having all the economic attributes of a tax payment. At the same time, by viewing the PILOT as a type of grant, one can focus more readily on substantive economic questions such as those regarding (1) whether a PILOT is just another grant-in-aid device being added to the long list of existing grant programs, and (2) how the PILOT might best be administered.

CONCEPTUAL CLASSIFICATION

Theoretically, a payment in lieu of tax could encompass nearly every state and local tax that is foregone because of the federal presence. As a starting point, one could accept the extreme theoretical case that if all federal property were privately owned and in its highest and best use, additional sales, income, property, inheritance and estate, and other taxes would be collected by states and localities. There would be only two broad areas for tax base erosion: (1) those activities or property use categories to which states or local units have accorded full or partial exemption, even when in the private sector; and (2) those properties and activities under state/local government control. However, it should be noted that a case can certainly be made for some form of in lieu payment on properties which are off the tax rolls due to either ownership of, or mandates by a higher level of government (e.g., federal mandates to a subnational government, such as those in the District of Columbia, or the much more common case of state-mandated exemptions from the local tax base). Indeed, several states already make compensatory in lieu of tax payments to local governments. (See Volume 2.)

*

Despite its academic attractiveness, however, attempts to design a PILOT by such a comprehensive view of the tax exempt base would be operationally impractical and, in some cases, simply not worth the administrative effort in terms of its revenue generation. Moreover, a comprehensive tax base approach would require a high degree of speculation regarding the eventual property owners and what their incomes and wealth might be under this alternative economic structure.

* Examples are: full exemptions, such as those for museums and educational institutions, and partial exemptions, such as those provided to agricultural and conservation lands and to various businesses through development tax incentives.

Institutions, Not Persons

Like a tax, a PILOT might be classified and designed in a variety of ways. The two broadest classes could be derived first from the distinction between a PILOT that is based on persons using, or indirectly associated with, a government service and the government as an institutional entity separate from the employees and the consumers of its services; and, second, a PILOT that distinguishes between general and specific payment programs.

For purposes of examining a uniform, broadbased federal PILOT program, the "persons" vs. "institution" division is straightforward and disposed of rather easily. Because the intergovernmental tax immunities doctrine is, with the exceptions noted in Chapter 2, no longer manipulated to include persons who have a derivative relationship with the U.S. government,1 no in lieu payment need be considered for major third-party direct taxes such as the individual income and estate and inheritance levies. Thus, in discussing a uniform PILOT, the justification, if any, must focus on the government as an institution.

General vs. Specific

The classification distinction for PILOT is somewhat more difficult to make in the "specific" vs. "general" context. As a guide, a specific PILOT would be one that addresses a particular set of circumstances, whereas a general payment would be designed to achieve comprehensive coverage of all (or most) like governmental institutions or activities. Thus, the distinction here is based upon the scope and uniformity of the payment rather than the form of payment.

Of all the existing payment programs listed in Chapter 2, the only programs that can be placed in the "general" category are some of the receipts-sharing programs and, perhaps, the Federal Impact Aid Program for local education. The former group is so defined because the purpose of the payments is to recognize that the federal government is uniformly using certain broad classes of property for commercial purposes. The Federal Impact Aid Program might also be put in this "general" classification, as the payments are based on categories

which are generally uniform nationally.

This study examines the nature and characteristics of a general PILOT that would be uniformly paid on nearly every type of federal real property to compensate subnational governments for the federal presence.

PROPERTY TAX EQUIVALENCY

By narrowing the PILOT base to one that can be applied generally to private and federal institutions alike, it is still theoretically possible to argue that at least the three major state and local tax bases could be constructed-viz, the sales, receipts (income), and property bases. However, designing a PILOT that corresponds to the first two of these is fraught with difficulties which stem from the tax base accessibility problems derived from both the economic function of government as a provider of public goods and the unitary administrative nature of commodity procurement practices. For example, although the federal government does generate income or receipts from its leasing of public lands to commercial interests and then provides for receipts-sharing with local governments, receipts-sharing is simply not applicable to the bulk of federal activities. This feature follows from the simple fact that most government agencies either do not generate receipts, or, what revenue is generated is usually in the form of a cost-of-service fee. The price paid for government publications, various business operating licenses, permits, airport landing fees, entitlement fees, EPA licenses, and park entrance charges are examples of the latter. The problem with setting aside part of these fee receipts as a form of receipts sharing is twofold: first, many fees are generally designed as regulatory or public service rationing aids, not as revenue generators, and second, those that are nonregulatory usually fail to produce even the revenue necessary to cover the costs-of-services provided by an agency.

The federal "sales" tax base is even more illusory. Theoretically, one could look at the federal government's current expenditure share of GNP and come up with some sort of total sales or expenditure activity. But beyond this point, the apportionment or allocation task becomes unmanageable and unmeaningful. In addition, even defining the "sales" of public

goods "purchased" by a system of compulsory taxation is a practical dead-end. Indeed, it is those cases in which sales of goods and services can be easily identified and apportioned among individual users that are used to delineate private from public sector activity.

The one general tax base that attaches to the federal government and is readily accessible to local government because of its immobility, and for which valuation procedures are already developed, is the government's real property. Accordingly, this base provides the most practical framework for designing a general federal to state/local PILOT.

COMPUTATION AND SCOPE OF THE PAYMENT

The PILOT to be examined here is based on a real property tax equivalency approach. That is, the amount of the proposed PILOT is equal to the dollar amount which the federal government's real property would yield were it fully taxable under a jurisdiction's state and local real property tax structure. The definition of real property-i.e., levies designed to defray all or part of the costs of specific public improvements, such as street paving, sidewalks, and sewer lines that serve the government property. In adopting this framework for the PILOT, it is explicitly understood that the U.S. government is to be treated as if it were a real property taxpayer. Thus, its property holdings are subject to the same definitions and state/local tax rates that apply to similar taxable private properties and, where appropriate, to one or more of the market valuation approaches endorsed by the American Institute of Real Estate Appraisers. ** These valuation methodologies include:

1. Cost Approach: the current cost of reproducing a property minus depreciation from deterioration and functional and economic obsolescence;

*The tangible personal property component of the property tax base is not considered here.

The definition of what constitutes "real" property or real estate varies among jurisdictions. For example, jurisdictions which do not levy a personal property tax tend to define real property more broadly than do those governments which levy both real and personal property taxes. Usually the issue focuses on whether or not to include various fixtures in the real property tax base.

2. Market Approach: the value indicated by recent sales of comparable properties on the market; and

3. Income Approach: the value which the property's net earning power will support.

In view of the data requirements needed for valuation, more than one of these methods may be used. Of course, there will be certain circumstances for which one or more of these approaches are not applied. Indeed, for purposes of valuing government-owned properties, the income approach could rarely be applied (although, in the case of office buildings, the income approach valuations of comparable private buildings may be appropriate "checks" for an appraiser to use). On the other hand, the market data approach may prove quite useful for the many urban properties, including vacant land. The most commonly used method, however, will be the cost approach. These costvaluation problems are discussed later in this chapter and again, in detail, in Volume 2. For now it need only be understood that the state of the art of real estate appraisal is such that the "valuation problem" is not an obstacle to designing or implementing a PILOT based on real property tax equivalency.

Similarly, conventionally accepted methods for valuing special assessments and apportioning that value according to benefit may be adapted to government holdings. Clearly, as is the case for any aspect of the PILOT, the special assessment must be nondiscriminatory. Thus, for example, the special assessments should fall uniformly on all owners who benefit from the improvement, probably eliminating special levies established by negotiations between the municipality and individual owners.

Exclusions From the Base

The following categories of real property are specifically excluded from the base of the PILOT being examined in this report:

• Land exclusions include: property in the public domain, property held in federal trust; flood control and navigation; parks and historic sites; forests and wildlife; reclamation and irrigation and grazing lands.

Among the excluded structures and fa-
cilities are: flood control and navigation;
roads and bridges; reclamation and irri-
gation; and monuments and memorials.

No buildings are excluded from the PI-
LOT base.

Together, these exclusions account for approximately $68.6 billion, or only about onefourth of the total value of all federally owned property in the U.S.

Except for the historic sites, monuments and memorials, and the roads and bridges categories, all of these categories are excluded because they are presently subject to the government's only broad-based payment program as administered under the "open-space" land, receipts-sharing, and guaranteed, per acre, minimum payment laws.

Excluding such open-space usage categories has the practical advantage of permitting the study to focus on payments for the federal government property holdings which have not been examined before. In addition, there is some substantive justification for these eliminations in that much of this excluded property can be made subject to direct taxation of the possessory interest, or to nonproperty taxation. Without cavil, however, it should be clearly stated that the exclusion of these openspace properties from this study should not necessarily be interpreted as a rejection of arguments for applying a tax equivalency approach to all federal real property usage categories. Indeed, there are good arguments both for maintaining this exclusion indefinitely or eventually including open lands in a PILOT base. As noted in Chapter 2, the case for inclusion has been made by both the Public Land Law Review Commission (PLLRC) and the U.S. General Accounting Office.

The reasons for excluding historic sites, memorials, and monuments can best be justified by ACIR's judgment that these "unusual" properties are likely to be excluded by Congress for purposes of administrative expediency; accordingly, it is acknowledged that a case can be made for including these types of properties in the base. The judgment to exclude was also made on research grounds that, in order to provide the most reliable and practical estimates of the current value of federal property for this report, parcels such as the Arizona Battleship

Memorial or the United States Capitol have such a special purpose character that they could be eliminated. Although this exclusion is not a serious one from an overall tax base perspective, it does, of course, erode significantly the PILOT base in some local jurisdictions (Washington, DC, is the extreme example). However, other real properties of a monumental nature, such as various ornate "federal buildings" (e.g., some old central city post offices, courthouses, and the Congressional office buildings), can-and should-be easily valued without regard to their ornamental features. Indeed, assessors commonly deal with this sort of problem with respect to both currently taxable and (when they are to be assessed) exempt properties. Regarding the latter, a practical solution is to have the owner of the exempt property provide to the assessor a statement that shows the original cost of the structure and of any remodeling. These costs can then be inflated to reflect current value.3

Public domain lands were also excluded from this PILOT base for practical reasons.

The first and most important is that, although there have been some isolated attempts to measure the value of the public domain, even the most basic acquisition cost data are nonexistent with respect to these lands (see discussion in Volume 2). This lack of cost data arises from the unique judicial status of the public domain itself-i.e., all the area title which was vested in the U.S. government by virtue of its sovereignty and, thus, which has never left federal ownership or was obtained in exchange for public domain lands or timber on such lands.4

Second, an examination of the inventory of the lands that constitute the public domain shows that most of this property (forests, parks, historic sites) falls under the open space categories, which, for reasons discussed above, are already excluded from the PILOT base considered here.

Roads and bridges are excluded for some of the same practical reasons noted above. The “unusual" characteristics of this usage classification include its permanence as well as its utility. Once constructed, it is no longer "vacant land;" yet it is really without market value as it cannot be developed. Although air rights over transportation rights-of-way are one ex

ception, they are marketed only in special situations. Moreover, most "U.S." highways are either in national park areas or under state/local jurisdiction (e.g., the interstate highway system) and could easily be excluded for other

reasons.

Finally, because of their quasi-federal status and the lack of usable cost data, trust properties in custody of the federal government (e.g., the Smithsonian Institution and land of the Indian nations) are also specifically excluded. Once again, however, a case can be made for including some trust properties in a PILOT base.*

The Tax Rate

Property tax discussions usually distinguish between "uniform" and "nonuniform" taxes. Generally, the uniform tax is one for which the effective rate (the legislated or nominal rate times the assessment-sales ratio) applies to all taxable real property. In contrast, nonuniformity is introduced when different types of property are classified and taxed at different rates.

Technically, few, if any, of the 13,4395 primary real property assessing jurisdictions in the U.S. adhere to uniformity. This is because, when a specific class or type of property is singled out for preferential nominal rate or assessment treatment (or when a special definition is applied to "real property"), the effective rate on such property is lowered below that on other classes. These preferences vary, ranging from various forms of residential tax relief (e.g., circuit breakers and homestead exemptions) to mechanisms designed to benefit specific business activities (e.g., preferential assessment for farmland and tax exemptions or moratoriums on land and/or capital improvements).

In addition to these "technical" considerations, however, some jurisdictions have moved, either by statute or constitutional amendment, to explicit classification of different property

*The Smithsonian Institution clearly appears to present a special case of abuse of the tax exempt status typically accorded federal and like private institutions (e.g., museums). The institution's museum shops sell books, gifts, and souvenirs through both over-the-counter and catalog mail operations. Although this activity competes directly with like private institutions (including private operations which may lease space in one of the museums), they pay no state, local, or federal taxes.