Update: GASB 77 New Disclosure Rules for Tax Abatements
Tax abatements are widely used by state and local governments and are often used to encourage economic development. However, tax abatements are not always widely publicized—nor understood—by taxpayers and other financial statement users.
With the rollout of Statement No. 77 in August 2015, the Governmental Accounting Standards Board took steps to increase transparency around tax abatements. The statement, which outlines new rules for financial reporting of tax abatements, went into effect for the fiscal year beginning Jan. 1, 2016. Here's what you should know about it.
What are tax abatements?
According to the GASB, a tax abatement is a reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which the following two things are true:
a) One or more governments promise to forgo tax revenues to which they are otherwise entitled.
b) The individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments.
An example of a tax abatement: A grocery store chain approaches a city about building a store in its jurisdiction. The city is interested in economic development and attracting new residents, so it agrees to abate or reduce a portion of the grocery store’s future taxes. In exchange, the grocery store promises certain parameters, such as a new building, sidewalk, street lights, parking lot, etc., that are agreed upon by both parties. In effect, this agreement is designed to benefit both the government and its citizens.
What is the purpose of GASB 77?
The purpose of this statement is to provide financial statement users with essential information about the nature and magnitude of the reduction in tax revenues through tax abatement programs. In doing so, this will allow users to better understand a government’s financial situation—from knowing where its resources come from to ensuring compliance with legal or contractual requirements.
What does GASB 77 require?
The statement requires governments to disclose relevant tax abatement information on their financial statements. This applies to a government’s own tax abatement programs, as well as those entered into by other governments that reduce the reporting government’s tax revenues.
The statement requires governments that enter into tax abatement agreements to disclose the following information:
• 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
• Commitments made by a government, other than to abate taxes, as part of a tax abatement agreement
Do tax increment financing (TIF) districts apply under GASB 77?
The following criteria should be used to determine whether or not a TIF district applies under GASB 77:
• Is the agreement with an individual or an entity?
• Is the party in the agreement required to perform any additional actions?
• Does the agreement actually result in a reduction or loss of tax revenue?
Example A: The city is planning a street reconstruction project along with a demolition of an old city-owned building to create marketable real estate. To fund the project, the city issues general obligation tax increment bonds (or interfund loans). The increment anticipated for the redevelopment will make the debt payments in the future. This example does not apply under GASB 77.
Example B: The city and the developer enter into an agreement in which the developer incurs costs for property improvements. In return, the city will reimburse the developer for some costs as the city collects future increment for the increased property value and tax capacity related to the economic development. This example applies under GASB 77.
If my organization is affected, what should I do?
If your organization may be affected by these new rules, call your auditor. It’s important to understand the requirements of this new statement; you don’t want to miss anything. It may be difficult to determine which agreements qualify as tax abatements—and that’s where your auditor would be able to help.