Perks for the profitable keep on coming

We started putting a spotlight on Iowa’s most lucrative business tax credit over 15 years ago. Big, profitable companies were getting a tax break to do research in Iowa — and in some cases getting millions from the state because they owed so little in tax that they received a “refund” of their unused credits.

Some people were alarmed. Some tried to make corrections. But for the most part, the Research Activities Credit (RAC) remains a great deal for big corporations — if not for the taxpayers.

The latest official annual report on the RAC shows that in 2022, the state gave away over $40 million in these credits.

If there’s some consolation, it’s that the $40.4 million in 2022 — and the $16.2 million in so-called “refunds” — are lower than what we have seen. And, while the Department of Revenue has projected that the claims will rise again, the pace might be slowed by one reform passed last year.

That provision — pushed by Sen. Dan Dawson, R-Council Bluffs, will reduce the refundability by 50 percent when fully phased in. So, while corporate income-tax rates will drive down revenues by $230 million in FY 2028, lower tax-credit refunds are expected to reduce that by $45 million.[1]

Still, the new annual report shows the RAC is big break for companies that really don’t need state taxpayers’ help, and makes a big dent in revenues available to pay for critical public services such as education, health care and public safety.

The largest beneficiary was Deere & Co., which received $14.5 million — the largest among of RAC claims for one company in a single year since annual reporting began in 2009.

Subsidies of private companies should have a clear public purpose, and promote an activity that would not happen but for the subsidy. It’s hard to imagine that a giant company such as Deere, which last year had over $2.2 billion in net income (profit) in one quarter alone.

That is not the kind of company the RAC was designed to support. It was created to boost entrepreneurs — startups — and because they would not be expected to be strong financially and might actually lose money early on, it makes sense that the credit was made refundable. That way, the small company would get the full benefit of the credit.

Instead, for many years, large companies have been the largest beneficiaries of the credit. Because of the way Iowa’s corporate tax structure is designed, many large companies do not owe a lot of Iowa corporate income tax.

The result: Big companies claim a lot of taxpayer dollars to do work they already would be able to do on their own, without taxpayer help.

Deere’s $14.5 million in claims in 2022 does not include $1.5 million more by other Deere-branded companies, John Deere Construction and John Deere Shared Services, that also made the list of 18 companies that had over $500,000 in RAC claims in 2022.

The previous high was $14.3 million in 2011 by Rockwell-Collins (now Raytheon). Rockwell was the top recipient from 2010-22 at $140.8 million. Deere was next at $129.5 million.

Better transparency in the program would show how much of those kinds of claims are used to pay down tax liability, and how much are paid out as checks to companies that pay no income tax. The 2022 reforms on refundability are welcome, but more should be done.

Paying for essential services is everyone’s responsibility, but those with the greatest ability to pay should be paying their fair share. Programs like the RAC take us further away from that important principle.

For more on the 2022 report by DOR, see our news release:

https://www.commongoodiowa.org/about/media-center/cgi-news-iowa-research-giveaway-gives-record-breaks-to-deere

To see the Department of Revenue annual report for 2022 and reports for previous years, see this page:

https://tax.iowa.gov/reports?term_node_tid_depth=78&title=Research Activities