It has become a familiar story: Tax breaks and tax expenditures growing at a pace that spending on traditional state priorities cannot match. This growth continues on autopilot, year after year, with little scrutiny and often with weak justification.
The cost of business tax credits under the income tax grew from $214 million in Fiscal Year 2015 to $244 million in FY19, and is projected to be $287 million for FY20.[1] The commercial and industrial property tax cuts enacted in 2013 have added significantly more to that estimate. The business property tax credit enacted in that legislation, which will remain at $125 million every year, will bring the overall state cost of business tax credits to more than $400 million by FY20. In other words, business tax credits in total will have about doubled in six years. (See graph.)
Related business breaks would drive total spending on subsidies to business much higher.
- Iowa in recent years has spent $152 million annually to backfill local public revenues lost when commercial and industrial property assessments were rolled back to 90 percent of actual value, a tax break to business.[2]
- Revenue losses from the state’s failure to enact combined reporting to plug loopholes in the corporate income tax amount to an estimated $200 million.[3]
- The state also spends nearly $60 million annually backfilling the loss of tax base to school districts as a result of city and county use of tax increment financing, much of which reduces the costs of business development.[4]
The total cost of business subsidies, in other words, approaches $800 million, even without other so-called tax expenditures, such as the state’s use of single-factor apportionment.
Tax credits have the same impact on the state’s bottom line as any other spending. Such spending comes outside the normal budget process where agencies, advocates and constituents make proposals that lawmakers vote up or down, on the record. Tax credits, with few exceptions, cause spending outside that competition.
State spending on business subsidies necessarily comes at the expense of other budgetary priorities, including education, health, and public safety. Investments in education and infrastructure, the building blocks of a strong economy, suffer when the annual budget debates start out with a billion dollars already committed to business incentives.
Real reform is needed now more than ever.
[1] The following tax credits listed in the Iowa Department of Revenue Contingent Liabilities Reports are included in our analysis as business tax credits: Enterprise Zone Programs, High Quality Jobs Program, Historic Preservation, Industrial New Job Training Program (260E), Research Activities, Targeted Jobs, Venture Capital, Accelerated Career Education, Redevelopment, Renewable Chemical Production, Renewable Energy, Wind Energy Production, Biodiesel Blended Fuel, E15 Gasoline Promotion, E85 Gasoline Promotion, Ethanol Blended Gasoline, Ethanol Promotion. With the exception of Historic Preservation, this list is in line with credits classified as “business incentives” by the Iowa Department of Revenue in their most recent tax expenditure study. https://tax.iowa.gov/reports/2010-iowa-general-fund-tax-expenditures-excel.
[2] Legislative Services Agency, Summary of the Governor’s Budget Recommendations FY2021. Jan. 16, 2020, page 212.
[3] Iowa Department of Revenue, 2017.
[4] Legislative Services Agency, FY 2018 Annual Urban Renewal Report, February 15, 2019, p. 24. About 15 percent of TIF erxpenditure in FY18 went directly for business projects; it is not known how much of the 63 percent that went to property acquisition, roads, bridges, utilities, and water or wastewater treatment plants was associated with business development.
Peter Fisher is the research director of the Iowa Policy Project.