RAC giveaway costs grow as lawmakers reach stagnant education funding deal

Iowa businesses large and small received nearly $70 million from the Research Activities Credit (RAC) in 2020. Taxpayers sent most of that — $41.2 million — as checks to companies that paid no income tax that year.

The Iowa Department of Revenue on Friday issued its 2020 annual report on the RAC, Iowa’s largest business tax credit program. The credit is “refundable,” meaning recipients receive a so-called “refund” for any share of the credit they do not need to pay taxes. In 2020, very large businesses took 73 percent of the total benefit.

The RAC subsidizes research those companies would do without the subsidy, and with no transparent public purpose.

Key points from the report:

• Total cost in 2020 was $69.2 million, and $41.2 million of that went out as refund checks to companies or individuals that paid no income tax to Iowa.

• The largest benefits — over $50 million — went to very large businesses (companies large enough to have nearly $7.7 million in qualifying research expenses).

• The 2020 cost dipped below 2019’s record $78.4 million price tag, but 2020 was the fourth straight year with a cost above $66 million. Before 2017, the previous high was $58 million.

Since the state started issuing full-year annual reports in 2010, this unaccountable program has given away nearly $665 million — 72 percent of it in checks to companies that pay no state income tax. The cost of the RAC rose 43 percent in that period.

This spending is on autopilot: it is not approved as part of the usual budget process, even though has the same budget impact as an appropriation that is proposed, negotiated, and passed in a recorded vote of legislators and signed by the Governor. The Iowa Legislature, year after year, refuses to reform this expensive program by at least reducing the refunds for unused tax credits.

By contrast, last week state legislative leaders reached agreement on another stagnant year of funding for public schools in Iowa. Child care and mental health services remain out of reach of many Iowa families, and our public colleges are squeezed because of the pandemic and years of declining state support.

Raytheon Technologies Corp. — the successor of Rockwell Collins — was the biggest beneficiary of the credit, with $10.2 million in claims, followed by Deere & Co. at $8.6 million and John Deere Construction at $4.2 million. These companies have been among the biggest beneficiaries of the RAC since annual reports have been released over the last decade. Fourteen companies had claims higher than $1 million in 2020.

The reports list each company that earned RAC credits over $500,000. To qualify for a credit of that size, a company would have to have research expenses of about $7 million in that year. These are not startups that bring new ideas and new jobs to Iowa. Large RAC recipient companies can cut jobs and still get a state check.

A special tax-credit review panel urged an end to RAC refunds for large companies in 2010. Lawmakers in recent years have acknowledged the concern about those uncontrolled subsidies but have not acted to restrain them, and the most powerful business lobbying interests have fought to keep them in place.