Earlier this month, the Governmental Accounting Standards Board (GASB) approved Statement No. 77, Tax Abatement Disclosures, which requires state and local governments to report on foregone revenue from tax abatement agreements. This will significantly increase scrutiny of negotiated tax incentives, particularly at the local level. Businesses need to consider how this may change their local incentive strategies.
To summarize, Statement 77 requires state and local governments to disclose basic information about their current incentive agreements, or other agreements, that reduce tax revenue:
- Dollar amounts by which the government’s tax revenues were reduced as a result of tax abatement agreements;
- The name and purpose of each tax abatement program;
- The specific taxes being abated;
- The authority under which the tax abatement agreements are entered into;
- The criteria that make the recipient eligible to receive a tax abatement;
- The mechanism by which the taxes are abated;
- The provisions for recapturing abated taxes (e., clawbacks);
- The types of commitments made by tax abatement recipients; and
- Any other commitments made by the government as part of the agreements.
For tax abatements where a government has reduced its own revenue, disclosed information should be organized by each major tax incentive program. For incentives where one government’s revenue has been reduced by a different government’s abatement (e.g. a municipal property tax incentive reducing a school district’s revenue), disclosed information is based on the government that entered into the abatement agreement and the type of tax being abated.
Statement 77 permits the reporting government to decide whether to report the required information individually or in the aggregate. If agreements are disclosed individually, the government must establish a quantitative threshold to determine which agreements to disclose—it cannot disclose selectively. A reporting government is permitted to omit specific information if it is legally prohibited from disclosures, such as via state confidentiality laws or a confidentiality provision in the agreement itself.
The disclosure provisions of Statement 77 apply only to tax abatement agreements, which are negotiated agreements where a government agrees to forego tax in exchange for some benefit. Tax incentives that do not require an agreement are not affected. Negotiated grants or other non-tax incentives are also not affected.
Statement 77 will significantly change the world of incentives, particularly at the local level where negotiated agreements reducing property or sales taxes are common. The disclosures of the amounts of forgone revenue associated with tax abatement programs will provide ammunition to groups criticizing incentives, and gone are the days that The New York Times has to spend 10 months gathering state and local incentive data, as they did in 2012. Businesses should expect increased scrutiny during the approval process as governments become more sensitive to whether they are getting a “good deal.” Companies with existing agreements should also be concerned: local governments may seek to renege on their commitments as the costs become more apparent, particularly when new politicians come into office who were not part of the original deal.
One consideration in negotiating incentives will be to insist on strong confidentiality protections in an agreement. Statement 77 envisions governments limiting reporting if legally prevented from doing so. Securing confidentiality provisions in an incentive agreement, even going so far as to specify the level of detail of financial reporting, will help a business avoid surprise public disclosures, particularly in situations where the amount of incentive benefits may reflect confidential business information.