Quick Hit Ellyn Fortino Wednesday September 9th, 2015, 11:51am

New Accounting Rule Requires Cities, States To Disclose Tax Break Costs

Government reporting on tax-based economic development subsidies will become more transparent under a new policy from the Governmental Accounting Standards Board (GASB).

That's the organization that sets accounting and financial reporting standards for U.S. states and localities.

Under GASB's "tax abatement disclosures" rule released in mid-August, state and local governments will have to disclose how much revenue they lose as part of income, property and sales tax breaks, including those designed for economic development purposes.

GASB said its new rule, the first of its kind, will make it easier to determine the impacts of tax abatement programs on a government's fiscal condition and ability to raise revenue.

"This new guidance will result in people who use governmental financial statements having access to essential information about the tax abatements governments enter into," said GASB Chair David Vaudt. "Not only will this mean that they'll have access to information that will allow them to better assess a government's financial health, but it will also make the impact of these agreements much more apparent."

Good Jobs First, a subsidy watchdog group, called GASB's new policy "historic good news for taxpayers."

"States and cities spend an estimated $70 billion a year for economic development, most of it through tax expenditures. But we could only estimate because GASB has never before called for standardized reporting," said Good Jobs First Executive Director Greg LeRoy. "That's the historic value of this new standard: taxpayers and policymakers will finally see the true price tag for economic development."

GASB's new standards for reporting tax abatements will take effect in fiscal years starting after December 15. As such, Good Jobs First expects new data to appear in annual financial reports issued by governments beginning in 2017.

During GASB's public comment period on its proposed tax abatement reporting standards, Chicago labor and community groups reached out to the organization in support of a strong pro-disclosure rule. The groups, including the Chicago Teachers Union and the Grassroots Collaborative, are interested in stronger standards because they want to better understand how Chicago's tax increment financing (TIF) program impacts the public school system.

GASB's new reporting rule covers TIF programs that meet tax abatement criteria.

"Given that states already publish tax expenditure budgets that often include this data [covered under GASB's policy], the new standard will have the greatest impact on local bodies of government: cities, counties, townships and school boards," LeRoy said. "We are especially pleased that GASB is calling for public bodies that lose revenue passively due to the actions of other bodies to report such losses. This means school boards will finally have to own up to the huge costs they suffer when cities and counties abate or divert property and sales taxes."

But GASB's rule does fall short in some areas, Good Jobs First argues. For example, the proposal does not require governments to identify company-specific tax break recipients or provide future-year estimates of tax revenue losses from signed subsidy agreements. Additionally, governments do not have disclose the total number of abatement agreements in effect and how many new ones were entered into during the reporting year.

"Though we are disappointed by some of the technical shortcomings of the new standard, make no mistake: this is absolutely historic good news for taxpayers," LeRoy stressed. "We have long criticized GASB for being MIA on corporate welfare; now the debate will turn to implementation of this landmark accounting rule."

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