cal Taxes and Finance, Mineola, NY, The Foundation Press, 1974, pp. 412-42.

'William S. Goodyear, “Assessment Problems Created By Exemption," The Proceedings of the Seminar of Property Off the Tax Rolls, National Conference of State Legislatures and The International Association of Assessing Officers, Denver, CO, June 2–3, 1980.

'Original public domain lands that have reverted to federal ownership through operation of public land laws are also included in this definition. The definition used here is that provided in the General Services Administration's Summary Report of Real Property Owned by the United States Throughout the World as of September 30, 1978, Washington, DC, U.S. Government Printing Office, 1979, p. 2.

"U.S. Department of Commerce, Bureau of the Census, State and Local Ratio Studies, Property Tax Assessments and Transfer Taxes, Fall 1980, Table 1. "International Association of Assessing Officers, Research and Information Services, Bulletin, “Classified Property Tax Systems," Chicago, IAAO, 1979, 18 pages. In November 1980, Ohio voters approved a constitutional amendment permitting the two classifications of (1) agriculture and residential and (2) all other property. "A review of the various forms of classification is provided by Steven David Gold, Property Tax Relief, Lexington, MA, Lexington Books, 1979, 331 pages.

The U.S. Bureau of the Census reaches a similar conclusion. In its definition of the effective property tax rate it reduces that rate to reflect homestead exemptions but not circuit-breaker tax credits or rebates, since the “latter are commonly associated with administration of the income tax.” U.S. Department of Commerce, Bureau of the Census, Taxable Property Values and Assessment-Sales Price Ratios, Vol. 2, 1977 Census of Gov

ernments, Washington, DC, U.S. Government Printing Office, November 1978, pp. 24-25.

'GSA, Summary Report of Real Property Owned by the United States Throughout the World as of September 30, 1978, GSA Office of Administration, various tables.

1oU.S. Department of Housing and Urban Development, Property Disposition Handbook, One to Four Family Properties, Processing of Tax Bills, July 1978, 4310.2 Rev., pp. 1-3.

11 Ibid., p. 2.

12 Communication from Douglas H. Clark, Assistant Director, Federal-Provincial Relations Division, Department of Finance, Canada. A similar federal-local property tax payment for federally owned land is also common in some European countries-for example, in Sweden, the Netherlands, and the United Kingdom. 13 Unpublished memorandum provided by Douglas H. Clark, Assistant Director, Federal-Provincial Relations Division, Department of Finance, Canada.

14 Robert M. Stein, "Federal Categorical Aid Equalization and the Application Process," a paper presented at the Annual Meeting of the American Society of Public Administration, Baltimore, MD, April 1979, p. 16.

15 See the report of the Congressional Budget Office, Advance Budgeting: A Report to the Congress, Washington, DC, U.S. Government Printing Office, 1977; and the discussion by Margaret J. Moore in Michael E. Bell, “The Federal Payment to the District of Columbia," in Technical Aspects of the District's Tax System, Committee on the District of Columbia, U.S. House of Representatives, 95th Congress, 2nd Sess., Washington, DC, U.S. Government Printing Office, December 1978, pp. 291-93. The 130-year reference is quoted verbatim from the CBO report, p. 9.

tion-particularly in an era of budgetary constraint in which federal aid programs in general, and unconditional grants in particular, are receiving a cool reception on Capitol Hill.

Within that policy context, this chapter first summarizes the nature of the existing grant-inaid programs and then examines the proposed payment in lieu of taxes. The finding is that a payments in lieu of taxes program would not overlap the scope and purpose of existing federal aid arrangements. Given this conclusion, the conceptual justification for a tax equivalency program and the alternatives to this method of determining the payment base are examined more closely.

Nature of Existing Grant Programs

There are two basic types of grants-inaid-conditional (or categorical) and unconditional (or block). The former is by far the larger of these two divisions (aproximately 90% in FY 80), and comes with a series of use restrictions designed to encourage the states and localities to expand the supply of certain public services. Thus, the recipient government gives up considerable fiscal independence, which is reduced even further if, as is usually the case, matching requirements are included in the grant.

The unconditional grant may be spent in any way the recipient government chooses, including supplementing program services, providing financing revenue, covering expenditure gaps, or enacting tax cuts. Included in the unconditional category is the General Revenue Sharing (GRS) program ($6.9 billion in FY 80) and some of the ad hoc payments in lieu of taxes listed in Chapter 2. If a uniform taxequivalency payment program for property taxes were to be enacted, administrative and theoretical considerations would argue that it, too, should be unconditional.

Identifying federal assistance programs as conditional or unconditional, however, does not provide enough information to determine whether the payments in lieu of taxes would simply duplicate other grant programs. The classes of problems that grants are intended to address should also be examined, so that a determination can be made regarding which, if any, of these areas would also be addressed by payments in lieu of taxes.

Recognizing the difficulty of distinguishing between intended and actual purposes of federal grant programs, grants can additionally be classified according to whether they provide for social, economic, and/or fiscal needs. Each of these purposes is discussed briefly below.3

• Providing for social needs: allocating resources to state and local governments in order to provide the mix of public goods and services which Congress deems desirable and for which state and local governments are seen as the institutional units best able to meet the requirements of their residents. Indicators of social need include the percentage of poor families and individuals living in a jurisdiction, the crime rate, per capita income, and measures of the quality of housing. The list of federal aid programs designed to address these social needs is enormous, ranging from historic preservation grants, aid for educational television, and acquisition and alteration of senior citizens facilities, to civil defense and safety training programs and a variety of housing rehabilitation and construction programs.

• Providing aid to areas experiencing structural economic need: grants intended to ameliorate the effects in such areas of a declining economic base resulting from business and residential migration between cities and suburbs and/or between regions of the nation. Indicators of economic need include changes in population (losses), per capita income, and the employment composition (e.g., losses in manufacturing relative to the service sector) of the area. Community development grants (e.g., the Urban Development Action Grant, Community Development Block Grant), education, training, and technical assistance programs (e.g., Comprehensive Employment Training services, Technical Assistance Research), and special community impact grants (e.g., Special Economic Development and Adjustment Assistance) are examples of the federal assistance programs targeted to alleviate economic problems.

• Meeting financial need: providing relief

to governments, usually urban, to help them cope with fiscal stress as manifested by indicators such as low liquidity, large debt, unusually high tax effort, and unbalanced budgets. Federal programs targeted to fiscal need concerns include General Revenue Sharing, loan guarantees (New York City), growth impact grants, and some of the in lieu tax payments discussed in Chapter 2. Clearly any classification of problems and, therefore, the general purposes of grant programs, will be somewhat arbitrary, as social, economic, and fiscal needs may be closely related to one another. For example, as the central cities in the U.S. continue to experience both population and job loss-an economic decline problem-social problems of crime, poverty, abandoned housing, and the like may be exacerbated. At the same time, fiscal stress will worsen as the tax base shrinks and costs will rise because of a rigid public personnel system and a growing proportion of low income residents in the population. Fiscal ills may, in turn, give added impetus to the population and job loss phenomena.

Just as these problems are cyclical and overlapping, so are the effects of the federal grant programs designed to address them. For example, the Antirecession Fiscal Assistance Program, initiated in 1976 but not extended in 1978, was found to be effective in targeting funds to cities with serious problems of economic base decline, as well as to those cities experiencing severe budgetary difficulties. Not only were these grants substantially larger in areas with high unemployment rates (the economic problem); they also tended to go to the large city governments that were experiencing severe fiscal strain. A similar conclusion can be reached regarding the Local Public Works Program. The purpose of this grant, authorized in 1976 ($2 billion) and then again in 1977 ($4 billion), was to stimulate the national economy by funding small-scale, quickly completed local government public works projects. The distribution of this aid was based on factors of both economic and fiscal need. Although the funds were initially targeted toward cities with high unemployment, a study by the U.S. Treasury found that the largest per capita grants also went to large cities experiencing severe financial difficulties."

Similar findings have been made with respect to the General Revenue Sharing (GRS) Program. Because these funds are initially distributed under either one of two formulas, both of which specifically take into account fiscal and economic indicators (e.g., tax effort, urbanized population, and state personal income tax collections), the GRS program is most responsive to city fiscal need-as was intended." But GRS funds are also well-targeted to municipalities which have high index of economic need.

Nature of Proposed PILOT Grant Program

The obvious question that follows is whether a payment in lieu of taxes program would also have these conditional or unconditional grant characteristics. Analytically, the question to be addressed is: as a general rule, does the presence of federal tax exempt real property significantly explain the existence of social, economic, or fiscal problems in local jurisdictions?

The answer is no, and is supported on both theoretical and empirical grounds.

An explanatory relationship between the incidence of the value of federal real property in a given jurisdiction and the various community "needs" cited above should not be expected for several reasons. There is little doubt that many of the municipalities experiencing the economic, social, and fiscal problems are also those in which there are large amounts of nontaxable federal real property. The fundamental reasons for the "need" problems, however, can be traced to factors such as reduced national population growth, reduced costs of commuting from suburb to city, changes in consumption as well as product technology, the changing composition of the private industrial base, and the consequences of federal government policies that have promoted suburbanization (e.g., the interstate highway system, FHA mortgage insurance, and the deductibility of mortgage interest payments from the income tax).

Certainly, the presence of federal tax exempt activities would be expected to worsen some of a municipality's problems-particularly financial. Nevertheless, the fact remains that, except in a relatively few extraordinary situations where the federal government dominates a community tax base (e.g., Kitsap County, WA;