Is There Theoretical Justification for Payments in Lieu of Taxes?

Darryll K. Jones, Florida Agricultural and Mechanical University

Abstract

Payments in lieu of taxes (PILOTs) are said to be voluntary payments from tax exempt entities to local government. To call such payments “voluntary,” though, is essentially to indulge a legal fiction that allows us to avoid the implication that the public may ultimately think it unfair and a sure waste of money to exempt certain revenue generating entities from taxation. Ultimately, given the implicit threats usually accompanying requests for payments in lieu of taxes, PILOTs are voluntary only in the sense that taxes, themselves, are voluntary. This article suggests that when local government officials ask charities to make PILOTs and charities do so without question or explanation, it is only natural that the public comes to view tax exemption as inequitable and inefficient. Indeed, why would a tax exempt organization pay what are essentially ad hoc taxes, except that the organization itself doubts its own deservedness? Local officials are probably happy to leave that impression because it serves their ultimate purpose; the purpose is not to seriously question the history and institution of tax exemption but merely to obtain financial support from apparently well-endowed, but politically weak constituents. Except in rare cases, Civil Society seems too eager to make the payment and be done with the matter, suggesting that it would rather not discuss or defend the notion that tax exemption is a legitimate characteristic of a taxing system. The goal of this article is to dispel and disprove the common and unfortunately reflexive notion that accompanies PILOTs, both from a motivational and explanatory standpoint. It is easy, though intellectually lazy, to conclude that PILOTs are motivated by local taxing authorities’ belief that tax exempt charities greedily consume public services while simultaneously depriving cities and counties of revenues needed to produce those public services. There are legitimate reasons, other than a disbelief in the efficacy of tax exemption, supporting local government’s requests for PILOTs as well as Civil Society’s typically unquestioned agreement to make PILOTs. Those reasons have never been adequately explained; this article attempts to do so.