Tax Abatement Disclosures
Project Description: The objective of this pre-agenda research project is to consider providing disclosure guidance for governments that have granted tax abatements and subsidies. Tax abatements are a reduction of or exemption from taxes, offered by a government to a specific taxpayer, typically for the purpose of spurring economic development. They are generally applied to ad valorem taxes, in particular property taxes. For instance, a government may offer a company an abatement of its property taxes—perhaps as a percentage of taxes or a flat dollar amount—in return for the company constructing and occupying an office or retail building within the government’s geographic area.
Status: Added to Research Agenda: April 2012
Tax Abatement Disclosures—Project Plan
At present, generally accepted accounting principles do not require state and local governments to disclose tax abatements as either an offset to revenue or an expense/expenditure.
Background: Tax abatement programs are widespread. Governments in 42 states are allowed by their states to offer tax abatements.1 The dollar amounts and number of governments involved can be substantial. For example, 40 percent of localities in Michigan granted at least one abatement between 1980 and 2001 under a statewide industrial development abatement program that currently abates local government taxes by an estimated $1 billion annually.2 That is the equivalent of more than 10 percent of all sub-state tax revenue in Michigan.3
The Gil Crain Memorial Research Grant for 2010 was awarded to three academics who proposed to conduct research on tax abatement disclosures. Their research was completed and submitted to the GASB in August 2011. The research focused on stand-alone property tax abatement programs (SAPTAPs) and entailed:
- A summary of the literature related to tax abatements
- An examination of state constitutions and statutes related to tax abatement programs and reporting on tax abatements
- A review of best practices in the area of reporting on the results of tax abatement programs
- A search of websites of county governments known to participate in abatement programs
- A survey of users.
The academics found that 44 states have statutes regarding programs in line with the definition of SAPTAPs. However, they identified just six states with statutes addressing reporting requirements. Fourteen states addressed accountability for abatement programs in their statutes by including provisions for benefit recovery (clawbacks) in instances of nonperformance by the recipient of the abatement. It may be possible that more states require reporting or impose consequences for nonperformance in policies and procedures outside their statutes; thus, further study is needed to fully answer questions regarding governments’ ability to monitor and evaluate their abatement programs and report their findings to interested parties.
The review of websites involved 36 counties (across 14 states) which had been identified through a Lexis-Nexis search as having tax abatement programs. The review turned up only one of the 36 county websites with any reporting on tax abatements after they were granted.
The survey of users was administered to staff and members of citizen groups, municipal bond analysts, and county board members. One portion of the survey offered statements about tax abatement programs drawn from the literature and asked respondents to rate their agreement or disagreement with the statement on a five-point scale (1 = strongly disagree, 5 = strongly agree). The statements specifically relevant to financial reporting were:
- Governments should report annually on tax abatement agreements outstanding.
- Legislators (for example, county commissioners or county board members) involved in granting tax abatements should receive timely reports comparing expected performance to actual performance.
- Citizens and other interested parties should have access to annual reports comparing expected performance to actual performance for all tax abatement agreements outstanding.
- Information about taxes recovered through recapture provisions should be reported to legislators who grant tax abatements.
- Information about taxes recovered through recapture provisions should be accessible to citizens and other interested parties on an annual basis.
Bond analysts were asked to rate how often they consider five issues related to tax abatements when analyzing municipal securities on a five-point scale (1 = never, 5 = always):
- Revenues forgone through property tax abatements
- Expected and actual outcomes related to existing property tax abatements
- Taxes recovered through recapture provisions when abatements recipients fail to meet conditions in the tax abatement agreements
- The degree to which a government uses property tax abatements to attract new businesses or to retain and expand existing businesses
- The degree to which a government uses tax incentives to encourage economic development.
The surveys of all three user groups asked them to rank the importance of seven items that could be reported by governments about tax abatements they have granted:
- Name of recipient
- Date abatement was granted
- Amount of tax abatement in the current year
- Length of tax abatement and projected abatement amounts in future years
- Commitments made by the government (e.g., infrastructure improvements)
- Contractual promises made by the recipient (if any)
- Recipient's compliance with contractual promises.
The scope of the project is limited to disclosure of information about tax abatements. It will not consider issues related to recognition or measurement of tax abatements. Further, the project examines tax abatement programs that lead to agreements between governments and single entities. For instance, the project addresses programs in which a government agrees to reduce a specific corporation’s property tax liability as an inducement to move to the government’s jurisdiction, to remain in the jurisdiction, or to hire additional employees. The project will not look into programs that reduce the tax liabilities of broad classes of taxpayers, such as senior citizen or veterans, which are not the product of individual agreements with each taxpayer.
In particular, the project will answer the following questions:
- Do users need information about tax abatements?
- How important is information about tax abatements to the decisions that users make and their assessments of accountability?
- What information about tax abatements, if any, should be disclosed in the notes?
The GASAC reviewed a draft project proposal for this project as part of its discussion of project priorities at its March 2012 meeting. The members ranked the project in the top five.
At the end of 2012, the project staff conducted a literature review to gain an understanding of the use and types of tax abatements provided by state and local governments as well as current reporting practices. The academic research funded by the Crain grant focused specifically on stand-alone property tax abatement programs. The literature review expanded that scope to identify other forms tax abatements, which taxes are being abated, how the abatement process functions, and what, if any, information governments are currently reporting.
At the February 2013 meeting, GASAC members included this research as one of the top eight highest priority projects.
Current Developments: In June 2013, the research staff began research to determine whether preparers have access to the types of tax abatement information necessary to support user needs for decision making and to assess accountability that was identified in the Gil Crain academic research. Specifically, preparers would be asked: (1) if they grant stand-alone property tax abatement programs (SAPTAPs) and other abatements, (2) if they do grant abatements, who in the government keeps track of them, (3) if they are able to obtain the seven types of information recommended in the academic study, and (4) how long after fiscal year-end it would take to accumulate the information. From June through August 2013, as part of phase 1 of this research effort, the research staff identified approximately 200 governments that have approved abatements and the appropriate individuals within those governments who are responsible for the maintaining of tax abatement information.
An update on this research was provided to GASAC at their June 2013 meeting.
Research Work Plan:
Develop the telephone interview protocol.
|September 2013:||Conduct telephone interviews with those individuals identified as being responsible for maintaining tax abatement information from those governments identified as having approved abatements to receive feedback on the availability of information regarding approved tax abatements.|
|October–November 2013:||Summarize the research results and finalize the research memorandum.|
|December 2013:||Present educational paper to the Board and discuss next steps for the project.|
1Wassmer, Robert W. “The Increasing Use of Property Tax Abatement as a Means of Promoting Sub-National Economic Activity in the United States” (December 12, 2007). Available at SSRN: http://ssrn.com/abstract=1088482.
2Sands, Gary and Laura A. Reese. Public Act 198 Industrial Facilities Tax Abatements: Current Practices and Policy Recommendations. (East Lansing, MI: Land Policy Institute, Michigan State University, October 2007).
4Dalehite, Esteban G., John Mikesell, and Kurt C. Zorn. “Variation in Property Tax Abatement Programs Among States.” Economic Development Quarterly, 2005, pp. 157–173.