The Method and Madness Behind Abating Our Future
By Katie Furtado and Christine Wen
April 1, 2021
State and local governments aren’t always transparent about their economic development subsidies, news that will come as a surprise to exactly no one who has ever tried to track down the specifics of a deal. But we recently learned just how much information is missing during the seven months we spent researching for our new study, “Abating Our Future: How Students Pay for Corporate Tax Breaks.”
Starting in 2016, a new accounting rule required all state and local governments to disclose the amount of revenue they lose from tax abatements. For the first time, we could see the impact on school districts, which are often “passive” losers in the game. That means they don’t usually approve the deals (or even always know about them) -- cities and counties give away revenue on their behalf.
In "Abating Our Future," we lay out just how much revenue school districts forgo to tax abatement programs -- $2.37 billion -- and that only reflects the small percentage of districts that reported that data. We're talking only one in five districts that independently report.
Getting even that information was no small feat: We extracted it a report at a time from end-of-year spending documents across all 50 states and D.C. In all, we gathered 10,370 PDFs of these reports (their formal name is Comprehensive Annual Financial Reports). We found tax abatement disclosures in 2,498 of them.
Sometimes, just tracking down the report itself was difficult. About half of the states do not post them online, which meant we had to get them from other sources. Thankfully, the Center for Municipal Finance and Electronic Municipal Market Access maintain partial databases of local government financials. If we still couldn’t find it, we contacted the school districts directly (not cool. Like budgets, CAFRs should be easily accessible to the public).
After painstaking effort, we acquired about 90 percent of all the financial reports issued for FY 2019. That's when we start seeing all the places data is missing, inexact, difficult to interpret or vastly misrepresented.
The 2,498 files that contain tax abatement disclosures – we searched for the term “tax abatement” and its several variations -- are concentrated in just a handful of states. We found out later that many states provided no guidance or erroneous advice to their school districts regarding this disclosure.
As an example, many new Jersey districts claim that calculation of the foregone revenue is impossible because the tax rates changed. Some of these districts reported the amount of taxes for the whole municipality, rather than the direct impact to its schools. And then there are districts like Brentwood Union Free School District in New York, which says: “The District has determined that tax abatements are not material” (2019 CAFR, p. 32). The problem is, we have no idea the amount that would make it “material.”
Some Texas districts chose to only report the amount of taxes received (unnecessary as these were reported under “revenues”) plus the offsetting payments from the state and the recipient companies, and referred to this sum as a “net benefit.”
That defies the entire intent of the rule, which is to track forgone revenue, whether or not it was paid back by taxpayers elsewhere in the state (as is the case of Texas, California and Michigan). In many New York school districts, the way the disclosure is phrased makes it impossible to determine whether the reported amount was the gross taxes abated (before accounting for payments) or net (after accounting for payments). Needless to say, this is a major distinction.
The flawed reporting is not always the school district’s fault. Newport Independent School District in Kentucky couldn’t provide a figure because the local government (presumably the county) “has chosen not to disclose the nature or amount of [the] abatements” (2019 CAFR, p. 53). Chapter 4 delves more deeply into these disclosure failures.
Bottom line: some states need to make public spending documents more accessible and impose stricter rules and guidelines on compliance with the rule. Without that, we simply can't have a full picture of how much our public schools are losing to economic development deals that may not help the community, but surely enrich corporate pockets.
NOTE: The accounting rule is Statement No. 77 of the Generally Accepted Accounting Principles, which are financial reporting standards set by the Governmental Accounting Standards Board. We call it “GASB 77” in the report, for short. Learn more about it here.