Proposed Accounting Rule Could Shed More Light on the Costs of State and Local Tax Abatement Programs

State and local governments often use tax incentive programs to promote business, stimulate job growth, and develop blighted areas, but according to the nonprofit General Accounting Standards Board, there is currently no way to discern a program’s effect on the financial health of state and local governments from their financial statements. Consequently, GASB recently issued for public comment proposed rules that require state and local governments to disclose information about property and other tax abatement agreements.

GASB believes that adhering to the proposed rules would help interested parties understand how tax incentive programs affect the government’s future ability to raise resources and meet financial obligations. The public comment period ends January 30, 2015. Under the proposed rules, state and local governments would include the following information in the notes to their financial statements:

• descriptive information, including
• each tax abatement program’s purpose,
• the abated taxes,
• recipient or project eligibility criteria
• the mechanisms for abating the tax,
• the recipients’ commitments,
• and the conditions under which recipients must repay abated taxes (“clawbacks”);
• the number of abatement agreements the government has entered into; and
• the amount tax revenues that was forgone or were reduced under the abatement agreements.

GASB’s chair discusses the proposed rule in this short video.

GASB is an independent, nonprofit organization that develops standards of accounting and financial reporting for state and local governments. But its standards do not have the force of law, and GASB has no enforcement authority. Some states though have enacting laws incorporating GASB standards and enforce them through the audit process, when auditors render opinions on the fairness of financial statements.