Wednesday, April 22, 2015

Is the incentives game about to change? New disclosure rules could radically alter how we think about tax breaks.

By Matt DeVeau, Project Manager

If you travel in community and economic development circles, you’re going to end up talking about tax incentives. It’s kind of our Godwin’s Law – if a discussion about economic development goes on for long enough, eventually someone is going to bring up the role of financial incentives to attract and retain corporate investment. These conversations typically take on a normative bent: incentives exist and you must have them to “remain in the game” but should this be the case? Who benefits

These are good discussions to have, but to this point, they’ve been built on limited data. At present, state and local governments have a wide range of reporting and transparency requirements related to how they distribute tax incentives. Putting together anything close to a comprehensive overview of the topic requires a laborious research effort. Getting information about even a single local project that received incentives may be difficult for an average citizen in some jurisdictions. 

But all of this may be changing soon. The Governmental Accounting Standards Board, an independent entity that sets financial reporting standards for most state and local governments, this past fall proposed a new rule that will essentially require governments to report the incentives they give to businesses in a uniform fashion. According to a recent analysis from the Pew Charitable Trusts, the new standards would require state and local governments to provide “descriptive information about tax abatement programs as part of their annual financial reports” for “as long as a tax abatement agreement remains in effect.” This descriptive information would include: 

· Purpose of the incentive. 

· Amount of revenue forgone during the financial reporting period. 

· Total number of incentives in effect and awarded during the financial reporting period. 

· Total commitments made by incentive recipients (such as job creation or capital investment). 

· Eligibility criteria. 

· Provisions for recapturing abated taxes, known as clawbacks (if any). 

· Statutory (or other) authority for reducing taxes and determining the incentive amount. 

· Other commitments made by the state or locality as part of the agreement. 

Note that the rule would not require local governments to identify individual recipients of incentives, and some popular incentive mechanisms such as tax increment financing (TIF) would not meet disclosure requirements. 

There is obviously a lot to unpack here, and the change is not yet final. According to the GASB, the rule still has a few hurdles to clear this summer, and proposed GASB rule changes have been known to come under attack in the past. If adopted, the rule would not take effect until 2017. But this could eventually lead to a radical shift in the way incentives are discussed and, more importantly, it could change who is involved in the discussion in the first place. 

Uniform reporting requirements would be a research goldmine. I’m envisioning better information about the effective tax rates in various jurisdictions and full-scale studies about the overall efficacy of tax incentives, to name two potentially exciting (well, to me) outcomes. But look again at that second bullet – “amount of revenue forgone during the disclosure period.” Presumably, this will allow policy makers and the general public to easily determine the value of incentives that their state or municipality has provided. More importantly, it will allow for easy comparisons across jurisdictions. It’s not hard to envision that leading to widespread discussions about the role of tax incentives and maybe even the broader corporate tax structure. In other words, economic developers could have a lot more company when discussing these issues in the future.