Many municipalities are currently striving to maintain adequate revenue flow to continue offering services to their citizens. The fact that property taxes are typically not levied on government / non-profit owned lands can take away a large potential source of money. As a result, a new form of non-tax income has been developed: payments in lieu of taxes (PILOT).
Kenyon & Langley (2010) explain that payments in lieu of taxes are determined cooperatively by city government working with an individual non-profit, although in some cases the municipality may have a schedule of payments for different types of non-profits such as hospitals and colleges. According to Kitchen (2013), assessing PILOTS to solve the revenue problem can pose serious issues with regard to the ad hoc nature of the process, the extra tax burden on for-profit businesses, and potential distortion of decisions made by the cities or the businesses He states that PILOTs collected should be equivalent to the property taxes levied on for-profit institutions and that all property should be assessed equally (Kitchen, 2013). This approach effectively negates the category of “tax-exempt non-profit.”
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In my view, governments should not rely on PILOTs as a substantial source of income, and preferably, they should not be used at all. For example, a working paper by Langley et al. from the Lincoln Institute of Land Policy suggests that PILOTS are not as valuable as they may sound. Although the practice seems ideal from the government point-of-view (Kenyon & Langley, 2010), since the local government is able through PILOTs to get some additional financing, PILOTs provided less than one percent of total revenue in 165 out of the 181 localities which were surveyed (Langley et al., 2012). Most of the cities who received significant payments were in the Northeast, where large educational institutions paid in millions of dollars (Langley et al., 2012). Also, 58% of the PILOTs were obtained via long-term contracts, and 34% by routine annual payments (Langley et al., 2012). This differential assessment of PILOTs might be perceived as discriminatory in the eyes of the non-profits (Langley et al., 2012). For example, hospitals are frequent targets for PILOTs because they do not appear to be non-profit in the same way that a library is non-profit (Brody et al., 2012). A standard of assessment for different types of non-profits would be better (Langley et al., 2012). From the point-of-view of the for-profit businesses that are having to shoulder more of the tax burden, PILOTs, particularly those that are virtually equivalent to taxes (Kitchen, 2013), would seem like an excellent idea.
- Brody, E., Marquez, M., & Toran, K. (2012). The Charitable Property-Tax Exemption and PILOTs.
- Kenyon, D. A., & Langley, A. H. (2010). Payments in lieu of taxes: Balancing municipal and nonprofit interests. Lincoln Institute of Land Policy.
- Kitchen, H. (2013). Property Tax: A Situation Analysis and Overview. In William J. McCluskey, Gary C. Cornia, Lawrence C. Walters (Eds.) A Primer on Property Tax (1-40). West Sussex, UK: Wiley & Sons
