What should Iowa do with its tax credit programs?

Incentives likely will be a part of a tax reform equation

(File photo) The Iowa State Capitol building in Des Moines, photographed on Tuesday, June 10, 2014. (Liz Martin/The Gazette)

With Iowa leaders saying “everything is on the table” for tax reform, the discussion likely will include debates about tax credits and economic incentive programs.

“At its best, this session has the opportunity to have modernization, simplification and reform of what we consider to be an uncompetitive and complicated tax code and the preservation of tax credit programs and economic incentive programs that drive economic growth,” Cedar Rapids Metro Economic Alliance Executive Director Doug Neumann said. “On the worst possible scenario on the spectrum of outcomes, we could have tax credit programs eliminated, reduced, capped, refundability changed (or) in some way negatively impact tax credit programs and get no tax reform.”

With that in mind, business groups have made arguments for why certain programs should not be changed, even if Iowa reduces income tax rates.

“If our M.O. in tax reform is to make Iowa more attractive, more competitive and to grow our economy, to raise incomes, to provide more opportunities for Iowa workers, then we absolutely still need the full suite of economic development tools that we utilize in those endeavors,” said John Stineman, executive director of the Iowa Chamber Alliance, which represents 16 chambers of commerce.

Even so, others have called for a review of Iowa’s incentive programs. With the state facing a tight budget and needed reductions in spending, something has to give, they said.

“The state has an obligation at this point to look at tax credits and the level of funding that goes to tax credits, primarily because it has grown so quickly comparatively to other parts of our budget,” said Rep. Chris Hall, D-Sioux City, ranking Democrat on the House Appropriations Committee.

WHAT’S A BETTER INVESTMENT?

Advocates for the tax credit programs argue eliminating the incentives would not guarantee more state revenue. Instead, they said the incentives act as a short-term investment for a long-term gain.

“If you hamper, hinder, cut, reduce those programs, you’re actually going to see less come back to the general fund because every one of them has a (return on investment),” Stineman said.

But Iowa Policy Project economist Peter Fisher said money put toward education and health care would better bolster the state’s workforce.

“It’s kind of shortsighted to be giving away money to get 100 jobs here or there rather than what are we doing for our next generation of workers,” Fisher said.

Iowa lawmakers should put sunsets on tax credit programs that would require them to reauthorize the incentives every few years, he said.

“We have a system in place for evaluating their effectiveness, but the legislature is not going to take those evaluations seriously unless those credits sunset, unless they’ve got to take legislative action to renew them,” Fisher said.

Iowa’s “contingent liability” — the amount the state could be on the hook for if all awarded credits are claimed — is $547.2 million for the current fiscal year, according to the state Department of Revenue. Expected tax credit claim amounts are about $450 million, as not all awarded credits are claimed.

House Appropriations Committee Chairman Pat Grassley, R-New Hartford, introduced legislation last session that would have reduced the value of Iowa’s tax credit programs. It also would have eliminated tax credit refundability, including for a state research-and-development tax credit used by companies such as Cedar Rapids-based Rockwell Collins.

“The state should really know what we are going to be on the hook for every year when it comes to tax credits,” Grassley said last March.

He could not be reached for comment for this story.

Grassley’s legislation did not make it out of a House Ways & Means subcommittee.

Both Fisher and Hall said the state should maintain tax credit programs for families and low-income Iowans.

“The type of tax credits that exist for private citizens and working families primarily go toward things like child care, toward preschool education and toward a segment that is working below the poverty line,” Hall said.

‘THE WAY THIS WORLD WORKS’

The Chamber Alliance, whose members include the Cedar Rapids Metro Economic Alliance and Iowa City Area Chamber of Commerce, specifically has said it wants to protect tax incentive programs for angel investors, job training and historic preservation, among others. It also wants to preserve Iowa’s High Quality Jobs tax incentives, a main program used by the Iowa Economic Development Authority.

Economic Development Authority Director Debi Durham said she would consider a pare down of the High Quality Jobs program as long as lawmakers make “real tax reform.”

“It has to be substantive, it has to move the needle, and if it does, then absolutely we need to have a conversation on our incentive programs,” Durham said.

She also said how Iowa calculates awards under High Quality Jobs should be re-evaluated to increase the requirements put on companies.

“Certainly that is a conversation we should have at the same time we’re talking about incentives, is increasing the amount of capital investment, increasing the amount of jobs in that matrix,” she said.

Iowa always will need incentive programs to be competitive, though, Durham said.

“It’s the way this world works, like it or not. There will still be incentives, but the incentives can be right-sized based on our competitive nature,” she said.

Rep. Hall said any changes to tax credit programs need to give businesses time to adjust. Changes also need to be “respectful to taxpayers,” he said.

“While we may want their business being done in the state, we can’t allow taxpayers to be a crutch for their business model,” he said.

CHAMBERS: DON’T TOUCH R&D

One tax credit Durham, Stineman and Neumann don’t want touched is Iowa’s Research Activities Credit, provided to companies who do research-and-development work in the state.

The credit is refundable, meaning Iowa will write a check to companies who claim more in the credit than they have in state income tax liability. Critics have called out the credit because its refundable and because most of the R&D credits are claimed by large companies, such as Rockwell and Moline, Ill.-based Deere and Co.

Supporters, though, said the credit encourages high-paying, high-quality work in Iowa. In addition, while companies who receive refunds may not have income tax liability, they pay taxes on property and payrolls they have in the state, Neumann said.

“They still provide far more to the state of Iowa than the state of Iowa is providing to them,” he said.

Iowa Policy Project’s Fisher said it would be better if more of the research credit went to small businesses. The state could encourage that, he said, by capping the refundability level of the credit.

“The total picture of job growth in this state and any state, it’s dominated by jobs in new and fast-growing entrepreneurial firms,” Fisher said.

Durham called the program “one of the best incentives we have.”

“These are highly paid positions and we know that where companies do their innovation — and there’s no better example than Rockwell Collins — they’re more likely to do their manufacturing and processing in the same place,” she said.

Durham did say Iowa could look at what type of work would qualify for the credit and whether there should be additional oversight of the program.

Hall also said programs such as the R&D credit should be “reworked.”

“The Research Activities credit is not something that was put in place in order to become a crutch for certain companies or allow it to be a funding source of their business plan,” he said.

l Comments: (319) 398-8366; matthew.patane@thegazette.com

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