Group says legislative tax credit reform mostly cosmetic

A tax credit reform packaged passed by Democrats in both legislative chambers is on its way to Gov. Chet Culver, but it represents only baby steps toward real reform, analysts for the nonpartisan Iowa Fiscal Partnership said Monday.

The bill, Senate File 2380, aims to reduce the state’s tax credit payments by $115 million, or roughly 22 percent, by suspending the film tax credit program for two years; lowering the cap from $185 million to $120 million on business tax credits; cutting the Iowa Fund of Funds contingent tax credits from $100 million to $60 million; cutting the Supplemental Research Activities Tax Credit in half for large corporations; and overall cutting 10 percent for many other tax credit programs.

The bill also calls for regular evaluation of credits, and those which do not produce results will be fixed or eliminated.

But the Iowa Fiscal Partnership, which has been advocating for tax credit reform for many years, says it doesn’t go nearly far enough.

“Senate File 2380 offers only very limited impacts on the runaway growth in tax credits and their damage to the state’s budget process,” the group said in a statement, later concluding: “While the legislative panel may offer recommendations in the future for curbing tax credits, the current bill is more cosmetic than real in taking a balanced approach to the state budget. Meanwhile, a number of tax reforms — such as combined reporting and limiting the total exclusion of capital gains income from the individual income tax — are not addressed.”

According to the Legislative Fiscal Bureau’s fiscal note on the Senate bill (before amendment), the legislation will have no impact in either of the next two state fiscal years on the costs to the state for the five largest of Iowa’s currently active tax credits – the Research Activities Credit (RAC), the Iowa industrial New Jobs Tax Credit, the High Quality Jobs Program, the Enterprise Zone Program, and the Historical Preservation Tax Credit.

The Department of Revenue’s March 2010 Contingent Liabilities Report estimates that Iowa’s liability for use of these credits in fiscal year 2011 will be $227 million and grow to $240 million in FY2012.

According to the fiscal notes, the state would gain only $5.4 million in revenue next fiscal year, FY2011, from the various credit changes.  Even in FY2012, the total savings would be only $25.2 million, and 75 percent of that is from the suspension of the film tax credit. By FY2013, the savings grow to $35.9 million, and 65 percent of that is from the effects of the suspension of film-credit awards through June 2012. Besides the film credit, most of the rest of the revenue savings — $4 million each year — come from the elimination of the refundable Value-Added Agriculture Tax Credits portion of the High Quality Jobs Credit.

“The new legislation provides for a legislative review panel on tax credits, but provides little guidance to that panel or to the public as the House removed a requirement that lawmakers review credits based on established, sound principles for tax policy,” the group says. “Strong momentum appeared to gather steam in 2009 for serious reforms of Iowa’s proliferation of tax expenditures, including tax credits, following the scandal in the film credit program and the strong recommendations of the Governor’s Tax Credit Review Panel, backed by Gov. Culver in his Condition of the State address and his budget proposal. That momentum has not produced legislation that can be expected to deliver any serious reform.”