Debate Rages Around Proposed Tax Incentives Rule

Although scores of public and private groups support the proposal, many say the requirements don't go far enough.
by | March 26, 2015

Do tax breaks to businesses spur economic development? It's a difficult question to answer, mainly because there is no standard way to measure the success of tax incentives. But that could change under accounting rules proposed back in October by the Governmental Accounting Standards Board (GASB) that would make governments report the tax breaks they give businesses.

Specifically, GASB is proposing that state and local governments disclose information about property and other tax abatement agreements in their annual financial statements. If approved, the new disclosures could shed light on an area of government finance and provide hard data on information that is assembled sporadically, if at all. Scores of public and private groups support the proposal and it has proven to be one of GASB's most debated topic yet, as nearly 300 groups or individuals submitted comment letters to the board. But many still say the requirements don't go far enough.

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What the disclosures don't include is other types of tax expenditures, such as tax increment financing (TIF), which discounts property taxes as a way to encourage redevelopment; agreements that discount personal income taxes; or programs that reduce the tax liabilities of businesses or similar classes of taxpayers. By some estimates, the proposal by GASB would capture about one-third of the actual tax expenditures a government makes.

Good Jobs First, a policy center that advocates for transparency in economic subsidies, says the proposal's scope is missing out on a big part of the picture. By way of an example, Greg LeRoy, the center's executive director, points to a 2012 study that shows that states are increasingly using the withheld taxes of their workers to subsidize companies. Employers are allowed to keep a portion of the income tax taken out of worker paychecks instead of remitting it to the state. "It is an agreement and it has an economic development purpose," said LeRoy, "but would fall through the cracks [under GASB's proposal]."

Another example brought up by labor and fiscal policy groups in New York: The state's largest economic development programs, the Brownfield Redevelopment Tax Credit and the Empire Film Production tax credit wouldn't be tracked under the proposed rules. The two programs cost the state nearly $1 billion annually and have been widely criticized for inefficiencies and opaque reporting.

GASB Chair David Vaudt said the proposal was deliberately "very narrow" in scope. "At its heart, the project is about giving users of governmental financial statements access to information that will allow them to better assess a government's financial health," he said.

Supporters of the rules argue that some standardized tracking of this data is better than none at all. A Pew Charitable Trusts analysis this year applauded GASB's requirement that government's state the specific purpose for every incentive program. "Pew has found that a lack of clarity about the objective of economic development incentives is a major obstacle to completing high-quality evaluations," the report said.

Philadelphia's controller, who supports GASB's proposal, has experienced this firsthand. His office, which prides itself on being a watchdog, issued a report last year assessing the financial impact of Pennsylvania's major tax incentive program on Philadelphia's economic development. Looking at expenses on two main tax credits for businesses in the city's Keystone Opportunity Zone, Alan Butkovitz concluded that the city spent $385 million in tax credits on 617 businesses over 15 years. Meanwhile, Philadelphia received $40 million in "new wage tax" revenues resulting from the creation of new jobs. In short, the city paid a little more than $100,000 per new job created. At an average salary of $50,000 per job, it would take more than 50 years of wage taxes for those new jobs to pay for themselves.

The city's commerce department disputes the numbers. Butkovitz's report doesn't take into account spending associated with new jobs or consider that the city's opportunity zones may have kept jobs from leaving Philadelphia. But what is patently obvious is that no one's really paying attention to whether the zones are worth the expense. In his report, Butkovitz lamented the fact that there were no adequate records indicating any oversight of the KOZ Program. He isn't the first to say so - in 2009, the state legislature's Budget and Finance Committee reported serious deficiencies in the KOZ program that made its success difficult to measure.

Of course, it's hard for anyone to argue against more transparency, said Jeff Markert, a public finance expert at the consulting firm KPMG. "It's really just a question of how and how much should be reported," he said. "That's where the debate comes into play."

GASB's proposal isn't perfect, said Butkovitz, but it would help policymakers think about accountability for their giveaways -- and that's no small thing. "The Keystone Opportunity Zone program has been a sacred cow," he said. "It's been repeated so frequently that abatement tax credits produce jobs, it's an axiom. The idea that you have to put up numbers against that just doesn't exist."