Tax Abatement Transparency

For accounting and financial reporting purposes, a tax abatement is an agreement whereby a government agrees to forgo tax revenues to which it is otherwise entitled in exchange for a promise by the counterparty to the agreement to take specific future actions that will contribute to the government’s economic development, or which otherwise benefits the government or its citizens (GASB Statement No. 77, Tax Abatement Disclosures). GASB Concepts Statement No. 3, Communication Methods in General Purpose External Financial Reports That Contain Basic Financial Statements, indicates that the notes to the financial statements should not include “either (a) subjective assessments of the effects of reported information on the reporting unit’s future financial position or (b) predictions about the effects of future events on future financial position.” (paragraph 37). Moreover, information presented in the notes to the financial statements must be “essential to a user’s understanding of those financial statements” (paragraph 36). Thus, governments may find themselves effectively prevented from providing certain highly useful information concerning the justification and expected long-term benefits of tax abatements in the notes to the financial statements. Consequently, if the annual comprehensive financial report of a government is to provide a complete picture of tax abatement transactions to the citizenry, the governing body, rating agencies, and other key stakeholders, additional information concerning the justification and expected long-term benefits of tax abatements may need to be provided elsewhere in the report.

The letter of transmittal, located in the Introductory Section of an annual comprehensive financial report, provides a government the opportunity to include information regarding its current economic condition, which includes the subjective analysis of its projected future financial direction. Therefore, the letter of transmittal is well suited to provide the justification and expected long-term benefits of tax abatements.

1. The government should disclose the following information in its letter of transmittal:
   1. A reference to other documents (budget, economic development plan, board minutes) where a complete cost/benefit analysis can be found, along with information on how to access those documents;
   2. An explanation of how tax abatements are accounted for and incorporated into the budget process and the final approved budget;
   3. A description of the policies governing tax abatements, including what the government is hoping to achieve with them, and the methodologies used to determine the entity's return on investment;
   4. An identification of those responsible for monitoring compliance with abatement agreements;
   5. An explanation of the relationship between tax abatements and the government's goals set forth in its strategic plan;
   6. A five-year chart of benefits anticipated and received due to the abatement, which should include both financial and nonfinancial benefits (e.g., increased employment).
2. In preparing and presenting tax abatement information in the letter of transmittal, a government should adhere to the following guidelines:
   1. Avoid duplicating information already provided in the notes to the financial statements and management's discussion and analysis;
   2. Avoid unnecessary detail by aggregating information both by government and by type of tax being abated (consistent with GASB Statement No. 77);
   3. Keep the discussion simple and straightforward;
   4. Use charts and graphs to supplement (but not replace) recommended contents; and
   5. Be mindful of materiality (both quantitative and qualitative).
3. GFOA recommends that finance staff initiate communication and develop/maintain relationships with its entity's economic development partners and/or budgetary officials charged with initiating, developing, and affirming tax abatements to ensure the proper flow of information.
4. The government should establish the same relationships with other governmental entities that have the power to abate their taxes, as well as a timeline to ensure that they provide all necessary information soon enough to prevent any delay in the timely issuance of a government's annual comprehensive financial report.