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Department of Taxation and Finance

Compensating Local Governments for Loss of Tax Base Due to State Ownership of Land


September 1996

This study focuses on methods of compensating local governments whose tax bases are adversely affected by state ownership of land. It was prepared by the New York State Office of Real Property Services at the request of Governor George E. Pataki. The major recommendations contained in the report regarding compensation of New York's local governments are incorporated into the Governor's 1997-98 Executive Budget.

At present, New York has a variety of compensation arrangements that have developed in a piecemeal manner over the past century. They include actual property taxes, from which the state would otherwise be immune but has consented to pay, as well as various payments in lieu of taxes (PILOTS) and local fees for services that directly benefit certain state properties. Under current statutes, a few taxing districts receive payments for all state lands within their boundaries, others receive payments for certain lands only, and still more receive no payments at all. Compensation levels range from almost $335 per acre in Rockland County to zero in five other counties, with payments of one sort or another currently made on nearly 3.6 million of the more than 4 million acres in state ownership. In fiscal 1994, the state payments to localities amounted to almost $80 million.

The report examines previous research on state land compensation programs, both in New York and in other states. It concludes that New York existing programs stand alone, in terms of coverage, complexity, and non-uniform treatment of local governments. They are more numerous and cover more types of property than those of other states, and they are also more complex, incorporating several tax-based programs, several types of PILOT programs, and hybrid programs that are difficult to classify.

Due to their conflicting eligibility requirements and patchwork coverage, these various programs result in unequal treatment of taxing jurisdictions having similar state lands. A relatively high rate of compensation may be paid for state land in a given community, but an adjoining community with identical land may receive none. Similarly, certain land may be subject to certain kinds of local taxes (e.g., school) but not to other types. Some PILOTs are seemingly arbitrary lump-sum amounts that remain fixed, while others are reduced over time.

Because actual property tax payments are made on most of the acreage (89 percent), millions of acres must be valued twice: once by the local government in order to compute the taxes, and again by the state to insure that the assessment is not excessive. This process is costly to administer and wasteful of resources. It also results in disputes between the state and local governments concerning the taxable value of the lands, with a total of 263 lawsuits initiated during the past decade to resolve such disagreements.

The report recommends consolidation of the existing tax and PILOT programs into a single PILOT program under which all local governments would be compensated at a fixed annual payment per acre for all eligible state lands. Eligible lands would include those which are in "open space" uses, e.g., state parks, the forest preserve, reforestation areas, etc. Excluded would be those lands acquired for public infrastructure, including roads, canals, publicly owned utility corridors, and the like. These properties serve local as well as statewide populations, are widely distributed, and impose no particular fiscal burden on any municipality. Also excluded would be lands occupied for state facilities, offices, and other such improved properties. These properties generally occupy a relatively small percentage of a municipality's land area, and they also generate local employment and business activity and often serve primarily local populations. Benefit assessments and service charges, where applicable, would continue to be paid on properties ineligible for the PILOT program by virtue of land use considerations.

Such a program would increase the number of local governments receiving aid from 759 to 1, 446, an increase of over 90 percent. The total state-owned acreage on which compensation is paid would increase from 3.6 million to over 4.0 million.

The report simulates the payments that the state would make to localities under several compensation scenarios. These include a simple arrangement whereby a payment of one dollar per eligible acre would be made to each taxing unit, and two additional plans under which total payments of $10.00 and $20.00 per acre would be apportioned among the respective taxing units according to their relative tax rates. Also incorporated into the simulations was the concept of guaranteeing local governments payments that were at least as large as those they received under the old programs. This provision effectively "held harmless" those units now receiving compensation levels that exceeded the new PILOT compensation amounts. The simulations indicate that increases in total compensation payments would range from $700,000 to over $27 million, depending on the compensation level selected.

Other recommendations of the report include adjustment of state aid formulas that use the value of taxable property in determining aid levels, and revisiting the question of which services local governments should be allowed to finance through benefit assessments rather than taxes.

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