Our View - Film tax credit just tip of a credit iceberg

Printed in the Iowa City Press-Citizen, Oct. 12, 2009

Our View - Film tax credit just tip of a credit iceberg

For the last few weeks, we've heard friends and patrons of Iowa's fledgling film industry complain that state leaders have overreacted to the recent discovery of gross abuses of Iowa's two-year-old film tax credit program.

They've been saying, "Don't throw the baby out with the bath water," and, "Fix, don't scrap, the program." They've also been urging the state to look what a small percentage the abuses represents when compared to the money being brought into the state by this rapidly growing industry.

But in the few weeks since the state's director of economic development resigned over the financial irregularities within the program, it's become readily apparent that the film tax credit was flawed from the beginning. Rather than help incrementally grow an industry that would improve Iowa's image and support an infrastructure of local actors and technical staff, the program gave qualifying filmmakers tax credits beyond the amount of tax that they actually owed.

Then filmmakers -- even some of the few who actually turned in their receipts -- proceeded to sell off those extra tax credits to other companies who had nothing to do with the film industry. Rather than simply lessen a filmmaker's tax burden to make Iowa slightly more competitive, the program created an additional marketplace in which filmmakers made money by helping to reduce other businesses' tax liability.

Back in 2007, the lawmakers were somewhat aware of this possibility, but the non-partisan Legislative Services Agency estimated that the credit would cost less than $800,000 in revenue losses this fiscal year. Now -- because so many filmmakers have applied for the program -- the Iowa Department of Revenue and Finance estimates that this year's loss will be nearly 33 times that amount: $26.3 million. Thankfully, lawmakers capped the program at $50 million last year or the potential loss -- during a time when the state is slashing 10 percent of its budget -- could be worse.

But the film tax credit is just the tip of the iceberg. Iowa also has a similar problem with its research activity tax credit, which gives qualifying companies 6.5 percent credit on their research expenses in the state. The problem is that companies like Rockwell Collins are able to claim more in research expenses than they owe in state taxes. Rather than just have the credit cover the taxes owed, the state actually writes out a check to these companies for the extra amount. (And state law says that the public doesn't have the right to know who is applying for the credits and how much is paid out.)

So we're not surprised the film industry folks -- like the research folks -- are worried about drying up this cash cow. We're just sorry that it took so long for our state leaders -- and for us -- to realize that this was a deal too good to be true.

And it's a painful lesson for everyone who agreed with the original intent of the legislation. The film tax credit deserved to have proper oversight -- not to be left largely in the hands of a single state employee who originally was hired for marketing the state and not for overseeing contracts and calculating tax liability. The program also deserved to have state officials higher up the political food chain making sure that the watchers were watching the watchers.

Now that every state dollar seems to count more than ever, it's time to make sure Iowa stops bleeding tax money through these tax credits.