Generally speaking, the objective of most nonprofit organizations in the United States is to help fill a societal void; making available those goods not otherwise provided by the open market or delivered by the government. Whether they provide animal care and treatment, help newly immigrated small business owners locate funding, or offer environmentally-conscious gardening advice, nonprofit organizations produce many positive benefits to the surrounding community. Because of the apparent public benefit that a nonprofit delivers to a local community, charitable nonprofits are exempt from paying property taxes in most states. However, this fact can be problematic to local governments, which derives an increasing percentage of revenue from local property taxes. The slide below is a demonstration of the increasing reliance on the property tax for a local suburb.
In municipalities where a large number of non-profits are located, simply losing property tax revenue is not palatable. In 2009 for instance, Boston, Massachusetts had approximately $345 million dollars from lost property tax revenue due to the presence of non-profits. (page 44 and 45 of the report) On top of that, charitable nonprofits still utilize many of the resources and infrastructure provided by the local government without compensation. Partly as a result of this pressure, local governments look for ways to offset the property tax loss. Larger cities have more flexibility in terms of tax reform, like the property tax model that the City of Saint Paul uses, which was discussed in class. However, smaller cities and towns often lack the necessary tax base to make up for the loss.
One method that local governments use to collect additional funds in order to offset the loss of property taxes from charitable nonprofits is from an agreement called a “Payment in Lieu of Taxes” (or PILOT) agreement. From Kenyon and Langley, “(PILOTS) are usually negotiated between a municipality and individual nonprofits… PILOTs can be one-time payments, but negotiations sometimes lead to contracts stipulating continued payments for many years.” (Kenyon and Langley of the Lincoln Institute of Land Policy produced a comprehensive report on PILOT agreements in 2010, found here.) Since these agreements are voluntary and are negotiated between the municipality and the nonprofit, the amount of money that is involved in the transaction can be highly variable and almost never reflects the full amount of property tax lost.
The PILOT agreement can aid the local government in collecting additional revenue to be sure, but requiring such an agreement for all non-profits would undoubtedly meet opposition. In the following paragraphs, I would like to offer a few suggestions for the planning staffs of local municipalities to consider before entering into a PILOT agreement.
1. Educate the elected officials in a workshop setting. Informing the elected officials on what a PILOT agreement is, what it can be used for, and explaining where these agreements have been successful can be paramount in helping the officials understand this revenue tool. The possible negatives and limitations of these agreements must also be discussed in great detail. Ideally, this informational session would happen in an informal setting, so as to encourage unrestrained discussion. This session would also be done before a nonprofit has made an application for development or filed tax exempt status.
2. Set parameters for investigating whether or not a PILOT agreement is a viable option. Acreage of tax-exempt property or location of the property in terms of zoning and estimated land value are parameters that could be useful in determining whether or not a municipality should pursue a PILOT agreement. Any condition that draws the public benefit of a particular nonprofit or addresses the nonprofit’s ability to pay should not be added into the parameters. Because the agreements themselves are negotiated and ad hoc in nature, the parameters serve as a guide as to whether or not a municipality should PURSUE an agreement, not that it demand one.
As Kenyon and Langley noted, PILOT agreements are becoming increasingly popular and with possible sequestration on the horizon, the importance of such agreements may also be on the rise.
For more recent information about the future of PILOT agreements, click here.