New Accounting Standards Could Profoundly Impact Incentives Transparency

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Executive Summary

The Governmental Accounting Standards Board (“GASB”) has issued an exposure draft of a proposed statement (the “Statement”). The Statement, for the first time, would set uniform minimum disclosure requirements on the financial statements of governmental entities in order for those entities to comply with U.S. accounting standards.

These standards would require governmental entities to disclose tax abatements, which that entity has granted, as well as tax abatements issued by other governmental entities which impact their revenue. The requirements of the Statement would be effective for financial statements for fiscal years beginning after December 15, 2015. Earlier application is encouraged.

Required Disclosures

A tax abatement, for purposes of the Statement, is defined as:

[A]n agreement between one or more governmental entities and a taxpayer in which (a) one or more governmental entities promise to forgo revenues from taxes for which the taxpayer otherwise would have been obligated and (b) the taxpayer promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the government(s) or its citizens.

The Statement would require governmental entities to disclose the following:

1. General descriptive information, such as the specific 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;

2. The number of tax abatement agreements entered into during the reporting period and in effect as of the end of the period;

3. The dollar amount of taxes abated during the period; and

4. Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.

Potential Concerns for Businesses and Governmental Entities

1. The definition of abatement is fairly broad and could capture some transactions not intended to be abatements, such as situations where a nonprofit or quasi-governmental entity which would otherwise be subject to taxation gets a tax exemption in exchange for agreeing to provide services to constituents.

2. The Statement categorizes abatements as “nonexchange transactions.” A nonexchange transaction is an accounting term of art where a government gives (or receives) value without directly receiving (or giving) equal value in return. Categorizing abatements as a nonexchange transaction could be problematic in states which have prohibition on gifts by governmental entities to private entities.

3. The Statement covers abatements that “may be in writing or may be implicitly understood by the government and the taxpayer.” Trying to track down substantiation for unwritten agreements could be difficult.

4. Confidentiality protection could potentially be weakened. While economic development documents are generally considered public records under the laws of most states (typically with an exception for deals that are not final), these documents are not widely publicized. Additionally, as more information is disclosed, the potential for state tax codes to become a political weapon increases.

5. Compliance could potentially be cumbersome and expensive—especially in the initial phases of implementation.

6. Finally, the Statement does not account for the benefit of abatements, which come through additional development in the surrounding areas. By presenting only the cost, in the form of decreased tax revenues, the Statement does not paint an accurate, complete picture of abatements. Not only does the Statement fail to account for increased revenues, but it ignores the fact that without the project occurring there would be no increased revenues so there is arguably no cost to the governmental entity.

Impact on Economic Development – Transparency on Steroids?

The impact on economic development, if the above concerns are adequately addressed, is likely to be positive as transparency with public funds usually is. Once governmental entities get over the initial reporting hurdle, it should give the public and economic development professionals more peace of mind regarding how public funds are utilized.

Additionally, by standardizing the disclosure regimes at a reasonable level, the Statement could help alleviate some of the headaches economic development professionals currently face trying to navigate and compare the often byzantine complexity surrounding reporting and disclosure regimes.

Comments on the Statement are due January 30 and can be emailed to  director@gasb.org or mailed to GASB, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856. Comments should be addressed to the Director of Research and Technical Activities, Project No. 19-20E.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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