The announcement by Mayor David Mayer that Gloucester Township is considering offering the developers of the Gloucester Premium Outlet a 25-year payment in lieu of taxes (PILOT) abatement made me wonder if a municipal tax abatement is as bad as it sounded to me. Well, after reading one document I’ve concluded it’s worse than I thought.
The document I read is A Programmatic Examination of Municipal Tax Abatement. It was prepared by Matthew Boxer, the New Jersey State Comptroller in 2010. I will be quoting parts of the report here, and the full report can be viewed, and a PDF downloaded, at the official web site for the State of New Jersey at http://www.state.nj.us/comptroller/news/docs/tax_abatement_report.pdf.
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First, it’s important to understand that tax abatement laws are intended to improve conditions in a municipality by encouraging and fostering economic development that would not normally occur. In general, these laws are meant to jump-start rehabilitation and redevelopment of distressed areas and to reap benefits that “include additional short- and long-term employment for local residents, attracting new businesses or improving existing benefits, luring new residents which in turn can generate additional tax revenue, generating a tax-revenue stream on once vacant or underdeveloped property, improving safety and commerce, and increasing adjacent property values.”
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There are two types of tax abatements that municipalities can offer.
1. The Five-Year Exemption and Abatement Law. This law “generally concerns rehabilitation of particular buildings and structures, with an abatement period that lasts no more than five years. These so-called ‘short-term’ tax abatements can be structured as reduced property tax bills that exclude all or part of improvement value or as payments in lieu of taxes.”
2. The Long-Term Tax Exemption Law. This is the type that Mayor Mayer talked about. It focuses on broader areas of redevelopment by allowing “for a longer abatement term to carry out a larger development plan through declaring an area as being ‘in need of redevelopment.’ These long-term abatements may last up to 30 years from completion of a project or 35 years from execution of the financial agreement.”
Property taxes are usually split among several entities, such as municipal, county, and school district. However, under long-term abatement arrangements, normal property tax collections on the development are eliminated and replaced with “a PILOT in an amount based generally on a percentage of project costs or revenue generated by the project, depending on the type of project.”
So, who is affected most by PILOT abatements?
Surprisingly, the local government is least affected. Usually, 95% of the negotiated PILOT is kept by the municipality, and “in many cases, the negotiated PILOT provides more funds to the municipality than it would have otherwise received.”
The report further states: “Many municipalities we contacted acknowledged that PILOT amounts often exceed the revenue that they would have received under a traditional tax structure.” These agreements help mayors and councils to boast that they have held the line on municipal taxes by not increasing them, or by increasing them only modestly.
County governments receive much less money through PILOT tax abatements. Their percentage of payment from a PILOT is just 5%. The revenue lost through the PILOT must be made up elsewhere, usually through higher county taxes paid by all of the property owners in the county, including those in the municipality that granted the PILOT.
The loser in PILOT tax abatements is clearly the local school district. NONE of the PILOT money collected goes to the local school district. Zero. Zip. Zilch. The new development contributes nothing to the school district budget. Therefore, any increases are therefore borne by the other property owners in the municipality.
Furthermore, school districts have no say in the granting of a PILOT. Currently, state law does not require participation of county governments or school boards when a PILOT is being considered. None of the municipalities interviewed for the report said they actively involved counties or school boards, and “the surveyed counties and school districts themselves confirmed that they are not involved and, typically, not even aware when abatements are granted.”
Those at the municipal level take credit for bring in new business and keeping their municipal budgets in line, but they admit no complicity in the increase in school taxes. The municipal leader’s argument is that school budgets are solely the realm of the elected school board members and these budgets are drafted by the school board and approved by the voters. The mayor and council have nothing to do with school board taxes.
Nothing, that is, but unilaterally eliminating what could be substantial tax receipts from their budget.
Next time: Abatements & Gloucester Township
