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New accounting standards will require states, local governments to report impact of tax incentives

by Laura Tomaka ~ October 2015 ~ Stateline Midwest »
Every state uses tax and financial incentives to attract, retain and expand businesses. The benefits are the jobs and economic activity that these firms bring to a state, but what are the costs?
In 2012, a New York Times investigation put the price tag for states and local governments at more than $80 billion, but to a large degree, policymakers have been establishing and continuing these incentive programs without a firm handle on the costs.
That may begin to change in 2017, when a new rule of the Governmental Accounting Standards Board takes effect. It will require state and local governments to report how much revenue they are losing or willingly not collecting as the result of their tax-abatement agreements with businesses.
“It’s long overdue,” Illinois Rep. Jack Franks says. “It’s something that I’ve been asking a long time because there [are no standard] metrics to determine whether there is any return on the investment when we don’t even know how much we are giving away.”
“There is no empirical evidence showing us that taxpayers are receiving any return on their investment and that we are actually incenting companies to do anything they normally would not do anyway,” he adds.
David Vaudt, chairman of the Governmental Accounting Standards Board, says the new rule is about transparency — making the impact of tax breaks on the financial health of states and local governments more clear to policymakers and the people they serve.
As part of the disclosure, governments will have to describe the purpose of the abatement program and the dollar amount of the taxes being lost. Franks has long been a critic of tax and financial incentives in his state, especially those that target help for a single company.
“I have a big problem with the fact that government is in the business of picking winners and losers,” he says. “Oftentimes we have small businesses that are paying their taxes subsidizing large companies that aren’t paying taxes. It’s unfair.”
Under the current policy framework, he says, states and local governments are pitted against each other in a “race to the bottom.” He would like to see lawmakers take a more cooperative, regional approach to economic development.
“Talk about working together to have a good business climate to have companies come together so we can all grow together instead of giving away billions of dollars in tax revenue,” he says.
He would also like to see even more done in the area of reporting — for example, details on how many jobs are being created and/or retained, a listing of recipient companies, and information on the value of each tax-abatement deal and the number of deals being used in a specific area.

 

Article written by Laura Tomaka, CSG Midwest staff liaison for the Midwestern Legislative Conference Economic Development Committee.