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States May Have To Disclose Business Subsidy Costs

For the first time, state and local governments may soon be asked to report the full costs of tax subsidies for economic development.

Under new standards recently proposed by the Government Accounting Standards Board (GASB), a private organization whose accounting rules nearly all state and local governments conform to, government entities would be required to include the full cost of tax abatement spending in their Comprehensive Annual Financial Reports.

The umbrella term “tax abatements” would cover any agreement “in which (a) one or more governmental entities promise to forgo revenues from taxes…and (b) the taxpayer promises to take a specific action…that contributes to economic development.”

In a press release issued on Monday, Good Jobs First, a group that promotes corporate and government accountability, expressed cautious optimism that the new standards would shed light on the true costs of corporate tax incentives. (RELATED: $4.2 Million in Tax Incentives Brings Whole Foods to Depressed Downtown Detroit)

The group’s president, Greg LeRoy, said, “We applaud GASB for finally ending their long, conspicuous silence on this issue, which costs taxpayers an estimated $70 billion per year,” adding that, “We consider this absolutely tectonic news in the long history of economic development incentive reform.”

However, LeRoy noted, “we also have many concerns about the draft standard, especially because it could miss many forms of economic development tax spending.”

On its website, Good Jobs First provides a generally laudatory analysis of the proposed standards, but also identifies “several kinds of costly subsidies [that] might not qualify for coverage,” which it hopes will be addressed in the course of a 90-day public comment period that ends on January 30, 2015.

On the positive side, Good Jobs First commends the GASB for including not only direct costs, but also “costs generated by the actions of other governmental bodies, and costs created by obligations associated with tax abatement,” in its reporting requirements. (RELATED: A Return to the JFK-Reagan Economic Model)

Accounting for costs generated by other governmental bodies, the group says, would bring attention to what it calls the “intergovernmental free lunch.” The most common example of this occurs when “city councils or county boards grant property tax exemptions or reductions,” because such arrangements tend to disproportionately affect school districts, “yet few states grant school boards any effective power to shield themselves from such losses.”

“GASB also correctly recognizes that governments often obligate substantial additional monies to tax-abated economic development projects,” for instance by promising to build infrastructure to serve the needs of new facilities, according to the analysis.

On the other hand, Good Jobs First also says that the GASB definition of tax abatement excludes several important types of tax incentives. (RELATED: Washington State Taxpayers Taken for a Bumpy Ride by Boeing)

Tax increment financing (TIF) is not included because “it does not facially involve lowering the taxes paid by a company,” but as the analysis points out, “TIF proceeds absolutely benefit specific companies pursuant to economic development agreements” by providing direct payments, servicing private debt, or covering other costs “that otherwise would be paid by recipient companies.”

Nor will tax diversions, in which a company is allowed to receive a share of either employees’ state income taxes or the sales taxes they collect, be considered tax abatements under the new standards, “because the money originates from employees’ [or customers’] taxes, not the abated companies’.”

Despite those shortcomings, Good Jobs First says they “applaud GASB for finally taking up this important form of public spending, especially at a time when economic development has become so hyper-politicized in some states due to the long, slow economic recovery.”

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