Iowa 2020 Tax Expenditures Study

Overview

The Iowa 2020 Tax Expenditures Study provides a comprehensive assessment of the states tax preferences, credits, exemptions, and deductions that function as indirect subsidies to private actors. By translating these provisions into dollar terms, the study quantifies the fiscal impact of policy choices made by the Iowa General Assembly and the Governors Office.

Tax expenditures are often described as hidden spending because they reduce revenue without a corresponding lineitem appropriation. Understanding the size and distribution of these expenditures is essential for evaluating fiscal sustainability, equity, and the efficiency of the states tax system.

Methodology

The study followed the guidelines of the International Monetary Funds Fiscal Transparency Manual and the U.S. Treasurys Tax Expenditure Guidelines. The process involved four main steps:

1. Identification All statutory provisions that reduce tax liability beyond the standard rate schedule were catalogued. This included credits, exemptions, deductions, accelerated depreciation, and preferential rates.
2. Classification Each provision was grouped into functional categories (e.g., Economic Development, Education, Energy, Housing).
3. Valuation The revenue loss for each provision was estimated using the 2020 tax base, applying the statutory parameters and assumptions about takeup rates where data were unavailable.
4. Aggregation Results were summed to provide total tax expenditures and a breakdown by category and by income/industry group.

Data sources included the Iowa Department of Revenue filing data, the Iowa Comprehensive Annual Financial Report, and supplemental information from the State Budget Office.

Key Findings

Overall, Iowas 2020 tax expenditures amounted to $1.12billion, representing roughly **4.6%** of total state tax collections for the fiscal year. The largest categories were:

Distribution by Income

When examined through an equity lens, the study found that 62% of the tax expenditures flowed to households earning above 200% of the state median income, while only 18% benefitted lowincome families. The remaining 20% were allocated to businesses and nonprofit entities.

Economic Development Focus

Economic development incentives, primarily in the form of tax credits for manufacturing, data centers, and agribusiness, dominate the landscape. These credits are concentrated in four countiesPolk, Linn, Johnson, and Scottaccounting for more than half of the total economic development spend.

Energy Policy

Iowas renewable energy tax credits, especially the windenergy production credit, represent a significant policy commitment to clean energy. However, the study notes that the credits effective cost per megawatthour is higher than comparable federal incentives, raising questions about costeffectiveness.

Policy Implications

Based on the findings, several actionable recommendations emerged:

• Increase Transparency Publish an annual tax expenditure report in a machinereadable format to facilitate external analysis.
• Reevaluate Economic Development Credits Conduct costbenefit analyses for each major credit, focusing on job creation, multiplier effects, and whether the benefits exceed the fiscal cost.
• Target LowIncome Beneficiaries Restructure education and housing credits so that a larger share reaches families with incomes below 150% of the median.
• Phaseout LowReturn Energy Credits Replace highcost state credits with streamlined applications for federal incentives, preserving renewable goals while reducing state outlays.
• Adopt Sunset Provisions Require periodic review of all tax expenditures, automatically terminating those that fail to meet predefined performance metrics.

Implementing these measures could reduce Iowas tax expenditure bill by an estimated $200million over the next five years, freeing resources for core services such as public education, health, and infrastructure.

Sources

1. Iowa Department of Revenue, 2020 Tax Revenue Statistics, 2021.
2. Iowa Comprehensive Annual Financial Report, FY 2020, Office of the State Auditor.
3. International Monetary Fund, Fiscal Transparency Manual, 2020 edition.
4. U.S. Treasury, Tax Expenditure Reporting Guidelines, 2019.
5. Iowa Economic Development Authority, Incentive Program Overview, 2020.
6. Midwest Renewable Energy Association, State Wind Energy Credit Analysis, 2021.