The city of Des Moines is trying to address high property taxes and PILOTs are being considered as a solution. PILOTs or payment in lieu of taxes, are payments paid to a state or local government in place of property taxes. Any PILOT being considered by a state or local government would affect non-profits, churches, and universities, which are exempt from property taxes. It should be noted, PILOTs are often targeted at more large-scale non-profits such as educational institutions and hospitals, rather than small non-profits such as a soup kitchen or other social service providers that have small operating budgets.
Non-profit organizations are not only exempt from property taxes, but they also use services which range from emergency, utilities, roads, among other. This leads us to the most popular argument for PILOTs, they can generate additional revenue from property tax exempt institutions who should have to pay something for services provided. As a result of the escalation of property taxes, it has led state and local governments to look to PILOTs as an additional revenue source. PILOTs are being used in close to 117 municipalities and in 18 states. Some large cities utilizing PILOTs include Baltimore, Boston, Philadelphia, and Pittsburgh.
Governments can use different means in implementing PILOTs. They can ask a non-profit to make a payment to help offset the cost of services. This may require governments to negotiate with each non-profit organization. Some non-profits may fight a PILOT through litigation or even refuse to pay. Some non-profits, especially educational institutions, will argue that they should not have to pay a PILOT because their economic impact benefits the city, which more than makes up for being exempt from property taxes.
Governments can use a variety of methods to set a PILOT amounts. Localities could determine a PILOT amount based upon the actual services that a non-profit receives. Other cities establish a certain percent standard for non-profits to pay. Boston has established a 25 percent standard, which asks non-profits to pay the city 25 percent of the property taxes that would be owed.
Other arguments in favor of PILOTs include the possibility of reducing tax inequities among non-profit organizations. Often the largest landholdings are hospitals, educational institutions, among others that benefit from the tax-exempt status. As an example, small non-profit organizations may rent building space and the private owner, who is paying property taxes, passes that cost onto the non-profit. A PILOT would help create a more level playing field by requiring large and wealthier non-profits to contribute to help pay for services.
The arguments against PILOTs, they not only provide limited revenue, but it is also unreliable. A 2002 study analyzed PILOT programs in several cities and found the impact on their budgets was minimal. PILOTs are also unreliable as a long-term source of revenue because it is difficult to negotiate agreements with non-profits. Related challenges that make PILOTs a difficult policy include potential litigation because of the non-profit tax-exempt status. It is argued that local governments who are interested in PILOT programs must make their “intent explicit in the contracts signed between non-profits and municipalities.”
Requiring a non-profit to pay a PILOT may also result in an organization to raise fees, reduce services, or eliminate jobs. This is the argument that Drake University is making in Des Moines. The University is arguing, if they have to pay a PILOT, then they will have no choice in passing that cost off to their students.
Another issue to take into consideration is economic development. The question should be asked, how generous is Des Moines is with economic development subsidies? In some areas PILOTs are often viewed the same as TIFs or tax increment financing. Economic development and tax exemptions can also hollow out the tax base and result in the tax burden shifting to other property taxpayers and even non-profits if a PILOT is considered.
Perhaps the most important argument against PILOTs is this conversation dodges the important question of, what is causing high property taxes? The answer to this question is government spending. Des Moines is looking to address high property taxes and looking for new sources of revenue without considering budget changes. Residents of Des Moines must live within their means and make appropriate preparations for property tax bills. Should local governments not do the same?
The city of Des Moines does have a problem as an estimated 40 percent of properties are exempt from property taxes. However, creating a PILOT program to “tax” non-profits seems to go against a long-respected boundary of non-profits not being taxed. Should non-profits be penalized for bad public policies that lead to high property taxes? Likewise, should non-profits be forced to “generate” additional revenues for cities?
High property taxes are forcing the city of Des Moines to look to new revenue streams. A PILOT applied to non-profits may provide some additional revenue, but it is unlikely to be enough to reduce the property tax burden. The strongest argument for PILOTs is that non-profits should have to pay for the services they receive from local governments. However, PILOTs are not a reliable or not a long-term source for revenues. In addition, PILOTs distort the real issue that confront property taxes and that is the issue of government spending.