Some tax credits will live and some will die

Shortly after the film tax credit scandal broke in September, Governor Chet Culver promised a “comprehensive review” of all tax credits. On Thursday we learned more about how this review will be conducted. Recommendations are likely before the state legislature convenes in January 2010.

Join me after the jump for additional details and analysis.

The Des Moines Register covered the basics:

PANEL LEADER: Gov. Chet Culver named state budget director Dick Oshlo chairman of the tax credit review panel.

PUBLIC MEETINGS: The review is due to the state Department of Management on Dec. 4. The panel will evaluate the review and hold two public meetings – one in Des Moines and the other in Cedar Rapids – the week of Dec. 7 to discuss the findings. Dates and sites of the public meetings are yet to be determined.

PARTICIPANTS: The panel will include the Iowa Finance Authority and the following departments, which administer the credits: economic development, agriculture, utilities, management, cultural affairs and revenue.

CREDIT PROGRAMS: The credit programs benefit a variety of people and businesses – from employers that sponsor training at community colleges to taxpayers that lease farmland to beginning farmers to retail dealers who sell biodiesel blended fuel to taxpayers who make charitable donations for conservation purposes.

LEARN MORE: Go to www.iowa.gov/tax/taxlaw/1009RECReport.pdf to find out more about Iowa’s tax credits and their cost.

Radio Iowa published the letter Culver sent to state agency directors. Excerpt:

To assist the panel with their work, I am asking you to submit information on your respective departments’ tax credits to the Iowa Department of Management by close of business December 4, 2009. Submissions should include the following information for each tax credit program administered by your agency:

•         General description of the purpose of the tax credit

•         Minimum, maximum and average value of tax credits issued

•         Contingency liability for each tax credit

•         Number of tax credits issued each year

•         Number of individuals and/or businesses served by the tax credit

•         Whether the tax credit is transferable and, if so, how many times

•         Whether the tax credit is refundable

•         Processes for oversight and regulation of the tax credit

•         The Return on Investment for the tax credit

•         Data on the fiscal impact of the tax credit for the past ten years, if available

•         A description of what information is currently made available to the public for the tax credit(s) administered by each agency.

State legislators may reach their own conclusions about which tax credits are worth keeping, which should be reined in, and which should be scrapped. From the Des Moines Register:

“It’s absolutely essential that we give this more attention, especially now because of the tight budget,” said Sen. Joe Bolkcom, D-Iowa City and chairman of the Senate Ways and Means Committee. “We need to make sure our job creation efforts are working.”

Bolkcom and Sen. Bill Dotzler, D-Waterloo, have long advocated that the state make public more information about tax credits’ recipients and projects. Unlike some other states, Iowa keeps private much of the information about tax credit recipients.

“The public needs an opportunity to review who’s getting what,” said Dotzler, who first alerted many state officials about allegations of abuse within the film program. “If companies don’t like that, it would be real easy for them not to participate in the tax credit program.”

One example, he said: State officials don’t know details about companies that receive research and development credits. Companies argue the information is proprietary, so information about projects awarded credits in that program are kept confidential. […]

Sen. Ron Wieck of Sioux City, the top-ranking Republican on the Senate Commerce Committee, said he agreed with Culver’s call to review the credits.

“I think, generally, tax credits are good. The history shows if they are in place in the proper way they can help generate new jobs,” Wieck said. “But I think too many times we put programs in place and they aren’t monitored closely enough and continue into infinity.”

The companies and industries that benefit from current tax credits will pour tons of money into lobbying during the 2010 legislative session. During the 2009 session, lobbyists were able to get an absurd number of exemptions written into a bill on consumer fraud lawsuits. I would not be surprised if legislators spare some tax credits that the governor’s panel recommends eliminating.

On the other hand, the budget is tight, and there probably will not be any additional federal stimulus funding to help plug holes in fiscal year 2011. I expect at least some of the tax credits to be eliminated or substantially revised.

The film tax credit is a goner in my opinion.

The research and development tax credit may well be revised to force more disclosure by companies that benefit.

I wouldn’t bet against the ethanol and biodiesel industries, which will fight like crazy to retain their tax credits.

I would like to see lawmakers reduce the scope of Tax-Increment Financing (TIF) to restore the original intent of this program: promoting redevelopment of urban blighted areas. The use of TIF has exploded in the past decade, allowing developers to avoid paying substantial amounts of property taxes on developments that would have happened anyway. To cite a couple of examples, TIF was used for the Jordan Creek and Glen Oaks developments in West Des Moines. The law should be changed so that a cornfield cannot be labeled a slum or an “urban renewal area.” TIF is a complicated issue, and I hope to have a guest post here soon by an expert on the uses and abuses of TIF.

I hope legislators keep the historic preservation tax credit. That’s a valuable tool for revitalizing small-town main streets as well as older neighborhoods in cities.

Final note: our state’s budget would be in better shape if the governor and legislators had heeded many warnings from the Iowa Policy Project and the Iowa Fiscal Partnership about the unsustainable growth in business tax credits. I hope that many policy-makers and journalists will attend the Iowa Fiscal Partnership’s December 4 summit on fiscal policy at the Botanical Center in Des Moines.

Post any thoughts on good, bad and ugly tax credits in this thread.

  • not so fast.............

    While i agree there has been abuse of tax credits in the past (certainly the film credit was completely out of control, and frankly the tax credits have been way too favorable to developers and investors in both the rehab and low-income housing development area in the last 15 years), I think it might be a bit much to dismiss the Jordan Creek use of TIF as any kind of failure.  (You might want to check your facts…are you sure Glen Oaks used TIF?  Are you not thinking of West Glen?)

    Jordan Creek, Glen Oaks (TIF or not), and West Glen may be the three finest development efforts and ending results EVER in the history of Iowa…and whatever it takes to duplicate any of the three may be worthwhile in any county in this state.  In the case of Jordan Creek, the planning involved by WDSM deserves credit, and the imaginative use of TIF speeded the process of overall development by years.

    It is not tax credits that got us in budget problems in this state…it is the out of control spending by a legislature the last couple of years and an incredible  increase in spending by over 20% by the Culver administration (with 2% inflation yearly) despite warning after warning by the state auditor and the minority party.

    Oshlow has his work cut out for him.  Unlike the State panel now in place to review government efficiency (run completely inepetly so far by Senator Appel) one my home this panel will come up with goals, a plan, and some real ideas to fix any tax credit problem.

    • facts

      Tax credits for business have grown much more rapidly than spending from the general fund. That is not disputable. Also, Iowa has a regressive state income tax because Republicans cut taxes for the wealthy when times were good. Now that times are bad, they want to cut services for everyone else.

      I recommend going to the Iowa Fiscal Partnership’s site and downloading the report from February 2009 called “Understanding the Revenue Roots of the Crisis.” Excerpt:

      Creating a sustainable foundation for the Iowa budget requires a serious review of tax policy and the largely unexamined growth in business-oriented tax breaks that have been enacted over this period. An examination of overall state revenues and expenditures in the context of overall state economic growth reveals a much different picture of state “spending” than is usually recognized. Figure 1 provides a longterm analysis of state general fund spending in relation to state economic growth as measured by personal income from FY1994 through FY2008 (both income and expenditures are indexed to a value of 100 in FY1995).

      Between 1994 and 2001, growth in general fund spending was closely aligned with economic growth. During that period, Iowa ranked as an average tax and average spending state on most statecomparisons.1 However, during the late 1990s, as the national and the Iowa economy both expanded rapidly, Iowa lawmakers enacted a series of tax cuts that were based on increases in revenue caused bythis growth. These tax cuts proved to be unsustainable over a full economic cycle.

      When the economic downturn came in 2001, Iowa faced a budget crisis as revenue growth declined dramatically. However, Iowa’s response to this budget crisis differed from that of most other states. During the period of fiscal crisis between 2001 and 2004, while many other states raised taxes to cope with declining revenues, Iowa not only cut spending substantially, but continued to enact tax cuts. […]

      The point is that tax expenditures and business tax credits are by far the fasting growing part of the state expenditure-revenue equation and need to be subject to much greater scrutiny and review. Their role in creating current fiscal shortfalls needs to be recognized and a response made. The Governor took a first step in this direction by proposing a cap on all uncapped business tax credits and eliminating the option to double the size of the state Research Activities Credit. The General Assembly should build upon that platform.

      Labeling the fiscal crisis a “spending problem” and calling for spending cuts runs counter to evidence regarding the growth in state expenditures and in revenue cuts. Spending through the tax code, particularly in the form of uncapped business credit programs but also in terms of long-term commitments to expand tax cuts without an offsetting source for financing them, represents a major contributor to structural budget instability in Iowa and needs to be addressed.

      Who cut spending and also continued to enact new tax cuts and tax credits during the last economic downturn? Republicans who controlled the state legislature until after the 2006 election. Unfortunately, Governor Tom Vilsack lacked the political courage to veto any of these unaffordable tax breaks for the wealthy.

    • Tax breaks and spending

      How do you make the distinction between tax credits and spending? Aren’t tax credits just spending in a different form?

  • the Iowa Fiscal Partnership for unbiased info????

    …i think not…that would be like me sending you to the Cato institute or the New Republic for similar “unbiased” info…..of COURSE what amounts to a pure leftist “research” arm comes to the conclusions you wish…..

    nor am i willing to go back years for the crux of the current problem which i am sure we can find references to blame it on anyone…reality is now….what are Culver and the legislators doing to fix the problem? My confidence is very low in the majority party at this point and i am sure i am joined by many in this state.

    i URGE you to take the D hat off and talk to ANYONE on Staci Appel’s government efficiency committee and ask how is it going.  i heard a devastating report on it from a member of that committee (and hear the same from the other party) on wednesday, but please…get your own opinion.

    • the rate of growth is indisputable

      The cost of tax credits to the state budget has exploded at a much faster rate than growth in spending from the general fund. Being a Republican, you may think that’s great, but you cannot deny the fact: growth in spending has been slow and steady compared to the rising cost of all these tax breaks and credits.

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