THE IMPACT OF NEW DISCLOSURES FOR TAX ABATEMENT
Tax abatements are one of the most widely used economic development tools in the nation and often the cornerstone of local economic development efforts – but will a recent accounting pronouncement reduce or eliminate their use?
In August of 2015, the Governmental Accounting Standards Board (GASB) issued Statement No. 77 providing final guidance requiring state and local governments for the first time to disclose information regarding tax abatement agreements with companies. The primary purpose of GASB 77 is to provide users of state and local financial statements with greater transparency into revenue that state and local governments are forgoing in connection with economic development efforts. The statement applies to “tax abatements,” but makes clear that it is the substance, not the title of the program that is important. GASB defines a tax abatement subject to disclosure as any reduction in tax revenues resulting from an agreement between a government and an entity, pursuant to which the government agrees to forgo revenues and the entity promises to take specific actions to contribute to economic development. As a result, it would appear traditional real and personal property tax abatements, tax phase-ins, payments in lieu of taxes (PILOT) agreements and other similar vehicles are all subject to the new disclosure requirements. In addition, the statement makes clear that a written agreement is not required to trigger the reporting requirements. Any agreement in writing or implicitly understood is sufficient.
In general, the information required to be disclosed includes the purpose of the tax abatement program, the tax being abated, the aggregate dollar amount of taxes abated and the general terms, including clawback provisions of the tax abatement agreement. Interestingly, the disclosure requirements do not just apply to the government approving a tax abatement, but to any government impacted by the tax abatement. For example, if a county approves a tax abatement that impacts the future tax revenue of a local school district, both the county and the school district are required to disclose the amount of revenue forgone as a result of the project.
Due to the extensive use of tax abatements in economic development, the applicability of GASB 77 will be felt broadly. Many governments are just now beginning to undertake a review of the disclosure requirements, which first become effective for the 2016 calendar year. Secondary to the compliance issues governments are currently reviewing is what, if any, impact will GASB 77 have on future economic development policy. Some believe that governments will become less aggressive in using tax abatements for economic development due to the increased transparency required by the statement. This may be the case in some instances, but I don’t believe it will be in most.
Use of tax abatement for economic development is already a very transparent process. Approval of a tax abatement almost always occurs at a public meeting, or multiple public meetings, requiring public posting of the meeting agenda and notice of the meeting time and location. Often, members of the public are invited to comment on the project and express any concerns. The terms of the tax abatement and the company’s commitments are often widely reported by local print and news media. So, while GASB 77 will certainly provide additional information on the “cost” of a tax abatement in the form of foregone revenue, the use of tax abatement as an economic development tool in a community should not be a surprise to those paying attention to local government activities.
What will be increasingly important going forward is for governments to actively communicate the benefits that accrue as a result of a tax abatement agreement. GASB 77 only requires disclosure of tax revenue forgone from an abatement. It does not require, or perhaps allow, disclosure of the benefits received by the government from the project, or the consideration that the tax revenue is not really forgone if the project itself would not have occurred without the tax abatement. As a result, it will be incumbent upon communities to quantify and communicate the increases in new tax revenues realized from economic development projects, the new employment positions created in the community and the overall economic activity created by the project. This information must be communicated to citizens and other stakeholders, but also to units of government impacted by a tax abatement agreement that they now have to disclose even though they did not directly approve it. For communities that successfully communicate these benefits and a clear vision of its economic development goals, GASB 77 should prove to only be an additional accounting obligation and not a driver of future economic development policy.