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Report The Impact of the State-Owned Land PILOT and Solar Taxation Policies on Municipalities

A lack of funding for the state-owned land PILOT program and recent rulings from the Appellate Tax Board related to taxation of solar energy facilities have created uncertainty and strained municipal budgets.

Organization: Office of the State Auditor Division of Local Mandates
Date published: December 10, 2020

Executive Summary

Programs that make payments in lieu of taxes (PILOTs) have existed in Massachusetts law for over 100 years, with the goal of compensating municipalities for lost revenues from tax-exempt properties. One of these programs, created for state-owned land (SOL), was established in 1910 and remains a significant source of revenue for communities, involving thousands of acres of protected forest, recreational areas, and properties that house public universities and houses of correction. Another program, which focuses on power generation facilities, was established in 1997 and has become increasingly important for municipalities hosting solar farms that generate power for households, businesses, and municipalities themselves.

Although these two programs are codified in state law, there are questions about whether municipalities are adequately compensated for hosting state lands and solar facilities. PILOT reimbursements for SOL are reliant on a legislative appropriation, yet the formula provides larger reimbursements to municipalities with high and fast-growing property values at the expense of other communities. Voices from communities and the Legislature have called for a reexamination of the SOL program in order to alter arrangements that disadvantage rural communities.

Power generation facilities provide another important source of tax revenue for municipalities. Small-scale, residential installations of solar panels have been exempt from taxation for decades. Decisions by the Appellate Tax Board (ATB) interpreting this law have extended tax exemptions for solar equipment to commercial entities. This change has resulted in varied reactions from communities, such as taxing solar facilities, negotiating PILOTs, and granting exemptions for varying rates and terms. Legislative action to clarify the law has advanced in recent years, but has not yet resulted in enacted legislation.

The Division of Local Mandates offers a unique perspective for examining state PILOT programs through DLM’s charge to measure the impacts of state law and regulation on municipalities. This report is the result of discussions with a wide range of stakeholders, including legislators, municipal officials, state agencies, environmental groups, the solar industry, and solar power advocates. The report also underscores the urgent need for a fix of the two examined PILOT programs for the benefit of communities across the Commonwealth.

Below is a summary of our findings and recommendations, with links to each page listed.

SOL PILOT Finding 1

The SOL PILOT Program has been underfunded for decades.

  1. Appropriations to the SOL PILOT Program have not fully funded the program’s statutory obligation to reimburse cities and towns in the last twenty years.
  2. At least $45 million was needed to fully fund the SOL program in fiscal year 2020. The Legislature appropriated $30 million that year, leaving a $15 million shortfall.

SOL PILOT Finding 2

The current SOL PILOT formula disadvantages communities with slowly increasing or declining property values.

  1. Changes made to the program by the Municipal Modernization Act favor communities who experience faster property value growth than the state average.
  2. Affluent urban and suburban communities in eastern Massachusetts are the largest recipients of SOL reimbursements.
  3. Rural, less affluent areas in central and western Massachusetts receive lower PILOT reimbursements over time due to slower growth and decline in property values.

SOL PILOT Finding 3

Municipalities receive higher reimbursements for lands in the Watershed PILOT Program than their SOL PILOT Program Lands.

  1. The Watershed PILOT Program is able to fully reimburse communities and protect against drops in funding due to hold harmless protections and a dedicated revenue source.
  2. All municipalities under the SOL PILOT Program have the same reimbursement rate, whereas the Watershed PILOT Program calculates reimbursements by using communities’ commercial tax rates.

SOL PILOT Finding 4

Not all state agencies’ properties are eligible for SOL PILOT reimbursements, limiting payments available for some municipalities.

  1. The list of state agencies and properties currently eligible for the program has been mostly unchanged in laws governing SOL since 1974.
  2. The SOL statute creates artificial limits among state agencies, meaning that land under major government properties, courthouses, and county jails is not eligible for reimbursements.

SOL PILOT Finding 5

PILOT reimbursements do not capture additional value that results from significant improvements on land.

  1. Buildings and other improvements to properties are not included in SOL values and therefore not counted towards reimbursements.
  2. Municipalities hosting highly-developed state-owned properties face a dual burden because the facilities create an increased demand for municipal services.

SOL PILOT Finding 6

Dissatisfaction with the SOL PILOT program has led local officials to oppose further acquisitions of land by the state.

  1. SOL represents a large share of property values in small towns in Western Massachusetts, which rely on adequate compensation by the program.
  2. In these towns, state acquisitions of land may result in lower assessments than when land was in private ownership.

SOL PILOT Recommendation 1

Strengthen the SOL PILOT Program and increase its appropriation.

  1. Fully fund the SOL PILOT program using the aggregate tax rate method.
  2. Include a hold harmless provision to protect municipalities with reduced land values and PILOT reimbursements.
  3. Examine and fix other issues within the SOL PILOT Program through legislative action.

Solar Facility PILOT Finding 1

The ATB’s interpretation of the solar property exemption has created confusion among municipal officials on how to tax solar arrays.

  1. Rulings from the ATB in the 2010s have interpreted the solar exemption to include both residential and commercial solar arrays from property taxes.
  2. The ATB decisions only apply to the towns involved in the cases, but could be binding on all communities if affirmed in an appeal to the Massachusetts Appeals Court.
  3. Municipalities lack resources to appeal ATB decisions, which disadvantage them in negotiations with developers.

Solar Facility PILOT Finding 2

Solar facility PILOT agreements do not always reflect the full tax value of solar equipment.

  1. In negotiations with solar developers, communities may discount some of the taxable value of solar equipment although the equipment must be based on “full and fair cash valuation.”

Solar Facility PILOT Finding 3

State laws and guidelines governing the taxation of solar equipment and PILOT agreements with solar facilities are outdated and lack clarity.

  1. A law allowing PILOT agreements between municipalities and “generation facilities” was enacted in 1997, but legislators likely did not expect that the entities using the law today would be solar developers.
  2. Formal guidelines for the valuation and taxation of generation facilities by the Division of Local Services (DLS) lack clear examples of standardized PILOT agreements and/or valuation processes for solar facilities. 

Solar Facility PILOT Finding 4

PILOT agreements have increased in importance as solar developers seek tax exemptions for their facilities.

  1. Solar developers can continue to negotiate PILOT agreements with municipalities, even if the developers may be exempt from paying taxes on solar installations.
  2. Some solar facility PILOT agreements have focused only on personal property taxes as a result of the ATB decisions.

Solar Facility PILOT Finding 5

The uncertainty of the property tax situation is one of several factors contributing to a slowdown in the development of solar facilities in the Commonwealth.

  1. In recent years, cities and towns passed solar moratoriums due to concerns about future tax revenues from solar facilities and the proliferation of solar projects in their communities.
  2. Solar development in Massachusetts is declining due to completed renewable energy incentives, net metering limits, and land use concerns by municipal officials.

Solar Facility PILOT Recommendation 1

Clarify the solar property tax exemption through legislative action.

  1. Proposed legislation would establish which solar arrays and installations are exempt from taxation and would exclude larger solar companies from seeking an exemption. 

Solar Facility PILOT Recommendation 2

Clarify the tax status of solar facilities that may not be eligible to participate in PILOTs under existing state law.

  1. Existing solar facility PILOT law excludes mid-sized solar farms that generate an abundance of energy but do not fit the definition of a “generation company.”
  2. Proposed legislation allows municipalities to negotiate PILOT agreements with solar facilities that were not covered under existing law and do not qualify for a tax exemption. 

Solar Facility PILOT Recommendation 3

Establish additional guidelines for assisting municipalities in creating and negotiating solar PILOT agreements.

  1. Proposed legislation exists that would require the Department of Revenue (DOR) and the Department of Energy Resources (DOER) to develop guidelines such as standardized valuation formulas and sample PILOT contracts.

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