How a PILOT works

One wonky phrase keeps cropping up in Chattanooga City Council meetings: “payment-in-lieu-of-tax” agreements, also known as PILOTs. This week, Council members deferred voting on two major PILOT-related items — changes to some of the rules governing these agreements and a deal with battery component manufacturer Novonix promising at least 400 new jobs by 2030.

PILOTs come in two forms and offer major tax breaks to private companies to get the result — housing or economic development — sought by the government. 

• Affordable housing PILOTs aim to entice building developers into constructing apartments that rent below the typical monthly rate. 
• Economic development or jobs PILOTs require participating companies to employ county residents either by opening local facilities or relocating here.

For fiscal year 2024, PILOTs accounted for $25 million in total lost revenue for the city, county, and school district. Let’s get into how these agreements work, and why city and county leaders think it’s worth it.

Why PILOTS?

Eric Holl, advisor to Mayor Tim Kelly, said PILOTs have to pass the “but for” test, meaning that without the incentive package, the community wouldn’t realize the benefits of jobs and cheaper homes. 

However, each deal strikes a balance between corporate and public interests. For example, an economic downturn might induce local governments to offer a more generous tax abatement in exchange for attracting needed business, said Joe Paden, a member of Chattanoogans in Action for Love, Equality and Benevolence (CALEB).

Paden said it’s important to know how well new jobs and promised wages counteract the loss of public resources. 

 ”Companies are basically — they’re trying to sell the cities, right?” Paden said. “And they’re trying to kind of get as beneficial a circumstance as they can.”

Which companies currently have a PILOT?

Several major corporations operate under favorable tax deals in Hamilton County, including Volkswagen, Blue Cross Blue Shield, Gestamp, and the Coca-Cola Bottling Company. The owners of apartment complexes at 1400 and 2108 Chestnut St. have the largest housing PILOT agreements. 

In total:

• The city’s Industrial Development Board (IDB) has 12 active economic development PILOTs.

• The county IDB oversees seven economic development PILOTs.

• The Health, Education and Housing Facilities Board manages 13 affordable housing PILOTs. The Chattanooga Housing Authority controls one.

See all the current PILOTs and their tax impact here.

How do PILOTs work?

• An appointed board with the ability to buy, lease, and manage property takes control of the title to a private company’s property. That could be the site for an apartment complex or manufacturing facility. The board then leases the property back to the company for a certain number of years.

• Companies make those lease payments instead of paying taxes on their property, now owned by a city board. The payments are set at a certain percentage of what the company would owe in property taxes.

• That percentage increases over the course of the deal, and in some cases, companies pay 100% of the taxes reserved for Hamilton County Schools for the entire PILOT period. When the PILOT ends, the company regains control of its property and pays its yearly taxes in full.

New rules for PILOTS

City Council is currently mulling changes to the city’s PILOT rules proposed by the mayor’s office. Among other changes, the proposal codifies the role of the Chattanooga Chamber of Commerce in promoting certain companies and suggesting PILOT terms to the IDB.

Though unelected, the chamber has always had a hand in securing PILOT agreements given its position straddling the private and public sectors, Holl said. Paden from CALEB, which has advocated PILOT reform for years, described the chamber’s dealmaking role as murky.

“Why are certain things done the way they are?” Paden said. “That’s been a big part of trying to bring this economic animal more into the light.”

The new policies outline a points system the chamber will use to score PILOTs based on total investment, job guarantees, apprenticeship programs, and more. Higher investment projections and more promised jobs yield longer deals with larger tax abatements. 

Paden said the new policies are a necessary step toward transparency. But a clearer process isn’t CALEB’s sole aim. Another is ensuring PILOTs create economic mobility by requiring wages for new jobs to approach the county average and targeting industries most beneficial for the local workforce. 

In two lengthy documents sent to Council members in January, the group also said officials should better define the indirect costs of PILOTs, such as strains on infrastructure and environmental harm on the neighborhoods where they locate. 

“ There is an impact on the public’s resources, not just in terms of taxes,” Paden said, “But also, you know, depending on the industry, it impacts what happens in communities.”

At their Jan. 28 meeting, City Council pushed back their vote on the updated PILOT rules until Feb. 11 to make additional tweaks to the resolution. 

“This is important work, and it is good work that is moving forward, but we need to defer it for two weeks,” said Councilwoman Jenny Hill, District 2.

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Contact William at william@chattamatters.com