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GASB proposes disclosures for tax abatements: the GASB has requested responses to its exposure draft on Tax Abatement Disclosures by January 30, 2015.

In late October 2014, the Governmental Accounting Standards Board (GASB) released an exposure draft (ED) on Tax Abatement Disclosures. The board has requested that those desiring to respond to the proposals contained in the ED do so by January 30, 2015. If approved, the proposed new guidance would be issued in the form of a final GASB Statement that would first take effect for the fiscal year that ends December 31, 2016 (with earlier application encouraged).

BACKGROUND

Governments may elect to forgo collecting all or a portion of taxes to which they are entitled (for example, property tax relief for the elderly). The opportunity cost related to the "lost" taxes is commonly described as a tax expenditure. Tax abatements, as the GASB uses the term, is intended to describe a subcategory of tax expenditures identifiable by: 1) the purpose of the arrangement; 2) the type of revenue reduced; and 3) the existence of an agreement.

First, the purpose of a tax abatement is to promote economic development (for example, revitalizing the local economy, retaining or attracting jobs and companies, increasing employment by existing employers, increasing the property tax base) or some similar objective (historical preservation, environmental protection, housing construction).

Second, the type of revenue related to a tax abatement is a tax rather than a fee or charge. Thus, for example, offering special water rates to a company considering relocating would not be a tax abatement.

Third, a tax abatement results from an agreement between the government and a specific taxpayer (either an individual or an entity) in which the government promises to reduce the counterparty's tax liability and the counterparty promises to take certain actions. This agreement, however, does not have to be in writing and does not have to be legally enforceable

PROPOSED DISCLOSURE REQUIREMENTS

The GASB proposes in the ED to require that governments disclose certain general information concerning both: 1) tax abatements to which they are a party to the agreement; and 2) tax abatements of other governments that affect them. That general descriptive information would need to include:

* Name and purpose of the tax abatement program(s);

* Specific taxes being abated;

* Authority for entering into the agreement;

* Eligibility criteria;

* Mechanism used (refund, reduction of assessed value) and how the amount was determined;

* Recapture provisions (if any); and

* Types of commitments made by the recipients (only for those agreements to which the government itself is a party to the agreement).

The GASB also proposes in the ED that governments disclose: 1) the number of agreements entered into during the reporting period; 2) the total number of agreements in effect as of the reporting date; 3) the dollar amount of taxes abated during the period; and 4) description of any commitments made by the government (other than the reduction of taxes) that have not yet been fulfilled.

As a rule, information for similar tax abatements could be provided either individually or in the aggregate. Disclosures, however, would need to distinguish agreements to which the government itself is a party from agreements of other governments that affect the government. The former (agreements of the government itself) should be organized by each major tax abatement program. The latter (agreements of other governments) could be aggregated as though they were a single program.

The proposed disclosure requirements would need to be made from the start of the agreement until it expired.

DUE PROCESS

As noted earlier, the GASB has set a deadline of January 30, 2015, for receiving comments on its proposed tax abatement disclosures. Two of the standing committees of the Government Finance Officers Association (GFOA), the Committee on Accounting, Auditing, and Financial Reporting and the Committee on Economic Development and Capital Planning, will jointly prepare GFOA's response to the ED. A copy of the ED can be obtained, free of charge, at the GASB's website.

STEPHEN J. GAUTHIER is director of the GFOA's Technical Services Center in Chicago, Illinois.
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Title Annotation:The Accounting Angle; Governmental Accounting Standards Board
Author:Gauthier, Stephen G.
Publication:Government Finance Review
Geographic Code:1USA
Date:Dec 1, 2014
Words:651
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