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March 2017 Brief: Volume 24, Number 8

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Tax Credits: Yea or Nay?

 

by Jennifer L. Crull

 

 

The headlines so far this legislative session have shown how tight budgets are this fiscal year (July 1, 2016 to June 30, 2017) and how tight they will be in the coming fiscal year (July 1, 2017 to June 30, 2018). But what does that mean for the average taxpayer? It means that unless our elected officials work to decrease overall spending by the state, legislators will continue to have budget fights like the ones currently happening in Des Moines.

 

The real question is this: how are Iowa lawmakers picking winners and losers with businesses in Iowa? The answer is tax credits, specifically research activities tax credits. While the overall tax-credit system needs to be reviewed and revised, this BRIEF specifically looks at the tax credits provided for research activities.

 

In a report examining all tax-credit programs from 2012, the Iowa Department of Revenue reported there “were 2,770 [total] refundable tax-credit claims made in 2012 as reported on the IA 148; these claims totaled over $107.3 million.”[1] Jump forward to 2016, when research activities tax credits were $49.1 million for corporations and $9.3 million for individuals. In total, this program cost Iowa taxpayers around $58.4 million dollars![2] Of that $58.4 million in tax credits, $43.7 million were given as refunds to businesses and individuals, with $40.4 million going to businesses and $3.3 million going to individuals![3]

 

While supporters may argue this money is an investment in our economy that supports the research activities of our small businesses and brings jobs to Iowa, I believe this is wrong! This money is going to many large businesses in Iowa, and the research tax credits decrease tax liability to the point that the state owes these businesses money — your hard-earned money! The following table shows the top claims for 2016.

 

 

As the table above shows, the total amount of research tax credits granted to the top 19 receiving companies equaled $44.3 million. The total for businesses was $49.1 million, so 90 percent of the tax credit went to 19 companies. Additionally, “207 (68 percent) were paid in whole or in part as checks to companies that paid no state corporate income tax.”[4]

 

Since 90 percent of the tax credits are going to 19 business, wouldn’t it make more sense to cut the tax rate for corporations so that all can benefit from this tax savings? Otherwise it seems that the state is choosing to help companies that have research budgets and penalizing our local hardware store that is working to stay competitive and helping the local community.

 

The Executive Director of the nonpartisan Iowa Policy Project, Mike Owen, said, “It is really time to examine whether this is a wise use of what legislators tell us are scarce resources.”[5] I would agree that the Iowa House and Senate should take the time to review the tax credits our state is handing out and make sure we are spending taxpayer money wisely and not allowing a few large companies to come out on top.

 

(Endnotes)
[1] Angela Gullickson, “Iowa’s 2012 Tax Credit Claims: Tax Credits Program Report,” Iowa Department of Revenue, July 2015, p. 34, <https://tax.iowa.gov/sites/files/idr/2012%20Tax%20Credit%20Claim%20Report.pdf> accessed on February 15, 2017.
[2] “Research Activities Tax Credit Annual Report for the Period January 1 – December 31, 2016,” Iowa Department of Revenue, p. 3, <https://tax.iowa.gov/sites/files/idr/RAC%20Annual%20Report%202016.pdf> accessed on February 15, 2017.
[3] Ibid., p. 4.
[4] “Majority of state research credits paid as cash refunds,” Business Record, February 16, 2017, <http://www.businessrecord.com/Content/Law-Government/Law-Government/Article/Majority-of-state-research-credits-paid-as-cash-refunds/164/788/76592> accessed on February 20, 2017.
[5] Ibid.

 

Jennifer L. Crull is an IT Specialist with Public Interest Institute, Muscatine, IA. Contact her at Public.Interest.Institute@LimitedGovernment.org.

 

Permission to reprint or copy in whole or part is granted, provided a version of this credit line is used:"Reprinted by permission from INSTITUTE BRIEF, a publication of Public Interest Institute." The views expressed in this publication are those of the author and not necessarily those of Public Interest Institute. They are brought to you in the interest of a better-informed citizenry.

   

 

 

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