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Proposed Legislation on Municipal Payments in Lieu of Taxes (PILOTs)

Jun 12, 2018 | Written by: Richard P. Cushing, Esq. |

Many municipalities in New Jersey, faced with either deteriorating downtowns, blighted properties, or affordable housing litigation threats from developers, are creatively using PILOTs (payments in lieu of taxes) to incentivize developers to develop plans that meet municipal goals.  Such goals may include supplying affordable housing or clearing blight and underutilization of property, while also reducing the municipal tax burden for the newly developed projects.

The PILOT statutes help to accomplish this win-win outcome by permitting a developer to make payments in lieu of taxes at statutorily established rates, which are usually substantially lower than the tax burden that would be imposed.  PILOTs have traditionally been used with low-income housing projects, but are now more frequently used in the redevelopment area.  The lower tax rate makes the resulting commercial or residential properties more market competitive, thereby making them more easily marketed.

In the affordable housing area, not-for-profit entities can more easily predict cash flow needs without worry about the fluctuation in market value or tax rates that can push up taxes unexpectedly and substantially.

While PILOTS are good for municipalities, allowing them to get a revenue stream similar to what they would have gotten from their share of the tax bill, they are not good for the schools.  The savings being passed on to developers come to a significant extent from the fact that schools do not participate in the PILOT revenue.  The dilemma created by this situation is that while there are public goals being achieved by redevelopment of blighted properties and the encouragement of affordable housing, schools still need an adequate revenue stream to deal with the public goal of properly educating our children.

There appears to be no clear answer as to whether the overall benefits from using a PILOT to lure more productive property use, and more jobs, outweighs the loss of revenue to the schools.  On the municipal side, an argument can be made that redevelopment of blighted properties encourages the upgrading of surrounding properties, thereby pushing up the total municipal assessed value.  The theory is this will benefit all taxpayers and increase the revenue available for the schools by increasing total assessed value and creating more attractive communities.

Schools claim this argument is only aspirational, and, in the meantime, their revenue stream is shrinking.  They argue that when municipalities enter into a PILOT, the municipalities are looking out for themselves but hurting the schools.  They further argue that, at the end of the day, if the revenue stream is cut to the schools, the needed amount will have to be raised through higher taxes.  Thus, one way or another, the taxpayers will pay more taxes to make up for the shortfall, but the properties benefiting from the PILOTs will not be paying their fair share.

This issue has now come to the attention of the Legislature, and Senate President Sweeney has introduced legislation to make the process more transparent.  His bill (Senate Bill 1701) would require municipalities to conduct an independent cost-benefit analysis of any proposed long-term tax exemption.  The municipalities and the state would then be required to post the results of that analysis and other fiscal-impact data online.  Sweeney's goal is not to discourage the use of PILOTs, but to make sure that their impacts are made clear to the taxpayers.

The League of Municipalities has raised questions about the bill and the costs associated with compliance.  This is obviously an issue that should be monitored by those municipalities who have used or wish to use PILOTs.

For your reference, here is a link to a more detailed article about this subject that appeared in NJ Spotlight:


Richard P. Cushing, Esq., is a senior partner with Gebhardt & Kiefer, PC.  He is a trial and municipal lawyer who specializes in complex litigation, land use matters, employment law, and the representation of public entities, corporations and insurance companies. Contact Mr. Cushing at 908-735-5161 or via email.