GASB Statement No. 77 Analysis

April 28, 2017
By Greg LeRoy

Good Jobs First Analysis

Governmental Accounting Standards Board (GASB) Statement No. 77 on Tax Abatement Disclosures
[a.k.a. Economic Development Tax Breaks]

Summary: Tax Abatement Disclosures

Using “tax abatements” as its umbrella term for all kinds of economic development tax breaks (i.e., property, sales and/or income taxes) GASB issued Statement No. 77 on August 14, 2015. Statement No. 77 applies to all state and local governments which adhere to GASB’s General Accepted Accounting Principles (GAAP); it is an amendment to GAAP.

Statement No. 77 does not apply to other kinds of tax expenditures made by states and localities (e.g., personal mortgage interest deductions, property tax exemptions for churches, or sales tax exemptions on business inputs). Such expenditures remain ungoverned by GASB. Indeed, Statement No. 77 makes economic development the only kind of tax expenditure covered by GAAP.

This new accounting rule takes effect for budgets starting after December 15, 2015 (which is to say calendar 2016 and later), so data first began to appear in Comprehensive Annual Financial Reports (CAFRs) reporting on 2016 published in April through June 2017. Many more governments are on fiscal years ending mid-year, so they will first report in late 2017. We estimate that more than 50,000 local and state government bodies will issue such data, revealing tens of billions of dollars in heretofore hidden spending.

The new data is required simply as a Note in the CAFR. There, Statement No. 77 requires a government to report how much revenue it lost to tax abatements in the budget year covered by the CAFR, and to do so whether it was itself the abating government or if another government’s abating caused the revenue loss. This means that governments such as school districts that often lose revenue passively due to the actions of counties or cities will have to determine and report how much revenue they lose to abatement programs.

At a minimum, the government must report one dollar-cost figure per economic development program per year. It may voluntarily choose to provide the names of specific taxpayers that received abatements, pursuant to a specified quantitative threshold (such as all abatements above a given percentage tax reduction or all abatements above a given percentage of the program’s annual cost).

A government must also provide a general description of each abatement program, including its statutory authority, its public purpose, the kind of revenue lost, and whether there is a clawback safeguard (but not whether clawbacks were invoked or how many dollars were recaptured). A government must also disclose major associated obligations it may have incurred as part of an abatement deal, such as a large infrastructure spending commitment it has made in association with an abated project.

Finally, states may choose to improve upon Statement No. 77, which has three major data-quality shortcomings. It fails to require the disclosure of: the number of total abatement agreements behind the dollar totals or the number of new abatements granted during the reporting year; a projection of the amount of revenues expected to be abated in future budget years as a result of existing deals; and the names of recipients (the disclosure of even major recipients is voluntary).

“Tax Abatement” Definition

For purposes of the new standard, GASB defines a tax abatement (at paragraph B15):

…as resulting from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. The scope of this Statement is limited to transactions that meet this definition.

GASB calls (at Paragraph B9) “the existence of an agreement” “[p]erhaps the most important feature of tax abatements.” It defines “tax abatement agreements” as consisting of two reciprocal promises: by the government to reduce the recipient’s taxes, and by the recipient to perform “a certain beneficial action.” Such agreements (B10) “may be in writing or may be implicitly understood” but they don’t have to be legally enforceable or include clawback penalties for non-performance.

GASB’s reference here to a tax reduction created an ambiguity we discuss below regarding TIF and other tax diversions . GASB rectified this ambiguity in its 2017 Implementation Guide.

Disclosure Standards: Where, What and for How Long

Statement No. 77 directs that states and localities report tax abatement spending in the Notes of their Comprehensive Annual Financial Reports (CAFRs).

The reports are to capture three kinds of spending information: direct program costs, costs generated by the actions of other governmental bodies, and costs created by obligations associated with tax abatement projects.

Tax abatement costs are to be reported in every year’s CAFR for as long as they reduce revenue. Associated costs are to be reported every year until they are paid.

Active Abatement Costs

This content in the CAFR Notes should include (at Paragraph 7a):

  1. A description of the tax abatement program, including its name and purpose;
  2. The tax being abated;
  3. The authority under which the program abates taxes;
  4. Eligibility criteria that apply to recipients;
  5. The abatement mechanism, including how the rate of abatement is determined;
  6. Any rules that provide for recapture or “clawbacks,” but not dollars actually clawed back (since such monies would already be reflected in general fund revenues) (at Paragraphs B44-45);
  7. Commitments made by recipients, i.e., the public benefit quid pro quos. However, we read this provision to enable a vague descriptor such as “job retention” or “capital investment;”
  8. The current-year cost of the program in foregone tax revenue, in one aggregate figure;
  9. Major recipients and their abatement values, if the government elects to disclose such recipients based upon a quantitative threshold that must be specified (such as all abatements above a given percentage tax reduction or all abatements above a given percentage of the program’s annual cost).

Passive Abatement Costs (and/or Offsetting Revenues)

Statement No. 77 (at Paragraph B46) requires any government losing revenue due to the tax abatement actions of another government to report such revenue loss. That is, passive losses of revenue must be reported.

This is an especially laudable aspect of GASB’s new standard, recognizing that the way some economic development tax abatements work essentially amounts to what we at Good Jobs First call the “intergovernmental free lunch.” The most common way this happens is when city councils or county boards grant property tax exemptions, or create TIF districts or enterprise zones. Usually the local government body losing the most revenue in such deals is the local school district. As GASB references, there are also cases in which active-abating governments lose revenue passively to other governments’ abatements.

Statement No. 77 directs that, whether a government is solely a passive revenue loser or a combined active tax abater and a passive revenue loser, it shall report the passive revenue losses, and do so distinctly. Those losses are to be organized by abating government and type of tax abated.

In a reporting example (at Appendix C, Example 2), GASB shows a county losing revenue due to two state abatement programs; in this example, the county also reports the state program names as well as the kind of tax revenue lost and the dollar cost.

Because intergovernmental abatement programs sometimes involve offsetting payments, Statement No. 77 requires a separate reporting of any offsetting revenue paid or due from another government as part of an abatement program. This disclosure should also include the names of the governments paying the offset and the authority under which that revenue was paid or is due.

Costs Created by Obligations Associated with Economic Development Projects

Statement No. 77 (at Paragraphs B38-40) recognizes that governments often obligate substantial additional monies to tax-abated economic development projects. The most common way this happens is infrastructure commitments (roads, sewer and water lines, utility connections) associated with large new facilities.

Therefore, it requires that such financial obligations be reported, by type, and that a government’s “most significant specific commitments” be disclosed, if there are any.

Privacy Exception

If a government is legally prohibited from disclosing a tax expenditure, it may omit the cost data, but when doing so, it must cite the legal authority for not reporting. In Good Jobs First’s opinion, this exception will rarely be valid. If a state privacy law prohibits the disclosure of an individual company’s income tax credit, and there is only one claimant of a program’s credit, that could invoke a privacy exception. However, such a situation is unusual. Many states disclose corporate income tax credits and there is no reason—proprietary business information or “business climate”—not to disclose them.