Strife over tax breaks and tradeoffs: It doesn’t have to be like this
We shouldn’t have to disadvantage taxpayers and our children to build smartly in the 21st century.
Robin Jacobowitz with Kt Tobin and Josh Simons
It would be pretty hard to be an Ulster County resident and to not by now have heard about the Payment in Lieu of Taxes (PILOT) sought by the developers of the Kingstonian, a mixed-use project proposed for uptown Kingston, NY. The Ulster County Economic Development Agency (IDA) grants PILOTs with property tax reductions to catalyze economic activity. Particularly, and historically, the size of PILOTs has been based on the number of short- and long term jobs created by a proposed project.
The Kingstonian is at the fore of a current debate about PILOTs because the county, city, and school district are in disagreement about whether this particular project should be awarded a PILOT, but this conversation is not new. In December 2013, the New Paltz Central School Board detailed the larger issue of how PILOTs in general differentially impact the multiple property taxing jurisdictions within their realm.
This point is key: PILOTs affect taxing jurisdictions differently. Fundamentally, PILOTs are about trade-offs between developers and impacted governmental jurisdictions. What is deemed a good trade to one potentially impacted jurisdiction may not be considered a good deal by another.
In order to better understand why entities come to differing conclusions about a PILOT, here we detail how these agreements are particularly impactful for school districts. School districts are heavily reliant on property taxes; any program that restricts their access to this key revenue source will necessarily have significant negative impacts. This is compounded by three other realities: school districts cannot make up for losses with other types of taxation, like sales taxes; school districts must go to a public vote and receive a 60 percent supermajority approval to exceed tax caps; and the new taxable value of PILOTed properties are never included in the calculation of the tax levy limit, reducing revenues in perpetuity.
The bulk of public school funding comes from property tax; therefore they are disproportionately burdened by PILOTs that reduce those revenues.
Public schools are dependent on property taxes for the majority of their funding. When an entity does not pay its full share of property taxes, that burden does not go away; unless cuts are made, costs get shifted onto other taxpayers. So when a PILOT is granted to a developer everyone else has to pay more. And even in an instance where a PILOT might contribute more than was being paid by the pre-PILOT property, that property is still not paying its full share. The difference has to be made up somewhere. Given these dynamics, something is decidedly not better than nothing, especially if the PILOT is for a housing development that will likely increase the size of the district’s student body.
School districts will not benefit from any sales tax that may be generated by a new development.
Developers often tout additional tax revenues — usually sales tax — that a PILOTed property may generate as one justification for that PILOT. But school districts are rarely the recipients of sales taxes. The norm is for them to not get any sales tax funds at all; school districts in Ulster County are not recipients of sales tax (52 of 57 counties outside of NYC did not distribute sales tax to school districts in 2016). Here in Ulster County, while some amount of sales tax is distributed to all municipalities, only the county and City of Kingston coffers might see a discernible sales tax revenue increase as a result of any PILOT-subsidized projects. Under the current formula, the county retains 85.5 percent of sales tax revenues for itself (a proportion well above the statewide norm), with 11.5 percent for the City of Kingston, and the remaining three percent is distributed to the 23 villages and towns (e.g., in 2019, the New Paltz zip code generated approximately $13.4M in sales taxes and the town/village portion received was about $251K of these funds to help offset property tax bills). This means that some municipalities will fare better than others, which is certainly a consideration for school board trustees, which have multiple towns and villages within their boundaries, as they think about the impact of a PILOT on their taxpayers.
School districts cannot exceed the tax levy limit without a supermajority vote from the public.
Annually, taxing authorities follow an eight-step formula to calculate their levy limit per the state’s tax cap law; this computation sets the limit on the amount of taxes they may collect. All taxing jurisdictions in NYS except for school districts can decide to exceed the limit set by the tax levy law with a 60 percent supermajority vote of its legislative body. So, for example, if the tax levy limit for a town is computed to be 1.8 percent, that town board could decide to exceed that limit — and levy more taxes for the town — with a supermajority vote of its elected board members. To be precise, a five member town board would only need three individual member votes to exceed its tax cap. School districts cannot do this; their budgets must be approved at the polls. School boards have to get the support of 60 percent in a public vote in order to approve a budget that exceeds the tax cap, which decreases the chances of passing the budget. In 2020, only 13 districts in the state attempted to exceed the cap, with a 69 percent success rate. In comparison, there was a 99 percent pass rate for districts that did not attempt to exceed the cap and therefore needed only simple majorities to adopt their budgets (Sources: New York State School Boards Association, 2020; Rockefeller Institute of Government, 2019).
School districts’ ability to raise property taxes – which is their only local source of discretionary tax revenues – is forever hampered by the award of a PILOT.
Property value increases brought on by investments under PILOT programs are excluded from the Tax Base Growth Factor (TBGF), which is part of the formula that determines the allowable tax levy increase. This omission, in effect, negatively impacts the amount of taxes that can be levied to support school districts. Moreover, this harm is permanent and ongoing, because the tax cap formula is never adjusted — even at the end of a PILOT’s term. To be clear, this is an issue for all taxing jurisdictions, not just school districts. But if other taxing jurisdictions can receive additional revenue through sales tax and can raise taxes above the levy limit if they decide they need to, the loss in the levy calculation might be offset by gains elsewhere. There is nothing to offset these types of losses for school districts.
There is no getting around it. PILOTs are a raw deal for school districts. And this should matter to everyone — not only because we all pay taxes, but more important, because these are all of our children, after all.
It does not need to be this way.
Elected and appointed officials who are proponents of PILOTs should work with affected jurisdictions to acknowledge and rectify these stark fiscal realities. Public servants could join with the common goal of finding a way to manage economic development without defunding the education of generations of K-12 public school students in our county. We need to work together to create a system that assures that projects that benefit one public entity do not hurt another.
It is important, also, to note that not all impacted jurisdictions have formal say in Ulster County’s Industrial Development Agency’s decision making. Affordable housing projects are an exception, as developers can bypass the IDA and go directly to local governments for approval, as RUPCO did for Energy Square, Lace Mill, and the Alms House projects. But there is no hard rule or law, let alone process, that directs the IDA to take any impacted jurisdiction’s point of view into account. The Ulster County IDA does have a policy to seek written consent from impacted jurisdictions for PILOTs involving mixed-use housing, but this consent is not required for IDA approval. This amounts to taxation without representation.
Certainly, overreliance on property tax to fund K12 public education and local governments factors prominently into the complications of PILOTs. We believe this needs a great deal more consideration, including examination of alternative funding structures that more accurately reflect contemporary taxpayers’ ability to pay. And we hope and expect that there will be more attention paid to property tax reforms as a result of the pandemic and our housing affordability crisis. In the meantime, given current pandemic development pressures, public officials in Ulster County should work together to improve its IDA process to provide a more fulsome, equitable, transparent assessment of PILOT benefits and harms, and to advocate for needed changes in state law in Albany. Strife can be preempted by leadership recognizing shared interests and working collaboratively to develop our economy and, most importantly, assuring adequate funding to support the best possible education of our children.
If PILOTs are to be in Ulster County’s, and New York State’s, economic development tool kit, the way they are evaluated and granted must be reworked. There has to be a better way. We should not need to disadvantage taxpayers and our children to build smartly in the 21st century.
In a future post we will begin to detail what we see as the critical reforms needed to transition Ulster County towards more equitable, inclusive, and transparent IDA processes.
Benjamin Center researchers are applied scholars, many of whom are elected leaders themselves. Blog posts are representative of Benjamin Center empirical research and analysis, and the views expressed here are not necessarily and should not be considered reflective of the elected bodies we serve on.