New GASB Rule Requires Disclosure of Tax Abatements
Local governments commonly use tax abatements to attract and retain business and jobs in a community. In exchange for the abatement or agreement by the local government to forego tax revenues, the company commits to making certain investments in a community that contribute to economic growth and development. State and local laws govern the use of tax abatement process, and generally require a transparent process for approving the abatement agreement and compliance by both the local government and the company in filing reports regarding the abatement.
Recently, the Government Accounting Standards Board approved new guidelines (Statement 77) that for the first time requires local governments to disclose on financial statements information about tax abatement agreements. According to GASB, although many governments offer tax abatements and provide information to the public about them, "they do not always provide the information necessary to assess how tax abatements affect their financial position and results of operations, including their ability to raise resources in the future."
This Statement requires disclosure of tax abatement information about (1) a reporting government's own tax abatement agreements and (2) those that are entered into by other governments and that reduce the reporting government's tax revenues. The following information must now be disclosed by the government that entered into the agreement:
- Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients;
- The gross dollar amount of taxes abated during the period; and
- Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.
The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2015.
In its comments to GASB during the drafting process, among other concerns, NLC cautioned that the narrow focus on the taxes abated would be misleading in that it would paint an incomplete picture of the impact of the abatement on the local government's overall financial position.
For more information regarding Statement 77, click here.