PILOT (finance)
Encyclopedia
A PILOT is a payment in lieu of taxes (also sometimes abbreviated "PILT"), made to compensate a local government for some or all of the tax
revenue that it loses because of the nature of the ownership or use of a particular piece of real property
. Usually it relates to the foregone property tax
revenue.
also has a program for federal payments in lieu of taxes to local governmental entities (including First Nations
) in areas where the federal government owns property.
, the occasion for such a payment can arise in several different ways:
Economic Concerns During the Recent Recession
Payments in lieu of taxes for nonprofit organizations are voluntary. However, with the recent recession that began in 2008, some cities want this to change. At issue are the vast amounts of land owned by universities, hospitals, churches, and other nonprofit organizations. The tax-exempt status granted to these entities by the IRS means that property taxes that would have been paid to municipalities had this land been owned by private individuals or companies are not collected.
According to a 2010 report by the Lincoln Institute of Land Policy
, between 2000 and 2010 PILOTs were used in at least 18 states. Seventeen of those states account for 35 cities and towns with PILOTs. In addition, 82 out of a total of 351 municipalities in Massachusetts have collected PILOTs (Massachusetts Department of Revenue 2003). A map in this report also reveals that although these 18 states can be found scattered across the country, the vast majority of this activity seems to be concentrated in the northeast.
For many municipalities in the United States, property taxes are a primary source of revenue. The amount of forgone tax revenue as a result of these tax-exempt land parcels is significant. The president of the city council of Baltimore, MD recently estimated that his city loses $120 million annually from these foregone taxes. Taxable values for properties within municipalities that are charged a tax have dropped due to the mortgage crisis, further decreasing local coffers.
At the same time, these local nonprofits enjoy the same level of service the rest of the residents of the given city or county enjoy. These services include fire, police, sewer, trash collection, etc. It is argued that asking some, or all, nonprofits to pay taxes, either voluntarily, or via statutory measures, would help offset some of these costs and ease the strain on local budgets. This would be equivalent to increasing the tax base in these areas. Many nonprofits, whose own budgets are dwindling, fear this trend. There is, however, no evidence this trend will have any impact upon the exemptions that nonprofits enjoy from other forms of taxation outside of property taxes.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
revenue that it loses because of the nature of the ownership or use of a particular piece of real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
. Usually it relates to the foregone property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
revenue.
Canada
The federal government of CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
also has a program for federal payments in lieu of taxes to local governmental entities (including First Nations
First Nations
First Nations is a term that collectively refers to various Aboriginal peoples in Canada who are neither Inuit nor Métis. There are currently over 630 recognised First Nations governments or bands spread across Canada, roughly half of which are in the provinces of Ontario and British Columbia. The...
) in areas where the federal government owns property.
United States
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the occasion for such a payment can arise in several different ways:
- Land owned by the federal governmentFederal government of the United StatesThe federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
is generally not subject to taxation by stateU.S. stateA U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
or local governments. Under Public Law 94-565, enacted in 1976, the federal government began a program of making payments in lieu of taxation to local governments affected by this reduction in their tax bases.
- In some states where land owned by collegeCollegeA college is an educational institution or a constituent part of an educational institution. Usage varies in English-speaking nations...
s and universitiesUniversityA university is an institution of higher education and research, which grants academic degrees in a variety of subjects. A university is an organisation that provides both undergraduate education and postgraduate education...
is not subject to local property taxes, the state government reimburses the local governments for part of the tax revenue that the local government would otherwise have collected. In other cases, the institution makes a direct payment to the local government (which would not otherwise be reimbursed) simply to maintain good relations.
- PILOTs may be negotiated in specific circumstances, as when an arrangement is made for a corporationCorporationA corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
or institution to build a facility on public land without assuming ownership of the land. For example, there is such a program in New YorkNew YorkNew York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
state. In conjunction with the proposal to build a West Side StadiumWest Side StadiumThe West Side Stadium was a proposed football stadium to be built on a platform over the rail yards on the West Side of Manhattan in New York City....
in New York CityNew York CityNew York is the most populous city in the United States and the center of the New York Metropolitan Area, one of the most populous metropolitan areas in the world. New York exerts a significant impact upon global commerce, finance, media, art, fashion, research, technology, education, and...
for use by the New York JetsNew York JetsThe New York Jets are a professional football team headquartered in Florham Park, New Jersey, representing the New York metropolitan area. The team is a member of the Eastern Division of the American Football Conference in the National Football League...
, there was controversy over the proposal by the Mayor, Michael BloombergMichael BloombergMichael Rubens Bloomberg is the current Mayor of New York City. With a net worth of $19.5 billion in 2011, he is also the 12th-richest person in the United States...
, to use PILOT money from the Jets to help finance the project rather than applying it to other municipal expenses. The Port Authority of New York and New JerseyPort Authority of New York and New JerseyThe Port Authority of New York and New Jersey is a bi-state port district, established in 1921 through an interstate compact, that runs most of the regional transportation infrastructure, including the bridges, tunnels, airports, and seaports, within the Port of New York and New Jersey...
, a bi-state public authority, makes payments in lieu of taxes to New York City under an agreement relating to its ownership of the World Trade CenterWorld Trade CenterThe original World Trade Center was a complex with seven buildings featuring landmark twin towers in Lower Manhattan, New York City, United States. The complex opened on April 4, 1973, and was destroyed in 2001 during the September 11 attacks. The site is currently being rebuilt with five new...
site.
- Similarly, where a non-profit organizationNon-profit organizationNonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends...
may be exempt from equipment taxes and sales taxes, its mission may permit payment of an agreed PILOT to the local tax authorities, to offset the impact upon local services funded by town residents. The size of such payments can be controversial, especially where the organization appears to have federal income from taxable activities. For example, the tax-exempt Appalachian Mountain ClubAppalachian Mountain ClubThe Appalachian Mountain Club is one of the United States' oldest outdoor groups. Created in 1876 to explore and preserve the White Mountains in New Hampshire, it has expanded throughout the northeastern U.S., with 12 chapters stretching from Maine to Washington, D.C...
operates a modern hotel for its members in Carroll, New HampshireCarroll, New HampshireCarroll is a town in Coos County, New Hampshire, United States. The population was 763 at the 2010 census. The two largest villages are Twin Mountain and Bretton Woods. Carroll is an important access point for recreational areas in the White Mountains, including many 4,000-footers, the Zealand...
, paying a negotiated PILOT amount to the town. A competing commercial hotel would also pay "meals and beds" taxes.
- As an incentive for investment in taxable infrastructure or other facilities that create a public benefit, a PILOT may be negotiated to limit or defer the property taxes on a developer, striking a balance between public and private economic needs. In effect, the local taxpayers are subsidizing the development, which might otherwise have gone elsewhere. This has occurred in poor rural areas where large wind energyWind energyWind energy is the kinetic energy of air in motion; see also wind power.Total wind energy flowing through an imaginary area A during the time t is:E = ½ m v2 = ½ v 2...
systems are often placed, providing cost relief to the owner and a limited tax payment to the locals.
Economic Concerns During the Recent Recession
Payments in lieu of taxes for nonprofit organizations are voluntary. However, with the recent recession that began in 2008, some cities want this to change. At issue are the vast amounts of land owned by universities, hospitals, churches, and other nonprofit organizations. The tax-exempt status granted to these entities by the IRS means that property taxes that would have been paid to municipalities had this land been owned by private individuals or companies are not collected.
According to a 2010 report by the Lincoln Institute of Land Policy
Lincoln Institute of Land Policy
The Lincoln Institute of Land Policy is a think tank based in Cambridge, Massachusetts that focuses on the use, taxation, and regulation of land. It conducts research and policy evaluations, holds conferences, provides education and training, supports demonstration projects, and publishes books and...
, between 2000 and 2010 PILOTs were used in at least 18 states. Seventeen of those states account for 35 cities and towns with PILOTs. In addition, 82 out of a total of 351 municipalities in Massachusetts have collected PILOTs (Massachusetts Department of Revenue 2003). A map in this report also reveals that although these 18 states can be found scattered across the country, the vast majority of this activity seems to be concentrated in the northeast.
For many municipalities in the United States, property taxes are a primary source of revenue. The amount of forgone tax revenue as a result of these tax-exempt land parcels is significant. The president of the city council of Baltimore, MD recently estimated that his city loses $120 million annually from these foregone taxes. Taxable values for properties within municipalities that are charged a tax have dropped due to the mortgage crisis, further decreasing local coffers.
At the same time, these local nonprofits enjoy the same level of service the rest of the residents of the given city or county enjoy. These services include fire, police, sewer, trash collection, etc. It is argued that asking some, or all, nonprofits to pay taxes, either voluntarily, or via statutory measures, would help offset some of these costs and ease the strain on local budgets. This would be equivalent to increasing the tax base in these areas. Many nonprofits, whose own budgets are dwindling, fear this trend. There is, however, no evidence this trend will have any impact upon the exemptions that nonprofits enjoy from other forms of taxation outside of property taxes.
External links
- "Payments in Lieu of Taxes" - explanation of the U.S. program, by the Bureau of Land ManagementBureau of Land ManagementThe Bureau of Land Management is an agency within the United States Department of the Interior which administers America's public lands, totaling approximately , or one-eighth of the landmass of the country. The BLM also manages of subsurface mineral estate underlying federal, state and private...
- Connecticut's PILOT Program (in PDFPortable Document FormatPortable Document Format is an open standard for document exchange. This file format, created by Adobe Systems in 1993, is used for representing documents in a manner independent of application software, hardware, and operating systems....
) - Canada's PILT Program
- Michigan's PILT program