Statement No. 77 on Tax Abatement Disclosures (GASB 77) set forth by the Governmental Accounting Standards Board (GASB) requires Generally Accepted Accounting Principles (GAAP)-compliant governments in the United States to report how much revenue they have lost to economic development tax abatement programs.
After reviewing about 15,000 financial statements by local governments to look for Statement 77 tax abatement disclosures, we found a lot of variation by state in reporting rates (see here). For example, New Mexico, Michigan, New York and South Carolina stand out as high-reporting states. In Iowa, a combined 138 out of 149 cities, counties, and school districts we sampled made the required disclosures. By contrast, just a handful did in Indiana.
Of course, some states rely on local tax abatements more than others, but Indiana has long been an aggressive abatement state, especially in areas like Fort Wayne/Allen County that have long used abatements to lure Michigan employers a short distance across the state line. So these large variations suggest to us that there is simply uneven compliance at work.
We do know for sure that most states legally require many cities, counties and school districts to adhere to GAAP rules, including Statement 77. However, how those rules apply and who supposedly enforces them varies greatly state by state. Indeed, we at Good Jobs First had to publish 51 state “roadmaps” to lay all that out.
A reminder: even if a government is not legally required to use GAAP, many do, for two additional reasons: 1) To get the best possible credit ratings when issuing bonds and thereby minimizing borrowing costs; and 2) to comply with federal auditing requirement if the jurisdiction gets more than $750,000 annually from Uncle Sam (for example, schools in low-income areas that get Title I funding from the U.S. Department of Education). So, when there are abatements to disclose, the absence of Statement 77 disclosures in GAAP-compliant financial report is a transparency problem.
Per our summary below, the lowest-reporting states are Alaska, Arkansas, Indiana, Montana, North Carolina, Tennessee, Utah, West Virginia, and Wyoming. Since small localities often lack the capacity to comply and/or are exempt from GAAP requirements (by virtue of their small populations or budgets), we also looked at just the five largest cities in each state as a confirmation. In 20 states, all five of the largest cities reported tax abatements in FY 2018. But at the other end of compliance spectrum, states where two or fewer of the top five cities reported abatements also show up as low-reporting states overall.
We draw on two 50-state studies by the Lincoln Institute of Land Policy (Mikesell et al., 2002; Kenyon et al., 2012) to verify that a given state has tax abatement programs that may impact local revenue. However, deep dives are needed to determine whether there are active agreements since 2017 when GASB 77 took effect. It’s also worth noting at this point that under the current specification of GASB 77, revenue losses or diversions due to tax increment financing (TIF) districts do not have to be reported if the increments go to service TIF bond debt or if they are applied to public infrastructure projects.
Alaska has a property tax exemption awarded at the discretion of local governments that affects the revenue of all overlapping jurisdictions, as well as enterprise zones. There are also property tax diversions as part of TIF districts. Alaskan localities are not legally required to comply with GAAP, but many do so anyway.
Arkansas has TIFs and enterprise zones, and the City of Little Rock reported some payment-in-lieu-of-taxes (PILOT) agreements as part of GASB 77 (deep property tax discounts). School districts in Arkansas are legally required to use GAAP accounting, but none of the 187 districts we examined make any Statement 77 disclosures.
Indiana has a couple of property tax abatement programs under which localities may grant deals. It also allows TIF districts and enterprise zones. Indiana’s local governments are not required to follow GAAP, but many do.
Montana has several property tax abatement programs for which all overlapping governments bear the cost as well as TIF. Montana’s local governments are not required by law to use GAAP accounting.
North Carolina abates property tax only for high-impact projects, and those require work-arounds because property tax abatements are facially unconstitutional. North Carolina’s local governments are legally required to follow GAAP.
Tennessee has a low reporting rate overall, but all five of its largest cities disclosed revenues lost to abatements in all three years for which GASB 77 has been in effect. This indicates that tax abatements may be mostly a big city phenomenon in the Volunteer State. Most of the programs reported are PILOTs and TIFs. All municipalities in Tennessee must follow GAAP.
Utah’s local governments can give businesses property tax rebates under State Statute Title 17C by designating an area for urban renewal. All local governments except very small ones are required to comply with GAAP.
West Virginia’s situation was covered a previous blog. We are reliably informed that there are active abatement agreements in counties that are not getting reported. Moreover, many school districts do report losing revenue to county programs, even if the actively abating counties are failing to report. Local governments in West Virginia use GAAP accounting but are not legally required to.
Wyoming has TIF districts, but these didn’t show up in any government’s GASB 77 disclosures. Wyoming’s cities aren’t mandated to follow GAAP, but many do use GAAP accounting.