Fact Brief: Do PILOTs hurt taypayers, schools and libraries?
In a typical Payment In Lieu Of Taxes (PILOT) agreement with a developer in New Jersey and many other states, schools, libraries, counties, and other entities do not receive the same amount of money they would have under normal property taxation. In most cases, they receive no money.
That’s why former state comptroller Matthew Boxer wrote a 30-page report on the issue in 2010. “Tax abatements result in significant foregone revenue and introduce tax inequities that deserve closer scrutiny,” Boxer wrote in his letter to the governor, Legislature, and residents of the New Jersey.
Elected officials like to say these entities “will still get their money.” What is missing from that statement is the fact that the rest of the taxpayers in the municipality are the ones making up the difference if they do. Anyone who argues otherwise either doesn’t understand how PILOTs work or is knowingly misleading people.
How regular property taxes normally work
When a property owner pays standard local property taxes, the bill is divided among taxing entities such as:
- Municipality (town/city government)
- School district
- County
- Library district (if separately funded or tied to municipal tax levy)
- Sometimes, a fire district or other special districts
The largest share goes to the schools in most New Jersey municipalities because of the way schools are funded here.
How PILOTs usually work
Under many PILOT structures, especially long-term tax exemption deals common in New Jersey under the Long Term Tax Exemption Law:
- The developer pays an agreed annual service charge instead of regular property taxes.
- Most of that payment goes directly to the municipality.
- The county receive 5%
- School districts receive no direct share from the PILOT itself. They only receive money if the municipality chooses to share it or has created a formula for sharing it.
- Municipal libraries lose out because their state-mandated funding formula depends on the regular tax base and is based on the equalized value of property in the municipality.
That means a town government benefits, while schools or libraries do not receive from the property owner what they would have under standard taxation.
Why towns still do them
Municipal officials often argue PILOTs help:
- Redevelop blighted or underused land
- Make difficult projects financially feasible
- Generate revenue the town otherwise wouldn’t get and doesn’t have to share
- Shift costs away from the municipal budget if the town keeps most of the PILOT payment
Critics argue PILOTs can:
- Starve schools of future ratables
- Reduce county revenue
- Shift tax burden onto homeowners and non-PILOT properties
- Create opaque subsidies for developers
- Hurt libraries or other services indirectly
In practical terms for schools and libraries
If a property had already been paying full taxes and then it is redeveloped and receives a PILOT, schools and libraries do not receive the same growth in revenue they otherwise might have received. Yet in the case of residential developments, the new development means more children in the schools. School districts are faced with increasing their budgets to educate more children or make cuts in services. The other taxpayers in the municipality make up the difference that is not being paid to the schools by property owners that have been excluded from paying school taxes through PILOTs.
This has been a major issue in cities like Jersey City, Newark, and Hoboken, where school districts have argued PILOT-heavy development reduced their share of new tax growth.
Bottom line
If a developer was paying normal taxes before, a PILOT does not mean everyone still gets the same money.
Princeton has:
- High property values
- Significant school costs
- A major public library that depends on stable municipal support
- Frequent debates about affordability, redevelopment, and the tax burden
So if a valuable downtown or apartment project entered a PILOT agreement with the town, the municipality might gain flexible revenue, but schools and other entities lose the growth in ratables they otherwise would have received.
If a new development would normally generate $2 million in annual property taxes:
- Under regular taxation, portions would flow to schools, the county, and the municipality.
- Under a PILOT, the municipality receives the negotiated payment directly.
- Schools receive no direct share from that new project tax stream.
That means homeowners and other taxpayers continue carrying more of the school levy burden.
Because Princeton is a relatively affluent town with strong housing demand, critics often argue that some projects may be built without needing a PILOT subsidy at all, making the question more controversial than in distressed cities. The AvalonBay project at the former hospital site on Witherspoon Street, for example, was developed without a PILOT and includes a 20% affordable housing set aside.
Further reading
Libraries Lose Millions of Public Dollars to Corporate Tax Abatements
Students lose out as cities and states give billions in property tax breaks to businesses
Tax abatements harm public school budgets
How tax breaks strangle American schools
Do Economic Development Tax Abatements Affect School Finances?
