GASB rules shine new light on costs for economic development incentives

Tax abatements. Are they “business incentives” or “cor­porate welfare”? It depends on whom you ask.

Either way, if a new IKEA store comes to Shelby County, Tenn., tax breaks will have played a major role in the Swedish home furnishings company’s decision. The project — and others like it nationwide — would trip a new rule from the Governmental Accounting Standards Board (GASB), Statement No. 77.

It requires, for the first time, that state and local governments disclose information about tax abatement agreements, such as the purpose of the tax abatement program, which tax is being abated and the dollar amount of taxes abated. State and local governments across the United States spend an estimated $70 billion a year for economic development — “most of it through tax expenditures,” according to Good Jobs First, a Washington, D.C.-based national policy research center. It tracks economic development subsidies and other types of government financial assistance to business.

It was earlier this year that the Economic Development Growth Engine (EDGE) of Memphis and Shelby County approved $9.5 mil­lion in tax abatements to attract what would be IKEA’s first store in Tennessee, according to Reid Dulberger, EDGE’s president and CEO. Since 2011, the economic development organization has offered more than $277 million in tax incentives to attract new or expanded businesses. Its primary direct business incentives are partial, temporary tax reductions known as a payment in lieu of taxes, or PILOT.

Dulberger said EDGE officials worry that the new rule “misrep­resents” the nature of economic development incentives by focus­ing too much on the cost of tax abatements while disregarding their benefits.

EDGE has approved 36 PI­LOTs over the past four years. Altogether, they’ve made, not lost, money — exceeding benefit-to-cost projections by returning $2.58 of new local taxes for every dollar of tax abated, Dulberger said.

“GASB is perpetuating a myth that tax incentives ‘cost’ cities and counties revenues that they otherwise would have collected — and thereby threatens to distort reporting of local governments’ financial condition,” he said. “I think in the long term our concern is that the new GASB rules are going to make it actually harder, not easier to evaluate economic development incentives and their impact.”

In an interview, Stephen Gauthier, director of the Govern­ment Finance Officers Associa­tion’s (GFOA) technical services center, said that because financial statements and notes are audited, there’s a limit to how much can be said about upside effects.

Before the new rule was final­ized, several local government organizations, including NACo, jointly sent written comments to the GASB. They noted that governments might be prevented by non-disclosure agreements from revealing the amount of tax abatements. “In addition, some income tax abatements would require disclosure — contrary to state law — of what is often considered to be confidential information.”

For governments with few tax abatements, disclosure could be tantamount to violating confi­dentially agreements, because the small number of abatement recipients would make it easier to identify them, they wrote. GFOA, International City/ County Management Associa­tion, National League of Cities and U.S. Conference of Mayors also signed on to the comments.

Often, critics of what some see as sweetheart deals have complained about a lack of transparency. The new GASB rule is designed to address that.

“Our reaction is very posi­tive,” said Greg LeRoy, executive director of Good Jobs First. “This is very tectonic good news for taxpayers. We’ve been critical of GASB for many years for being missing in action on these huge tax expenditures.” He added that the new reporting requirements will allow taxpayers and policy­makers to see the real costs of economic development.

“Given the squeeze on munici­pal and local finance these days, we think everybody deserves to know how much revenue is being lost this way,” LeRoy said, “so people can make prudent, bal­anced decisions about spending priorities.”

GASB’s disclosure rule also requires governments to spell out provisions for recapturing abated taxes, the types of commitments made by the recipients of tax abatements and other commit­ments made by a government in abatement agreements, such as to build infrastructure.

“It is a true cost that needs to show up somewhere,” said Stephen Burdett, Brevard County, Fla.’s finance director. In his com­ments to GASB, he noted that while tax abatement agreements result in reduced tax revenues for a given reporting period, they also represent commitments to future-year revenue reduction.

The final rule applies to budgets that begin after Dec. 15. The new data will start appearing in 2017.

LeRoy said the increased reporting requirements aren’t designed to disadvantage any company or require governments to disclose propriety business information.

“Nobody’s saying disclose a corporate income tax return; nobody’s saying disclose a profit; nobody’s saying disclose a tax li­ability,” he said. “All we’re saying is disclose the tax credit, that is, the amount of money claimed as an incentive, because it’s no different than if the state wrote the company a check for the same amount. And if the state did write a check, obviously that would be automatically disclosed.”