ILSR joined other members of the Advocates for Independent Business coalition in submitting a joint public comment letter 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 companies for economic development purposes.
The proposed rule change comes from the Government Accounting Standards Board (GASB), 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 in order to sell bonds.)
Local and state governments spend an estimated $70 billion a year providing subsidies to companies in the name of job creation and economic development. Most of this spending is in the form of foregone revenue (i.e., tax breaks) rather than direct outlays. Under current GASB rules, governments are not required to disclose these expenditures in their financial reporting, as they must for spending on things like roads and schools. This lack of transparancy makes it difficult for citizens to monitor, evaluate, and challenge these corporate giveaways.
In its letter, the coalition, which is coordinated by ILSR and includes 14 national organizations representing about 150,000 independent businesses, noted that the vast majority of tax incentives go to large companies, including retailers like Walmart and Amazon, that compete with locally owned businesses and often do not produce an increase in jobs:
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.
While expressing strong support for the disclosure required by the rule, AIB 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,” the coalition wrote.