Goldman Sachs recently reported that state and local governments will spend at a slower pace than they have in the last few years. One of the reasons for this is slow growth in tax collections. Given that tax collections are slowing, it would seem that state and local governments might want to rein in their use of tax abatements, which include business tax credits and incentives. But as logical as that sounds, it’s highly unlikely.
Tax credits and incentives, often frowned upon by tax policy experts, are seen as necessary by state and local governments. In good economic times and bad, state tax credits and incentives are available to corporate taxpayers. The reason is simple -- state and local governments are focused on creating jobs and encouraging investment within their borders. They must compete with surrounding states, most of which also offer tax credits and incentives. Job creation and job retention are important goals for any state.
Many have argued that more transparency is needed with tax abatements overall, but any given transparency has been on a state-by-state basis. Last October, the Governmental Accounting Standards Board released an exposure draft of proposed standards for reporting tax abatements. GASB is responsible for developing standards of state and local governmental accounting and financial reporting. While GASB has historically focused on accounting issues, this exposure draft is focused squarely on state and local tax incentives.
In the draft, the board concluded that “the prevalence of tax abatements among state and local governments and the magnitude of the dollars involved underline the importance of information about these agreements to assessments of interperiod equity, sources and use of resources, financial position, and economic condition.” As a result, GASB issued a proposed statement that, when final, would require state and local governments to disclose information about tax abatements in the notes of their financial reports.
The proposed statement would require governments to disclose general information about their tax abatement agreements, including the tax being abated, the authority for the abatement, eligibility, how the abated taxes will be recaptured, and the types of commitments made by tax abatement recipients. Governments would also be required to disclose the number of tax abatement agreements entered into during the reporting year, the dollar amounts of taxes abated during the reporting period, and other commitments made by the government as part of a tax abatement agreement.
The exposure draft has been the subject of much debate, though most groups that provided comments are in favor of the proposal. It’s difficult to argue that we don’t need more transparency about state and local tax incentives. That’s partially because it’s difficult to argue that tax incentives provide the bang for the buck that state and local governments claim. States seem inclined to throw around incentive packages without thinking about what they are getting or giving away. The lure of economic development is too strong.
Billy Hamilton wrote an excellent article recently on the proposed standard for State Tax Notes. It’s well worth reading. He dives into potential technical issues and notes, quite correctly, that “the devil is in the details.”
For example, the proposed standard is limited to tax abatements for which there is a “promise from the recipient to subsequently perform a beneficial action in order to lower its tax obligation.” That definition of tax abatement is very narrow. It excludes many other forms of tax incentives (for example, tax increment financing would likely be excluded). It also seems to exclude tax abatements for which there is no promise to perform a beneficial action.
The narrowly tailored definition of tax abatement seems to go against an overall goal of more transparency. Still, state and local governments should be providing information about the abatements they hand out, so perhaps this is the right first step. It will be interesting to monitor the proposed statement. If it becomes final, it would apply for fiscal years beginning after December 15, 2015.