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Tax abatements take needed revenue by Amy Rose and Jacob Bundrick Special to the Democrat-Gazette | September 9, 2022 at 3:03 a.m.

Earlier this year, the Little Rock School District agreed to raise starting salaries for teachers. The raises were contingent upon available funding, and they were ultimately put on hold after school officials determined that they couldn't afford the increases.

Teachers were told the district had lower-than-expected tax revenue. Partly, the shortfall was caused by declining enrollment, which means less state aid, and officials cited operational changes as well.

But there's another reason Little Rock School revenues are down, through no fault or choice of their own: economic development tax abatements given to corporations. Tax abatements often impact school districts the most, though they typically have the least say in the matter.

In fiscal year 2021, the school district lost out on $2.3 million in potential revenue due to those subsidies. That amounts to nearly $1,450 per teacher.

Which companies received the abatements? Did they deliver promised jobs? No one can tell because of Little Rock's poor transparency around the giveaways. But thanks to a relatively new reporting rule, the public can learn how much revenue the tax abatements cost their schools.

Each year, government entities that follow Generally Accepted Accounting Principles (GAAP) produce an end-of-year, backward-looking spending report. Unlike a budget, which is projected expenditures, an Annual Comprehensive Financial Report shows what was actually spent. In 2015, the Governmental Accounting Standards Board (GASB), which sets GAAP principles, added "Statement No. 77 on Tax Abatement Disclosures." It requires most state and local governments (including school districts) to include a note in their annual financial statements if they lose revenue to economic development tax abatements.

It's big news: For the first time, the public can finally see the costs of corporate tax breaks on local communities--not just the alleged benefits touted during ribbon-cutting ceremonies for the arrival of a new company.

While required by the state to use GAAP, none of the 234 school districts in Arkansas reported tax abatement revenue losses (as required by Statement 77) in their financial reports. Thankfully, and uniquely, the city of Little Rock did.

According to the city's financial reports, no entity has lost more than the school district. Indeed, between 2016 and 2021 (all the new data that's available) the Little Rock School District lost $14.6 million to economic development subsidies awarded by the city--or 65 percent of all the abatement dollars given out by the city.

What's worse, evidence suggests that forgoing this revenue isn't necessary to attract businesses. In fact, research shows that incentives do not alter the location decisions of at least 75 percent of firms receiving them--and perhaps as much as 98 percent.

This loss of revenue is not insignificant. The money could have been used for vital services such as school libraries, technology, building maintenance, and raises for teachers. For a district that educates 21,200 students, $14.6 million resulted in $688 per student in forgone revenue over the six years.

To be sure, the abated revenue wouldn't have solved all the budget challenges facing Little Rock school officials, but one thing is clear: Local taxes are an important funding source for Little Rock students, and the city's actions took revenue away from them.

The revenue loss reported by the city should have also been reported by the school district. GASB 77 requires even "passive losers," like school districts (who typically don't have a say in giving these corporate tax breaks), to report tax abatements. Little Rock School District did not report this information. The state could--and should--address these reporting lapses by requiring school districts to include a Statement 77 note stating clearly whether there were any tax abatements in effect, as is done in Iowa.

Public education is both the most expensive local public service and the most powerless to protect itself from corporate tax abatements. There are better ways:

• State officials should shield school district revenues from abatement programs, as is the case in Florida, or give school districts the power to opt in or out of deals involving tax breaks, as happens in Louisiana;

• The Arkansas state auditor, who oversees GAAP compliance, should require municipalities that adhere to GAAP to include a GASB 77 Note--even if only to say "no abatements this year"--in their end-of-year reporting statements. And of course, all passive revenue losers should be required to include it, but it was missing from the Little Rock School District, Pulaski County, and the Pulaski County Special School District; and

• Give the public project information when a company is asking for tax breaks--well in advance of final approval.

If a company receives a public subsidy, residents should know what they're getting in return and the full projected costs. Thanks to Statement 77, the public can at least begin to answer the latter.

Amy Rose is a project coordinator at Good Jobs First. Jacob Bundrick is a lecturer of economics at the University of Central Arkansas and an affiliated scholar with the Arkansas Center for Research in Economics. The views expressed are the authors'.

Print Headline: Cost to schools


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