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September 1, 2015

The Great GASB

Openness is a crucial
first principle of good governance. And a new rule is helping to increase
transparency regarding how tax dollars are spent in Virginia.

Starting in December of
next year, the annual financial reports state and local governments across the
nation produce will have to disclose how much money it cost them to give out
various forms of tax abatements.

The rule came from the
Governmental Accounting Standards Board (GASB), an independent organization that establishes and improves standards of accounting
and financial reporting for state and local governments.

Tax abatements are tax
reductions aimed at encouraging certain behaviors or activities. Often
abatements are intended to spur investment and job creation, under the premise
that if a business’s taxes are reduced it will be more likely to expand or
relocate. The new GASB rule is limited to abatement based agreements between
the government and a specific individual or entity like Virginia’s Motion
Picture Tax Credit Program.

The new rule will
require state and local Comprehensive Annual Financial Reports to have a brief
description of abatements and the gross dollar amount of taxes governments gave
up during the fiscal year. Details will include the authority under which the
abatement was granted, commitments made other than abating taxes – such as
infrastructure improvements – and how taxes can be reclaimed if the recipient
of an abatement doesn’t live up to the agreement.

This is a meaningful
step in bringing greater disclosure to the massive pile of tax breaks that cost
the state billions in lost revenue each year. Just like budget appropriations,
these “tax expenditures” cost money. That means either higher taxes elsewhere
or reductions in spending in order to balance the state budget. Tax
expenditures, including credits, exemptions, and deductions, reduced the state
tax liability of Virginia’s residents and companies by $12.5 billion in 2008.
Estimates of the impact on local revenues are essentially impossible because of
slim and varied reporting, something the new rule will improve.

Unlike public investment
through the state budget in education, health care, transportation, and
other areas, tax expenditures are not subject to the legislature’s
appropriations process. So they end up being mostly invisible. Instead of being
evaluated every year and subject to elimination as part of the state budget
process, they are passed in one-time legislation and often operate on autopilot
with little oversight. The rule change will empower policymakers, advocates,
and everyday citizens to be involved in oversight and review. At a time when
Virginia’s support for important services like K-12 education is below what it
takes to meet growing public needs, tax expenditures in the form of tax
abatements are a cost worth examining.

Transparency is a
bipartisan value, with power to unite policymakers of all backgrounds. The GASB
rule moves Virginia  toward a more transparent government – from the city
council of Roanoke to the Virginia General Assembly chambers in Richmond to the
voting booths of Accomack.

–Aaron Williams, Research Assistant

The Commonwealth Institute

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