Posts > PILOT Agreements Cost State Millions in Tax Revenue: An In-Depth Look at Longview Power Plant
October 15, 2019

PILOT Agreements Cost State Millions in Tax Revenue: An In-Depth Look at Longview Power Plant

Over the last decade or so, local governments entities in West Virginia have used a myriad of business property tax incentives to reward or induce local economic development projects. These can include tax increment financing or TIFs, lease agreements, tax credits (e.g. local B&O), issuing bonds to purchase property, and the use of Payment in Lieu of Tax (PILOT) agreements.

A PILOT agreement is a property tax abatement where a company (sometimes a non-profit) agrees to make annual payments to local governments instead of paying the property taxes it would normally owe. Usually these payments are just a fraction of what otherwise would have been paid over the time of the PILOT agreements or a fixed percentage of property taxes owed. While it is unknown how many PILOT agreements and property tax abatements exist in West Virginia and what their impact is on our revenue systems or economic development, there are several options that policymakers can pursue to provide the accountability and transparency needed to discern whether they are a sound use of public funds.

PILOTs in West Virginia

The way PILOTs usually work in West Virginia is that a government entity – usually the county or a local development authority, but sometimes the WV Economic Development Authority – purchases the property (sometimes by issuing revenue bonds) to be developed and then enters into a long-term lease with the company when construction begins.  Since ownership of the property is with a government entity or economic development authority (and pursuant to WV Code §7-12-10 or §8-19-4), it is exempt from real and personal property taxes (along with the leasehold interest). Instead of paying property taxes, the company agrees to make annual payments to local governments – including the school board, the country commission and municipality (if applicable). The terms of the payments can differ greatly depending on the size of the project and the negotiation that takes place with the interested parties.

Over the last several years, some of the largest business expansions or new operations have included PILOT agreements as part of a package of business economic development incentives. For example, a proposed PILOT agreement between Jefferson County government officials and Rockwool (a controversial insulation manufacturer) in Ranson, WV included an agreement where the local economic development authority would purchase $150 million worth of property to build the plant by selling revenue bonds that Rockwool would then make payments on so they would not have to pay property taxes (although the terms on this deal have changed). Neighboring Berkeley County has signed several PILOT agreements with companies, including Quad Graphics (commercial printer), Macy’s (warehouse and distribution center), Procter & Gamble (product manufacturer), Knauf Insulation (insulation manufacturer), and Argos (cement factory). For most of these PILOT agreements, the WV Economic Development Authority has issued billions in revenue bonds to purchase property that is leased back to these companies so they do not have to pay  property taxes.

More recently, there have been a flurry of PILOT agreements made between local governments and electric power plants in Harrison, Brooke and Monongalia County. In June of 2003, Monongalia County officials, including the Mon County Commission, Sheriff’s Office, Assessor, and Board of Education and Mon County Development Authority signed a PILOT agreement with Longview Power on a $2.2 billion coal-fired power plan. The agreement  provided a 100% abatement of property taxes in exchange for $105 million in payments over a 30 year period. More recently, Longview Power is negotiating  a new PILOT agreement in Mon County for a $1.1 billion expansion that includes a 1,200 megawatt natural gas fired power plant and 50 megawatt solar installation (located close to their plant in Pennsylvania).

Transparency & Accountability of PILOT Agreements

There is very little in the way of transparency or accountability with regard to local property tax abatements or PILOT agreements, including how much revenue the state or local governments lose each year. In the executive state budget released every year, there is a section on the estimated forgone revenue from economic development tax expenditures (page 75), but according to the budget report, “no accurate estimate is available for county-imposed payment in lieu of tax (PILOT) arrangements. Based on available PILOT payment data, however, the net PILOT tax expenditure is likely similar in magnitude to the value associated with certified capital additions.” If that’s true, these agreements cost the state over $40 million per year. When it comes to PILOT agreements in West Virginia, there is not only very little transparency but there is no evaluation of these property tax abatements at the state or local level. Unlike some of the state business tax credits that have capital investment and job creation requirements, and claw-back or recapture provisions, these requirements do not exist for local property tax abatements.

A new accounting rule from the Government Accountability Standards Board (GASB) – Statement Number 77 – is supposed to require local government entities that use General Accounting Acceptable Practices (GAAP) to disclose annually the yearly lost revenue from “tax abatements” (aka corporate tax breaks in the name of economic development). While many counties and school boards discuss GASB 77 in their annual audits, few if any estimate the tax revenue lost from these abatements. For example, neither Berkeley or Jefferson County estimate the tax revenue forgone from the PILOT agreements mentioned above in their annual audits. And the school boards don’t fare much better. In Monongalia County School Board’s 2018 audit, the PILOT agreement with Longview Power is mentioned under “tax abatements” but the audit says “property tax revenues were reduced by an unknown amount.” A recent WV Supreme Court case brought by coal companies challenged whether some PILOT agreements were in the “public interest”  because local governments failed to disclose the forgone property tax revenue from these property tax abatements.

Longview Power PILOTs

While state and local governments do not disclose the forgone revenue from these agreements, it is possible to estimate the value of the tax expenditure by looking at what Longview would be paying if it paid the same tax rate as most businesses in Mon County. The chart below looks at the value of PILOT payments from Longview Power’s first PILOT agreement (Longview #1) and the second PILOT agreement proposal (Longview #2) over the life of the agreement. These estimates are based on the capital investments in each project ($2.2 billion and $1.1 billion, respectively), an average annual depreciation rate of 2.76% on public power utilities in West Virginia, and Class 3 Mon County property tax rates (2.08% in FY20).

The difference in PILOT payments and the estimated property taxes owed without the abatement is stark. The estimated tax abatement for the first Longview Power PILOT agreement is $457 million compared to $217 million for the second proposed PILOT agreement with Longview Power. Altogether, the property tax abatement over 30 operating years for both PILOTs is estimated to be $674 million. These estimates should be taken with caution because the assessed valuations of the property could vary significantly depending on the depreciation rate used for the property and capital improvements over time.

According to an economic impact analysis (paid for by Longview Power) of the proposed project that includes a 1,200 MW natural gas-fired combined cycle turbine power plant and a 70 MW utility scale solar power facility, it will create 628 permanent jobs and 5,002 job-years during the 3-year construction phase of the project (or an average of 1,667 job per year for three years). Based on the above estimates (which is very debatable), this adds up to 794 full-time jobs per year over the 30 years of the PILOT agreement. This means that the cost of the property tax abatement amounts to an estimated $273,000 per job created. To put this in perspective, the state’s Economic Opportunity Tax Credit program has a cost of just $25,000 per job created.

It is important to keep in mind that the estimated employment impacts of this proposed project are jobs not just within West Virginia or to local workers. Only a share of the new jobs (30%) will be to local workers, with many construction workers working temporarily in West Virginia on the project. And the permanent full-time jobs estimated (628) rely on a very high multiplier (for every one direct job created 16 other jobs will be created).

Like all economic impact analysis that uses models (IMPLAN), the  results are based on  the economic assumptions being made and what is included in the “black box” to inform the results. Furthermore, no economic analysis is complete until it also includes a fiscal impact analysis. This should include an examination of the the costs of direct public services (e.g. schools, waste water, etc.) generated by the project and population growth, the cost of expanded infrastructure capacity required to handle the new business activity and population, and the cost of the tax incentives themselves on public services. IMPLAN models do not provide these types of cost feedbacks.

While it is difficult to compare the property tax owed by similar plants in surrounding states, a close look at two new gas-fired power plants in Pennsylvania reveal that similar plants do not pay much in property taxes. For example, the Caithness Moxie Freedom Generating Station in Salem Township in Luzerne County Pennsylvania, which is a new $1 billion 1,000 megawatt gas-fired power plant that went online in 2018, had an assessed value of $42.5 million and a total property tax bill of just $752,000. Meanwhile, a new 940 megawatt gas-fired power plant in Westmoreland County Pennsylvania that had a direct construction cost of around $500 million with 24 full-time employees was assessed at just $1.9 million in 2019 with a total property tax bill of just $179,000. The Lordstown Energy Center operates a 940 megawatt gas-fired power plant in  Ohio that went online in 2018 and received a 100 percent tax abatement for 15 years while having to make annual payments that total $19 million over 15 years.

One reason for the low amount of assessments and taxes paid by these facilities in Ohio and Pennsylvania is because these state do not tax business personal property. Another new gas-fired power plant owned by Duke Energy in Anderson County, South Carolina (W.S. Lee Station) is estimated to pay $4.4 million in taxes in 2019. The W.S. Lee is a 750-megawatt plants that cost an estimated $700 million to construct.

Another way to compare the above PILOT payments with property tax payments is to look at what publicly regulated electric power utilities pay in West Virginia. For example, Mon Power owns the Harrison County Power Plant in Haywood, WV, which was built in 1994 and has a assessed value of $210 million and a property tax liability of $4.8 million. The Mitchell Power Plant in Moundsville, WV, which is owned by Wheeling Power (AEP) and is a 1600 megawatt unit built in 1968, has an assessed value of $257 million and a property tax liability of $5.2 million.

Best Practices for PILOT Agreements and Property Tax Abatements

There are several reasons for the proliferation of PILOT agreements. Property taxes comprise a large share of total state and local business taxes paid in the United States and in West Virginia. In West Virginia, they make up about 36 percent, compared to 39 percent nationally. Unlike the state corporate income tax, which is easier for large corporations to avoid paying by shifting their taxable income offshore (yes, there are ways to fix that in West Virginia), the property tax is harder to avoid. And that’s one reason companies go out of their way to avoid paying it. Often the result is an economic race to the bottom between states (think Amazon HQ2).

The best evidence to date shows that economic development incentives don’t play a large role in tipping the decision for companies on where to locate. In exhaustive review of over 30 studies, economist Tim Bartik found tax incentives are the determining factor in location decisions between two and 25 percent of the time. This means in most instances that business location or expansion decisions would have happened anyway. This doesn’t stop companies, however, from doing all they can to shift their business costs on the public and workers.

In West Virginia, there are no rules or laws that govern local property tax abatements or PILOT agreements. If fact, there is a pending lawsuit questioning whether even property tax abatements are even legal under our state constitution.  That said, there are best practices that can help increase transparency, reduce waste, and ensure a more democratic process in the abatement process. These include:

1) Giving school boards decision-making power over approving PILOT agreements and tax abatements including negotiating the PILOT with the interested parties.

2) Ensuring that a portion of collected PILOTs go to affected governments (county, municipality, schools boards).

3) Granting abatements only when necessary to attract development that would not occur otherwise.

4) Limiting abatements only to areas in need of rehabilitation or redevelopment and to those that maximize beneficial outcomes (Emphasis should be on infrastructure improvements, creation of quality jobs, revenue gains from other sources, and anticipated improvements in surrounding areas).

5) Limiting the number of years of the abatement that is necessary to attract the development sought.

6) Conducting a cost-benefit analysis to ensure that the deal is worthwhile over the short- and long-term of life of the project, including the forgone property tax revenue over the term of the PILOT agreement.

7) Including appropriate enforcement mechanisms, including claw-back and recapture provisions, job creation requirements, and the imposition of penalties or other measures to ensure for when the developer fails to fulfill its obligations.

8) Ensuring that the state plays an active role in the abatement process by increasing guidance on granting and implementing property tax abatements, including disclosing all PILOT agreements online, their impact on the state budget, and increased monitoring of local property tax abatements.

To improve the accountability and transparency of PILOT agreements and the resulting tax abatements, it is imperative that the public, and especially local schools boards that rely on about two-thirds of all property tax revenues, has the tools needed to approve or disapprove PILOT agreements and to evaluate their short and long-term impact.

While states and local governments have varying levels of transparency and accountability with regard to property tax abatements, Shelby County Tennessee’s economic development authority called EDGE (Economic Development & Growth Engine) provides a good example of transparency and some accountability of PILOT agreements. Since 2003, EDGE has approved 95 PILOTs and lists each of them on its website. EDGE also requires a cost-benefit analysis before any PILOT can be approved to help ensure that the amount of tax abatements do not outweigh the new tax revenue from the business expansion or relocation and investment. For example, EDGE estimates that its PILOT program has a benefit-to-cost ratio of 2.60, meaning every $1 dollar of tax abated created $2.60 in new tax revenues.

At the very least, PILOT agreements in West Virginia, especially those where almost all of the economic impact happens during construction, like Longview Power, should require that the new tax revenue from the project exceeds the property tax abatement and that there are job creation and retention requirements.The assessments should also include the value of forgone revenue for local and state governments.

While there have been several economic impact studies of the Longview Power Plant, and the other new gas-fired power plants that have received PILOT agreements, those studies should be conducted by neutral third-parties instead of the companies themselves. When companies or the local economic development authorities pay for these economic impact studies it can create a perverse incentive which can lead to inflated expectations and the loss of more tax revenue.

Property tax abatements included in PILOT agreements have a significant impact on state and local budgets and they often occur behind closed doors. They can also be highly controversial (see Rockwool). It is incumbent upon our state and local governments to ensure that PILOT agreements and local property tax abatements provide a good investment for our communities. And they must ensure that we are not just shifting costs on to workers and taxpayers for investments that businesses would have made anyway.

While state and local government can improve the process for property tax abatements and PILOT agreements by including more transparency and accountability, they should also ask whether alternative development measures such as enhancing local infrastructure, investing in education and job training programs, or undertaking local beautification projects provide a better return on investment.

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