North Carolina property tax collections account for the lion’s share of each county’s total revenue, but when cash-strapped counties face a budget shortfall, raising rates is not a popular option. That leaves many local governments seeking new revenue opportunities.
PILOT (payment-in-lieu of taxes) programs are one such strategy that is gaining popularity among local governments.
Under a PILOT program, a local government could seek a payment in lieu of North Carolina property tax from entities such as hospitals and universities, which are exempt from property tax collections. The logic is that these entities occupy property that would otherwise generate revenue for the municipality.
These programs can be particularly beneficial to counties where there is a large concentration of organizations exempt from North Carolina property tax. For example, half of all NC charities are located in just eight of the 100 counties. In Charlotte alone 4% of the total property value is owned by non-profits.
While municipalities in some states collect windfall amounts from PILOTs, the decision to launch your own shouldn’t be made without serious consideration.
First, consider who you should target for the PILOT program. Some municipalities target individual exempt organizations, while others call on all exempt entities of a particular type, such as all hospitals or all universities.
The deciding factor should generally relate to how much property is consumed by the organizations and how that will translate into actual North Carolina property tax revenue. For municipalities with few tax exempt organizations within their borders, the effort to collect a PILOT may not be worth the revenue received.
Second, consider the impact on the community. On the plus side, collecting PILOTs from entities exempt from North Carolina property tax laws means that the burden on individual tax payers will be lessened.
On the flip side, many of these exempt organizations argue that the services that they provide will be cut if they must pay North Carolina property tax, therefore putting the burden for providing those services back on local governments.
Finally, consider your approach. Some non-profits agree to PILOTs because they, too, have an interest in the services tax revenue provides. In many other cases, the non-profits only agree upon the threat of some other pressure.
An example of the first scenario played out between Providence, Rhode Island and Johnson and Wales University, where Johnson and Wales agreed to provide a $6.4 million PILOT upfront, with the promise of an additional $5 million over the next 5 years after the mayor called upon the seven largest exempt entities to help the struggling city.
An example of the second scenario played out in Philadelphia in 1994 when, then Mayor, Ed Rendell created a Voluntary Contribution Program. There wasn’t much interest in the program until he threatened to pursue a mandatory PILOT. After that, collections poured in in the amount of $27.3 million in volunteer services and $28.7 million in cash. But, after the court struck down the legality of a mandatory PILOT, the voluntary contributions dried up.
With the financial picture still uncertain, both nationwide and locally, PILOTs may continue to grow in popularity and become an acceptable method of supplementing North Carolina property tax revenue.