A legislative proposal to require municipalities to share some payments in lieu of taxes, or PILOTs, with schools would achieve a reform of tax abatements recommended nearly a decade ago.

The bill, sponsored by Sen. Troy Singleton, D-Burlington, was approved in the spring by the Community and Urban Affairs Committee that he chairs. It got some attention recently when the prospect of short-changing schools helped motivate successful opposition to renewing the tax abatement for Millville’s N.J. Motorsports Park.

The intent of tax abatements is to encourage business development that would otherwise not occur. While giving a new or relocating business a tax break reduces government revenue for a period, thereafter payments by the business at the regular tax rate could reduce the burden on residential taxpayers.

Municipalities are free to share such payments and they sometimes do. Atlantic City’s PILOT agreement, part of the state plan to restore its finances, this year gave its school district $45 million of the $152 million PILOT funds from casinos.

But municipalities don’t have to share and in many cases they don’t. That can increase school and county tax rates even as it reduces the municipal rate.

Under a typical five-year tax abatement plan to encourage development, a business pays no tax the first year and 20% of the regular rate the second year, increasing another 20 percentage points a year until the full rate is paid in the sixth year.

Nearly all of this money goes to the municipality, so schools do without the portion of local property taxes they would otherwise get. And since school taxes typically dwarf the municipal government tax, towns often wind up with a revenue windfall by getting to keep nearly all the PILOT in the years the business pays 60% or 80%. Unless a municipality uses all of that extra money to reduce the municipal rate, increases a PILOT requires in the school and county tax rates will cost taxpayers more.

A report by N.J. Comptroller Matthew Boxer in 2010 said this municipal windfall from tax abatements is an incentive for local governments to give them out, even if they may not be needed to attract the development.

The report said payments in lieu of taxes should be divided between the municipality, schools and county. It also recommended that schools and county government, as well as the public, be given a bigger voice in the process of granting property-tax abatements. Current law says municipalities get 95% of PILOT revenue and counties 5%.

Singleton’s legislation would make such programs fairer and more transparent. In addition to sharing the payments with schools, it also would require municipalities to provide copies of tax abatement applications to county and school officials.

A consistent, statewide sharing of PILOT payments also would level the playing field between municipalities competing to attract business development. This could help reduce the need for and size of tax abatements, saving taxpayers more money.

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