Governments must report tax abatements on financial statements

Local governments commonly use tax abatements to attract and retain businesses and jobs in a community. In exchange for the abatement or agreement by the local government to forego tax revenues, the company commits to making certain investments that contribute to economic growth and development in a community
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State and local laws govern the use of tax abatement processes. They generally require a transparent process for approving the abatement agreement and compliance by both the local government and the company in filing reports regarding the abatement.

Recently, the Government Accounting Standards Board approved new guidelines, Statement 77, that require local governments for the first time to disclose on financial statements information about tax abatement agreements.

According to GASB, although many governments offer tax abatements and provide information to the public about them, “they do not always provide the information necessary to assess how tax abatements affect their financial position and results of operations, including their ability to raise resources in the future.”

During the comment process for this Statement, the Municipal Association of SC joined with the National League of Cities to caution that the narrow focus on the taxes abated would be misleading by painting an incomplete picture of the impact of the abatement on the local government’s overall financial position. Despite similar comments from many local government and economic development interests, the Statement was released recently.

Local governments must disclose information about (1) its own tax abatement agreements and (2) abatement agreements entered into by other governments that reduce the reporting government’s tax revenues.

The following information must now be disclosed by the government that entered into the agreement:

• Brief descriptive information, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients;
• The gross dollar amount of taxes abated during the period; and
• Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement.

The requirements of this Statement are effective for financial statements for periods beginning after December 15, 2015.

The Municipal Association is joining with the SC Economic Developers Association to present a seminar for legal, accounting and economic development professionals whose work will be affected by GASB 77. An agenda and registration information are available here.