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Making State and Local Tax Breaks for Businesses More Transparent

State and local tax breaks to encourage certain activities, like saving for college or locating a business in a specific neighborhood, have become very costly and deserve as much scrutiny as government spending.  But, for the public, identifying these so-called “tax expenditures” can be difficult, and finding out their cost is often impossible.

The Governmental Accounting Standards Board (GASB), which sets the rules that states and localities generally follow in preparing their annual financial reports, is developing a proposal that would go far toward solving this problem.  It would require these financial reports to specify the revenue losses from state and local tax incentives to encourage specific companies to boost jobs or investment.  These arguably are the most obscure types of tax breaks.

Most states have passed legislation requiring the kind of tax-break disclosure that GASB proposes for at least one of their tax-incentive programs.  But obtaining information about the total state costs of company-specific tax incentives often requires digging through multiple sources or making special requests for unpublished information.  The obstacles are even greater at the local level; cities and counties rarely publish the cost of property tax breaks (“abatements”) they negotiate with companies.

If GASB approves its proposal, the vast majority of states and localities will have to implement it or have trouble selling their bonds, since investors want annual financial reports to conform fully to GASB rules.  (Many states’ laws require conformity.)  This will eliminate the need for public disclosure advocates to wage difficult state-by-state battles for disclosure legislation.  It also will ensure that this vital information is widely available and reported uniformly.

We commend GASB for proposing the new rule; we’re especially pleased with the mandatory reporting of forgone revenue, which even states with supposedly comprehensive tax expenditure reports often omit.  Also valuable is the proposal’s requirement that localities disclose the revenue losses that independent school districts often suffer when the cities and counties in which they’re located grant abatements over which they have no control.

Unfortunately, the draft rule doesn’t require financial reports to include the number of years that existing tax breaks will continue, let alone the revenue losses still ahead.  Nor does it require them to name the specific companies that have received tax breaks.  That’s a major flaw, given that more and more states are putting all their eggs in one basket by granting multi-billion-dollar tax incentive packages to just one or two companies.

We hope GASB modifies the proposal to correct these and other shortcomings before issuing a final rule.  Nevertheless, the proposal represents a huge step forward in tax break transparency.  If implemented, it will be a powerful tool to help budget watchdog groups and average taxpayers alike hold public officials accountable for the use of tax dollars.