.bodytext {float: left; } .floatimg-left-hort { float:left; margin-top:10px; margin-right: 10px; width:300px; clear:left;} .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 10px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 10px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 10px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Remember when Wells Fargo Home Mortgage received a record $10 million incentive from the Grow Iowa Values Fund four years ago to build its new headquarters in West Des Moines?

The company’s incentive package also included a number of tax credits,among them $14.9 million in investment tax credits on its new buildings in West Des Moines and downtown Des Moines. The company is also eligible for research tax credits it plans to claim on future tax returns.

Since then, the state has awarded $423 million in tax credits to leverage more than $6 billion in private investment in alternative fuel production facilities.

Huge projects such as these, along with many smaller project awards, were part of the estimated $1.23 billion in tax credits the Iowa Department of Economic Development has awarded throughout the state during the past 10 years. Ninety percent of those credits were given to businesses, in return for creating or retaining nearly 36,000 jobs and investing more than $11.6 billion in new buildings and equipment.

Iowa’s economic development leaders say the incentives offered to growing businesses have been a key component driving their expansion within Iowa. However, there is increasing concern about the accelerating pace at which new tax credit programs are being created and new credits are being issued and the long-term effect they could have on the state’s finances.

Clear benefits

It’s hard to argue with incentive programs that lead to hundreds of millions or even billions of dollars in new capital investment and the creation of thousands of new jobs in the state. The investments spurred by tax credit awards have been particularly valuable to many of Iowa’s rural communities, said Michael Tramontina, director of the Iowa Department of Economic Development.

“You really have to consider how big those (ethanol plant) investments are,” he said. “For a rural county to get an investment of $175 million to $225 million, that’s more than the equivalent of adding an 801 Grand (building) in one of those counties.” The dollar amount of the tax credits awarded to those plant projects has averaged about 7 percent of the total private investments, he said.

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In the fiscal year that ended June 30, the state awarded more than $450 million in tax credits through 33 tax credit programs, or nearly half the dollar amount issued over the past decade. Eight of those tax credit programs were created by the Legislature in just the past two years.

The state’s growing largesse with tax credits is making some legislators nervous. “In the broadest context, if you look across all the tax credit programs, virtually all of them are growing, and there is very little oversight of them by the Legislature,” said State Sen. Joe Bolkcom. The Iowa City Democrat has sponsored legislation seeking more transparency for such economic development incentive programs.

“The tax credit programs are largely automatic; if someone qualifies for the tax credits, they get them; it’s on automatic pilot, if you will,” Bolkcom said. “These are revenues that aren’t available for other programs, such as education and infrastructure. As these tax credits grow, it’s important that legislators pay attention to them and make sure we’re getting our money’s worth.”

Tramontina said he shares that sentiment, but that it’s important to examine each program separately.

“I would say that it is time for the state to re-evaluate all of its tax credit programs for their cost, efficiency and accountability,” he said. “When the state does that, however, you can’t simply take a meat-ax approach, because there are some tax credits that really should be increased.”

In Tramontina’s opinion, tax credit programs that should be increased because of their potential to further spur economic development include the Endow Iowa Tax Credit, the Research and Development Tax Credit and the Renewable Energy Generation Tax Credit. Each of those programs was capped at a relatively low dollar amount, he said.

Tramontina, whose in his state government career has also headed the Iowa Department of Management and Iowa Finance Authority, attributed the increase in tax credit programs over the past several years to a Republican-led Legislature. Generally, Republicans adhere to an economic theory that tax credits should not be considered a cost or loss of revenues, under the assumption that those revenues would not have been created without the incentives, he said.

“What we’ve seen for the past four or five years when the Republicans controlled the Legislature, their answer to every problem was to throw tax credits at it, and they argued that it didn’t cost any money,” he said. “And they had a tax credit solution for everything. So we came up with this big web of tax credit programs, which they would argue have no cost at all.”

Democrats, on the other hand, are not as inclined to use tax credits as an incentive; they’re more apt to use direct monetary awards, he said.

The big increase in the total dollar amount of tax credit obligations has been within the Enterprise Zone program, and that is largely due to the growth in ethanol plants over the past several years, Tramontina said.

“That has worked extremely well,” he said. “We can see that by the growth in the number of plants out there and it has created jobs in rural areas where we’ve historically had a hard time in job creation.”

The IDED board of directors has decided that tax credit awards for ethanol plants should continue at the same level, though the pace of projects has slowed lately, Tramontina said.

Evaluating the programs

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What isn’t slowing is the pace at which tax credits are being claimed. State officials estimate that by 2011, businesses and individual taxpayers will claim about $400 million in credits against their taxable income, compared with $157 million in credits actually used in fiscal 2004, the latest year for which data is available.

In 2005 the Legislature passed a bill to create the Tax Credit Tracking and Analysis System. As part of that effort, businesses or individuals who were awarded tax credits last year were required to complete a new tax form, Iowa Form 148, detailing the amount of tax credits used by program, rather than simply reporting a total figure for all credits used.

As part of the tracking initiative, this fall the Iowa Department of Revenue is expected to issue the first in a series of reports designed to shed more light on the effectiveness of tax credit programs.

“What we’re really trying to get to is the question: Was there increased economic activity as a result of the credits?” said Jim McNulty, program manager for the Department of Revenue’s Taxpayer Services and Policy Division. “Considering the credits, how much more activity occurred because the credits were in place?”

The initial tax credit program being examined is the Historic Preservation and Cultural and Entertainment Tax Credit. Earlier this year, Gov. Chet Culver signed a bill that increases the $6.4 million cap on those credits to $10 million in fiscal 2008, then to $15 million in fiscal 2009 and $20 million in fiscal 2010 and subsequent years. The department is also working on a report on the effectiveness of the Earned Income Tax Credit for individual taxpayers.

The department is also working toward recommendations of which tax credit programs could be eliminated because they are used infrequently. For instance, in the past five years, no businesses have elected to take the Housing Assistance Credit, a withholding tax benefit provided under the Enterprise Zone program that allows businesses to offer down-payment or rental assistance to employees in new jobs. Another tax credit program, the Assistive Device Credit, was created to assist small businesses with costs related to installing modifications to accommodate employees with disabilities. Only one business has applied for that credit since the program began six years ago.

First-come, first-served

There have been some instances in which legislators have cut tax credit programs. Funding for the Wage-Benefit Tax Credit program was cut to $4 million from $10 million by the Legislature earlier this year; as a result, many companies that had anticipated credits won’t receive them. (The Business Record has requested a list of those companies under Iowa public records laws; the Iowa Department of Revenue has said those records are confidential). Created in the 2005 session, the program in 2006 attracted about $14 million in applications from companies and awarded the limit of $10 million in credits

“That (Wage-Benefit) program was very attractive,” said Mark Miller, director of corporate services for Pioneer Hi-Bred International Inc., who said his company was just beginning to hire people under that program when it was cut. “We were really counting on that credit,” he said. “We hire some very well educated people in the area of information technology and research; we had a lot of people who would have qualified under that program.”

McNulty said that tax credit, for which businesses applied on a first-come, first-served basis, was intended to provide a way for companies to receive incentives for creating or retaining jobs without the requirement of a large capital investment that’s built into the High Quality Jobs Creation tax credit program. Legislators based the new $4 million cap on the amount that had been used by April 1, he said, and apparently reduced the program “solely for budgetary purposes.”

Miller said that experience hasn’t shaken Pioneer’s confidence in other state tax credit programs, however.

Through a previous award, Pioneer received an estimated $363,875 in New Jobs and Income Program tax credits for an expansion that created 58 jobs. That four-phase expansion has actually resulted in 242 new jobs in communities across the state since 2003, he said. “We’re projecting that we’re going to get to $82 million in investment in 15 Iowa communities,” he said.

The Johnston-based seed-corn company in June was awarded an estimated $3.4 million in High Quality Jobs Creation tax credits for a planned $42 million expansion that it expects will create 65 jobs. That’s in addition to 100 more jobs the company plans to create for which it will receive incentives under the Community Economic Betterment Account program, he said.

“The thing about both programs, you don’t get any credits until you do what you say you’re going to do,” he said. “Pioneer is not taking any money upfront for planning to do something; it’s always after the fact with these programs.”