Thank You, GASB, for Bringing Tax-Break Transparency to Local Government

How to blow a hole in your tax base without really trying.

Every year, local governments across Virginia publish a voluminous document called a Comprehensive Annual Financial Report (CAFR) that describes their fiscal condition, detailing revenues, expenditures, debt, and growth in the tax base. This year, CAFRs should include a new data point: revenue foregone due to business tax incentives.

Few localities have bothered to compile and report this information before. But the Government Accounting Standards Board (GASB) issued a directive that requires state and local governments to disclose any taxes being abated, the dollar amount of the tax breaks, and any other commitments made by the government as part of a tax-abatement agreement. This “statement 77” goes into effect for financial statements beginning after Dec. 15, 2015. The data should begin surfacing in 2016 annual reports being submitted this year.

The accounting issue has become an issue because tax giveaways have become so ubiquitous. By one estimate, reports a Land Lines magazine article on GASB 77, state and local governments spent $45 billion in tax incentives in 2015, including $12 billion in property tax abatements. According to another estimate, total business incentives have tripled since 1990.

Many state and local governments have been addicted to tax incentives as a tool for recruiting businesses and capturing the tax revenue they generate. Here in Virginia, local governments reap real estate property taxes, machine & tool taxes, BPOL (business professional and occupational license) taxes, and a share of sales taxes paid by businesses in their borders. Many are willing to forego some of those tax revenues in order to capture a business and the balance of the revenue it will pay.  While Virginia localities haven’t gone to the extremes of some regions — the Land Lines article highlights the Kansas City metropolitan area and Franklin County, Ohio — tax exemptions are widespread.

For purposes of calculating a jurisdiction’s fiscal health, it is critical to get a handle on its real estate property tax base, which accounts for about 30% of all local revenue nationally. Local governments typically track the impact of non-profit and tax-exempt hospitals, universities and state facilities within their borders. Excessive reliance upon exemptions for corporate citizens also can hollow out a locality’s tax base, but that information is not readily available to citizens.

Few observers would advocate abolishing all tax incentives. Attracting a cornerstone facility such as an automobile assembly plant can generate tax revenues even after abatements, draw suppliers to an area, boost worker productivity, spark the creation of new training programs at local colleges and universities, and recruit top technical and managerial talent in a positive feedback loop. But all too often, incentives are handed out to everyone as businesses learn to play the game. A huge challenge for economic developers is gauging whether a business prospect is seriously considering relocating to other localities and needs the incentive as a tie-breaker or if it is just seeking to extract a subsidy for a decision it has already made.

Tax exemptions also raise equity issues. Why should newcomer companies get better tax treatment than businesses that have demonstrated a commitment to a community and paid taxes all along? From a social justice perspective, how much money is being diverted from priorities such as schools and infrastructure for all? From a free market perspective, could localities use the money to reduce tax rates for everyone?

People are less likely to ask those questions if they have no idea how much money local governments are leaving on the table. Transparency is good. GASB’s reporting requirement will make the information available in localities’ annual reports. Now it’s up to citizens to ferret out that information and make something of it.

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6 responses to “Thank You, GASB, for Bringing Tax-Break Transparency to Local Government

  1. interesting thing is that GASB is not a govt entity – it’s totally private sector…

    so who is forcing the localities to follow GASB?

    • It’s my understanding that, if a government entity did not follow GASB, it would be unable to sell securities in the market or get a sign-off from its outside auditors. Further some state laws require their local governments to follow GASB. Perhaps, state governments as well.

  2. Before everybody gets excited let’s see a few of the reports and see how things are handled. Full disclosure can be an elusive thing. But Jimbo, it always warms my heart (and heats my blood to fighting temp) to see the concept of “tax expenditures” and “giveaways” bandied about, as if the money actually belonged to the government all along. First they come for the special tax rate offered to a particular industry to win a location decision – next they go after those “tax expenditures” like the exemptions for retirement income, and my favorite – the special tax treatment for newspapers (not that they’ve saved the industry).

    My recollection is that some report, and it may be CAFR, tracks the value and foregone taxes of property exempt from real estate taxes (churches, private schools, federal government) and no question those are by far the biggest “loopholes” in the code in some localities. I can’t really complain if all the “tax preferences” (a more neutral term) are tracked and reported. Let’s see if they are.

  3. called tax expenditures at the Federal Level and total up to more than a billion dollars …enough to not have a deficit and have enough left over to buy down the debt..

    and I tend to agree with Jim on this… everyone deserves the same “lowest” tax rate and when you do specific ones for specific people – they come at the expensive of others who did not get them.

    Existing businesses should be concerned that they are getting taxed = effectively at a different rate than others… Ditto for tax breaks for individuals. The rationale for the “breaks” is often some perceived “good” but the question is – is it a “good” for all taxpayers or is it specific to an individual taxpayer? Health insurance is a good example. Is it good for all or just some?

    Health insurance is the biggest at 300 billion that provides thousands in less taxes owed for those who have employer-provided versus those that have to buy their own and inordinately favors those in higher paid occupations over those who work in service jobs… And you can’t extend the tab break to those who buy their own without increasing the deficit..even more.

    I understand that the health insurance tax break is on the table for the GOP for both the Repeal and Replace and Tax reform… and as Jim says – the idea is that everyone is treated more equally in taxation and enjoys the same lower tax rate – except those who have been getting the tax breaks..of course!

  4. Just as long as you realize that is not just the exemptions or deductions related to business, not by a country mile. Because this is one of those Pogo moments – we have met the enemy, and it is us. The business-related provisions are hardly the largest ones. A flat tax on all income, with no deductions, and a sales tax on all transactions with no exemptions, would be a huge change in our economy. And all the effects might not be positive.

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