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Iowa’s efforts to spur more corporate research and development activity could begin to be hindered by the cost of an increasingly expensive tax credit program, which critics say provides multimillion-dollar cash payments of state funds to large corporations with virtually no oversight.

Legislators say they are still in the “fact-finding” phase of scrutinizing the Research Activities Credit (RAC) program, which for 2007 is expected to issue $46 million in credits, the majority of which will be “refundable,” or paid out as cash, to fewer than a dozen large corporations. Unlike economic development incentive awards, which require approval by a state board, the credits are automatically awarded for qualified expenditures.

A new projection by the Iowa Department of Revenue estimates that RAC claims will balloon to nearly $70 million by 2012. Though 38 states provide some form of research tax credit, Iowa is among just five states that issue refundable credits, which means a company can receive all or a portion of the credit as a direct payment, even if it doesn’t owe any state taxes.

Michael Tramontina, director of the Iowa Department of Economic Development, said the tax credits are an important tool for encouraging key research and development activities in Iowa. Whether the credits should continue to be refundable and whether they should be limited to a certain dollar amount are legitimate policy issues for the Legislature to address, he said.

“In our view, incentives focused on increasing research activity are good for the work force and in increasing innovation,” Tramontina said. “Each of the Battelle (Institute) reports (that recommended strategies for developing key growth industries) leads off by saying encouraging research activities is among the most important things a state can do. This encourages innovation.”

Critics of the program question whether a small number of companies should be receiving the lion’s share of the money, as well as the confidentiality that cloaks how much each has received.

Of the payments made in 2005, the 10 largest payments went to 10 companies that received 85 percent of the total credits, $31.6 million, though the firms together owed less than $1 million in corporate taxes to the state. A total of 134 corporations that paid no state income tax in 2005 received RAC payments from the state, the report also found.

“The term ‘refund’ is really a misnomer for what’s happening with the RAC,” said David Osterberg, executive director of the Iowa Policy Project, a nonprofit tax and fiscal policy research organization. “That word implies the state is returning money the company actually paid in taxes, but that’s not the case with the ‘refundable’ part of these claims. It would be more accurate to call these grants, paid by secret checks.”

In 2005, the most recent year for which complete state corporate income tax-return data are available, 172 RAC claims were made totaling more than $37 million, or more than 80 percent of all corporate tax credits claimed, according to the Iowa Department of Revenue report. Over the 20-year period from 1985 to 2005, corporations conducting research in Iowa have received more than $263 million in RAC tax credits, the majority of which were made as cash payments rather than reductions in tax liabilities.

“If we were going to spend that on education or any other area of state government, we would want to know where it’s going,” said Sen. Joe Bolkcom, an Iowa City Democrat who chairs the Senate Ways and Means Committee. “This is a growing credit, and I just think there needs to be more accountability around it.” Bolkcom said no legislation has been introduced yet. At the same time, legislators are grappling with how to bridge a projected $350 million budget deficit.

The amounts paid to individual companies are maintained as confidential taxpayer information. However, state officials say companies benefiting from the tax credit include Rockwell Collins Inc., Deere & Co., Emerson Electronics and Pioneer Hi-Bred International Inc., each of which conducts extensive research in Iowa. Overall, 81 percent of the dollars claimed since 1985 have gone to companies in the manufacturing sector. The Iowa Department of Economic Development touts the credit on its Web site as an assurance for companies that “research is more profitable in Iowa.”

Under federal tax law, corporations and individuals may apply for a research and development tax credit of up to 20 percent of qualified research expenditures on their federal returns.

The program technically lapsed at the end of 2007 after Congress failed to extend it. However, the federal credit has been allowed to lapse on 13 previous occasions and has always been reinstated, usually retroactively, and tax experts predict it will continue to be offered.

Iowa’s RAC provides for an additional credit of 6.5 percent of qualified expenditures made within the state. The state RAC may also be doubled to up to 13 percent of qualified expenditures for companies that participate in the High Quality Jobs Creation (HQJC) or Enterprise Zone programs.

That ability to double the state research credit is one of the benefits of participating in the HQJC program, said Mark Miller, Pioneer’s director of corporate services. The company has received funds from that program, formerly known as the New Jobs and Income Program, since 1998, he said.

Over the past five years, Pioneer has made an estimated $80 million in capital investments in Iowa for projects such as the expansion of its greenhouse research facilities in Johnston. Through the HQJC program, it has received $1.966 million in benefits during that same period, which would include any research tax credits or payments received, Miller said. He did not have a breakout for just the tax credits received.

“We’re happy to do research in Iowa, because it’s our home headquarters,” Miller said. “It’s in the middle of where all our customers are at; there’s a great quality of life here. But we’re competing in a very global economy. We’re competing not only with other companies for capital, but also for resources within the corporation. Anything that Iowa can do helps us to make a better case to do research and continue to grow in Iowa.”

Bolkcom said he believes legislators would like to see more transparency and accountability in the tax credit program. One proposal under consideration is to limit the amount that can be issued in credits or paid out to a corporation to no more than $250,000, the same as the cap that New York has imposed on its credits.

“I think the proposal is worth examining,” Bolkcom said.

“(The goal is) to provide incentives, while not spending unnecessarily for that research. There is a point at which research would be done anyway. It’s a matter of trying to find that balance.”