This is a guest post written by Ellen Harpel. The post originally appeared on the Smart Incentives blog.

State and local governments will begin disclosing financial information about tax abatements under new guidance from the Governmental Accounting Standards Board (GASB). The requirements take effect for financial statements for periods beginning after December 15, 2015.

Tax abatements are defined by GASB as agreements between one or more governments and an entity or individual that reduce the taxes the entity or individual would otherwise owe, and in which the business or individual promises to take a specific action that contributes to economic development or otherwise benefits the governments or their citizens.

Why?

Tax abatements can limit revenue-raising ability because a government has agreed not to collect taxes that it otherwise would be entitled to. GASB seeks “to make the financial impact of these transactions readily transparent”, stating:

“Financial statement users need information about certain limitations on a government’s ability to raise resources. This includes limitations on revenue-raising capacity resulting from government programs that use tax abatements to induce behavior by individuals and entities that is beneficial to the government or its citizens.”

GASB is not directly concerned with the effect of tax abatements on economic development or community-level outcomes.

What needs to be disclosed and what does not?

Information that must be disclosed includes:

  • Brief descriptive information, including
    • The tax being abated
    • Authority under which abatements are provided
    • Eligibility criteria
    • Mechanism by which taxes are abated
    • Provisions for recapture, and
    • Types of commitments made by recipients
  • Dollar amount of taxes abated during the reporting period (accrual basis)
  • Other commitments made by a government (such as providing infrastructure)
  • Tax abatements entered into by other governments that reduce the reporting entity’s tax revenues

Information that does not need to be disclosed includes:

  • Individual tax abatement agreements
  • Future amounts to be abated
  • Number of agreements entered into and effect during the reporting period (a change from the draft statement)
  • Information the government is legally prohibited from disclosing – but the general nature of the information omitted and the source of the legal prohibition must be provided

Of interest to economic development organizations

The guidance for disclosure is limited to tax abatements. It does not include all tax expenditures (only the subset that fit the definition) and it does not include many other forms of assistance to businesses, such as grants, loans or transfers of capital assets.

The disclosure rules are not limited to tax abatements for business attraction. Tax incentives designed to support economic development objectives such as historic preservation, brownfield cleanup or housing construction are also covered if they meet the other criteria.

Disclosure does not depend on the existence of a written, legally enforceable agreement. Abatements must be disclosed even if the government’s agreement to reduce the tax liability and the taxpayer’s agreement to perform a “certain beneficial action” is implicit.

The disclosures will be useful for transparency purposes but not for compliance, evaluation and accountability. GASB explained, “(I)t was not an objective of the Statement to provide information needed to evaluate the effectiveness of tax abatement programs.” Further, the Board noted that information on compliance may not be readily available for reporting purposes.

Our take

We support greater transparency in economic development incentive use and believe this standard is a good step in that direction even though it will not answer many key questions about incentive costs and benefits.

GASB cares about how tax abatements affect government finances. Our concern, by contrast, is effective and responsible use of economic development incentives to accomplish community objectives.

Challenges for economic developers will be 1) responding to financial reporting on tax abatements that lacks context on why incentives were provided and 2) telling a complete story about incentive use to demonstrate responsible use of those funds and to explain how they help achieve a community’s economic development goals.

The full GASB statement can be accessed here.

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The post originally appeared on the Smart Incentives blog and was cross-posted at Cities Speak.

About the Author: Ellen Harpel is President of Business Development Advisors (BDA) and Founder of Smart Incentives. She has over 17 years of experience in the economic development field, working with leaders at the local, state and national levels to increase business investment and job growth in their communities. Contact Ellen at eharpel@businessdevelopmentadvisors.com orellen@smartincentives.org. You can also follow her on Twitter at@SmartIncentives.