Common Good Iowa

Iowa's research credit: Still funneling big dollars to big companies

Posted on February 28, 2024 at 12:34 PM by Mike Owen

Research Activities Credit subsidies pass $800 million mark in 14 years

Why should companies reporting profits in the billions receive millions from Iowa taxpayers, who in many cases might pay more in state income taxes than the companies they are subsidizing?

It's not a rhetorical question. It’s what is happening with Iowa’s Research Activities Credit (RAC), which has contributed over $800 million to businesses over the last 14 years,[1] as taxpayers subsidize the research many of these businesses can afford to do even without a subsidy.

We had the latest illustration of it just this month.

On Feb. 15, Deere & Co. reported first-quarter net income of $1.751 billion.[2] The very same day, the Iowa Department of Revenue (DOR) reported it had processed $15.2 million in RAC claims by Deere in 2023. It reported processing a total of $84.6 million in RAC claims by businesses operating in Iowa. Deere ranked first, followed by Rockwell Collins, Dupont, Vermeer Manufacturing and John Deere Construction & Forestry.[3]

A few key points about the DOR report

First a caveat: A reporting change by DOR muddies some of the picture for 2023 compared to past years (see note, below). But it is abundantly clear that big companies remain the big recipients of these tax credits.

  • The state reported processing $84.6 million in RAC subsidy claims in 2023.

  • Of that amount — $35.3 million, or 42% — was paid directly to firms that owed no state income tax. These payments are called “tax credit refunds,” and they are not the same as “tax refunds,” which reflect overpayment of taxes. The tax credit refunds assure the recipient receives the full amount of the credit regardless of the amount of taxes the recipient paid.

  • Due to the change in DOR tracking methods, the $84.6 million includes $39 million of claims also reported in previous years. That means about $45 million in the 2023 report represented new claims.

  • The DOR reported Deere & Co. had the largest amount of credits, $15.2 million. Rockwell Collins [4] was next at $14.2 million. It is not clear how much of the $39 million in previously reported claims is part of the totals for Deere, Rockwell Collins or the other 18 companies receiving more than $500,000 in credits. Seventeen of those companies passed the $1 million mark in 2023.

A few larger points:

First, the annual DOR report has been a great example of transparency on the spending of taxpayers’ money since it was first required in a 2009 law. Because of that law we know that over $800 million has been claimed under the RAC and supplemental RAC since 2010.

Second, large companies are getting taxpayer help whether they need it or not, and whether it serves a public interest or not. The RAC is effectively a business entitlement.[5] Of the $807 million in claims since 2010, about half a billion dollars has been claimed by companies doing enough Iowa research to claim over $500,000 in credits in one year. The annual report requires identification of companies claiming that much in credits.

To understand the magnitude of that benefit, consider that this is a 6.5% refundable tax credit on costs of new research above a base amount. A typical recipient of over $500,000 in credits would be doing in the range of $7.7 million or more in new qualifying research. Twenty companies hit that mark in the 2023 report.

Third, having big-profit beneficiaries is best understood as a loophole, not the intention of the law. As legislators who were around when the RAC passed in 1985 remember, the credit was designed for small, start-up companies, not the big ones. That’s why lawmakers made the credit refundable. That means that a company can use the credit to erase taxes, and once it owes no more tax, it receives a check from the state for the balance. Offering a refundable tax credit could be considered a reasonable strategy to boost an entrepreneur starting a research-focused business that was not likely to owe enough taxes to make a non-refundable tax credit useful. In the mid-1980s, Iowa lawmakers were looking for ways to help entrepreneurs.

There would have been enormous controversy had lawmakers announced plans to offer millions in state checks to companies showing hundreds of millions of dollars in profits but not paying income tax. The bill would never have passed. The 2009 transparency law, pushed by then-Sen. Joe Bolkcom, D-Iowa City, ultimately passed when it became evident from state reports and analysis by the former Iowa Fiscal Partnership (now Common Good Iowa) that large, profitable companies like Deere and Rockwell Collins were drawing a large share of the benefits.

Fourth, reforms are starting. Sen. Dan Dawson, R-Council Bluffs, pushed for a provision in the 2022 income- and corporate-income tax package that limits the refunds. Starting with 2023, it reduces credit refundability by 10% each year until refundability reaches 50% in 2027.[6] That change will reduce the cost of the credit, especially as corporate and individual tax rates are being steadily reduced as a result of that 2022 bill. Without the change, lower taxes would have resulted in bigger RAC refund checks, and it is projected to save $45 million in FY 2028.[7]

To better target the credit to smaller operations, the reform would cap refunds at a given amount, from $250,000 to $1 million, or limit eligibility to smaller companies, and still save taxpayers’ money (presumably more). Even with the reforms, big companies that do not need taxpayer help still may receive it.

Finally, it is important to understand these giveaways as a budget choice. For every $1 million given away for companies to do research that the market tells them they must do anyway, Iowa taxpayers are giving up $1 million in resources that could be used for something else.

Advocates go to the Capitol every year to ask lawmakers to improve schools, hire teachers, lower college tuition, enforce water-quality laws, and improve public health and safety. Companies receiving the RAC subsidies don’t even have to show up in Des Moines to ask the Legislature for it. The basic RAC is automatic, and the smaller supplemental RAC can be awarded by state development officials.

Furthermore, taxpayers never receive an explanation for how their contributions were used to boost profits for big companies. Taxpayers become investors whether they like it or not — and legislators cannot give them an explanation either. As good as the transparency law is, it doesn’t require enough.

The official Department of Revenue report is available here. See also a CGI news release on the DOR report.

Note on DOR methodology change: The latest report makes it difficult to compare the number and size of credit claims in 2023 to those in past years. It also makes it more difficult to compare the identification of new claims by the larger, identified claimants in the report. That is because the DOR has just changed its tracking methods for the annual report, which resulted in $39 million in claims reported previously to be included in the 2023 numbers. This means that while $84.6 million in claims were reported to have been processed in 2023, only about $45 million of that was in new claims. While DOR provided the number and amount of previously reported claims from seven previous years, it did not report how much in refunds was new, and no breakdown of new vs. previously reported claims in the list of the biggest claimants.

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[1] Common Good Iowa analysis of Iowa Department of Revenue annual reports on the Research Activities Credit.

[2] Deere & Co., news release: “Deere Reports First Quarter Net Income of $1.751 Billion,” Feb. 15, 2024.

[3] Iowa Department of Revenue, Research Activities Tax Credit Annual Report, Feb. 15, 2024.

[4] Rockwell Collins has been a longtime user of the RAC, but due to ownership changes – it is now part of RTX Corp., which had $5.5 million in claims on the 2023 DOR report – it is not clear to which years its $14.2 million in reported claims apply. DOR does not provide that level of detail.

[5] To qualify for the Research Activities Credit, businesses’ claims must meet federal IRS requirements, and must conduct research in Iowa that is experimental, done to discover information that is technological in nature, and aimed at the development of a new product. The amount eligible for a credit must exceed a base amount that is at least 50% of the company’s current year research expenditures. See the 2023 annual report, page 1.

[6] Iowa Legislative Services Agency, Fiscal note on House File 2316, June 23, 2022.

[7] Ibid.

Categories: Budget & taxes

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