Another $69 million: Giveaway costs grow as lawmakers reach stagnant education funding deal

IOWA CITY, Iowa (Feb. 12, 2021) — Iowa businesses large and small received nearly $70 million from the state’s generous research tax credit in 2020, with taxpayers sending most of that — $41.2 million — as checks to companies that paid no income tax that year.

The cost of the Research Activities Credit (RAC) has risen 43 percent since the state started issuing full-year annual reports in 2010. In 2020, very large businesses took 73 percent of the benefit, or $50.3 million.

“Over the last 11 years, this unaccountable program has given away nearly $665 million — 72 percent of it in checks to companies that pay no state income tax,” said Mike Owen, deputy director of the nonpartisan Common Good Iowa (CGI).

The Iowa Department of Revenue on Friday issued its 2020 annual report on the RAC, Iowa’s largest business tax credit program. The credit is “refundable,” meaning recipients receive a so-called “refund” for any share of the credit they do not need to pay taxes.

Key points from the report:

• Total cost in 2020 was $69.2 million, and $41.2 million of that went out as “refund” checks to companies or individuals that paid no income tax to Iowa.

• The largest benefits — over $50 million — went to very large businesses (companies large enough to have nearly $7.7 million in qualifying research expenses).

• The 2020 cost dipped below 2019’s record $78.4 million price tag but 2020 was the fourth straight year with a cost above $66 million. Before 2017, the previous high was $58 million.

CGI analysts through the years have noted this spending is not approved as part of the usual budget process but has the same budget impact as an appropriation that is proposed, negotiated, and passed in a recorded vote of legislators and signed by the Governor.   

“This kind of spending is on autopilot, with no transparent public purpose, for research those companies would do without the subsidy. By contrast, this week state legislative leaders have reached agreement on another stagnant year of funding for public schools in Iowa,” Owen said.

“Those funds could be used instead for public education or other public purposes, but the Iowa Legislature, year after year, refuses to reform this expensive program by at least reducing the so-called ‘refunds’ for unused tax credits.”

Raytheon Technologies Corp. — the successor of Rockwell Collins — was the biggest beneficiary of the credit, with $10.2 million in claims, followed by Deere & Co. at $8.6 million and John Deere Construction at $4.2 million. These companies have been among the biggest beneficiaries of the RAC since annual reports have been released over the last decade. Fourteen companies had claims higher than $1 million in 2020.

The reports list each company that earned RAC credits over $500,000. To qualify for that size of credit, a company would have to have research expenses of nearly $7.7 million in that year. These are not startups that bring new ideas and new jobs to Iowa. Large RAC recipient companies can cut jobs and still get a state check.

A special tax-credit review panel urged an end to RAC refunds for large companies in 2010. Lawmakers in recent years have acknowledged the concern about those uncontrolled subsidies but have not acted to restrain them, and the most powerful business lobbying interests have fought to keep them in place.

“At a time when child care and mental health services are out of reach of many Iowa families, and our public schools and colleges are squeezed, we’re sending out $40 million a year in refund checks to companies that don't pay income tax,” said Anne Discher, executive director of Common Good Iowa. “That is a twisted set of priorities, to say the least.”

The report also indicates the continued, extensive use of this credit program by ethanol operations. There is no information provided about how those, or other companies, are using the funds.

Common Good Iowa is a nonpartisan, nonprofit organization founded in 2020 by the merger of two respected Iowa organizations, the Child and Family Policy Center and the Iowa Policy Project. Reports are available at https://www.commongoodiowa.org.

The official Department of Revenue report is available at https://bit.ly/3d9QcRo.

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For More Information:

Contact Mike Owen