Tax Abatement Disclosures
Project Description: The objective of this research project is to consider providing disclosure guidance for governments that have granted tax abatements and subsidies. Tax abatements are a reduction of or exemption from taxes, offered by a government to a specific taxpayer, typically for the purpose of spurring economic development. They are generally applied to ad valorem taxes, in particular property taxes. For instance, a government may offer a company an abatement of its property taxes—perhaps as a percentage of taxes or a flat dollar amount—in return for the company constructing and occupying an office or retail building within the government’s geographic area.
Status: Added to Research Agenda: April 2012
Tax Abatement Disclosures—Project Plan
Background: Tax abatement programs are widespread. Governments in 42 states are allowed by their states to offer tax abatements.1 The dollar amounts and number of governments involved can be substantial. For example, 40 percent of localities in Michigan granted at least one abatement between 1980 and 2001 under a statewide industrial development abatement program that currently abates local government taxes by an estimated $1 billion annually.2 That is the equivalent of more than 10 percent of all sub-state tax revenue in Michigan.3
At present, generally accepted accounting principles do not require state and local governments to disclose tax abatements as either an offset to revenue or an expense/expenditure.
The Gil Crain Memorial Research Grant for 2010 was awarded to three academics who proposed to conduct research on tax abatement disclosures. Their research was completed and submitted to the GASB in August 2011. The research focused on stand-alone property tax abatement programs
(SAPTAPs) and entailed:
- A summary of the literature related to tax abatements
- An examination of state constitutions and statutes related to tax abatement programs and reporting on tax abatements
- A review of best practices in the area of reporting on the results of tax abatement programs
- A search of websites of county governments known to participate in abatement programs
- A survey of users.
SAPTAPs are programs that “(a) provide for decreased tax liability for select parcels, (b) serve a specific purpose beyond tax relief—e.g., spurring growth, (c) are in effect for a limited time, and (d) can stand alone without other incentives.”4
There is a considerable body of research on tax abatements, particularly focusing on evaluating their effectiveness as an economic development tool, accountability for tax abatement programs, and improving the information available with which to make decisions about granting abatements.
The academics found that 44 states have statutes regarding programs in line with the definition of SAPTAPs. However, they identified just six states with statutes addressing reporting requirements. Fourteen states addressed accountability for abatement programs in their statutes by including provisions for benefit recovery (clawbacks) in instances of nonperformance by the recipient of the abatement. It may be possible that more states require reporting or impose consequences for nonperformance in policies and procedures outside their statutes; thus, further study is needed to fully answer questions regarding governments’ ability to monitor and evaluate their abatement programs and report their findings to interested parties.
The review of websites involved 36 counties (across 14 states) which had been identified through a Lexis-Nexis search as having tax abatement programs. The review turned up only one of the 36 county websites with any reporting on tax abatements after they were granted.
The survey of users was administered to staff and members of citizen groups, municipal bond analysts, and county board members. One portion of the survey offered statements about tax abatement programs drawn from the literature and asked respondents to rate their agreement or disagreement with the statement on a five-point scale (1 = strongly disagree, 5 = strongly agree). The statements specifically relevant to financial reporting were:
- Governments should report annually on tax abatement agreements outstanding.
- Legislators (for example, county commissioners or county board members) involved in granting tax abatements should receive timely reports comparing expected performance to actual performance.
- Citizens and other interested parties should have access to annual reports comparing expected performance to actual performance for all tax abatement agreements outstanding.
- Information about taxes recovered through recapture provisions should be reported to legislators who grant tax abatements.
- Information about taxes recovered through recapture provisions should be accessible to citizens and other interested parties on an annual basis.
Overall, the level of agreement in each of the three groups of users was very high on all five of these statements (an average greater than 4.0). Citizen group members and staff particularly agreed with statements a (average ranking of 4.53), b (4.54), and c (4.62). The county board member rankings were lower across the board (though still above 4.0 on each statement). The highest level of agreement among county board members was with statement b (4.23). The rankings by municipal bond analysts fell in between those of citizens and county board members. Municipal bond analysts most strongly agreed with a (4.31), c (4.40), and d (4.33).
Bond analysts were asked to rate how often they consider five issues related to tax abatements when analyzing municipal securities on a five-point scale (1 = never, 5 = always):
- Revenues forgone through property tax abatements
- Expected and actual outcomes related to existing property tax abatements
- Taxes recovered through recapture provisions when abatements recipients fail to meet conditions in the tax abatement agreements
- The degree to which a government uses property tax abatements to attract new businesses or to retain and expand existing businesses
- The degree to which a government uses tax incentives to encourage economic development.
Four of the five factors linked to tax abatements were identified by bond analyst respondents as being considered somewhat regularly (average mean of approximately 3.0—1, 2, 4, and 5.
The surveys of all three user groups asked them to rank the importance of seven items that could be reported by governments about tax abatements they have granted:
- Name of recipient
- Date abatement was granted
- Amount of tax abatement in the current year
- Length of tax abatement and projected abatement amounts in future years
- Commitments made by the government (e.g., infrastructure improvements)
- Contractual promises made by the recipient (if any)
- Recipient's compliance with contractual promises.
The survey again used a five-point scale (1 = not at all important, 5 = very important). All three groups rated the importance of items iii–vii highly (average of 4.0 or greater). Citizen respondents rated i and ii highly as well, and county board member respondents rated those items near 4.0 (3.97 and 4.02, respectively). Citizen respondents rated items iv–vii particularly highly (each over 4.5). Those items also were the most highly rated among county board member respondents. The highest-ranked items among bond analyst respondents were iii and iv.
The scope of the project is limited to disclosure of information about tax abatements. It will not consider issues related to recognition or measurement of tax abatements. Further, the project examines tax abatement programs that lead to agreements between governments and single entities. For instance, the project addresses programs in which a government agrees to reduce a specific corporation’s property tax liability as an inducement to move to the government’s jurisdiction, to remain in the jurisdiction, or to hire additional employees. The project will not look into programs that reduce the tax liabilities of broad classes of taxpayers, such as senior citizen or veterans, which are not the product of individual agreements with each taxpayer.
In particular, the project will answer the following questions:
- Do users need information about tax abatements?
- How important is information about tax abatements to the decisions that users make and their assessments of accountability?
- What information about tax abatements, if any, should be disclosed in the notes?
: The project was formally added to the potential projects list in August 2008.
The GASAC reviewed a draft project proposal for this project as part of its discussion of project priorities at its March 2012 meeting. The members ranked the project in the top five.
: The project staff is conducting research to gain an understanding of the use and types of tax abatements provided by state and local governments as well as current reporting practices. In August 2011, the GASB received academic research focusing specifically on stand-alone property tax abatement programs (SAPTAPs). The additional research being conducted by the project staff expands that scope to identify other forms tax abatements, which taxes are being abated, how the abatement process functions, and what, if any, information governments are currently reporting.
At the February 2013 meeting, GASAC members included this project as one of the top eight highest priority projects.
Research Work Plan
Continue additional research on the prevalence and types of tax abatements provided by governments and the information needs of users regarding tax abatements.
1Wassmer, Robert W. “The Increasing Use of Property Tax Abatement as a Means of Promoting Sub-National Economic Activity in the United States” (December 12, 2007). Available at SSRN: http://ssrn.com/abstract=1088482.
2Sands, Gary and Laura A. Reese. Public Act 198 Industrial Facilities Tax Abatements: Current Practices and Policy Recommendations. (East Lansing, MI: Land Policy Institute, Michigan State University, October 2007).
32002 Census of Governments, State and Local Government Finances, U.S. Bureau of the Census. Available at: http://www.census.gov/govs/www/estimate02.html.
4Dalehite, Esteban G., John Mikesell, and Kurt C. Zorn. “Variation in Property Tax Abatement Programs Among States.” Economic Development Quarterly, 2005, pp. 157–173.