Cutting tax deals with businesses to lure them to a place is a common practice, from remote rural counties to bustling metropolises. But does it work?
Originally born out of negotiations between cities and large nonprofits like universities and hospitals, PILOT (Payment In Lieu Of Taxes) agreements have become increasingly common in the for-profit world. Large developers, promising jobs and construction projects, bargain with economic development agencies to cut tax deals that can stretch for decades.
In a typical PILOT agreement, a local IDA (Industrial Development Authority) will agree to let a business pay a reduced annual payment instead of property taxes. In return, the business must comply with the terms of the PILOT, which might require the business to create a certain number of jobs.
Followup to make sure businesses comply with the terms of PILOT agreements can be spotty. Last year, one Tennessee business had fewer than half of the 160 employees required to maintain its property-tax-exempt status. Transparency is also an issue; negotiations over PILOT terms tend to happen behind closed doors.
The recent implosion of Amazon’s $3.4 billion tax deal with New York has trained a national spotlight on these deals, and may represent a watershed moment for the way citizens and public officials think about them.
In a recent New York Times story about the failure of the Amazon deal, urban policy reporter Emily Badger writes that the disintegration of “the largest and most public subsidy auction in history” is exposing the limitations of these agreements in a very public way. Badger writes:
Economists have long warned against the financial mirage of tax incentives for corporations. Now Amazon’s cautionary tale has made two things clearer to communities that might think about offering them. At least some voters will chafe at these deals. And companies don’t really make location decisions based on subsidies anyway.
Are we approaching a tipping point with tax deals for businesses? Amazon’s failure in New York is unlikely to put an end to the smaller-scale dealmaking between developers and local IDAs that goes on all the time in the Hudson Valley, and across the nation. But with new fervor in the opposition to these large deals, and a growing appreciation for the complications they can create for local communities, they are coming under more scrutiny.
Taking a systematic look at PILOT agreements and how well they perform might be a good idea for cities and regions where they are an important piece of the local economy. A 2006 study of PILOT agreements for businesses in Memphis found that tax incentives that had strict guidelines for how they were awarded, or applied equally across an industry, were more likely to yield positive economic benefits to the city than agreements made individually at the discretion of local officials.
Local Deals, Local Problems
While Amazon’s courting of New York State for tax deals may have made an outsized splash in the news, efforts by businesses to convince local economic development authorities to sweeten the pot with tax deals sometimes make waves on a local scale.
In 2015, developer Rosenblum Properties LLC caused a stir in Troy, when they turned down a $1.5 million incentive package offered by the city’s IDA and then wrangled $9.5 million in tax breaks out of the Rensselaer County IDA for the same project. Troy economic development authorities accused the developer of “PILOT shopping,” playing two local IDAs against each other at the expense of taxpayers. Last year, the developers told county IDA officials that they needed still more tax breaks for the project, after issues with an underground electric line pushed the project behind schedule.
In New York State, where a strict tax cap keeps a lid on increases in local government spending, PILOT agreements can make serious problems for school districts. In smaller rural districts, where one business can have an outsized impact on the tax levy, the effect is especially pronounced.
The problem, researcher Paul Heiser writes for the New York State School Boards Association, lies in the impact PILOT payments have on the math districts use to calculate their allowed tax levies under the cap:
Under the state’s tax cap formula, PILOT payments must be subtracted from a district’s tax cap calculation. If PILOT payments increase, the amount of property taxes a school district is allowed to raise without exceeding its tax cap will decline, all other things being equal. This could lead to a district needing to obtain a 60 percent majority voter override to maintain – or even decrease! – its tax levy.
In 2018, the Onteora school district in Ulster County faced this sobering prospect when the developers of Woodstock Way, a large hotel under construction in the district, applied to the Ulster County IDA for roughly half a million dollars in tax breaks. Fearing that the agreement could make budgeting problems for the district, the school board considered passing a resolution opposing the agreement. Soon after, the developers pulled their application for the tax break because of public opposition. But with multiple large PILOT agreements already in effect in the district, it’s only a matter of time before the issue comes up again.
One of the largest PILOT agreements in the region is currently playing out in Orange County: a 20-year, $37 million tax break for the Legoland theme parkunder construction in the town of Goshen. Opponents of the park, who have banded together to form a group called Concerned Citizens of the Hudson Valley, have been critical of the tax breaks, and have brought two lawsuits against the project on environmental grounds.
Upstate New York is also home to one of the biggest success stories in business tax incentives: Advanced Micro Devices, a chip manufacturer that got a record-breaking $1.2 billion in tax breaks in 2006 to build a plant in Saratoga County. Twelve years later, the Times-Union reports, the plant has created twice as many jobs as the company promised, and made four times as much capital investment.
When businesses seek PILOT agreements, they tell compelling stories about jobs and tourist dollars, making the case to local officials that the benefits they’ll bring to the community are worth passing up some tax revenue. But years later, long after the ink on those deals is dry and the construction is finished, do our local PILOT projects live up to their early promises? That’s a question that demands careful, in-depth journalism to answer well—the kind of question we’re building a local newsroom to tackle.