Panel proposes eliminating some tax credits, reforms for others

DES MOINES – A panel formed by Gov. Chet Culver to study the state's tax credit programs is calling for the elimination of eight credits, including two film tax credits that have been the subject of investigations, as well as caps on credits and other reforms.

The seven-member panel, made up of state department heads, voted to approve the proposal Friday.

The panel's report recommends eliminating programs they say have either not been fully utilized, are no longer necessary, have been improperly managed or have seen resources for the credit exhausted.

The programs they propose eliminating are the investment and expenditures film tax credits and tax credits for assistive devices, disaster recovery housing projects, early childhood development, economic development regions, and two venture capital tax credits.

Richard Oshlo, the interim director of the Department of Management who served on the panel, said if the recommendations were adopted, the state would have about $55 million more in available revenue in fiscal year 2011 and $106 million more in 2012.

The report said it is virtually impossible to identify what is being “spent” in the form of tax credits each year.

“Without greater transparency, it is very difficult for taxpayers to determine whether tax credits have been effective in generating economic activity and helping businesses start up and become competitive,” the report said. “It is also difficult for state policy makers to predict the impact of tax credits on the budget.”

The panel is recommending that the state's Revenue Estimating Conference include the types and amounts of tax credit claims included in its tax receipts calculation at each meeting.

That would allow the public and state policy-makers to more fully see the impact of tax credits on the state's general fund budget, the report said.

The panel's report also recommends that all business-related tax credits be subject to an overall $185 million cap and that all tax credits be subject to a five-year sunset to provide greater accountability.

Recommendations also call for eliminating transferability provisions for all tax credits and ending the policy of allowing large companies to collect refunds on the state's research activities tax credit. The panel proposed no changes for the state's earned income and motor fuel tax credits, but recommended that a tuition and textbook tax credit on the state income tax return be restricted to taxpayers with annual gross incomes of $45,000 or less.

The panel is also seeking a way to calculate the return on investment for tax credits to determine how effective they are and whether changes should be made.

State Sen. Joe Bolkcom, a Democrat from Iowa City and chairman of the Senate Ways and Means Committee, said he did not have any major disagreements with the proposals. He said he hoped they would gain support from lawmakers.

“We're doing a major review of state government for efficiency. We need to put the same kind of focus and attention to this spending, which frankly, as the report indicates, has pretty much been out of sight, out of mind,” Bolkcom said.

The recommendations drew criticism from Dave Roederer, executive director of the Iowa Chamber Alliance, which represents chambers of commerce and economic development groups across the state. He said economic development tax credits that have been used the most have been the most successful, creating more research jobs.

“Why would we be sending a signal to business and industry throughout the country, as well as in Iowa, that we don't think we're going to provide the incentives that we provided you in the past?” Roederer said.

Fred Hubbell, interim director of the Iowa Department of Economic Development, said in a time of more limited resources, both businesses and governments are cutting back and reallocating priorities.

“There should be some changes, and I think the business community expects some changes. But is this going to significantly impair the ability of the state to grow its economy going forward? I don't believe that,” Hubbell said.

The proposal came out the same day as a report from Iowa State University economists that questioned whether the state's research activities tax credit is successful in generating high-tech job growth, research and development activity or high-tech start-ups.

Victor Elias, senior associate with the nonpartisan Iowa Fiscal Partnership, called the recommendations a good first step in bringing tax credit programs under fiscal review.

“We should have done this years ago, because the increase in tax credits has been running amok,” Elias said.

He said businesses make their location decisions on other factors than just the tax credits offered, such as the state's work force.

He questions the loss of revenue to the state because of the tax credits at a time that schools and other programs face budget cuts.

“We cannot continue to cut without cutting our future,” Elias said.

Panel's recommendations for Iowa tax credit programs --

-- Provide a greater transparency of tax credits, so the state and policy makers can see the impact on the state budget.

-- Eliminate the ability to transfer tax credits, which the panel said has contributed in some instances to abuse.

-- Develop an effective way to calculate whether tax credits have been effective.

-- Establish a five-year sunset on all tax credits, giving the Legislature a chance to review and reauthorize them.

-- Place all business-related tax credits under a $185 million cap.

-- Eliminate eight tax credits, including two tax credits under the Film, Television and Video Project Promotion Program.

-- Eliminate the ability of large companies claiming the research activities tax credit to get a refund from the state if their claim is more than the taxes they owe the state.