Iowa’s Research Activities Credit (RAC) has come under scrutiny for providing a tax subsidy that reimburses companies for research activities. According to an annual report by the Department of Revenue, the RAC program provided $49.1 million in 2016 to large companies that do not pay state income tax. Of the claims made by companies, 82% or $40.4m were paid to 207 companies that paid no state income tax, primarily large companies that claimed over $500,000 in research credit. The Iowa Fiscal Partnership (IFP), a nonpartisan policy institute, claimed that the credit, which cost $58.4m in total, was a “budget choice” for the state, which recently increased state school aid by $40m. This credit program cost could have doubled that figure if reduced, IFP Executive Director Mike Owen said.
The RAC program is refundable, meaning the state makes a payment for the difference if a company has more tax credits available than it owes in taxes. The IFP has previously recommended the phasing out of “refunds” of the research credit and a five-year sunset on all tax credits to ensure the legislature must vote to continue them. The RAC program costs Iowa more than any other state tax credit, according to the Des Moines Register, although the state has introduced tax credit reform since the tax credit review panel recommended curtailment in 2010.
Iowa’s research subsidy is under scrutiny as it resembles subsidies offered in other states. Last year, Wisconsin’s research credit was cut as part of a package of reforms to limit business tax incentives, while Georgia introduced legislation to create a tax credit for angel investors. The move was backed by the Georgia Chamber of Commerce, among other groups, which claimed that the state was losing start-ups to competing jurisdictions. The value of research subsidies has also been queried. In 2012, analysts at the St Louis Federal Reserve found that such incentives did not increase innovation in states that offered them.
The report noted that fewer than 6% of claimants accounted for 90% of the benefit. Among the largest beneficiaries were Rockwell Collins, Dupont, Deere & Co., John Deere Construction, and Golden Grain Energy. RAC claims in Iowa increased by $6.3m between 2015 and 2016, with the 2015 total standing at $42.8m.
The Iowa Fiscal Partnership notes that Iowans have access to more information on the credit since the introduction of the annual report in 2009. The credit is under scrutiny as more states reduce or limit business tax incentives. Furthermore, the value of research subsidies has been questioned as analysts have found that they do not increase innovation in states that offer them.
Scrutiny of corporate subsidies is increasing in the United States, with some critics calling for reform. Last week, Tesla CEO Elon Musk warned states against offering too many subsidies to firms, stating that there is a danger of states “thinking they can just give subsidies and they will magically make something happen.” Musk suggested that such an approach could lead to a lack of accountability. On Monday, a report revealed that Google has spent more than $1.2bn on property in the San Francisco Bay area in the past two years, much of it bought using public tax incentives.
Overall, the report on Iowa’s Research Activities Credit highlights the issue of tax subsidies for research activities and their value in stimulating innovation. While some states are reducing or limiting business tax incentives, others continue to offer such incentives to companies. With the increasing scrutiny of corporate subsidies in the United States, it remains to be seen what changes may be implemented in the future.
