010, and we can say it again in 2015.

The seven members of the Tax Credit Review Panel, by the way, were Richard Oshlo, then interim director of the Department of Management; Fred Hubbell, interim director of the Department of Economic Development; Rob Berntsen, chair of the Iowa Utilities Board; Bret Mills, executive director of the Iowa Finance Authority; Cyndi Pederson, director of the Iowa Department of Cultural Affairs; Mark Schuling, director of the Iowa Department of Revenue; and Jeff Ward, executive director of the Iowa Agricultural Development Authority.

Their work was good and important, and with hundreds of millions of dollars at stake, we should not forget it.

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

*The Iowa Fiscal Partnership is a joint public policy analysis initiative of two nonpartisan, nonprofit Iowa-based organizations, the Iowa Policy Project in Iowa City, and the Child & Family Policy Center in Des Moines.

Leveling the playing field

The more small-business owners understand how big businesses compete unfairly and do not contribute their fair share of state taxes, the more pressure can build for real reform.

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