State and local governments have long used incentives and tax breaks in the name of economic development and job creation, as well as other purposes. Such agreements often are an important tool to encourage organizations and individuals to relocate businesses, construct new facilities, and retain jobs, with the promise of a reduction in taxes. However, generally accepted accounting principles did not fully address these agreements and thus, the Governmental Accounting Standards Board has issued GASB Statement No. 77 Tax Abatements, which is effective for periods beginning after December 15, 2015. While the effective date means local governments will have more than a year to implement, now is the time to begin gathering the necessary information to comply with the new disclosure requirements.
The new standard provides disclosures to help users of the financials fully understand the agreements entered into by a local government, and the impact on the financial statements. The standard does not contain new accounting requirements and limits its scope to disclosures. The concept of tax abatement is fully defined, and the local government must provide disclosures for agreements they enter into directly, as well as agreements that are entered into by other local governments that impact their revenue collections.
It is important to understand which agreements are considered tax abatements, as defined in the standards. An abatement results from an agreement between a local government and an individual or other entity in which the government forgoes tax revenues in exchange for the individual or entity contributing to economic development or otherwise benefiting the local government or its citizens. For example, a local government may forgo property taxes in exchange for the relocation of a new employer to its area; and in return, the employer promises to hire a specific number of employees and remain in the facility for a specific period of time. Ultimately, an agreement’s substance, not its title or form, will determine if it is subject to disclosure.
GASB 77 contains a number of general principles that local governments should understand as they consider new disclosures. First, disclosures should distinguish between agreements that are entered into by the reporting governments, and agreements that have been entered into by other governments that will reduce the reporting government’s revenues. Thus, if a local government has not entered any such agreements, but has a future loss of revenue due to the agreement signed by another local government, disclosures will still be required. Second, disclosures can be for individual agreements or aggregated for all similar agreements. If the reporting local government entered into the agreements, disclosures should be organized by each significant tax abatement program. However, if the tax abatements were entered into by another local government, the disclosures should be organized by the government that entered into the agreements and the tax abated. Finally, disclosures should start in the period the agreement is entered into and continue until it expires.
The disclosure requirements for tax abatements entered into by local governments include:
- A brief description that includes the purposes of the tax abatement program, including the taxes abated, the legal authority for the agreement, the criteria for recipients, how the recipient’s taxes are reduced, the commitments made by the recipient and any provisions for recapture.
- The gross dollar amount of the local government’s tax revenues that were lost because of the agreement during the reporting period.
- Details of any other commitments made by the local government, other than reducing taxes.
For agreements entered into by other governments that reduce the reporting government’s revenue, the following items should be disclosed:
- A brief description, including the names of the governments entering into the agreements and the taxes abated.
- The gross dollar amount of the local government’s tax revenues that were lost because of the agreement during the reporting period.
- The names of the local governments and the dollar amounts to be received from other governments, if amounts have been received or are receivable, related to the forgone revenue.
Finally, if a local government omits these disclosures because it is legally prohibited from disclosing these arrangements, a general description of the tax abatement should be disclosed along with an explanation of the legal prohibition.
While GASB 77 is not effective for more than a year, local governments should evaluate the new disclosure standards and begin the process of gathering information related to their tax abatement programs. Since many tax abatements have existed for years, it may require considerable effort to gather all agreements, especially if a local government has not centralized the administration of them. All outstanding agreements should also be reviewed to ensure that disclosures are complete and accurate. Your CSH advisor can assist you with preparation for, and compliance with, this requirement.
