Tax Abatements are Under the Microscope
A new system of “checks and balances” may soon impact states and their ability to provide corporate tax abatements.
Historically, to achieve state income tax savings a company had two options: to either wait to be approached by a state official for a tax incentive package, or to proactively seek tax relief. Also known as tax abatement programs, tax incentive packages are typically part of a state’s economic development program to achieve specific goals. In other words, states offer to reduce a company’s state-related tax basis in exchange for some sort of economic benefit, most often jobs to stimulate their local economy. As an example, in 2014, Nevada offered Tesla a $1.3 billion incentives package to build the company’s new “gigafactory” there. As part of the package, Tesla would be exempt from paying sales taxes for 20 years, and property and business taxes for 10 years.
A new system of “checks and balances” may soon impact states and their ability to provide corporate tax abatements. Under GASB Statement No. 77 (approved in August 2015), state and local governments must disclose key information about their tax abatement agreements that have not been consistently or comprehensively available before. The requirements of the GASB Statement No. 77 are effective for financial statements for periods beginning after December 15, 2015, with earlier application encouraged.
While states, such as South Carolina, have publicly voiced opposition to GASB Statement No. 77, others, such as California are already undergoing voluntary audits. In August, the “Golden State” approved an audit to examine the efficacy of the estimated $5 billion in corporate tax credits and incentives it gives out each year. According to Long Beach Post, the audit will evaluate whether numerous tax credits, approved by the state legislature and aiming to create jobs, have achieved the established objectives. Specifically, as stated by a Department of Tax Expenditure report, the audit is looking to examine at least six of the largest corporate tax credits and incentives set aside in the last three years.
Because GASB Statement No. 77 also allows for the aggregation of a large number of similar agreements, some state taxation experts warn that such aggregation must be done carefully or the disclosures will lose their usefulness. According to Brian Strahle, Founder and Managing Member of LEVERAGE SALT LLC, a state tax research and writing firm, “While GASB 77 says its objective is not to evaluate the effectiveness of abatement programs, a reader of the disclosures will automatically start evaluating the programs regardless.”
Strahle also added, “Opponents of the GASB 77 may argue that the disclosures don’t create an adequate financial picture because the benefits of the abatement programs are not required to be disclosed. GASB 77 attempts to counteract this argument by simply saying that the positive effects of any abatement program should already be seen in the financial statements. Regardless, readers may call for the discontinuation of abatement programs if all they see are the revenue decreases and cannot see the corresponding economic benefits. To adequately evaluate tax abatement programs, the reader also needs to know the economic benefit realized from the program. Otherwise, the disclosure only provides negative information and may be misleading.”
Ultimately, even if GASB Statement No. 77 does indeed impact the number of tax abatements granted by certain states, the majority of states will still need to find creative ways to attract businesses. To that end, more and more states are turning to a general reduction of corporate state income tax. At the start of 2015, states including Arizona, Illinois, New Mexico, and Rhode Island reduced their corporate income tax rates. In many instances, these cuts were part of multiyear legislation to lower the rates even further. A handful of other states, such as Pennsylvania, recently introduced proposals to slash corporate taxes and loosen apportionment regulations. In other words, states are creating huge state income tax incentives to lure businesses into their respective regions. The result is millions and even billions of dollars in potential tax savings. However, in order to uncover potential tax savings goals, companies – even the Teslas of the world – need to have the right tools to help them obtain a complete picture.
Whether GASB Statement No. 77, or any other future “checks and balance” system is put into place, it behooves companies of all sizes, even those with political pull, to put the right tools in place to uncover state and local tax savings today and for days to come.
Innovative state tax analysis software, such as State Tax Analyzer™, from Bloomberg Tax, helps companies predict the impact of potential tax-savings decisions. The goal of such software is to be able to analyze various tax-related scenarios, over multiple years, for multiple states and with the most current state and local tax codes, so a business can make decisions with confidence and take advantage of the dynamic state tax landscape.
To help gauge the role state taxes play in corporate business decisions to relocate and develop new facilities, access results of a recent Bloomberg Tax study entitled When States Compete: How State Tax Climates Impact Corporate Investment below.Download White Paper
Bloomberg Tax Technology recently interviewed 100 U.S. corporate tax professionals to gauge the role state taxes play in their businesses' decisions to relocate and develop new facilities, their prior experience with receiving local tax incentives, and their perceptions of which states offer the most favorable business tax climates.