Rule boosts transparency on tax abatements

TAX TALK: Ronald W. Nossek, right, partner, converses with colleagues Patrick McAssey, left, principal, and Michael A. Karolewski, partner, at BlumShapiro offices in Cranston. / PBN PHOTO/TRACY JENKINS
TAX TALK: Ronald W. Nossek, right, partner, converses with colleagues Patrick McAssey, left, principal, and Michael A. Karolewski, partner, at BlumShapiro offices in Cranston. / PBN PHOTO/TRACY JENKINS

New accounting standards going into effect this fiscal year will require a greater level of transparency regarding deals made between governments and businesses.

The Governmental Accounting Standards Board, known better as GASB, now requires governments to disclose how tax abatements impact revenue each year. The rule – which will be reflected in government financial statements – took effect July 1, 2016.

“Although many governments offer tax abatements and provide information to the public about them, they do not always provide the information necessary to assess how tax abatements affect their financial position and the results of operations, including their ability to raise resources in the future,” according to GASB.

The new rule requires states and municipalities to disclose such information as what tax is being abated, the authority under which it’s provided, gross dollar amount and other commitments made as part of the abatement agreement.

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GASB defines a tax abatement as an agreement between one or more governments and an individual or entity, in which the government promises to forgo tax revenue in exchange for “specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments.”

Rhode Island this fiscal year awarded several tax breaks and other incentives for companies looking to build and grow jobs in the state. At the end of this fiscal year, those abatements will have to show up on the state’s fiscal statements. Other deals made in previous years that are still in effect must also be reported.

“Prior to this statement, there really hasn’t been any requirement of disclosure on financial statements for abatements,” said Ronald W. Nossek, a certified public accountant and partner at BlumShaprio in Providence.

“This is part of a transparency initiative,” he added.

Nossek, who joined BlumShapiro one year ago, is part of the firm’s government-services group, and specializes in audits of government entities. He says it will likely take municipalities a little more time this year to gather all the necessary information to comply with the new accounting rule, adding that it’ll vary depending on how many deals have been made.

“The folks working in economic-development departments will probably have a good handle on these agreements,” he said. “But some might be missed, I’ve done this long enough to know that.”

The new rule is timely for Rhode Island, as Gov. Gina M. Raimondo and the R.I. Commerce Corp. have made tax incentives and abatements a key part of the state’s approach to economic development. Raimondo’s office in December said it had invested about $50 million through the Rebuild Rhode Island program alone.

That amount – along with all other deals made through the governor’s economic-development push – must now be disclosed on the state’s fiscal statement, along with general information about the deal.

“It’s an interesting disclosure because it’s for abatements generally connected to economic-development purposes, which is an issue that’s very much of interest to folks today,” said Dennis E. Hoyle, Rhode Island auditor general.

Hoyle, a certified public accountant, says state officials will likely start training for the new requirements early this year.

The new standard takes financial reporting one step toward enhancing transparency surrounding these types of deals, but it stops short of complete disclosure. While the rule requires governments to disclose the program through which an abatement is granted, it doesn’t force reporting agencies to reveal all details about the deal.

“The board acknowledges it is possible that the circumstances of some governments could legally prevent them from disclosing specific information, particularly governments with one or a few agreements,” according to GASB. “This statement allows a government to omit specific information that [it] is legally prohibited from disclosing.”

This confidentiality clause opens the door for governments not to disclose such information as the name of a company making the deal, or what exactly the entity will do in return for the abatement. This could bring some level of comfort to private entities wary of sharing too much of their financial information with the public at-large. And for transparency advocates, it likely falls short.

But as Hoyle points out, GASB statements are a work in progress.

“These things are done incrementally,” he said. “It’s evolving.” •

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