The Office of the Comptroller has released an article related to GASB 77 which calls for greater scrutiny of tax incentives intended for economic development.
GASB 77 requires governments to disclose information about economic development arrangements that reduce tax revenues. The newly required disclosures include:
- the purpose of the tax break;
- the tax being affected;
- dollar amount of taxes foregone per reporting period;
- the types of commitments made by the recipient;
- provisions for recapturing foregone taxes if the commitments aren't met; and
- other commitments made by a government in tax abatement agreements, such as the construction of infrastructure assets.
Spotlight from the article:
The Comptroller's office has conducted extensive research to determine what effect, if any, GASB 77 will have on Texas state government. The key criterion is whether or not a state entity foregoes tax revenues based on a prior agreement with an individual or entity. This agreement could be very broad-based, considering that GASB 77's definition of tax abatements appears to include tax credits and refunds as well as abatements (as strictly defined).
Upon careful evaluation, the agency has determined some state programs may qualify as "tax abatements" under GASB 77, such as the state's Enterprise Zone Program, which offers businesses state sales and use tax refunds on qualified purchases in exchange for creating jobs and investment in economically distressed areas.
But most activity affected by GASB 77 occurs at the local level, and these local governments will bear sole responsibility for reporting on their tax incentives.
One of the largest such programs is the Texas Economic Development Act, commonly called Chapter 313 for its place in the Texas Tax Code. Chapter 313 allows Texas public school districts to enter into agreements offering businesses a 10-year limitation on their property's assessed value for maintenance and operations (M&O) property tax purposes in exchange for building facilities and creating jobs in the district.
While the state largely underwrites the cost of this program through state school finance funding formulas, the actual tax loss occurs at the school district level. School districts may have to report these agreements under GASB 77, and should check with their accounting and finance professionals on how to proceed.