December 17, 2015
For decades, state and local governments have issued Comprehensive Annual Financial Reports (CAFRs) that failed to include an important part of their fiscal condition: the extent to which they have forgone revenue by giving economic development tax breaks to businesses. An estimated $70 billion in subsidies are awarded each year in the name of job creation and economic growth.
That disclosure shortcoming is coming to an end, now that the Governmental Accounting Standards Board (GASB) has issued new rules requiring states and localities to report how much revenue they are losing: a new era of fiscal transparency has begun. (A link to the text of the rules and other material can be found on the GJF GASB page.)
The final GASB rules come nine months after the accounting standards body issued a draft proposal and invited comments. Good Jobs First, which had long called for such reforms, took the lead in responding to the draft. We actively publicized the proposal and submitted detailed comments. Some 300 organizations and individuals also commented, mostly pro-disclosure, in what was one of GASB’s largest comment files ever.
Highlights of the GASB Rule
GASB uses the term “abatement” to refer to a variety of subsidies such as corporate income tax credits, property tax reductions and sales tax exemptions. Beginning with fiscal years starting after December 15, 2015 governments will be required to include in their CAFRs an estimate of how much tax revenue was lost. For issuing governments, the rule requires a dollar figure for each program. For government bodies losing revenue passively (e.g., school boards), the rule calls for one lump sum of revenue lost from the actions of each other entity.
Reporting entities will be required to describe the authority under which the subsidy was awarded and will have to include information on commitments other than abatements that were part of the subsidy agreement. This could include, for instance, an agreement to make infrastructure improvements on the property of the subsidized company. Details also have to be provided on circumstances under which abated taxes may be recaptured; i.e., clawback provisions that apply when companies fail to meet job creation or other obligations (but not whether clawbacks occurred in specific cases or how much revenue was recovered).
What Is Missing from the Rule?
While the GASB standard is an important step forward, it contains some shortcomings. Good Jobs First and many other groups pointed out these issues in our comments on the draft proposal, but GASB chose not to adopt them.
Perhaps the most significant flaw is the failure to require governments to include projections of how much tax revenue will be lost in future years from signed subsidy agreements. This is essential information for assessing the fiscal trajectory of a government, given that some subsidy agreements last for decades. We find its absence particularly troubling, given that GASB requires such future-year projections for pension costs.
In a late surprise, GASB also chose to eliminate from the final rule a draft provision that would have required the disclosure of the number of subsidy agreements the government has in effect and how many new agreements it signed in the reporting year. This means taxpayers won’t be able to determine the average cost of deals or whether deals are becoming more or less numerous.
GASB did not budge from the position in its draft proposal making it optional for governments to disclose the identity of the subsidy recipients, claiming that it would be burdensome for reporting entities that had made numerous awards. We argued in our comments and still believe this would not be a significant burden and that at the very least governments should be required to disclose the names of the largest recipients. The final text states that if a government chooses to disclose information about individual recipients, it should do so only for those that “meet or surpass a quantitative threshold selected by the government.”
It is also unclear whether the reporting rules will apply to all as-of-right and performance-based programs, given that the definition of “abatement” is limited to programs in which the recipient promises to take an action (such as job creation) after the agreement has been entered into rather than an action already performed.
On the other hand, we are pleased that GASB has made it clear that the reporting requirement will apply to programs such as sales tax diversions, tax increment financing and PILOTs when they meet the basic criteria.
What Happens Next?
In the coming months Good Jobs First and our allies will be publicizing the new rule and encouraging governments to go beyond the minimum GASB requirements. We will also be exploring ways to make the new data as accessible and useful as possible. Good Jobs First will also be preparing a new branch of our Subsidy Tracker database that compiles the new cost disclosures as they appear in CAFRs starting in 2017.