A controversial element of Iowa’s tax credit policy is under scrutiny at the statehouse. 

Last week, a task force appointed by the governor recommended scrapping a provision that allows tax credits to be transferred from one business to another.  State tax credits for filmmakers, for example, often were transferred so the filmmaker could get cash up front and the investor got the full value of the credit. Dick Oshlo, the governor’s budget director, says while only a few tax credits can currently be transferred, the practice has led abuse.

“Going back to the film office issue — that’s where transferability became a problem because the Department of Revenue or the state has limited capacity to go after any of those funds once those tax credits have been transferred,” Oshlo says.

But Senator Joe Seng, a Democrat from Davenport, says just because a tax credit is difficult to track doesn’t always mean it’s being abused.  He worries the film scandal has tainted the whole system.  

“As politicians, we are worried that the backlash on some of these credits may come to reflect on our finesse as far as being businessmen,” Seng says.

The governor’s task force estimates the state could save $55 million next year through a series of tax credit reforms.  One of the proposals would limit the state’s research activities credit.  In some instances, the state has written checks to some businesses because the amount of the credit was larger than the company’s corporate income tax payment to the state.  Senator Herman Quirmbach, a Democrat from Ames, says that makes no sense.

“I don’t necessarily have a problem with the state making grants for economic development, but let’s just call them that.  Let’s have companies apply for those grants.  Let’s do some evaluation on that,” Quirmbach says.  “Let’s not just hand out checks.” 

The proposal advanced by the governor’s advisors calls for barring businesses that make more than $20 million annually from getting a check from the state if they qualify for a research activities credit that’s larger than their corporate income tax bill. But Seng – -the Democrat from Davenport — warns such changes could cost the state in the long run if it impedes business growth.

“We’re trying to balance the budget.  We’re trying to find money,” Seng says. “But I mentioned being penny-wise and pound foolish.”

A senate committee opened discussion about tax credits yesterday and committee members say they want to know how many companies earning more than $20 million a year currently qualify for a refundable research activities tax credit before making any decision.