State and Local GASB 77 Tax Abatement Disclosures for FY18 & FY19: Known Spending Rises, Compliance Still Uneven

February 11, 2020

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Many governments on July-to-June fiscal years have now issued their FY19 Financial Reports, and we at Good Jobs First are scanning them for tax abatement disclosures* and adding them to our FY18 analysis. We discuss here our first take on reports from states and major local jurisdictions. For most governments, this is their third year of reporting the revenue lost to tax break programs, so we can begin to look for trends:

  • For FY19, states are on course to exceed the $7.9 billion they reported abating in FY18 (and remember: only some tax break programs meet GASB’s “abatement” definition).
  • New York tops subsidy spending at both state and local level.
  • Despite the robust economy, cities report a  rise from 2017 to 2019 in tax spending for economic development abatements.
  • Counties lose tax revenue passively due to state and city-controlled incentive awards.
  • Actual foregone revenue is surely much higher due to flaws in the disclosure rule, which cause many tax-based subsidies to be excluded from the GASB Statement 77 reporting requirements.

* These disclosures are mandated by Statement No. 77, an amendment to the Generally Accepted Accounting Principles for public bodies, as set forth by the Governmental Accounting Standards Board (hereafter referred to as GASB 77 ). Under this rule, governments are required to disclose the amount of tax revenue that was foregone as a result of economic development tax abatement programs. The disclosure is to be presented as a note in the government’s Comprehensive Annual Financial Report (CAFR) – a backward-looking spending document.  FY 2018 was the second non-calendar year that GASB 77 was in effect and the latest year for which financial information is widely available, since many governments have yet to publish their FY 2019 CAFR.

States: Spending Up (When It is Disclosed)

In an earlier blog post, we showed that state governments reported abating $7.9 billion in 2018. Since then, 32 states have released their FY19 CAFRs, revealing total costs so far of $5.2 billion (more details available here). If the remaining 18 states and DC were to have abated roughly the same amount in 2019 as they did in 2018, we would be looking at nearly $9 billion of total abated taxes by states in 2019. Chances are it’ll be more, since the 32 states with three years of data altogether reported ever larger abatements from 2017 to 2019.

New York State, as usual, dominated in subsidy spending at $1.5 billion. Louisiana, Missouri, Nebraska, Pennsylvania, and Washington also disclosed large abatement spending. More than half of the states reported bigger losses in 2019 than 2017. Three states (Idaho, Louisiana, and Oregon) has substantial and continuous decreases over the three years. Maryland and Kansas were the only two states that reported losing revenue passively to local tax break programs.

The actual cost of programs is higher than reported, as in several cases – notably Georgia and Minnesota – where taxpayer confidentiality was cited as prohibiting the disclosure of the abated amount (even though the reporting requirement is for only one dollar figure for multiple firms’ abatements). Moreover, Hawaii, North Dakota, South Carolina, and West Virginia, as in the past years, failed to include a note on tax abatement disclosures as required by GASB 77. We are looking into these discrepancies.

Although just a small handful, the non-reporting states are a cause for concern. The non-disclosure of state-level incentive programs, which could be massive, reveal the holes in the current definitional formulation of the GASB 77 rule. See the end of this blog for more on compliance.

Cities: Traditional Incentives Dominate Spending

Good Jobs First examined CAFRs from the 100 largest U.S. cities for FY18 tax abatement disclosures (see here for more details) and also issued a 2019 update for those that had published their FY19 CAFRs by the time of writing.

In 2018, 70 of those 100 cities reported forgoing a total of $5.8 billion in tax revenue. Of that, a dominant $5.5 billion was attributed to incentives aimed at business recruitment and real estate development. Those for purposes such as affordable housing, renewable energy production, conservation of open space or farmland, and historic preservation accounted for only about $300 million. Thirteen cities also lost $650 million passively to state-granted abatements. The 30 non-reporting cities are concentrated in Arizona, California, and North Carolina.

At $3.5 billion, New York City tops the charts in the amount of subsidy given – more than all other large cities reporting, combined. Of the ten costliest programs, six are in New York City. The largest program reported as a single entry was the city’s Commercial Conversion Programs, which resulted in nearly $1.5 billion in reduced revenue. Kentucky’s Business Investment program takes the second place at $740 million.

Tax increment financing (TIF) is one of the gray areas in GASB 77 reporting mentioned above; many TIFs fall through the definitional crack even though, in our opinion, they function like tax abatements. Those that did get reported diverted $833 million from the coffers of 16 cities. The TIF program in Lexington-Fayette accounted for about half this amount. Other sizable TIF spending was reported by Chicago, Kansas City, Aurora, and Boston.

For the few big cities that have made FY19 data available, we can begin to identify some emerging trends. Notably, 22 out of the 28 reporting cities witnessed increases in yearly lost revenue between 2017 and 2019; 16 had continuous increases. In some cases, the increase is due to the addition of a new (or inclusion of a previously unreported) program. For example, St. Louis, Missouri went from $6.3 million in 2018 to $25.6 million in 2019 because of a new TIF program. In most cases, however, it’s the same bundle of programs costing more each year.

Because of technical shortcomings in the wording of GASB 77, we cannot tell whether the increased spending is due to a greater number of recipients or larger individual awards. (The rule, despite our comments and those of many others, does not require the disclosure of how many deals comprise each year’s spending.)

Counties: Passive Losses Can Add Up

Good Jobs First also looked at the FY18 disclosures for the 100 largest U.S. counties. Only about half provided GASB 77 notes. The total amount reported is around $600 million (see more details here).

Compared to cities, counties are more likely to suffer passive revenue losses due to the actions of other governments (and such passive losses are to be reported). Revenue was reduced for nearly half of the reporting counties as a result of some 75 state or municipal abatement programs. The biggest such loss was reported by Nassau County, New York: $22 million caused by agreements entered into by the Glen Cove Industrial Development Agency (even after accounting for offsetting payments in lieu of taxes, or PILOTs).

Abatements granted by the individual cities or towns can quickly add up at the county level. Hamilton County, Ohio, for example, lost revenue to more than 20 municipal governments. Hennepin County, Minnesota, lost $11 million to TIF districts created by at least eight cities. Jackson County, Missouri, lost $12 million to 9 cities including enterprise zones and TIF districts.

Further Evidence that Subsidies are Windfalls

We also note that these newly-revealed increases in subsidy spending, by both states and localities, contradicts the theory of incentives’ role in the economy. That is, if incentives are meant to address market failures, they should be counter-cyclical. Instead, despite a booming economy and very low unemployment, governments are spending more. This lack of counter-cyclicality has been evident in other data sources for many years; Good Jobs First has long pointed to it as further proof that most subsidies are windfalls rather than “leveraging” private investments that would not have happened otherwise.

A Final Word on Compliance

Our GASB 77 analyses uncover more than just numbers. They continue to reveal problems with disclosure practices – at least some of which are due to inadequacies and ambiguities in what would otherwise have been a transformative accounting rule. Two issues stand out:

First, some major tax break programs are left out of the current formulation because they do not meet the conceptual definition of “tax abatement.” Operationally, however, they work exactly like one. These include TIFs for which the revenue from tax increments are not directly given to the recipients but are used to finance infrastructure improvements that exclusively benefit the TIF district occupants.  They also include de facto property tax exemptions for “government-owned” buildings that are actually private workplaces, i.e., abatements devised as a constitutional workaround to evade state gift clauses.  

Second, there is no way to discern whether localities omit a GASB 77 note in their CAFRs because they are ignoring the rule or because they don’t have anything to report. GASB does not require “negative disclosure.” This is especially problematic when assessing compliance for the tens of thousands of local governments, as Good Jobs First has attempted to do here. Even when governments do report that they had no active abatement agreements or that no taxes were abated, GASB’s squishy definitions make such reports hard to trust.

Related Links:

Good Jobs First Tax Abatement Disclosures (GASB 77) Resource Center

GASB Statement No. 77 Full Text (external site)