Proposed Accounting Change Aims to Unlock Incentives Secrecy

November 28, 2014

Investigative Reports

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Closed MeetingA little-known, proposed national accounting change could shed light on how much public revenue is lost in South Carolina through generous taxpayer-backed incentives that routinely are doled out secretly to companies.

The Connecticut-based Governmental Accounting Standards Board (GASB), an independent organization that sets accounting standards used by state and local governments nationwide, has proposed a new standard that would require the annual reporting of certain types of incentives.

“Although many governments offer tax abatements, little information is publicly available regarding the provisions of tax abatement agreements or the magnitude of the effect those agreements will have on a government’s ability to raise resources in the future,” GASB said in its summary of the proposed standard, which was released last month.

GASB is inviting written public comments on the proposed change through Jan. 30. A final decision could be issued by next August; if enacted as written, the change would take effect for reporting periods beginning after Dec. 15, 2015.

S.C. law requires state government to comply with generally accepted accounting principles (GAAP), an umbrella term incorporating the principles of GASB and the Financial Accounting Standards Board (FASB), which oversees private-sector accounting, said Eric Ward, spokesman for S.C. Comptroller General Richard Eckstrom. Local municipalities can choose not to follow GAAP, though independent auditors will not issue those governments a “100 percent clean review that does not include any caveats or reservations” when performing annual audits, he said.

“This is a huge deal; this is tectonic,” said Greg LeRoy, executive director of Good Jobs First, a Washington, D.C.-based national policy resource center on state and local job subsidies, when contacted this week by The Nerve about the GASB proposal. “These things (incentives) have gotten so out of control, so overgrown, so arcane – it’s been off the radar.”

LeRoy’s organization last month issued an initial analysis of the proposed standard. The bottom line, according to LeRoy, is that the GASB proposal is an important step toward greater transparency, though he added, “We’re concerned that GASB is missing some money.”

“I don’t think anybody really knows how that GASB (proposal) will affect the states because they haven’t finalized it yet,” said Burnie Maybank, an attorney with the Columbia-based Nexsen Pruet law firm and a two-time former director of the S.C. Department of Revenue, when contacted this week by The Nerve.

Maybank added, “The governmental entities are probably the ones most opposed to it.”

Under the proposal, state and local governments for the first time would have to report, among other things, in their annual financial statements:

  • General description of their tax abatement programs;
  • The total number of tax abatement agreements entered into during the reporting period, and the total number of agreements in effect at the end of the period;
  • The dollar amount by which the reporting government’s tax revenues were reduced during the reporting period because of tax abatement agreements; and
  • A description of the types of commitments other than to reduce taxes – for example, tax dollars spent on purchasing land and installing utility lines – and the most “significant individual commitments other than to reduce taxes, if any, made by the reporting government in tax abatement agreements.”

GASB defines a tax abatement as an agreement between one or more governmental entities and a taxpayer (a company) in which:

  • One or more governmental entities “promise to forgo revenues from taxes for which the taxpayer otherwise would have been obligated”; and
  • The taxpayer “promises to take specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or citizens of those governments.”

The problem, however, with that definition, LeRoy explained, is that it while it would appear to cover certain incentives handed out by S.C. government bodies through incentives agreements – such as, for example, the millions in state “deal-closing” grants awarded annually – it might not cover other incentives that companies would automatically qualify for under state law if they met particular job-creation or investment targets.

The proposed standard as currently written also wouldn’t require state or local governments to report the cost of tax breaks on specific projects, LeRoy acknowledged.

The Nerve has frequently pointed out how South Carolina typically awards tens of millions of dollars in taxpayer-backed incentives annually – with little transparency – to companies seeking to locate or expand in the state. The Nerve launched in January 2010 with a week-long investigative series on the secretive Boeing incentives package, estimating the minimum total taxpayer cost over a 15-year period for the aerospace giant’s North Charleston plant at a half-billion dollars.

The South Carolina Policy Council – The Nerve’s parent organization – has called for greater transparency with economic incentives as part of its eight-point reform agenda released in 2012.

From 2000 to 2009, corporate and individual tax incentives for economic development skyrocketed from $70.3 million to $261.2 million, according to a Policy Council analysis of state Bureau of Economic Advisors data. In 2010 (the latest year for which the BEA provided data to the Policy Council), the Palmetto State gave out $469.4 million in individual income tax credits, $67.8 million in job development or job retention credits, and $143 million in corporate income tax credits – not counting $1.5 billion in corporate income tax credits carried over from previous years.

And as of last March, South Carolina was projected to give approximately $3 billion in sales tax exemptions for all of last fiscal year, which ended June 30.

In March, state Rep. Laurie Funderburk, D-Kershaw, sponsored a bill (H. 4875) that would have required the Department of Revenue to complete a study every four years to assess the costs and benefits of economic development tax incentives.

The bill never made it out of the budget-writing House Ways and Means Committee.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org. Follow him on Twitter @thenerve_rick. Follow The Nerve on Facebook and Twitter @thenervesc.