Preparing Local Tax Expenditure Reports: A Practical Guide for Local Governments

Abstract

Tax expenditures are provisions in the tax code that allow for special treatment of some properties or a certain type of expense when computing the tax liability. Such treatment usually results in a reduction in tax liability for the taxpayer. Policymakers use tax expenditures as tax incentives for economic development or to provide tax relief to taxpayers among many other reasons. Often these are in the form of sales or property tax exemptions that reduce and sometime eliminate the tax liability for some taxpayers. Common tax expenditures at the local government level include sales exemptions for nonprofit organizations, property tax exemptions for senior homeowners, and tax increment finance (TIF) districts.

In principle, these tax benefits could be provided by direct budget appropriations, thus these provisions are referred to as tax expenditures. They represent tax revenues that would have been otherwise collected if not for this preferential treatment in the tax code. Like direct government expenditures, tax expenditures are an allocation of government revenue that are intended to support a particular policy outcome or encourage some type of activity. The value of a tax expenditure can be thought of as representing the amount of money that would be necessary to provide the same level of financial support in the form of a government grant instead of through the tax code.

The presence of tax expenditures is not suggestive of bad tax policy and tax expenditures have long been part of our tax system. The District of Columbia (D.C.) notes a property tax exemption for nonprofits dating back to 1902. However, it is important to monitor the estimated current and future values associated with these tax provisions as they are reductions in tax revenue and their presence results in special treatment for some taxpayers relative to others.

Furthermore, a tax expenditure report provides the ability to gauge the taxing autonomy of a local government – that is, the degree to which it has control over the exemptions against its own tax base. According to the 2012 U.S. Census of Governments, there were 90,056 local governments in the United States, with 43 percent designated as general-purpose governments and 57 percent as special-purpose districts. The taxing authority of these many local governments share the same tax base, and create a complex jurisdictional and taxing landscape where decisions of one jurisdiction can directly affect the revenue of other jurisdictions.

The aim of this “how to” document is to assist local governments who choose to prepare a tax expenditure report themselves by providing them the practical resources and example methods to begin the process. Therefore, this document gives a general overview and theoretical background for preparing a local tax expenditure report with specific and practical examples drawn from the preparation of a local tax expenditure report for Fulton County, Georgia.