Common Good Iowa

Iowa's research giveaway: Tax-free millions for companies

February 16, 2022

Research break for non-taxpaying companies cost $44 million in 2021

DES MOINES, Iowa (February 16, 2022) — The state of Iowa gave away nearly $44 million in 2021 to companies that paid no income tax, to do research most would do anyway.

The annual disclosure on the use of the Research Activities Credit (RAC) comes about two months after the Department of Revenue concluded the program — Iowa’s most generous business tax credit — does little to expand research in the state.

Because the credit is “refundable,” companies receive a check from the state for any amount of their credits not needed to pay income tax. In 2021, the report showed, the vast majority of the $56.2 million cost — $43.9 million — went out as so-called “refunds.”

 “Over a dozen years, this program has cost $721 million — 73 percent of it in checks to companies that pay no state income tax,” said Mike Owen, deputy director of the nonpartisan Common Good Iowa.

“These checks are not the same as tax refunds. They are not returns of excess tax payments. These are subsidies, outside the budget process, often to very large and profitable companies that do not need state assistance to do research,” he said.

“Furthermore, taxpayers are given no explanation of how their funds are being spent,” he added. “Without transparency to show how these taxpayer dollars are being used, it is imperative to ask why we cannot get reform to cap the program.”

The annual report showed the overall cost of the program dipped to $56.2 million in calendar year 2021, from $69.2 million the year before. But refunds grew, to $43.9 million from $41.2 million. Of those refunds in 2021, more than half — at least $24 million — went to firms that paid no income tax.

“The RAC is another example of Iowa sacrificing the things families and workers need to get ahead — including schools, child care and workplace protections,” said Common Good Iowa executive director Anne Discher.

“Instead of giving away money to corporations for activities they would be doing anyway, we should be asking them to contribute their fair share, so we can advance opportunity for every Iowan,” Discher said.

The report this week was required by a 2009 law to increase transparency of the program. A special tax-credit review panel in 2010 urged an end to RAC refunds for large companies, and a report last December by the Department of Revenue found that “the research activities tax credit has “a weak — if any — effect on research inputs and outputs.”

Although lawmakers in recent years have acknowledged the concern about uncontrolled subsidies, they have made few changes, and powerful business lobbying interests have fought to keep the credit in place. A supplemental credit that is part of the program has been scaled back, and the types of industries where it may apply has been limited, but the cost has remained high.

A bill in the Senate would reduce the credit from 6.5% to 4% of permitted research expenses, and refundability would be reduced, but the plan does not cap very large claims and refunds.

“That proposal for the RAC if considered on its own might be a good start toward reform,” Owen said. “But it’s part of a larger Senate bill that eventually would eliminate the income tax and devastate public services in Iowa for decades. It is simply not worth that price.”

Designed to help entrepreneurs cover costs of doing research in Iowa, the largest share of the benefit instead goes to big companies. In 2021, $36.2 million was claimed by companies that had over $500,000 in credits.

In the context of previous annual reports and ongoing tax-credit evaluations by the state, the new official report also shows:

  • The $43.9 million in refunds in 2021 was just above the 12-year average of $43.4 million.

  • Of those “refunds,” over $24 million — 55 percent — went to very large companies that had more than $500,000 in claims. Those companies accounted for 65 percent of the overall cost of the credit.

  • The overall cost of the program grew from $48.5 million in 2010 to a record $78.4 million in 2019 before dropping to $69.2 million and $56.2 million in the last two years. However, the latest state Department of Revenue estimates project the cost will grow again and is expected to be over $73 million by FY 2026.

The official Department of Revenue report is found here.

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Biggest beneficiaries

Deere & Co. posted the highest amount of research credit claims in 2021, $11.4 million, while John Deere Construction claimed nearly $1.4 million in credits, fifth overall.

Companies claiming over $500,000 in credits are required to be listed by name.

The second-highest claimant was Corteva Inc., a spinoff company from DuPont, at $5.9 million, while DuPont claimed $2.5 million.

Also in the top five was Poet Biorefining at $2.3 million ($7.3 million in the last three years).

It is not clear how much of those claims were used to reduce taxes, or paid out as checks. That reporting is not required.

Notably not in the list for 2021 was Raytheon, formerly Rockwell Collins, which has been the largest RAC recipient at over $126 million since the start of full-year annual reports in 2010.

 

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