Property Tax Exemptions and Payments in Lieu of Taxes – Local Revenue Effects

Property taxes are the county’s largest revenue source. However, many exemptions are offered for certain types of property relieving property owners from remitting these revenues to the county.  Although Payments in the Lieu of Taxes (PILOT) and other arrangements may offset some of this revenue loss, property tax exemptions have a significant effect on county revenues.

Using a presentation prepared and presented by the Department of Legislative Services (DLS), this blog post will examine property tax exemptions, PILOTs and other similar arrangements, and their effect on local government revenues.

Property Tax Exemptions

The Tax-Property Article, Title 7 defines exempt properties for property tax purposes. A large number of these exemptions are mandatory as provided for in Subtitle 2, General Property Tax Exemptions. Other exemptions fall under Subtitle 5 and provide counties and municipalities the option of enacting a property tax exemption. These properties remain subject to the State’s property tax.

Tax-exempt properties generally fall into the following categories – Religious, Charitable, Fraternal/Sororal, Educational, Blind Persons, Disabled Veterans and Surviving Spouses, and other special exemptions granted to government-owned properties, cemeteries, fire companies and rescue squads, historical societies and housing authorities, to name a few. These categories are defined more broadly on page 10 of the DLS presentation. The State Department of Assessments and Taxation (SDAT) is responsible for determining statutory exemptions and is required to assess all exempt real property, except property owned by the federal government.

According to the DLS presentation, tax-exempt properties have an assessed value totaling almost $80 billion and account for 11% of the total assessable property tax base. Baltimore City has the largest percentage of tax exempt property at 31.6%, followed by Allegany, Somerset, and Wicomico Counties with 26.9%, 22.7%, and 17.5%, respectively. Of the $80 billion in assessed property, 69% is federal, state and county/municipal property, and 31% falls under the other categories listed in the paragraph above.

Comparison of Tax-exempt Real Property

Once accounting for county/municipal property, local governments lose $669 million in property tax revenues annually from the other categories of exempt properties. It is estimated that Baltimore City has the largest revenue loss, followed by Montgomery and Prince George’s Counties.  However, when examining the revenue loss on a per capita basis, Baltimore City’s loss is $399 per capita, followed by Allegany, St. Mary’s, and Somerset with a per capita loss of $132, $126, and $113, respectively.

Revenue Impact of Tax-exempt Real Property

Payments In Lieu Of Taxes/Other Arrangements to Offset Revenue Loss

As mentioned previously, local governments may enter into agreements with a developer, business, non-profit organization, or other property owner that substitutes a negotiated payment for the annual property taxes that are due on a property.  This agreement is  typically called a Payment in Lieu of Taxes (PILOT).  For SDAT’s purposes, PILOTs are applied to two categories of properties, tax-exempt and nonexempt.

  • Tax-exempt property owners are not required to pay property taxes, but voluntarily agree to pay the jurisdiction a negotiated sum based on a percentage of property taxes due, or to cover a share of the services consumed by the entity. (Title 7, Subtitle 2)
  • Nonexempt property owners would otherwise pay property taxes, but based on a specified interest, a jurisdiction has authorized the property owner to pay a reduced level of taxes over a specified period of time as an incentive to develop in the area. (Title 7, Subtitle 5)

PILOTs used for tax-exempt properties (both categories) take many different forms.

• Long-term, Formal Contracts signed by entities stipulating annual payments for a specific duration
• Routine Annual Payments initiated by local government sending annual letters to nonprofits requesting PILOTs or by some other similar means
• Voluntary Property Tax Payments that nonprofit elects to make on properties that are otherwise tax-exempt under State law
• Irregular One-time Payments to the jurisdiction as gifts or to support certain projects or programs

Data is limited on the number of PILOTs in place for tax-exempt properties, but for the 92 localities where the methods used for PILOTs are  known, 57.6% use long-term contracts, 33.7% routine annual payments, 12% voluntary property tax payments, and 10.9% irregular one-time payments.

The number and value of PILOTs for tax-exempt property vary by jurisdiction. For example, Howard County has one PILOT with Johns Hopkins University with an exemption value of $190.2 million. Baltimore City has  a total of 201 PILOTs with an exemption value of $187.4 million. Wicomico County follows next with 102 PILOTs, but here the exemption value is much lower, $6.2 million. Page 18 of the DLS presentation provides a ranking of PILOTs based on the exemption value.

The number and value of PILOTs for nonexempt properties vary in the same manner. Baltimore City accounts for nearly two-thirds of the nonexempt property PILOTs, a total of 205 with an exemption value of $570.2 million. Page 19 of the DLS presentation provides a ranking on nonexmept properties based on exemption value.

Another type of agreement that Baltimore City has entered into with the Maryland Hospital Association (MHA) and the Maryland Independent College and University Association (MICUA) is the “2010 Nonprofit Assessment Agreement. Under this agreement, members of both organizations located in Baltimore City have voluntarily agreed to make payments to the City to assist with the delivery of services while at the same time preserve their tax-exempt status.  A total of $20.4 million will be paid by the 15 members to Baltimore City during the six-year term of the agreement, fiscal 2011 through 2016. Page 22 of the DLS presentation provides a breakdown of the payments by member organization for the six-year period.

Although PILOTs and other agreements exist to offset some of the revenue lost due to property tax exemptions, counties are not recouping the total revenue loss.  While there are very legitimate reasons for property tax exemptions, policy makers should take into consideration the effect on a county’s tax base when determining whether new exemptions should be added or existing exemptions altered.