Tax credit benefits debated

DES MOINES – Business leaders and investment managers Monday cautioned state lawmakers to take a balanced, measured approach when scaling back tax credits that have spurred research and good-paying jobs for Iowa.

David Roederer, executive director of the Iowa Chamber Alliance, urged a Senate panel to reconsider changes that would lower tax credits by $12 million in fiscal 2011 and $115 million over three years – some hitting a small number of large employers that employ a majority of Iowa's workforce.

Bill Brown, a Des Moines attorney whose firm is involved in the Fund of Funds venture capital investment pool, said Iowa is in danger of signaling entrepreneurs that Iowa is “not really open for business here” by proposing action he worried is “a knee-jerk reaction to the film tax credit scandal.”

However, Victor Elias of the Child and Family Policy Center said the proposed changes “don't go as far as we'd like” in reducing the tax breaks or eliminating the transferability or refundability of tax credits. He called Iowa's research activities tax credits “the most generous” in the country with no evidence the investments results in jobs or research.

Majority Democrats in the Iowa Legislature are proposing a package of tax credit changes that will reduce the state's liability, increase transparency and accountability, eliminate or cap some credits, and offer more help to small businesses.

Sen. Joe Bolkcom, D-Iowa City, chairman of the Senate Ways and Means Committee, called the changes under consideration “a modest effort” to rein in one of the fastest-growing areas of state spending. He said many of the reforms being contemplated were designed to take some of the state's $525 million in tax credits off automatic pilot.

“This $500 million is not just off the table as some sacred spending,” said Bolkcom, whose committee gave the tax credit legislation a 10-6 initial vote of approval on Monday. The House Ways and Means Committee approved a similar measure on a 14-11 vote Monday.

An updated tax credit report issued Monday by the state Department of Revenue noted that awards made in fiscal 2009 were down significantly from previous years due to the recession and a depressed bio-fuels market.

The revised contingent liabilities totaled $351.9 million in the current fiscal year, $444.9 million in fiscal 2011 and $502.7 million in fiscal 2012. The data indicated a dramatic spike in research activities tax credits from $28.2 million in fiscal 2008 to $50.6 million in fiscal 2009 and companies rushed to beat a new disclosure requirement.

Lawmakers said they are responding to questions raised about the credits after allegations of abuse arose in the state film tax credit program. On the advice of the Attorney General's Office, lawmakers plan to suspend the film tax credit until July 2012 while criminal and civil investigations are completed, Bolkcom said.

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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