New GASB Rule Will Require Disclosure of Tax Credits

The Governmental Accounting Standards Board issued a new rule this week that will require state and local governments to show the value of property, income, and sales taxes that have been waived for businesses and other taxpayers. States and local governments offer these credits and exemptions to incentivize businesses to locate or expand in certain areas, or to provide certain incentives to property owners. Investors, government officials and others are growing concerned that these types of economic incentives are limiting financial flexibility leading to their disclosure on financial reports.

As reported by the Wall Street Journal (Subscription Required),

“These agreements reduce the amount of tax revenue you get, but you never see that, because it’s not reflected in the accounting system,” said Dean Mead, a research manager at the Governmental Accounting Standards Board. “To understand what they can collect, you need to know about things that would prevent them from collecting taxes.”

Cities use a number of incentives to lure businesses or keep them there. They may reduce or even suspend tax collections of businesses for years, or transfer tax receipts directly to developers and employers. Another popular approach is to agree to spend any tax revenue from projects to improve the surrounding areas. That spending then benefits the companies that set up shop, directly or indirectly.

“Anything that gives more transparency to what a government is doing and what is behind government finances, I’m all for it,” said Hugh McGuirk, head of mutual-fund company T. Rowe Price Group Inc. ’s municipal-bond team. “If we find out that, of the potential tax revenue, they’re only realizing 60%, versus another entity that’s realizing 98% of potential, maybe they’ve been a little too generous with their tax incentives.”

The reporting of this information will begin next year.