Washington, DC — Good Jobs First today lauded the Governmental Accounting Standards Board (GASB) for its latest formal guidance on how localities and states should disclose the costs of economic development tax breaks. Noting that the guidance apparently corrects at least one state auditor and some accounting firms, Good Jobs First called upon state officials and firms to publicize the new guidance and, if necessary, to revise and re-issue any erroneous instructions they may have given.
GASB’s latest Implementation Guide, released late last Friday, makes it clear that some forms of tax increment financing (TIF) and similar tax diversions or tax rebates are what GASB defines as “tax abatements” and therefore must be disclosed under GASB’s Statement No. 77. (See the Guide here, at Question 4.40.)
“Just because a government briefly receives a tax payment doesn’t mean the tax wasn’t abated. If the revenue is then diverted or rebated as part of an economic development agreement, and not for debt service, that’s an abatement,” said Greg LeRoy, executive director of Good Jobs First, the watchdog group that advocated for Statement No. 77.
GASB’s guidance supports Good Jobs First’s criticism last week of Columbus Ohio for failing to report at least three tax-break programs as tax abatements in its 2016 financial report. The guidance appears to correct official advice recently issued to local governments by Ohio State Auditor David Yost, as well as statements from some private accounting firms in various states.
Oversight of local governments’ compliance with GASB’s rules is legally the domain of state auditors, comptrollers or treasurers. Private accounting firms often are retained by local governments to write their financial reports, following GASB’s Generally Accepted Accounting Principles or GAAP, to which Statement No. 77 is an amendment.
“We urge all concerned state officials and private accounting firms to be sure their instructions on Statement No. 77 are correct on TIF,” LeRoy said. “If they have issued erroneous instructions, we hope they will amend and re-issue them.”
Good Jobs First noted that the guidance will unfortunately not apply to the first round of Statement 77 disclosures now unfolding, because it does not take effect until reporting years starting after June 15, 2017. However, GASB (at Paragraph 6) encourages earlier adoption of the guidance. And because a majority of governments are on fiscal years starting July 1, the guidance means that most of the disclosures issued in 2018 will be covered by this clarification.
In its new guidance, GASB states in part (answering a hypothetical example):
The developer is promising to take the specific action of constructing a building for purposes of economic development, and the government is forgoing tax revenues to which it is otherwise entitled by providing some or all of the additional property tax revenues above the baseline to the developer. Although many tax abatements directly reduce the amount of taxes paid and do not involve the actual collection and return of taxes, the mechanism used to conduct the transaction is not relevant to determining whether a transaction meets the definition of an abatement. Therefore, the fact that the developer pays property taxes and subsequently receives amounts from the government related to the additional property tax revenues means that the government did, in substance, forgo tax revenues. [Emphasis added]
“We applaud GASB for its clarity in this matter,” said LeRoy. “It is consistent with GASB’s recurring advice that function matters, not labels. And because TIF is such a large tax expenditure in some states, today’s guidance augurs well for better disclosure nationwide.”
Besides TIF, also at issue are programs in which states or cities rebate incremental personal income taxes to companies. These “paying taxes to the boss” programs, as Good Jobs First has dubbed them, have the same effective structures and are therefore also reportable abatements, Good Jobs First believes.
States and localities also sometimes divert or rebate incremental sales taxes. In its 2016 Implementation Guide, GASB made it clear that, except when such revenues are used for debt service, they are also abatements to be reported under Statement No. 77.
Good Jobs First noted that when TIF revenues are applied to debt service, GASB has ruled that they are not subject to the new Statement No. 77-mandated disclosure. That’s because TIF bond debt service is already required to be disclosed in a different part of Comprehensive Annual Financial Reports (CAFRs) under GAAP.
Good Jobs First’s newly revised summary of Statement No. 77 is here.
Good Jobs First is a non-profit, non-partisan resource center promoting accountability in economic development. Based in Washington DC, it was founded in 1998.