Elected officials and community groups are demanding better data on incentive costs and benefits. New tax abatement disclosure rules for state and local government (GASB 77) are one manifestation of this trend toward greater transparency and accountability in incentive use.
Will these disclosures fundamentally change how economic development incentives are used? In my opinion, the broader trend toward greater transparency will have more lasting consequences than the specifics of the GASB disclosure rules. Still, these disclosures will change the public discourse around incentives. My expectation is that GASB will have the following effects:
Some of the most expensive, lowest performing or poorly designed tax abatement programs will be repealed or modified. These modifications will include caps or limits on use and tightening of eligibility rules. While there may be more restrictions to avoid runaway costs, I do not foresee a significant decline in overall use of tax abatement programs.
Organizations will focus on streamlining and standardizing reporting procedures to better answer questions on incentive use. Economic development groups may also find it useful to document their decision-making process leading up to the provision of tax abatements. By conducting due diligence, completing a cost-benefit analysis, and monitoring compliance with agreements, economic development organizations will have the information they need to answer calls for greater transparency in incentive programs.
An unintended but possibly beneficial consequence will be more insight into how other governments are using incentives and how much they are spending. Economic developers often complain about information asymmetry in the incentives negotiation process, and the financial disclosures will add a meaningful category of information to the market. Other incentive data sets are frequently used for benchmarking and market research. This new cross-government information has the potential to alter the market as much as the disclosures themselves.
For more information on GASB 77 and steps economic development organizations should take to prepare for disclosures, please follow these links:
Enhancing tax abatement transparency
3 steps economic developers should take to prepare for GASB 77 tax abatement disclosures
What will tax abatement disclosures mean for economic development groups?
Smart Incentives comments on tax abatement disclosure guidelines
As a reminder, the Governmental Accounting Standards Board (GASB) last year approved Statement No. 77, Tax Abatement Disclosures, which establishes guidance requiring state and local governments to disclose certain information about tax abatement agreements for periods beginning after December 15, 2015.
This post is excerpted from my recent article “New Disclosure Rules and the Future of Incentives” from the Summer 2016 issue of the IEDC Economic Development Journal. You can access the article here.