Report: PILOTs programs can bring in revenue
Interest in collecting payments in lieu of taxes (PILOTs) from charitable nonprofit organizations is likely to grow as cash-strapped municipalities seek additional revenue, according to a new report released Tuesday by the Cambridge, Mass.-based Lincoln Institute of Land Policy (LILP). However, LILP’s “Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests” suggests that local governments collaborate with colleges, universities, medical facilities and other nonprofits that are exempt from paying property taxes to achieve greater consistency and transparency.
In recent years, many cities have initiated and expanded PILOTs, and increasingly relied on charging user fees that can help pay for basic public services, according to LILP. “PILOTs can provide crucial revenue for certain municipalities, and are one way to make nonprofits pay for the public services they consume,” said the report’s authors, Daphne Kenyon and Adam Langley. “However, PILOTs are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits. In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation.”
The report covers PILOT programs currently in use in 117 municipalities across 18 states, including large cities like Baltimore, Boston, Philadelphia, and Pittsburgh. The payments made in these programs are voluntary, are typically only a fraction of what the institutions would provide if they paid property taxes, and constitute a very small percentage of overall revenues collected by municipalities.
The report makes the following recommendations:
• PILOTs are most appropriate for municipalities that are highly reliant on the property tax and have a significant share of total property owned by nonprofits. The programs are most suitable for nonprofits that own large amounts of tax-exempt property and provide modest benefits to local residents relative to their tax savings.
• Municipalities should work collaboratively with nonprofits when forming PILOTs. In some cities, case-by-case negotiation with one or several nonprofits is best. But, in cities with a large number of nonprofits, creating a systematic PILOT program can promote horizontal equity among tax-exempt nonprofits and raise more revenue than negotiating individual agreements.
• Both state and local governments should consider alternatives to PILOTs. State governments should consider providing grants to local governments that host tax-exempt nonprofits to compensate them for their loss of property tax base. If states are unwilling to provide such grants, municipalities can consider alternative ways to raise revenue from tax-exempt nonprofits, such as increased user fees.
Download “Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests.”