PILOT for Real Property Tax

by Tom Yamachika, President, Tax Foundation Hawaii

In late 2021, the City & County of Honolulu’s Real Property Assessment Division inspectors took a look at several parcels of land on which solar farms and other renewable energy projects had been built.  The inspectors noted that the land had been granted a super-duper low rate for agricultural use.  We’re not sure of the details, but we do know that under section 8-7.3 of the Revised Ordinances of Honolulu, land that has been dedicated to agricultural use for 10 years is assessed for property tax purposes not at fair market value, but at one percent of fair market value.

The inspectors didn’t think that having a bunch of solar panels soaking up the sun, instead of fruits and vegetables, was an agricultural use.  So, they reclassified the property as industrial.  The owner in the previous year paid $30,154 in property tax and got a bill for $835,710, resulting in an extremely unhappy owner.

We in the Foundation covered that story in “Tax Isn’t a Peanut Butter Cup.”

Now, our savvy legislators at the State Capitol think they have figured out a way around this problem.

It’s called a “Payment in Lieu of Tax,” or PILOT, program.  Under such a program, an energy operator can pay a certain amount to the county that is based on some agreed metric, like the nameplate capacity of the solar farm that sits on the property.  The county accepts the payment instead of the real property tax otherwise due, and everyone’s happy – at least in theory.

So, our state legislators are pushing bills such as House Bill 348 that would “authorize” the counties to adopt PILOT programs.  But the programs need to meet certain conditions, like they need to exempt renewable energy projects in full in exchange for the PILOT payments.

Unfortunately, there are a few wrinkles.

First, our state constitution gives exclusive power over the real property tax to the counties.  The state has nothing to do with real property tax.  Zero.  Therefore, the State doesn’t need to authorize counties to adopt PILOT programs with regard to real property tax.  They have the power to adopt the programs by themselves.  Furthermore, for the same reasons, the State can’t force the counties to adopt PILOT programs, and that the State has no business telling the counties what they can and can’t put in a PILOT program. 

Second, the nightmare scenario that appears to have motivated this bill is 100% unaffected by the bill.  Whether or not the City & County of Honolulu adopts a PILOT program doesn’t, and can’t, affect their taxing authorities’ position that a papaya farm is an agricultural use but a solar farm isn’t.  When property is “dedicated” to agricultural use, the owner has made a promise that the property will be used for agriculture and won’t be used for other things.  If the owner makes the promise in order to get property tax that is 1% of what others would pay, and then breaks the promise, then of course there are going to be dramatic consequences. 

Certainly, the taxpayer’s plight here can and did motivate City officials to think about some relief, and the City enacted Ordinance 21-32 to create a partial exemption for renewable energy projects.

In any event, our state legislators really shouldn’t be mucking around in this area.  They need to realize that they are not, in fact, all-powerful.  Their time is better spent elsewhere.