Taking a Look at Iowa’s Tax Credit Programs

In last week’s newsletter, I discussed the recent news regarding the budget. Although Iowa revenues continue to grow at nearly 2.5 percent, the incoming tax receipts are projected to grow at a lower rate than had been anticipated. For this reason, we must make very difficult decisions to maintain our promise of a balanced budget.

When explaining this financial dilemma, I have received feedback regarding the tax credit programs in Iowa. A common response is “if you wouldn’t give away $400 million a year in tax credits to corporations, you wouldn’t have this problem.” I wish to shed some light into the tax credits being mentioned in this talking point.

I, like many of you, believe when you are allocating resources of this magnitude it is imperative to regularly review all the state’s revenues and expenditures, including our tax credit programs.  It is the Legislature’s responsibility to determine if they are needed and if they are working. With that said, I believe we can and should get rid of some of the state tax credits. The reality is tax credit programs came about as a result of the state’s broken tax policy. Today, Iowa has one of the highest corporate income tax rate and personal income tax rate in the country. In past years, instead of reducing income tax rates, making Iowa competitive with neighboring states and the rest of the nation, past legislatures and governors decided to create tax credit programs.  Unfortunately, this “quick fix” never addressed the real problem facing our state- an uncompetitive and outdated tax structure.

The Iowa Income Tax Code allows for many different tax credits, for personal and corporate income taxpayers, and there are two distinct types of tax credits within this system.  These are capped and uncapped tax credits. Capped credits allow a set dollar amount of tax credits to be claimed and then no more credits are allowed. Uncapped credits mean that an unlimited dollar amount of credits can be claimed for certain criteria. Capped credits give us a very predictable total dollar amount to be claimed, where uncapped are a little more unpredictable because we do not know the total number of taxpayers who may utilize that tax credit.

In total, taxpayers could claim as much as $536 million in tax credits next year; this is considered to be the state’s tax credit liability.  However, our estimate is that $406 million will be claimed. This is why people say we are “giving away”more than $400 million of our revenues.

Taking a closer look at the credits will give you an idea of some of the credits.These include several different job training programs which account for more than $80 million, a Wind Energy Production Tax Credit, the state’s Historic Preservation Tax Credit totals more than $59 million and there are other economic development and job creation tax credits.

The Research Activities Credit is one that commonly comes under fire. It is typically awarded to more than 180 Iowa job creators, like Monsanto, Rockwell Collins and DuPont Pioneer and accounts for approximately $60 million in total tax credits.

But not all tax credits are for corporations.  For example, the Earned Income Tax Credit is a percentage of the federal tax credit given to lower income taxpayers and accounts for $70 million of the state tax credit liability.

There is a Tuition and Textbook Tax Credit, available for individuals with children in grades K-12 accounts for more than $15 million.  These are just a few of the more than 40 different tax credit programs.

Although these tax credits account for an estimated $400 million, the real story is not as simple as “giving away the state’s money to rich corporations.” Iowa’s tax credit programs are for both the personal income taxpayers and the corporate income taxpayers. These credits are designed to give a hand up to low-income Iowans who are working and raising a family, help to provide low-income students to receive scholarships to private schools, increase economic development across our state and provide job training for high skill jobs.

As I said, I am willing to look at all of the tax credits and evaluate the importance of each one. We must take a look at both the revenue and expenditure side of our state budget annually, and in particular when we are in a budget crunch. However, considering tax credits impact the lives of so many Iowans, simply eliminating all of the tax credits could have far-reaching repercussions and unintended consequences if done recklessly and thoughtlessly.

I have long supported comprehensive income tax reform. I believe it is vital to the long-term success of our state. Whether we get it done in 2017 or do it in 2018, I will continue to push for tax reform this General Assembly.