Researching Audits and Tax Expenditure Budgets

Researching audits and tax expenditure budgets

It is often possible to learn quite a bit about a state’s subsidy use even in states that do not publish disclosure data. States routinely publish a number of documents, including budgets and audits, which contain information about the spending practices of particular programs, agencies, and the legislature. They can be valuable for researchers seeking to understand the overall picture of development spending in a state. In some cases, such as performance audits, information may even be available critiquing the operation of a particular program.

States vary widely in the amount of useful information they publish in these documents, as well as in how often the documents are published. Some documents, such as state budgets, can be obtained in every state, and most states issue tax expenditure budgets.

Below we discuss several types of documents your state may publish that can be useful to subsidy researchers: audits, budgets, annual comprehensive financial reports (ACFRs), tax expenditure budgets/reports, and unified economic development budgets.

Audits: Just as the IRS may audit your tax return, state and city governments periodically audit their budgets and activities. Depending on the type of audit, the goal may be to confirm compliance with regulations on how funds are spent, or to assess the effectiveness of a program by evaluating whether the outcomes match the intent.

Single audits are required by the federal government for all state and local governments that receive more than $100,000 of federal funds. Single audits must cover all of that government’s financial operations, with a separate schedule of federal funds received. The audits are conducted annually. They are done by either the state auditor or state comptroller, and may be released for each agency or as a single document for the state.

Single audits review the accounting and management controls of each department in the state, and so may contain specific information about the department of economic development. They also include the total expenditures of federal money for the Community Development Block Grant program (from the U.S. Department of Housing and Urban Development) as well as a compliance audit to determine whether funds have been used appropriately, national objectives have been met, and required procedures have been followed.

Financial audits are another place to look for information about the budget and spending practices of economic development agencies. Governments must conduct financial audits of all agencies every year or every other year. Audit reports may be very thin–a simple review of financial accounting practices to affirm compliance with accounting principles–or they may review financial reporting, oversight over expenditures, and other useful information. In either case, you will find information about an agency’s budget and at least some detailed information about how the money is spent.

States require that compliance or technical audits be conducted every year or two to evaluate compliance with the requirements of subsidy programs. These kinds of audits may provide useful financial data regarding the spending on different subsidy programs. They may also uncover cases of subsidy misuse.

Performance audits are potentially the most useful kind of audit for economic development research. Rather than evaluating technical compliance with subsidy regulations, performance audits make more substantive judgments about a subsidy’s effectiveness. Their goal is to determine whether the outcomes of subsidy deals meet the program’s intentions. The audits usually make recommendations for improvements based on their findings, which may or may not be accepted. A performance audit may have found problems with a subsidy similar to those cited by activists.

Unfortunately, performance audits are less common and less uniform than other types of audits. Few states complete performance audits regularly, and those that are done often fail to really measure effectiveness. That’s because the agencies have bad data, or because the agencies fail to establish clear goals and criteria against which to evaluate outcomes.

Despite our overall findings about the quality of many audits, auditors are generally pro-accountability. And their status as impartial watchdogs means they can lend highly credible support during reform debates.


All state legislatures pass a budget every year or every other year. The budget details how the government’s money will be spent in the upcoming fiscal year. The level of detail given for each program and agency varies by state. The budget includes appropriations (money set aside for a specific purpose), but does not include tax expenditures (money lost due to tax exemptions, deductions, credits, etc.); those may be available in tax expenditure reports (see below).

You can get a copy of your state’s budget through the governor’s office or department of finance. City and county budgets can be obtained from the city council or office of the county commissioner. Agencies also have their own budgets, which contain greater detail about how they spend money allocated by the legislature.

You can obtain agency budgets directly from the agency or from state legislative office.

Annual Comprehensive Financial Report (ACFR)

An ACFR (“ACK-fer”) is the state’s consolidated financial statement, which includes a schedule of federal financial assistance, sorted by federal agency and state agency. This document is a backward-looking document of how money was actually spent, as opposed to a budget, which reflects proposed spending.

ACFRs summarize information about obligations, expenditures, and revenues. They may contain useful information about specific agencies or illustrate historical trends of spending on various areas of government. ACFRs also include detailed lists of debt obligations, but they don’t often include private activity bonds (including industrial revenue bonds) because those do not represent government debt. Starting in 2017, state and local governments (including school districts and special districts) that prepare their single audits or ACFRs in accordance with GAAP (Generally Accepted Accounting Principles) are required to report tax abatements in the notes section immediately following the main financial statements (revenues, expenditures, fund balances, etc.). These accounting standards are set by a professional organization called GASB which stands for Governmental Accounting Standards Board, and this particular requirement is known as Statement No. 77: Tax Abatement Disclosures. It is the first and only requirement set by GASB for reporting tax expenditures as part of financial accounting.

Per Statement No. 77, the reporting government must disclose all economic development tax abatement agreements it is subjected to and the amount of foregone revenue for each agreement—aggregated by program where appropriate. When it is the reporting government that entered into the agreements, for each program/agreement, they must provide its name, type of taxes abated, the statutory authority for the abatements, eligibility criteria, the mechanism by which revenues are reduced, the amount of tax revenues foregone for the reporting government only, and the provisions for recapturing the abated taxes (“clawbacks”). If a government is subjected to other governments’ tax abatement agreements, it must disclose the names of the governments that entered into these agreements, the amount of tax revenues foregone for the reporting government only, and amounts receivable from other governments in association with the foregone revenues.

Tax abatement disclosures are useful for quick access to the costs of tax incentive programs. Governments are not required to disclose company-specific information, although some do. Agreements that exceed 10% of the total taxes abated are sometimes required to be disclosed individually. Any legal restrictions that prohibit disclosure on the ground of taxpayer confidentiality must be stated. Statement No. 77 does not cover tax breaks for purposes other than economic development, as-of-right programs that do not entail agreements, or taxes diverted to pay for debt service on infrastructural improvement. Currently, the usefulness of Statement No. 77 is limited for three big reasons: 1) There is too much room for interpretation in the way the rule is phrased or specified; 2) Costly programs aren’t explicitly included, i.e. Tax Increment Financing 2) Oversight is lacking in many states, and governments can often omit required information without repercussions.

ACFRs are published annually. They are likely to be performed by a state’s comptroller, but may also be performed by the state auditor.

Tax expenditure budgets (a.k.a. tax expenditure reports)

All but four states (Missouri, North Dakota, Utah, and Virginia) regularly publish documents that tell the amount of revenue not collected due to tax breaks. These documents are referred to as tax expenditure reports, tax expenditure budgets, or tax preference reports. Tax expenditure budgets vary greatly in their completeness, and there is no standardized reporting format. You can expect to find some of the following information:

  • name of the tax break;
  • number of the statute that authorizes the tax expenditure;
  • estimated dollar amount of forgone revenue for the current year and possibly past years (also called a “revenue impact”);
  • description of the tax break;
  • purpose of the tax break, usually drawn from the statute;
  • breakdown of who benefits from the tax break, either a general description or a detailed itemization of the types of people or corporations that use the tax break (i.e. their income levels or size);
  • breakdown of the total tax expenditure by type of taxes, purposes, and industries; and
  • evaluation of whether the tax expenditure is achieving its purpose.

To find out if your state publishes summary reports for subsidy programs, check with the agency that administers the program or with the department of revenue, which is often charged with overseeing compliance, particularly for tax credits. You might also check the program’s enabling legislation or administrative rules to see if they mandate any form of annual report.

Unified economic development budgets

A few states have begun to debate ways to make it easier for taxpayers and legislators to see the big picture. A unified economic development budget (UDB), also called an integrated economic development budget, compiles information on all forms of development spending — both direct and tax expenditures – in one place.

In several states, watchdog groups have created their own unified development budgets. While not official state documents, such reports can be very useful for researchers and accountability campaigners.

ACFRs are published annually. They are likely to be performed by a state’s comptroller, but may also be performed by the state auditor.