Senate passed tax-credit reform package

DES MOINES – Some state tax credits for businesses would be scaled back or halted and brought under more scrutiny to prove return on investment under a reform measure approved by the Iowa Senate on Wednesday.

Included in the measure was a provision to suspend the state's controversial film tax credit program until July 2012 while Iowa's Attorney General Office sorts through criminal and civil matters stemming from allegations of mismanagement, lax oversight, irregularities and theft.

“Every part of the budget is being cut and that will include tax-credit spending,” said Sen. Joe Bolkcom, D-Iowa City, shortly before senators voted 32-18 along party lines to begin to rein in more than $500 million in tax incentives for research activities, movie production and other job-creation ventures.

“I think this is a good start. I think we've struck a good balance,” Bolkcom said. “There's some folks, I include myself in this, who wish we could have gone farther; there are folks who think we're doing a lot. I think this bill reaches consensus.”

However, Sen. Brad Zaun, R-Urbandale, called Senate File 2380 “a money grab” by majority Democrats looking for money to balance the fiscal 2011 budget, and Sen. David Hartsuch, R-Bettendorf, contested Bolkcom's contention the action was a spending cut because credits reduce the amount of tax owed the government.

“A reduction in tax credits is actually a tax increase,” Hartsuch said. “I'm very concerned about the impact that this is going to have on businesses that want to relocate to Iowa.”

Backers predicted provisions of S.F. 2380 would lower tax credits by $12 million in fiscal 2011 and eventually $115 million in the “out years.” But a fiscal note issued by the nonpartisan Legislative Services Agency projected the savings would be $5.4 million next fiscal year, $25.2 million in fiscal 2012 and $35.9 million in fiscal 2013 – with most of those reductions tied to the film credit suspension.

Peter Fisher, research director of the Iowa Policy Project, expressed disappointment that lawmakers are “taking baby steps” to rein in business tax incentives while other government programs are being cut. He said the reform package “falls far short” of changes needed to achieve short-term savings and long-term accountability.

Fisher said the legislation ignored most of the key recommendations made by a review panel and does not achieve the $52.5 million in spending reductions that Gov. Chet Culver had included in his fiscal 2011 budget plan.

Fisher and Victor Elias of the Child and Family Policy Center said the proposal to lower a $185 million cap on economic development tax credits to $120 million over time produce no savings because currently the programs only cost about $100 million – making the lowered cap fairly meaningless.

Elias attributed the legislative work product to the effectiveness of lobbyists representing business interests that outnumber other groups by a 10 to one margin. “You're seeing the effect of their influence by what's in it and what's not in it,” Elias said.

Bolkcom said there was no question taxpayers' interests were “outgunned” by business lobbyists in shaping the reform package.

Provisions of Senate File 2380 would establish a statutory panel of legislators to review a set of tax credits over the next five years and reduce caps on certain business tax credits. It did not include a five-year sunset on all tax credits, eliminate the transferability or refundability of tax credits or adopt other recommendations made by a tax credit review panel.

In addition to the suspension of the film tax credit, the reforms include eventually lowering the cap economic development tax credits from $185 million to $120 million, cutting the Iowa Fund of Funds contingent tax credits from $100 million to $60 million, an overall cut of 10 percent from many other tax credits, and an on-going oversight process to regularly evaluate all tax credit results.

Also, the supplemental Research Activities Credit would be changed to help small businesses and start-up firms create more jobs by giving them a 10 percent tax credit. The credit for firms with gross revenues more than $20 million a year would drop from 6.5 percent to 3 percent.

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