Project Pages

Tax Abatement Disclosures

Project Description: The objective of this project is to determine what disclosure guidance for governments that have granted tax abatements, if any, is essential to financial statement users. For purposes of this project, tax abatements are a reduction of or exemption from taxes, offered under an agreement between a government and a specific taxpayer, typically for the purpose of spurring economic development. The project will not consider guidance for programs that reduce the tax liabilities of broad classes of taxpayers or are not the product of individual agreements with each taxpayer. The project also will not consider issues related to recognition.

Status:
Added to Current Agenda: December 2013
Exposure Draft approved in October 2014

Tax Abatement Disclosures—Project Plan

Background: Tax abatement programs are highly prevalent in the U.S. The results of external research conducted under a Gil Crain Memorial Research Grant from the GASB suggest that tax abatements are an issue of concern among citizen groups, county board members, and municipal bond analysts, and that each group desires to receive information about the level of abatement activity and the results of the abatement programs. However, the researchers found relatively few states (six) with statutes requiring any level of external reporting after tax abatements are granted. These findings indicate that there is an important information need that is largely unmet.

These academics found that 44 states have statutes regarding programs in line with the definition of a stand-alone property tax abatement program. (This is consistent with a 2007 study that concluded governments in 42 states are allowed by their states to offer tax abatements.1) 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.

Constituents have periodically raised the possibility of a pronouncement requiring governments to disclose additional information about tax abatements. At present, generally accepted accounting principles do not require state and local governments to disclose information related to tax abatements.

In September 2013 the project staff conducted interviews and received feedback from 78 individuals responsible for keeping records on tax abatements within governments that authorize stand-alone tax abatements. This research indicated that governments generally do keep records on the type of information identified by users as being necessary for their decision-making and assessment of a government’s accountability.

User needs. The survey of users was conducted by the academics 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. The statements specifically relevant to financial reporting were:

  1. Governments should report annually on tax abatement agreements outstanding.
  2. Legislators (for example, county commissioners or county board members) involved in granting tax abatements should receive timely reports comparing expected performance to actual performance.
  3. Citizens and other interested parties should have access to annual reports comparing expected performance to actual performance for all tax abatement agreements outstanding.
  4. Information about taxes recovered through recapture provisions should be reported to legislators who grant tax abatements.
  5. Information about taxes recovered through recapture provisions should be accessible to citizens and other interested parties on an annual basis.
Overall, the level of agreement in each of the three groups of users was very high on all five of these statements. Citizen group members and staff particularly agreed with statements a, b, and c. The highest level of agreement among county board members was with statement b. Municipal bond analysts most strongly agreed with a, c, and d.

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. Revenues forgone through property tax abatements
  2. Expected and actual outcomes related to existing property tax abatements
  3. Taxes recovered through recapture provisions when abatements recipients fail to meet conditions in the tax abatement agreements
  4. The degree to which a government uses property tax abatements to attract new businesses or to retain and expand existing businesses
  5. The degree to which a government uses tax incentives to encourage economic development.
Four of the five factors–1, 2, 4, and 5– linked to tax abatements were identified by bond analyst respondents as being considered somewhat regularly.

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:
  1. Name of recipient
  2. Date abatement was granted
  3. Amount of tax abatement in the current year
  4. Length of tax abatement and projected abatement amounts in future years
  5. Commitments made by the government (e.g., infrastructure improvements)
  6. Contractual promises made by the recipient (if any)
  7. Recipient's compliance with contractual promises.
All three groups rated the importance of items iii–vii highly. Citizen respondents rated i and ii highly as well, and county board member respondents rated those items nearly as high. Citizen respondents rated items iv–vii particularly highly. Those items also were the most highly rated among county board member respondents. The highest-ranked items among bond analyst respondents were iii and iv.

Accounting and Financial Reporting Issues: The project will consider the following issues:
  1. What information about tax abatements, if any, should be disclosed in the notes?
  2. What tax abatement information do governments currently have available?
  3. What costs, if any, might a government incur to collect information about tax abatements?
Project History:
  • Pre-agenda research approved: April 2012
  • Added to current technical agenda: December 2013
  • Task force established? No
  • Deliberations began: April 2014
  • Exposure Draft approved: October 2014
  • Comment period: October 2014- January 2015
  • Redeliberations began: March 2015
Current Developments: The comment period for the Exposure Draft, Tax Abatement Disclosures, ended January 30, 2015. The Board began redeliberations at its March meeting, focusing on scope and applicability. Redeliberations continued in April with general disclosure principles and note disclosures of general descriptive information.

Work Plan:

Board Meetings Topics to be Considered
July 2015: Review preballot draft of a final Statement.
August 2015: (T/C): Review ballot draft and issue final Statement.


Tax Abatement Disclosures—Recent Minutes


Minutes of Meetings, June 2-4, 2015

The Board continued to review issues raised by stakeholders in their comments on the Exposure Draft, Tax Abatement Disclosures.

The Board began redeliberations by considering comments made by respondents to the Exposure Draft who raised the concern that some governments might be legally or contractually prohibited from disclosing information required by the proposed standards. The Board tentatively decided to amend the general disclosure principles to allow governments that are legally prohibited from disclosing certain information about a tax abatement agreement to omit such information. Such governments would be required to identify the general nature of the tax abatement information omitted and cite the source of the legal prohibition.

The Board next discussed the disclosures proposed in paragraphs 6b, 6c, and 6d of the Exposure Draft. The Board tentatively reaffirmed that the dollar amount by which the reporting government’s tax revenues were reduced during the reporting period should continue to be disclosed for both tax abatement agreements entered into by the reporting government and tax abatement agreements entered into by other governments that affect the reporting government’s revenues.

The Board considered the disclosure proposed in the Exposure Draft of the number of tax abatement agreements entered into during the reporting period and the number of tax abatements in effect at the end of the reporting period. The Board tentatively decided not to require these disclosures in the final standards.

The Board tentatively decided that the accrual basis of accounting should be used to determine the amount of foregone tax revenues disclosed. The Board considered respondent recommendations that the standards be amended to address the issue of differing year ends between a reporting government and an abating government but tentatively decided not to amend the proposed standards to address this issue.

The Board also tentatively decided that governments that receive an offsetting payment from another government should disclose the gross amount of foregone revenues in the current reporting period, the amount of any offsetting payments received from another government that is associated with the tax abatement, and the identity of the government providing the offsetting amount, including the authority under which the offsetting amount was established. The Board tentatively decided that this information should be disclosed for both tax abatement agreements entered into by the reporting government and tax abatement agreements entered into by other governments that affect the reporting government’s revenues.

The Board also tentatively decided that, if a government has made commitments other than to reduce taxes as part of its own tax abatement agreements, it should continue to disclose the following until the commitments have been fulfilled: (1) a general description of the types of commitments other than to reduce taxes and (2) the most significant individual commitments other than to reduce taxes.

The Board also considered comments made by respondents regarding the financial reporting implications of tax abatement agreements entered into by component units of the reporting government. The Board tentatively decided that for tax abatement agreements entered into by its discretely presented component units, a reporting government should disclose the same information as required for its own tax abatements if it concludes that that information is essential for fair presentation (based on the application of Statement No. 14, The Financial Reporting Entity, as amended). Otherwise, the reporting government should disclose the discretely presented component units’ information as it would for a tax abatement agreement entered into by other governments that affect the primary government’s revenues.

The Board tentatively decided that governments should disclose the quantitative threshold they use to determine which tax abatement agreements they choose to disclose individually.

The Board considered the following additional disclosures recommended by respondents to the Exposure Draft but tentatively decided not to require them:
  • The amount of foregone tax revenues abated in the prior two reporting periods
  • The remaining amount of future tax revenues to be abated
  • The number of tax abatements in effect at the end of the prior two reporting periods
  • The time remaining on tax abatement agreements.
The Board also tentatively decided to replace the proposed general disclosure principle that information about agreements entered into by other governments that affect the reporting government’s revenues may be aggregated as if for a single program. Instead, the Board tentatively decided that the reporting government should organize disclosures about tax abatement agreements entered into by other governments that affect the reporting government’s revenues by (1) the government entering the agreement and (2) the specific tax being abated.

The board tentatively decided that the standards would be effective for periods beginning after December 15, 2015, with earlier implementation encouraged. The final Statement also will contain standard transition guidance.

Finally, the Board agreed that the expected benefits of the tax abatement disclosures standards will outweigh the perceived costs of implementation. The Board also agreed that all information that would be required by the final Statement qualifies as Group 1 information, as defined in the Financial Accounting Foundation’s GASB Scope of Authority: Consultation Process Policy.

Minutes of Meetings, April 21-23, 2015

The Board continued to review issues raised by stakeholders in their comments on the Exposure Draft, Tax Abatement Disclosures. The Board’s redeliberations began with consideration of comments made by respondents to the Exposure Draft regarding the general disclosure principles in the proposed standards. The Board then discussed issues raised by respondents about the proposed guidance and its relevance to the Conceptual Framework in terms of the objectives of financial reporting and the appropriate method of communication for the disclosures. Finally, the Board considered issues raised by respondents regarding the general descriptive information proposed in the Exposure Draft.

The Board tentatively decided that information about the tax abatements of other governments that reduce the revenues of the reporting government should be disclosed by the reporting government. The Board also tentatively decided that this information should be reported separately from information about the reporting government’s own tax abatements.

Furthermore, the Board tentatively decided the following about the level of detail of disclosures:
  • Governments should organize information about their own tax abatements by major tax abatement program.
  • Governments may aggregate information about the tax abatements of other governments as if for a single program.
  • A government may disclose information about individual tax abatement agreements. If so, it should disclose all individual abatements above a quantitative threshold selected by the government. The threshold should be based on a percentage of the total dollar amount of all abated taxes during the reporting period.
The Board tentatively decided to retain the general principle that disclosure of tax abatement information would begin in the period in which the tax abatement is entered into and continue until the tax abatement expires, unless otherwise specified.

The Board considered respondent comments regarding whether the proposed disclosures met the objectives of financial reporting as described in Concepts Statement No. 1, Objectives of Financial Reporting, and affirmed that they were essential to understanding the government’s inflows of resources as well as the financial position and economic condition of the government. The Board also considered respondent comments regarding the appropriate method of communication for information about tax abatements. The Board tentatively decided that information about tax abatements should be reported in the notes to the financial statements.

The Board next considered respondent comments regarding the disclosure of general descriptive information proposed in the Exposure Draft. The Board tentatively decided that the following brief general descriptive information should be included in the notes to the financial statements for a government’s own tax abatement agreements:
  • The name and purpose of the tax abatement program, and the specific taxes being abated
  • The authority under which the tax abatement agreement is entered into
  • The criteria that make a recipient eligible to receive a tax abatement
  • The mechanism by which taxes are abated
  • Provisions for recapturing abated taxes, if any, including the conditions under which abated taxes become eligible for recapture
  • The types of commitments made by the recipients of tax abatements.
The Board tentatively agreed that, for tax abatement agreements entered into by other governments that affect the reporting government’s tax revenues, the reporting government should disclose the name of the government that entered into the tax abatement agreement and the specific taxes being abated. The Board tentatively decided not to retain the Exposure Draft proposals to disclose the following information about the tax abatement agreements of other governments: purpose, authority, mechanism, recapture provisions and conditions, and recipient commitments.

The Board considered respondent recommendations that governments be required to disclose (a) the amount of abated taxes recaptured during the reporting period and (b) the amount eligible to be recaptured as of the end of the reporting period but not yet recaptured. The Board tentatively decided not to require these disclosures.

Minutes of Meetings, March 10-12, 2015

The Board reviewed stakeholder comments on the Exposure Draft, Tax Abatement Disclosures. The Board’s redeliberations began with consideration of general comments made by respondents to the Exposure Draft in favor of or opposed to the proposed Statement. The Board then discussed issues raised by respondents about the scope and applicability of the proposed standards and the proposed definition of a tax abatement.

The Board tentatively decided that the scope of the standards should not be revised to include disclosure of information about the benefits or results of tax abatement programs. The Board also tentatively decided that the scope of the standard should not be expanded to include subsidies to businesses in general. In addition, the Board tentatively decided that the scope of the standards should not be expanded to include all tax expenditures.

The Board considered respondent comments regarding particular types of tax expenditure programs, including tax increment financing arrangements, tax diversions, payments in lieu of taxes, and as-of-right programs. The Board tentatively decided not to amend the definition of a tax abatement to specifically include or exclude any particular type of tax-reduction arrangement. Instead, the Board tentatively decided to add a sentence after the definition of a tax abatement to emphasize that the substance of a transaction is a key factor in determining if it is a tax abatement for financial reporting purposes, regardless of its title or form.

The Board did, however, tentatively decide to amend the definition of a tax abatement to ensure that tax diversion transactions that meet the definition of a tax abatement would be included in the scope of the standard. Additionally, the Board tentatively decided to retain the requirement that a tax abatement agreement precede recipient performance.

Finally, the Board tentatively agreed to make clarifying edits to the scope and applicability paragraph and the definition of a tax abatement in response to respondent comments.

Minutes of Teleconference, October 20, 2014

The Board reviewed the ballot draft of the Exposure Draft and agreed to changes that enhanced the clarity of the document. The Board then unanimously approved the issuance of the Exposure Draft for comment.

Minutes of Meetings, September 30- October 1, 2014

The Board reviewed a preballot draft of an Exposure Draft, Tax Abatement Disclosures, and provided feedback on revisions to the document. In addition, the Board unanimously agreed that all information that would be required by the proposed Statement qualifies as Group 1 information, as defined in the Financial Accounting Foundation’s GASB Scope of Authority: Consultation Process Policy. At its October teleconference, the Board will review and consider for approval a ballot draft of the Exposure Draft and vote on whether to issue it for public comment.

Minutes of Meetings, August 20-22, 2014

The Board discussed potential transition guidance for the proposed standards. The Board tentatively decided to propose that the proposed disclosure requirements be applied to note disclosures related to the current and all prior periods presented. The guidance also would include an exception for prior periods if disclosure of the required information for those periods is not practical. In such circumstances, a government would explain why it was not practical to apply the proposed Statement to those periods.

The Board tentatively decided that the proposed standards would be effective for periods beginning after December 15, 2015, and would encourage earlier implementation. Additionally, the Board tentatively decided that the comment period for the Exposure Draft of the proposed standards will be 90 days.

The Board then reviewed a draft of the standards section of an Exposure Draft and provided edits and comments.

The Board concluded by reviewing the expected costs and benefits of the proposed standards. The Board tentatively agreed that the benefits of the proposed disclosures would outweigh their perceived costs.

Minutes of Teleconference, July 28, 2014

The Board continued deliberations from its July meeting on what level of detail should apply to each tentatively proposed disclosure. The Board tentatively decided to propose that the following tax abatement disclosures—other commitments made by the reporting government, commitments made by recipients, information about provisions for recapturing abated taxes, and general descriptive information—adhere to three general disclosure principles:
  • The reporting government should disclose tax abatement information disaggregated between its own agreements and those of other governments.
  • Governments should be permitted to disclose information individually or in the aggregate.
  • The reporting government should present agreements by major program for its own abatements and in the aggregate for the abatements of other governments.
The Board tentatively decided to propose that the reporting government disclose the types of commitments it has made—other than to reduce taxes—as part of tax abatement agreements and describe the most significant individual commitments.

The Board tentatively decided to propose that governments disclose the types of commitments made by tax abatement recipients, by major program for a government’s own abatements. The Board tentatively decided not to propose this disclosure for the tax abatement agreements of other governments.

The Board next deliberated whether tax abatement disclosures should be recurring or nonrecurring. The Board tentatively decided to propose that the tax abatement disclosures be included as recurring notes to the financial statements as long as the agreements remain in effect, with one exception: The disclosure of other commitments made by a government would cease after the government has fulfilled its commitment.

Minutes of Meetings, July 9-10, 2014

The Board continued deliberations on what information to propose be disclosed about tax abatement agreements.

The Board discussed the following potential disclosures:
  • Other commitments made by governments as part of tax abatement agreements
  • Commitments made by recipients
  • Recipient compliance with their commitments
  • Provisions for recapturing abated taxes
  • General descriptive information.
The Board tentatively decided to propose disclosure of other commitments made by governments, commitments made by recipients, provisions that allow for recapture, and general descriptive information. The general descriptive information tentatively would include:
  • Name and purpose of the program(s), and the taxes being abated
  • The authority under which tax abatements are granted
  • The criteria, if any, that make a recipient eligible to receive a tax abatement
  • The manner in which the taxes are abated, including how the amount of abatement is determined and how the taxes are reduced
  • The number of abatements granted during the reporting period and the total number of abatements in effect as of the date of the financial statements.
The Board tentatively decided not to propose disclosure of recipient compliance with their commitments.

The Board next deliberated the level of detail at which governments should disclose information about their tax abatements. The Board tentatively decided that the reporting government should disclose tax abatement information disaggregated between its own agreements and those of other governments. The Board tentatively decided to propose that governments be given the option to disclose information individually or in the aggregate. Further, the Board tentatively decided that a reporting government should present agreements by major program for its own abatements and in the aggregate for the abatements of other governments.

The Board began discussion on how the number of tax abatement agreements (level of detail) would affect the Board’s tentative decisions to date. In considering this perspective, the Board tentatively decided to propose that the amount of taxes abated in the current year be disclosed by major program for the reporting government’s own tax abatement agreements and in the aggregate for tax abatement agreements of other governments.. The Board also tentatively decided a disclosure of the years remaining on a tax abatement would no longer be proposed due to concerns about the practicality of disclosing the information and its usefulness when aggregated.

The Board will continue its discussion of how the level of detail should apply to each tentatively proposed disclosure at its July teleconference.

Minutes Archive


TAX ABATEMENT DISCLOSURES—TENTATIVE BOARD DECISIONS


These tentative decisions have been made since the issuance of the Exposure Draft, Tax Abatement Disclosures, and in anticipation of a final Statement. The Board tentatively agreed on the following:
  • The definition of a tax abatement for financial reporting purposes, subject to further revisions : “For financial reporting purposes, a tax abatement is a reduction in taxes that results from an agreement between one or more governmental entities and an individual or entity in which (a) one or more governmental entities promise to forgo tax revenues to which they otherwise are entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments.”
  • A transaction's substance, but not its form or title, is a key factor in determining whether the transaction meets the definition of a tax abatement for the purposes of this Statement.
  • The scope of the tax abatement disclosures standard should be limited to transactions that meet the proposed definition of a tax abatement.
  • Information about tax abatement agreements should be disclosed according to the following general principles:
    • Information about a reporting government’s tax abatement agreements should be disclosed separately from information about tax abatement agreements entered into by other governments that reduce the reporting government’s tax revenues.
    • Disclosure information for tax abatements resulting from agreements entered into by the reporting government should be organized by each major tax abatement program.
    • Disclosure information for tax abatements resulting from agreements entered into by other governments should be organized by the government that entered into the tax abatement agreement and the specific tax being abated.
    • Information may be disclosed about individual tax abatement agreements.
      • A government that chooses to disclose information about individual tax abatement agreements should disclose all tax abatement agreements above a quantitative threshold selected by the government.
      • A different quantitative threshold may be selected for a government’s own tax abatement agreements and for those agreements entered into by other governments that reduce the reporting government’s tax revenues.
    • Disclosure should commence in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires, unless otherwise specified.
    • Governments that are legally prohibited from disclosing specific information about tax abatements may omit that information and should disclose the following:
      • The general nature of the tax abatement information omitted
      • The source of the legal prohibition.
  • The following information should be disclosed for a reporting government’s own tax abatement agreements:
    • Brief descriptive information, including:
      • Name and purpose of the program(s) and the specific taxes being abated
      • The authority under which tax abatements are entered into
      • The criteria that makes a recipient eligible to receive a tax abatement
      • The mechanism by which the taxes are abated, including:
        • How the tax abatement recipient’s taxes are reduced, such as through a reduction of assessed value or a refund of taxes paid
        • How the amount of the tax abatement is determined, such as a specific dollar amount or a specific percentage of taxes owed
    • Provisions for recapturing abated taxes, including the conditions under which abated taxes become eligible for recapture
    • The types of commitments made by the recipients of the tax abatements
    • The gross dollar amount by which the reporting government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements, on an accrual basis. If applicable, the following also should be disclosed:
      • The dollar amount of offsetting payments received by the reporting government from other governments
      • The identity of the other governments providing the offsetting amount and the authority under which the offsetting payment was made
    • Information about commitments other than to reduce taxes, if any, made by the reporting government in its tax abatement agreements—disclosed until the reporting government has fulfilled the commitment—including:
      • A description of the types of commitments made
      • The most significant individual commitments
    • If information is disclosed about individual tax abatement agreements, the quantitative threshold selected by the government to determine which individual tax abatement agreements to disclose.
  • The following information should be disclosed for tax abatement agreements entered into by other governments that reduce the reporting government’s tax revenues:
    • The name of the government entering into the tax abatements and the specific taxes being abated.
    • The gross dollar amount by which the reporting government’s tax revenues were reduced during the reporting period, on an accrual basis. If applicable, the following also should be disclosed:
      • The dollar amount of offsetting payments received by the reporting government from other governments
      • The identity of the other governments providing the offsetting amount and the authority under which the offsetting payment was made
    • If information is disclosed about individual tax abatement agreements, the quantitative threshold selected by the government to determine which individual tax abatement agreements to disclose.
    • If a reporting government’s discretely presented component units have entered into tax abatement agreements that reduce the reporting government’s tax revenues, the reporting government should disclose the following:
    • The information required for the reporting government’s own tax abatement agreements, if the government concludes that the information is essential for fair presentation (based on the application of Statement No. 14, The Financial Reporting Entity, as amended)
    • Otherwise, the information required for tax abatements entered into by other governments that reduce the reporting government’s tax revenues.
    • The proposed standards would be effective for periods beginning after December 15, 2015, and would encourage earlier implementation.
    • The disclosure requirements would be applied to all periods presented.
    • If application for all prior periods presented is not practical, the reason for not applying the standards to prior periods presented would be explained.



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.