Comments on: Governor's supplemental budget proposes business tax cuts, cuts to local governments and Renters' Credit http://minnesotabudgetbites.org/2010/03/03/governors-supplemental-budget-proposes-business-tax-cuts-cuts-to-local-governments-and-renters-credit/ Wed, 08 Feb 2012 19:43:27 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Peter Fisher http://minnesotabudgetbites.org/2010/03/03/governors-supplemental-budget-proposes-business-tax-cuts-cuts-to-local-governments-and-renters-credit/#comment-309 Peter Fisher Wed, 03 Mar 2010 17:44:07 +0000 http://minnesotabudgetbites.org/?p=4137#comment-309 It is discouraging to see that Minnesota may be emulating Iowa by expanding the Research and Development Credit, and making it refundable. Iowa currently is one of only five states with a refundable research credit, and this feature makes it very expensive. On a per capita basis, Iowa spends over twice as much as Minnesota on the credit. In fact, 92 percent of Iowa's research credit dollars are in the form of so-called refunds: payments to corporations who have already had their state corporate tax eliminated. What has this very generous credit produced for Iowa? Not much. The Iowa Department of Revenue, in a study of Iowa's credit, concluded that they could find no evidence that it had produced a greater level of research activity in the state (see http://www.iowa.gov/tax/taxlaw/IDRTaxCreditEvalJan2008.pdf). A study by researchers at Iowa State University found that Iowa has been a laggard in R&D spending and in R&D jobs for a long time, and the existence of one of the most generous research credits in any state does not appear to have done anything to improve this (see http://www.econ.iastate.edu/research/webpapers/paper_13152.pdf). Most of the R&D credit in Iowa goes to a very small number of large and profitable firms,and most of that is in the form of "refunds." This led the governor's Tax Credit Review Panel to recommend recently that refundability be eliminated for large firms. This would retain the full benefit of the credit for small, innovative new firms (the original intended beneficiaries of the credit), and still allow large firms to eliminate their state tax, while dramatically reducing the revenue losses to the state. If Minnesota does decide to expand the credit, they should at least avoid the refundability trap, an expensive and wasteful diversion of state revenues to a handful of large profitable firms who need to do research to survive anway. It is discouraging to see that Minnesota may be emulating Iowa by expanding the Research and Development Credit, and making it refundable. Iowa currently is one of only five states with a refundable research credit, and this feature makes it very expensive. On a per capita basis, Iowa spends over twice as much as Minnesota on the credit. In fact, 92 percent of Iowa’s research credit dollars are in the form of so-called refunds: payments to corporations who have already had their state corporate tax eliminated.

What has this very generous credit produced for Iowa? Not much. The Iowa Department of Revenue, in a study of Iowa’s credit, concluded that they could find no evidence that it had produced a greater level of research activity in the state (see http://www.iowa.gov/tax/taxlaw/IDRTaxCreditEvalJan2008.pdf). A study by researchers at Iowa State University found that Iowa has been a laggard in R&D spending and in R&D jobs for a long time, and the existence of one of the most generous research credits in any state does not appear to have done anything to improve this (see http://www.econ.iastate.edu/research/webpapers/paper_13152.pdf).

Most of the R&D credit in Iowa goes to a very small number of large and profitable firms,and most of that is in the form of “refunds.” This led the governor’s Tax Credit Review Panel to recommend recently that refundability be eliminated for large firms. This would retain the full benefit of the credit for small, innovative new firms (the original intended beneficiaries of the credit), and still allow large firms to eliminate their state tax, while dramatically reducing the revenue losses to the state.

If Minnesota does decide to expand the credit, they should at least avoid the refundability trap, an expensive and wasteful diversion of state revenues to a handful of large profitable firms who need to do research to survive anway.

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