The Lease Buy Back and the PILOT agreement – Commonly used tax abatement scheme in WV

What is a PILOT?

A Payment in Lieu of Taxes (abbreviated as PILOT) is a payment made to a state or local government to compensate those entities for the property tax revenue lost due to tax exempt ownership or use of real property. PILOTs are meant to help cover the government’s cost of providing services to the tax exempt real property or the entity that owns or uses that property.

Think of large federal public parks. Property taxes are not due on these lands because they are owned by the federal government. However, local governments must still provide services to these lands. These governments maintain roads to and from the park, provide fire and EMS protections for the park and law enforcement around the park and in case of emergency. And just as importantly, these governments’ budgets pay to support an educated labor force, and education for that labor force’s children. These services obviously cost money to provide and, in the absence of the property taxes paid on these lands, the burden falls to the remainder of the taxpayers in these jurisdictions to pay higher taxes to cover the cost.

In an attempt to at least partially mitigate the burden on local government, the government entity who owns the land may voluntarily pay some amount of money in lieu of tax—a PILOT. But the PILOT payment amount is usually well below the cost of the services provided to the tax-exempt property by the local government.

Co-opting government’s tax exempt status to provide corporate economic incentives

Unfortunately, the fact that no property tax is owed on government-owned property has been co-opted by economic development agencies as an instrument to provide tax cuts to select businesses.

In West Virginia, a lease buyback agreement is typically employed. A development entity (which is a government agency) takes ownership of the company’s land and equipment. Such government ownership does away with the property tax liability because under law such governmental entities are not required to pay taxes of that nature.  Then the company “leases” back the land and equipment, usually for a nominal or no fee. At the end of some agreed upon period of time, the company “buys” back the land and property, again usually for a nominal fee ($1).

To help cover the cost of services provided by local government entities, the company usually (but not always) agrees to pay some amount of money in lieu of the taxes it otherwise would have paid. The company in structuring a PILOT can influence who receives its PILOT payments—unsurprisingly, such payments frequently are made to projects or entities that are popular or otherwise have a high profile. In addition to the public relations benefit a company can achieve via PILOTs, sometimes such payments are directed to specific projects that disproportionately benefit the company.

Unfortunately, these payments are massively lower than would have been paid by the company if they had simply paid taxes on their real property. Again, the burden falls to the remainder of the population in these jurisdictions to pay higher taxes to cover the cost of what the company does not pay.¹

Sometimes, but not always, the company promises to provide a certain number of jobs in exchange for the economic incentives it receives. Unfortunately, experience shows that in these situations companies rarely provide the full number of jobs promised and–unlike the government jobs provided by national parks–the jobs provided are usually low paying or undesirable or both.² There are rarely any explicit requirements for the company to follow environmental or employment standards, much less provisions requiring the entity to forfeit the economic incentives received if it does not meet these standards.³

Coercion of local development authorities by corporations

Such tax break deals have been positioned as tools to attract new business development to a particular area. However, research demonstrates that these deals have little effect on the location decisions of businesses.⁴

Research has shown that most business decide where they want to locate prior to approaching development entities for these deals. Then the business or its consultant (like Deloitte) approach the jurisdiction, claiming the business will invest large amounts of money and provide large numbers of “good paying” jobs, but only if they get these incentives.

The business and their consultants try to maximize the incentives to be received to locating in the selected area. For example, they try to convince local governments and development authorities that but for these deals the business would not locate in the jurisdiction where they are requesting the tax breaks.⁵ In fact, a review of 30 peer-reviewed papers found:⁶

FOIA exemptions keep people in the dark, put corporations in control

State legislatures, including in West Virginia, have over the years been convinced to enact exemptions to government transparency laws that prevent information on such economic development deals from being made public in a timely way. These exemptions also prevent rival jurisdictions’ development authorities from obtaining information on these deals. This lack of transparency leaves business themselves as the only source of information on what has been offered to them by another jurisdiction. The business can tell one jurisdiction that another has given the business a better deal and there is no way to verify this information.

In this way, businesses pit one jurisdiction against another. It becomes a race to the bottom of which jurisdiction can give away the most to the business.⁷ It is a genius scheme if you are the business and a bad joke if you are the taxpayers who collectively will need either to pay more in taxes or live with lower quality of government services—and who regardless will need to endure the environmental degradation and other negative economic impacts these deals have been shown to cause.⁸ 

This type of “corporate welfare” allows state development offices and economic development authorities to pick winners and losers among businesses. While we this is inappropriate everywhere, in West Virginia these schemes are actually unconstitutional.

Unconstitutional in West Virginia!

The West Virginia constitution requires that all entities are taxed equally. And as described above, these schemes allow some entities to be taxed at an effective rate that is significantly less than applies to others.

In 1863 when West Virginia became a state, the West Virginia constitution had a uniformity provision for the ad valorem tax or property tax. This meant that all property would be taxed equally in the state. Article X, Section 1 of the West Virginia Constitution, provides that all property shall be taxed equally. The lease buyback schemes described above are in direct violation of this provision of the constitution as they allow the companies to pay less tax on their property then others.

While Article 11, Section 3, Chapter 9 of the WV code of 1931 does set out some provision for exemptions, these lease buyback deals are not articulated as one of the authorized exceptions from the ad valorem taxation. No matter the justifications offered by economic development authorities for such deals, they are not constitutional in West Virginia.

Bad for business

Not only is government’s use of lease buyback deals in this way unconstitutional in West Virginia, it does not achieve the goal of economic development. As noted previously, research shows that companies decide where to locate largely regardless of these type of incentives.⁹ In fact, studies show that the decision of where to locate is made in most cases before the companies even approach the jurisdiction to request these types of incentives. These incentives are the icing on the cake for companies, not the actual driver of economic development.

Worse yet, these deals are actually bad for local economies.¹⁰ These incentives favor large corporations over small businesses and startups.¹¹ Then small businesses, startups, and long standing companies in the community are saddled along with the residents with the burden of making up the difference in the tax revenue.

Research has shown that small businesses and startups drive lower unemployment and higher wages, while driving economic development by attracting outside large corporations to move into a jurisdiction actually depresses local economies.¹²

So in West Virginia these unconstitutional deals allow political appointees to pick winners and losers in the economic race, depress local economies, drive wages down, increase the tax burden on small businesses and individuals and make it harder for local jurisdictions to meet their commitments to their residents all the while providing welfare to large, often environmentally unfriendly corporations who rarely keep their end of the bargain to provide a number of “good paying jobs.”¹³

What happened with Rockwool

In 2017 a PILOT agreement was made between the Jefferson County Development Authority (JCDA) and Rockwool. This was made pursuant to a memorandum of understanding. The constitutionality of the PILOT agreement was legally challenged in 2018. However, the constitutional challenge was not adjudicated since in 2019 Circuit Court Judge Hammer found that the agreement was incomplete and never finished.

In November of 2018 soon after the elections a majority of the JCDA members responsible for recruiting or approving Rockwool resigned from the JCDA. These members were eventually replaced, shifting the composition of the JCDA decidedly away from the original supporters of the Rockwool PILOT agreement. By the time the PILOT decision was made by Judge Hammer in 2019, it was fairly clear the new JCDA would not be finishing the Rockwool PILOT agreement. Unbeknownst to the Jefferson County public, however, Rockwool had taken its request for tax breaks to the West Virginia Economic Development Authority (WVEDA) and on May 3, 2019 the WVEDA approved a $150 million bond agreement, with a lease buyback mechanism, to benefit Rockwool.

Under the WVEDA agreement, the WVEDA will buy Rockwool’s property and equipment. This will alleviate Rockwool’s tax liability. The WVEDA agreed to give Rockwool up to $150 million in guaranteed loans provided by State-backed bonds. Rockwool will lease back the property for the price of servicing their debt. Ten years after the last loan is drawn by Rockwool, it will buy back the land and equipment for $1. Only then will Rockwool be required to pay taxes on its land and the depreciated value of its equipment.

So the state government usurped the local government to provide economic incentives (without any PILOT payments) to a company that had already decided to locate in Jefferson County and indeed was already starting to build. What exactly was it that they were incentivizing?

What Jefferson County Foundation is doing about it

Due to the antiquated and ineffective public notice measures used by the WVEDA, the people of Jefferson County only became aware of the May 2019 deal in September of 2019..  Members of Jefferson County Foundation’s Strategy and Economic Development Committee discovered this information and immediately responded.

The Foundation sent letters to representatives demanding to know who knew what, when, and why the local government was usurped. From our research it seems that the impacted local governments in Jefferson County were caught unaware as well, while state officials had  no issue with acting unilaterally to attract Rockwool to Jefferson County.

The Foundation legal team undertook detailed evaluation and research of the agreement and the legal authorities including seeking expert input from legal scholars and specialists. After the statutorily required notice period, with collaborative representation from multiple firms, Jefferson County Foundation filed a lawsuit challenging the constitutionality of this agreement in Kanawha County Circuit Court in April 2020.

Rockwool first filed to have the case dismissed. Then they filed to have the case moved to a business court. The Foundation filed response briefs to both motions. The court has yet to act on these motions, so we await its decision.

How you can help

---

1 Ward TR. The impact of economic development incentives on public education in Missouri (Doctoral dissertation, University of Missouri–Kansas City).
Calcagno P, Hefner FL. Economic Development Tax Incentives: A Review of the Perverse, Ineffective, and Unintended Consequences. For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century. Arlington, VA: Mercatus Center at George Mason University. 2018.
2 Jensen NM. The effect of economic development incentives and clawback provisions on job creation: A pre-registered evaluation of Maryland and Virginia programs. Research & Politics. 2017 Jun;4(2):2053168017713646.
Jensen NM. Job creation and firm-specific location incentives. Journal of Public Policy. 2017 Mar;37(1):85-112.
3 First GJ. Money-back guarantees for taxpayers: Clawbacks and other enforcement safeguards in state economic development subsidy programs. Good Jobs First. Washington, DC. 2012.
4 Donegan M, Lester TW, Lowe N. Striking a balance: A national assessment of economic development incentives. Urban Affairs Review. 2019 Oct 14:1078087419880013.
Bartik, Timothy J. 2018. “Incentives and Local Job Creation.” Policy Brief. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
Bartik, Timothy J. 2018. “‘But For’ Percentages for Economic Development Incentives: What percentage estimates are plausible based on the research literature?” Upjohn Institute Working Paper 18-289. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.
5 Mast E. Race to the bottom? Local tax break competition and business location. American Economic Journal: Applied Economics. 2020 Jan;12(1):288-317.
6 Bartik, Timothy J. 2018. “‘But For’ Percentages for Economic Development Incentives: What percentage estimates are plausible based on the research literature?” Upjohn Institute Working Paper 18-289. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research
7 Goetz SJ, Partridge MD, Rickman DS, Majumdar S. Sharing the gains of local economic growth: race-to-the-top versus race-to-the-bottom economic development. Environment and Planning C: Government and Policy. 2011 Jun;29(3):428-56.
8 Ward TR. The impact of economic development incentives on public education in Missouri (Doctoral dissertation, University of Missouri–Kansas City).
Calcagno P, Hefner FL. Economic Development Tax Incentives: A Review of the Perverse, Ineffective, and Unintended Consequences. For Your Own Good: Taxes, Paternalism, and Fiscal Discrimination in the Twenty-First Century. Arlington, VA: Mercatus Center at George Mason University. 2018.
LeRoy G, Fryberger C, Tarczynska K, Cafcas T, Bird E, Mattera P. Shortchanging small business: How big businesses dominate state economic development incentives. Available at SSRN 2771463. 2015 Oct 20.
Small Business is Good for Local Economies; Big Business is Not, Researchers Say, Business News Daily, 2020 Feb 26; https://www.businessnewsdaily.com/1298-small-business-good-for-economy.html
9 Mast E. Race to the bottom? Local tax break competition and business location. American Economic Journal: Applied Economics. 2020 Jan;12(1):288-317.
10 Goetz SJ, Partridge MD, Rickman DS, Majumdar S. Sharing the gains of local economic growth: race-to-the-top versus race-to-the-bottom economic development. Environment and Planning C: Government and Policy. 2011 Jun;29(3):428-56.
11 LeRoy G, Fryberger C, Tarczynska K, Cafcas T, Bird E, Mattera P. Shortchanging small business: How big businesses dominate state economic development incentives. Available at SSRN 2771463. 2015 Oct 20.
12 Small Business is Good for Local Economies; Big Business is Not, Researchers Say, Business News Daily, 2020 Feb 26; https://www.businessnewsdaily.com/1298-small-business-good-for-economy.html
13 id