Tax Credit Communities Unclear About Effect of GASB Disclosure Guidance

Published by Michael Novogradac on Tuesday, September 1, 2015 - 12:00am

The tax credit communities face an air of uncertainty after the Government Accounting Standards Board (GASB) issued final guidance that requires more detailed disclosures on tax abatement programs. The programs affected could include both federal and state low-income housing tax credits (LIHTCs), new markets tax credits (NMTCs), historic tax credits (HTCs) and renewable energy tax credits (RETCs). It is unclear whether these tax credits meet GASB’s definition of tax abatement–and meeting the definition could have a potential adverse effect on affordable housing, community development and renewable energy. If these credits meet the definition of tax abatement, the government affected by the tax abatement would have to list in its financial statements the dollar amount of the taxes being abated. However, there is no requirement to disclose the financial and nonfinancial benefits these programs bring to the government and its community. Including the cost of the credits but excluding the program benefits from the disclosure requirements could create a distorted image of the overall impact of these tax credit programs.

The GASB issued final guidance Aug. 14 in GASB Statement No. 77, Tax Abatement Disclosures (GASB 77), which requires federal, state and local governments to disclose for the first time information about tax abatement agreements. The disclosure requirements are intended to inform users of a government’s financial statements about tax abatement agreements and the impact that these agreements have on a government’s finances. GASB 77’s requirements are effective for financial statements with periods beginning after Dec. 15, 2015, though earlier application is encouraged.

Tax abatements are defined within GASB 77 as a subset of tax expenditures. GASB 77 does not apply to all tax expenditures and the statement specifically notes that tax exemptions and tax deductions are not tax abatements. However, GASB 77 doesn’t specifically discuss federal or state tax credits, which are another common form of tax expenditure.

In a Jan. 30 joint letter to the GASB, the Novogradac Low-Income Housing Tax Credit Working Group and the Novogradac New Markets Tax Credit Working Group provided comments on the GASB Exposure Draft, Tax Abatement Disclosures. The letter addressed the ambiguity of the application of GASB 77 to tax credit programs and asked for clarity on whether such tax credits are included in GASB 77’s definition of tax abatements. GASB responded in paragraph B12 of the final guidance, stating:

  • A variety of labels are used to identify tax reduction programs–exemptions, deductions, credits, rebates and abatements foremost among them. These labels are used interchangeably to describe similar transactions … the Board concluded that this Statement should focus on the substance of the transactions rather than on their form or label.

GASB 77 goes on in paragraph B15 to define tax abatements as:

  • Resulting from an agreement between one or more governments and an individual or entity in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a 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. The scope of this Statement is limited to transactions that meet this definition.

However, as addressed in the working groups’ comment letter, paragraph B11 of GASB 77 states:

  • Certain tax expenditure programs that exhibit the features of a tax abatement–they reduce taxes, encourage beneficial actions by individuals or entities, and may be based on an agreement–are, nevertheless, excluded from the scope of this Statement because the government does not commit to abate taxes until after the entity has already performed the activity for which the government is providing the tax abatement.

Although there may be an “agreement” between the government and an entity for tax credits, the commitment doesn’t come until after the activity has been performed (i.e., construction of a building). In some cases, there may be no initial “agreement” and the government doesn’t commit to abate taxes until after the performance of the activity, such as is the case with some RETCs. This analysis possibly could lead to discrepancies regarding which tax credits are viewed as tax abatements under GASB’s definition.

GASB’s definition of tax abatement provides weight to the argument the tax credit programs are included in the scope of GASB 77. However, GASB’s focus on the substance of transactions over form or label and the timing of performance leaves itself open to interpretation regarding the inclusion of tax credit programs.

Another concern discussed in the working groups’ comment letter is that if tax credit programs are included in the definition of tax abatements, then the disclosure requirements should include the tax credit programs’ economic benefits. That would include such items as future revenues stimulated, future expenses reduced and other community benefits obtained through the foregone revenue. The GASB directly responded to this recommendation in paragraph B6:

  • Some respondents to the Exposure Draft expressed concern that by omitting information about economic benefits or other outcomes, the tax abatement disclosures may be misleading or incomplete. The Board concluded that it was not an objective of the Statement to provide information needed to evaluate the effectiveness of tax abatement programs and, therefore, did not modify the disclosure requirements to include information about the benefits of these programs.

Both federal and state tax credit programs have had a powerful economic impact on low-income communities. By excluding these impacts from the disclosure requirements, it is possible that the government’s financial statements are misleading, as these programs may appear as a liability on federal and state governments. The larger impact of the benefits on the government are excluded in the disclosures on the tax abatements, instead intermingled as part of revenue in the financial statements with no credit given to the programs that created this revenue. This could create a negative connotation in the minds of financial statement users that these programs are drains on the state and local government. With so many governments struggling to stay in the black, the tax credit communities should be concerned that financial statement readers might voice concerns about the tax credit programs and cast an undesirable light on these programs when finding ways to balance government budgets.

One positive implementation made in the finalized form of GASB 77 relates to the disclosure of recapture provisions. In paragraphs B44 and B45, GASB 77 requires disclosure of any recapture provisions. However, only the recapture provisions themselves are required to be disclosed. The amounts that are recaptured are not required to be disclosed as the GASB believes that they would be accounted for and reported in the financial statements. At a minimum, this will inform users of the financial statements that there are ongoing compliance requirements that these programs have to abide by which have a positive impact on individuals in the communities being served by the programs. In addition to the recapture provision, if the tax credits programs are considered tax abatements, the government would have to disclose:

  • the purpose of the tax abatement program;
  • the tax being abated;
  • the dollar amount of taxes abated;
  • the types of commitments made by tax abatement recipients; and
  • other commitments made by the government in tax abatement agreements, such as to build infrastructure assets.

Until the ambiguity of GASB 77’s applicability to tax credit programs is resolved, the air of uncertainty about whether tax credit programs, such as the LIHTC, NMTC, HTC and RETCs, are excluded from tax abatements will continue to linger.