Late in 2015, the Governmental Accounting Standards Board issued Statement No. 77, requiring governments to disclose in the notes of their financial statements certain information related to tax abatement agreements. As defined in this standard, a tax abatement results from an agreement between a government and an individual or entity in which the government promises to forgo tax revenues and the individual or entity promises to subsequently take a specific action that contributes to economic development or otherwise benefits the government or its citizens.
After reading that definition, you may be thinking you’re off the hook because your government has not entered into any tax abatement agreements. Unfortunately, this statement applies not only to a reporting government’s own tax abatement agreements, but also to those that are entered into by other governments (like the state) that reduce the reporting government’s tax revenues. Tax abatement programs can vary widely across the country, but some examples include those to attract businesses to a particular location, abatements of industrial facility taxes, and abatements for newly constructed or rehabilitated housing.
GASB believes that adding additional disclosures to the financial statements will provide the information necessary for readers to assess how the tax abatement programs affect the government’s financial position and results of operations, including its ability to raise resources in the future.
The disclosures will depend upon whether or not you are the government entering into the abatement program. For governments entering into tax abatement agreements, the disclosure should include the following:
- Brief descriptive information including:
- The names of the tax abatement programs, if applicable
- The specific taxes being abated
- The authority under which the agreements were entered into
- The criteria that make a recipient eligible to receive a tax abatement
- The mechanism by which taxes are abated, including how the tax abatement recipient’s taxes are reduced (such as a reduction of assessed value) and how the amount of the tax abatement is determined (such as a specific dollar amount or a specific percentage of taxes owed)
- Provisions for recapturing abated taxes
- The types of commitments made by the recipients of the tax abatements
- The gross dollar amount by which the government’s tax revenues were reduced during the current year as a result of tax abatements.
- If amounts received or receivable from other governments related to the forgone tax revenue. If so, the names of the other governments, the authority under which the amounts will be paid, and the dollar amount received or receivable.
- If the government made commitments other than to reduce taxes, a description of the commitments made.
- If tax abatements are disclosed individually, a description of the threshold the government used to disclose individually.
For governments, including most public schools and higher education institutions receiving property taxes, whose tax revenue is reduced as a result of tax abatement agreements entered into by other governments, the items to be disclosed are significantly reduced. In these situations, the required descriptive disclosures are simply the names of the other governments that entered into the tax abatement agreement, the specific taxes being abated, and the gross dollar amount of taxes abated during the reporting period.
The new statement will first apply to December 31, 2016, year ends. As you consider implementing this statement, your first consideration should be the identification of all tax abatement agreements, including those that other governments have entered into that impact your government. Working with those related governments early to gather the requisite information will be key to adequate preparation. Accumulating the information needed will be more difficult than preparing the actual financial statement disclosures; however, know that Plante Moran is available to answer any questions you might have.