A payment in lieu of taxes, or PILOT, is a payment made to a local government by an entity that does not owe property taxes, meant to help cover the cost of the public services that property still uses. PILOTs come in three distinct forms: the federal government pays counties that contain national forests, parks, and other untaxable federal land; nonprofits such as universities and hospitals negotiate voluntary payments with the cities they sit in; and private developers accept reduced-tax PILOT deals as an incentive to build. The common thread is a property that generates no tax revenue but still needs roads, fire trucks, and police.
Why These Payments Exist
Local governments fund most day-to-day services through property taxes. When a large share of land in a jurisdiction is tax-exempt, the remaining property owners carry a bigger share of the bill. In some cities with major universities, hospital systems, or federal installations, tax-exempt property can account for a third or more of total assessed value. That concentration creates real fiscal pressure, especially in smaller communities where a single campus or military base dominates the map.
Tax-exempt organizations still call the fire department, still need plowed streets, and still rely on water and sewer infrastructure. PILOTs bridge that gap. The mechanism varies by type. Congress wrote a statutory formula for federal land. Local nonprofit PILOTs are almost always negotiated one deal at a time. Economic development PILOTs run in the opposite direction, deliberately shrinking a private developer’s tax bill to attract investment. All three share the label, but they solve different problems.
Federal PILT Payments to Counties
The largest and most structured program is run by the U.S. Department of the Interior under 31 U.S.C. §§ 6901–6907. The federal government owns roughly 640 million acres across the country, and none of it appears on a local property tax roll. Counties with large tracts of federal land would face serious revenue shortfalls without some form of compensation.1U.S. Department of the Interior. PILT Frequently Asked Questions
Eligible lands include National Park System units, National Forest System land, Bureau of Land Management holdings, National Wildlife Refuge withdrawals, federal water resource project lands, Army Corps dredge disposal areas, and certain semi-active or inactive Army installations used for training.2Congress.gov. The Payments in Lieu of Taxes (PILT) Program: An Overview
How the Payment Is Calculated
The formula is statutory, not negotiated. The Department of the Interior calculates each county’s payment from three inputs: the number of qualifying federal acres, a per-acre rate adjusted annually for inflation, and a population-based cap. In fiscal year 2025, the standard per-acre rate was $3.46, with a minimum alternative rate of $0.50 per acre. The population cap limits total payments by multiplying the county’s population (capped at 50,000 for calculation purposes) by a per-person rate that ran from about $93 to $233 depending on county size.2Congress.gov. The Payments in Lieu of Taxes (PILT) Program: An Overview
If the per-acre calculation exceeds the population cap, the county gets the capped amount. When total appropriations fall short of total authorized payments, every county receives a proportional reduction. In fiscal year 2025, Interior distributed $644.8 million to more than 1,900 local governments.3U.S. Department of the Interior. Interior Department Announces $644.8 Million in Payments to Support Vital Services
Payments go directly to the eligible local government, usually a county, unless a state has enacted legislation to receive the funds and redistribute them to smaller jurisdictions. Counties do not need to apply. Eligibility is automatic if federal entitlement land falls within their boundaries.1U.S. Department of the Interior. PILT Frequently Asked Questions
Nonprofit PILOTs
A very different kind of PILOT exists between municipalities and tax-exempt nonprofits. Every state exempts property owned by charitable organizations from local property taxes. Large nonprofits, including private universities, hospital systems, and cultural institutions, can own enormous amounts of real estate in a single city, and those properties generate zero tax revenue despite consuming public services.
Nonprofit PILOTs are voluntary. The word matters. Because the property tax exemption is typically rooted in state constitutional or statutory law, municipalities generally have no legal authority to impose a property tax on a qualifying nonprofit. Courts have struck down attempts to deny zoning permits or building approvals as retaliation when a nonprofit refuses to pay a PILOT.
Cities still have ways to apply pressure. Some formally request participation from nonprofits whose property exceeds a certain assessed value. Others tie cooperation to smoother permitting or frame it as civic stewardship. Nonprofits often argue that the community benefits they already provide, such as charity care at hospitals, scholarship programs, and free public events, offset the value of their tax exemption.
How the Amount Is Set
There is no standard formula. The most common approach is direct negotiation between the municipality and the institution. The resulting number reflects the institution’s financial capacity, the assessed value of its exempt property, and the city’s fiscal needs. Some cities have adopted more structured programs that ask participating nonprofits to pay a fixed percentage of what their property tax bill would be if the property were taxable, with credits allowed for community benefits already provided. Other agreements base the payment on estimated municipal service costs or arrive at a lump-sum figure both sides can accept.
The nonprofits most frequently involved are universities and hospitals, sometimes called “eds and meds,” because they tend to own the most valuable tax-exempt property. Museums and performing arts centers, large religious organizations, and human service providers also participate in some cities.
Economic Development PILOTs
The third category of PILOT works in reverse. Instead of collecting revenue from a tax-exempt entity, the local government deliberately reduces a private developer’s property taxes to encourage construction, job creation, or redevelopment in a targeted area. These agreements are especially common for projects in blighted or underutilized neighborhoods where development would not pencil out at full tax rates.
The Mechanism
The typical structure uses a public entity, often an Industrial Development Agency or similar authority, that takes legal title to the property. Because a government body now owns it, the property comes off the regular tax rolls. The developer leases the property back and makes reduced PILOT payments instead of full property taxes. At the end of the agreement, title reverts to the developer for a nominal fee.
PILOT payments in this context are commonly set at 10 to 15 percent of the project’s annual gross revenue, or as a percentage of total project costs. Agreements typically run 10 to 30 years, with payment schedules that often escalate over time so the municipality gradually captures more revenue as the project matures. Tying payments to revenue lets the municipality share in the project’s upside if rents increase.
The School Funding Tension
Economic development PILOTs are the most controversial of the three types, and school funding is the main flashpoint. When property comes off the regular tax rolls, school districts that rely on property tax revenue can lose out. Whether PILOT revenue gets shared with schools depends entirely on the specific agreement and local policy. Some states have moved toward requiring municipalities to share a portion of PILOT revenue with school districts, but many agreements still direct all or most of the money to the municipality. Critics argue the result is a subsidy where the municipality gets the ribbon-cutting while schools absorb the cost.
What a PILOT Agreement Contains
Whether the deal involves a nonprofit or a developer, a formal PILOT is a contract. Most agreements address the same core issues.
- Duration. One-time payments exist, but multi-year terms of 10, 20, or 30 years are far more common, especially in economic development deals. Many include provisions for periodic review or inflation adjustments.
- Payment schedule. The agreement specifies whether payments are annual, quarterly, or on another timeline, and whether amounts escalate over time.
- Calculation method. The contract spells out exactly how the payment is determined, whether by a percentage of assessed value, gross revenue, project cost, or a flat negotiated amount.
- Scope and conditions. The agreement may restrict how the property can be used, specify which municipal services the payment is meant to support, or set performance benchmarks the developer must hit.
- Revenue sharing. For economic development PILOTs, the agreement should state whether any portion of the payment goes to other taxing bodies such as school districts or counties.
- Termination. The contract outlines what happens if either party wants to exit early, if the developer fails to meet job-creation targets, or if the property changes ownership.
Where the Criticism Lands
PILOTs draw fire from different directions depending on which type is under discussion.
For nonprofit PILOTs, the central tension is fairness. Supporters note that the biggest tax savings flow to institutions with the most valuable property, not necessarily those providing the most community benefit. A large research university saves millions each year, while a small housing nonprofit saves comparatively little, yet both enjoy the same legal exemption. PILOTs can help correct that imbalance. Nonprofits respond that negotiations are often contentious and secretive, that similar organizations end up paying wildly different amounts, and that total revenue collected through PILOTs is usually a small fraction of a city’s budget.
For economic development PILOTs, the debate is whether the incentive actually changes behavior. Critics argue that many projects receiving PILOT benefits would have been built anyway, making the reduced payments a giveaway. Research on comparable incentive programs has found that only a small fraction of participating businesses genuinely needed the tax break to proceed. Proponents counter that without the incentive, developers would choose a different city or the project’s financing simply would not work, particularly for affordable housing or environmental remediation on contaminated sites.
The federal program generates less controversy but is not immune. Because appropriations must be renewed and can fall short of the formula’s authorized amounts, rural counties that depend heavily on federal payments face budget uncertainty from year to year. The population cap also means that counties with vast federal acreage but small populations receive less per acre than the formula would otherwise provide.