The Governmental Accounting Standards Board approved a new rule on Monday that requires governments to include in financial statements the value of tax abatements given to companies to spur economic development starting next year.
“The results of external research … suggest that tax abatements are an issue of concern among citizen groups, county board members, and municipal bond analysts, and that each group desires to receive information about the level of abatement activity and the results of the abatement programs,” according to GASB. “However, the researchers found relatively few states (six) with statutes requiring any level of external reporting after tax abatements are granted. These findings indicate that there is an important information need that is largely unmet.”
GASB has been studying the issue since 2013, and the change will mean that citizens and elected officials will have more information available about the cost of tax breaks, and the often multi-year commitments entered into by their local and state governments.
The Wall Street Journal’s Theo Francis is his story about the change on Tuesday used Shelby County in Tennessee as an example, noting it waived about $48.7 million in property taxes last year, the equivalent of 6.5 percent of its property tax receipts.
In Shelby County, Tenn., which competes with neighboring Arkansas and Mississippi for many industrial and commercial businesses, Memphis and other local governments have entered into more than 500 multiyear agreements with companies like Nike Inc., typically waiving 70% and often more of the property taxes that would otherwise be owed.
In a 2013 deal with Nike, Shelby County agreed to abate $30 million of property taxes over 15 years. That was on top of $28 million that Memphis had waived. In return, the sportswear company said it would invest $301 million to expand a distribution center and improve another facility, adding 250 jobs and $8.75 million in payroll.
Nucor Corp. paid just $300 in taxes last year on property in Shelby County that ordinarily would have been taxed at $1.3 million thanks to pacts that extend out as far as 2028. One, a 15-year deal signed in 2012, involved a promise by the steelmaker to add 27 jobs and invest $113 million in its facility there.
In January, a joint economic-development board for Memphis and the county voted to give Swedish home-furnishings retailer IKEA a combined $9.5 million in tax breaks over 11 years if it builds one of its stores in the county. An IKEA spokesman said the company plans to break ground this fall and open the store a year later. Spokesmen for Nucor and Nike declined to comment.
Absent such agreements, the county’s overall tax rate could be reduced, said Shelby County Trustee David Lenoir, who collects the county’s taxes, to about $4.07 from the current $4.37 per $100 of assessed property value. For a house assessed at $100,000, that would amount to a $300-a-year tax cut.
“It is a significant amount,” Mr. Lenoir said.
County economic-development officials said the incentives have paid off. The joint city-county economic development agency that negotiates many of the tax-incentive agreements estimates that they have created or saved nearly 9,500 jobs and spurred $2 billion in capital investment since 2011, in the process generating another $715 million in tax revenue. The estimate includes partial payments by the companies and a computer model’s projection of the taxes that will be generated by newly hired employees and the businesses they patronize.
Memphis, of course, is not alone. Francis also reported on Nevada’s $1.3 billion in tax breaks to Tesla Motors and $8.7 billion in incentives Washington offered Boeing Co.
The numbers show how the costs of discounted tax bills, special tax zones or outright waivers are piling up for local governments that in some cases have pressing problems with pensions and other budgetary issues. …
Now, investors, some government officials and others are becoming concerned that the combined effect of such deals over the years may be significantly limiting the financial flexibility of some cities. Governments rarely sum up the value of the tax breaks they have granted, and the accounting board worries that this leaves investors in the dark about the toll.
“These agreements reduce the amount of tax revenue you get, but you never see that, because it’s not reflected in the accounting system,” said Dean Mead, a research manager at the Governmental Accounting Standards Board. “To understand what they can collect, you need to know about things that would prevent them from collecting taxes.”
Good Jobs First, a policy resource center that promotes corporate and government accountability in economic development and smart growth, has been tracking the rule and called the change a “landmark event”.
“Never in its history has GASB issued standards specifically addressing the estimated $70 billion per year states and cities spend each year in the name of jobs. Although much of this spending is recorded (albeit in many different places), tax breaks for economic development are by far the costliest subsidies and also the least well disclosed. So GASB’s development of standards to cover reporting of business tax breaks is truly a landmark event….
“Because nearly all state and local governments conform to GAAP, this new standard will have huge ramifications.
“Good Jobs First believes that when states and localities start issuing new data under this Standard in 2017, it will enable massive new bodies of analysis and reform policymaking. Organizations and scholars concerned with state and local finances, tax policy, government transparency, economic development, regionalism and sprawl, public education finance, campaign finance, and contracting and privatization will all gain access to significant information heretofore unavailable.”
Helen Burns Sharp, a Chattanooga resident who has advocated for more disclosure of economic development information in her city, said the change was huge.
“Before this rule was announced earlier this year, it was almost impossible to get accurate figures on the amount of taxes city and county governments had waived in PILOT agreements,” said Sharp, who has documented that Chattanooga and Hamilton County waived at least $16 million in property taxes through PILOTS (payment-in-lieu-of-taxes agreements) in 2014. She noted that some information is now posted on a Hamilton County website, but she has urged that the total amount forgiven over the life of agreements be included.
During the comment period, the Tennessee Comptroller’s Office offered suggestions to GASB, advocating altering the language to include the effect of tax-increment financing programs, commonly referred to as TIFs, that are often used in Tennessee.
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