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So what's a tax credit, anyway?

posted on February 4, 2010 at 3:41 PM

On October 28th, a group of international filmmakers filed a lawsuit against the Iowa Department of Economic Development.  The filmmakers had to postpone making a movie in Iowa because the state’s film tax-credit program has been put on hold.

So once again, the state’s most visible and recent effort to prime the pump and attract a new business and jobs ran into problems.   

Encouraging private business while still raising enough revenue to take care of the public’s business is a tricky balancing act.  Here is a look at what tax credits are and how they’re used. 





It wasn’t that long ago, that The Iowa Journal reported on Iowa’s newest “growth” industry, moviemaking. It was fueled by generous state income tax credits – for producers and investors.

The Iowa legislature enacted those tax credits in 2007. By fall 2009 there was trouble. “Irregularities” with the film tax credits caused the governor to put the program on hold and call for a review of all the state’s tax credits.

The film tax credit is actually only one of more than 30 credits the Iowa legislature has created for businesses, organizations or individuals. They are used to stimulate the biodiesel and ethanol industry ... the rehabilitaton of historic properties ... research ... the creation and retention of jobs ... donations to local communities and much more.

So how does a tax credit work? For starters it’s different than a deduction and that is important. A deduction is subtracted from income. Once the income is calculated and the deductions are taken, then the tax is determined. A tax credit is subtracted from the tax that is due. It works the same for individuals and businesses.

Some tax credits are claimed. Just as any person who files a return can claim a $40. individual credit, businesses can claim credits allowed in the law. Some other tax credits are awarded to companies by different government entities if they meet specific criteria, such as promising to create a certain number of jobs. The film industry credits were awarded.

Some footnotes on awarded credits: A business won’t necessarily claim all the credits it’s granted. If a company fails to do what it promised, in some instances the state can take the money back – called a “clawback” provision. And awarded tax credits can be capped, so there is a limit to how much the awarding agency may authorize.

The Department of Revenue reports to the legislature, the governor and the public how much is claimed in the aggregate for the various business tax credit programs. But an individual company’s information is not released, with one recently enacted exception. The report is called the Tax Credits Contingent Liabilities Report – what it estimates the state might lose in revenue because of tax credits – for businesses and individuals.

The October, 2009, report found potential liabilities growing significantly. Major contributors to that growth were five tax credits aimed at businesses. In fiscal year 2010, they are expected to be $233.8 million, with another 73 million in movie credits under review.

Tags: business economy Iowa taxes