AIB has submitted comments in support of an important proposal to change the accounting rules that local and state governments follow. The change would require governments to disclose the tax breaks and incentives they provide to companies for economic development purposes.
The new rule has been proposed by the Governmental Accounting Standards Board (GASB), which is a professional association that establishes standards of accounting and financial reporting for state and local governments. (Although GASB has no legal authority, the vast majority of states and localities follow its rules, in part because doing so is necessary for those that want to sell bonds.)
Local and state governments spend an estimated $70 billion a year on economic development subsidies given to private developers and companies. Most of this spending is in the form of foregone revenue (i.e., tax breaks) rather than direct outlays. Governments are not currently required to disclose these expenditures under GASB’s rules, making it difficult to know how much a city, county, or state is spending on tax incentives for companies and to evaluate the whether these expenditures are worthwhile.
In its letter, AIB, a network of 14 organizations that represent about 150,000 independent businesses, wrote:
We have a deep interest in this proposed policy, because the tax expenditures that local and state governments make for economic development directly affect the competitive landscape in which our members operate.
Many cities, for example, have provided tax abatements to new big-box retail projects that compete directly with the Main Street businesses that we represent, sometimes leading to business closures and job losses. There is evidence that the public may not be getting their money’s worth from some of these expenditures. For example, a 2011 study produced for the East-West Gateway Council of Governments found that cities and counties in the St. Louis metro area had diverted more than $5.8 billion in public tax dollars to finance private development, with more than 80 percent of these funds supporting retail projects. Yet the region saw virtually no economic growth. “The number of retail jobs has increased only slightly and, in real dollars, retail sales per capita have not increased,” the study found. According to the study, more than 600 small retailers closed in the St. Louis metro area during the period, producing job losses that apparently offset the new jobs created by the subsidized development.
In its letter, AIB expressed its support for the proposed rule, but urged the board to modify two aspects of its draft. It asked GASB to ensure that its definition of “tax abatement” covered tax increment financing, a common way cities subsidize chain retail development. It also urged the board to specify that state and local governments must not only report the total value of tax incentives, but also disclose details on each individual tax break, including the name of the company that received the subsidy. “This information is essential if citizens and policymakers are to be able to evaluate the costs and benefits of these expenditures, which vary widely from deal to deal. In retailing, for example, this information would reveal whether a new abatement recipient is a known competitor of existing employers,” AIB wrote.