Real Property Tax Versus PILOT for Solar?
by Brent Sohngen, AED Economics (Sohngen.1@osu.edu)
Amid the debate about installing solar power on farmland in the state lies a discussion about how to evaluate the approach any county takes when taxing solar fields. It is well known that producing electricity on land increases the value of an acre of land relative to farm uses, especially in places where the Current Agricultural Use Valuation (CAUV) subsidy for farming substantially depresses tax revenues for local authorities. However, when a solar farm is taxed, local communities can choose between two different approaches: tax the real property or utilize the Payment In Lieu of Taxes (PILOT) program.
Rightfully so, county commissioners often wonder which of these approaches is best financially for their county. In an analysis by Open Roads Renewables in their submissions to the Ohio Power Siting Board for their Frasier Solar installation in Knox county (see case record 23-0796-EL-BGN at https://opsb.ohio.gov/cases), the company argues that the PILOT payments are best.
Their rationale is that the total payments from the company to the county will be greater under the PILOT program, and more stable, which can be seen in the figure below. The figure illustrates the payments Open Roads calculates would be available to officials in Knox County under the two alternatives.
The blue (solid) and green (hatched) lines show the tax revenues when the land and the real property on the land are taxed at the locally appropriate rate, just like other property is taxed. Under this approach, the value of the real asset will depreciate over time as the solar facility becomes less efficient, so tax payments start high, but decline over time. The decline is due to deprecation, using a schedule set by the Ohio Department of Taxation, which also sets a minimum valuation of 15% of the initial value of the project.
The green hatched line is the one Open Roads argues is the correct line for counties to consider because it adjusts the payments the county receives for changes in state subsidies sent to the county in response to higher property tax receipts. Under PILOT payments no such adjustment in state-subsidy will happen.
The alternative approach is the PILOT payment, which is the orange line in the figure. Under this method, the local authority need not value the property. Annual payments are fixed over time to the original capacity of the solar field at $7000 per MW of capacity, with an additional $2000 per MW potentially charged based on whether the local county commissioners decide to impose this additional payment.
The difference in payments between the property tax approach and the PILOT approach cannot be more obvious. But which one is best?
Figure from Ohio Power Siting Board case records for Frasier Solar project (https://dis.puc.state.oh.us/CaseRecord.aspx?Caseno=23-0796&link=DI)
A couple of recent blog posts by The Buckeye Institute argue that Open Roads is incorrect, making the case that the property tax valuation approach is best. These postings can be found at the following two links:
Buckeye Research Casts Doubt on Value of Knox County’s Solar Deal for Taxpayers
and
Highway to the Danger Zone? PILOT Program Set to Shortchange Taxpayers
The Buckeye Institute argument is that counties with potential solar projects need to evaluate the present value of future cash flows under the two alternatives. Because of what economists call the “time value of money” – the preference all of us have for access to money today versus access to the same amount of money in the future – the cash flows under the alternatives must be discounted before they can be summed and compared. Analysts at the Buckeye Institute also argue that the things a county can buy with tax revenues will get more expensive over time because of inflation, so inflation must be incorporated into these calculations.
Both are good points, however, when I do the calculations with the Open Roads data in the figure above – with what should be the same set of future cash flows as the Buckeye Institute used – I get different numbers from Buckeye Institute, and come to a different conclusion.
First, I find that with a 3% discount rate, or interest rate, with or without inflation included in the analysis, the PILOT payments are either much better (0% inflation) or only somewhat better (2% inflation). Under the much higher discount rate of 7%, the property tax is somewhat better. In terms of annual payments, the difference between these two approaches is between +$50,000 in favor of PILOT payments and -$80,000 per year in favor of taxing, or +$400/MW to -$670/MW per year.
Table 1: Present value of tax revenues under property tax option or PILOT option. Number bolded represents the best decision financially under the assumed discount rate and inflation rate.
| Property tax with need-based adjustment | PILOT | |
| Undiscounted flow of money | $30,530,730 | $42,840,000 |
| 3% discount rate; 0% inflation | $21,544,538 | $25,352,872 |
| 2% discount rate; 2% inflation | $19,485,786 | $21,748,023 |
| 3% discount rate; 2% inflation | $17,805,674 | $18,950,618 |
| 7% discount rate; 2% inflation | $13,247,044 | $12,146,158 |
Second, what are the correct assumptions? The Buckeye Institute points to the federal government rules for benefit cost analysis (OMB Circular-94). These rules historically have argued for government to use a 3% and 7% discount rate for this type of analysis. But in 2023, the Office of Management and Budget updated their rules to include 2% at the lower end, rather than 3%. Their rationale was that interest rates and inflation had been low for a 20- to 30- year period, suggesting much lower time value of money. Using a 2% rate tilts the balance in further in favor of PILOT payments. Only under the much higher discount rate of 7% is the property tax approach better financially.
When the answer over which is best varies depending on the interest rate, as in a case like this, the county needs to consider other factors, such as how the different profiles for payments will play out over time given their current and expected expenditures. Some counties may be “high discounters” because they need cash now to meet current financial obligations. These counties likely will push to use the property tax approach. Counties with preferences for long-term stability in tax revenues will prefer PILOT payments. I don’t know, but this is probably what the legislature was intending when they created the PILOT program.
Third, it is not clear why the estimates by The Buckeye Institute are so different from mine. I downloaded their data and found that they assumed different cash flows than Open Roads (and me), so their analysis isn’t an apples-to-apples comparison with Open Roads or this analysis. They claimed to use the same data as Open Roads, but it does not seem to be the same.
The choices counties must make over the installation of solar facilities are complicated. When financial flows cross over different time periods, present value analysis can help counties make decisions that will provide the greatest benefit to the local community.
Calculations
Table 2 below presents the raw data used for the analysis. The first three columns are the annual cash flows in each of the 40 years of the project. The final four columns are the factors each of those numbers must be multiplied by in order to determine its present value. Once the present value is determined for each future year’s, the values can then be summed. The second table carries out the calculations for the 2% inflation and 3% discounting case.
The numbers that include inflation and discounting adjustments are shown in Table 3 in the last two columns. Column 6 is the present value of the needs based adjusted tax revenue approach, which is column 2 multiplied by columns 4 and 5. Column 7 is the PILOT approach also multiplied by columns 4 and 5. Then these discounted numbers can be summed, which is done in the last row. At that point, they can be financially compared.
Table 2: Basic input numbers used in analysis.
| Undiscounted Annual Change | |||||||
| Year | Property Tax Revenue | Needs-Based Funding Reduction | PILOT Revenue | Inflation factor (2%) | discount factor (2%) | discount factor (3%) | discount factor (7%) |
| 1 | $1,505,461 | $1,204,369 | $720,000 | 1.0000 | 1.0000 | 1.0000 | 1.0000 |
| 2 | $2,111,427 | $1,689,142 | $1,080,000 | 0.9804 | 0.9804 | 0.9709 | 0.9346 |
| 3 | $2,027,461 | $1,621,969 | $1,080,000 | 0.9612 | 0.9612 | 0.9426 | 0.8734 |
| 4 | $1,942,154 | $1,553,723 | $1,080,000 | 0.9423 | 0.9423 | 0.9151 | 0.8163 |
| 5 | $1,857,743 | $1,486,194 | $1,080,000 | 0.9238 | 0.9238 | 0.8885 | 0.7629 |
| 6 | $1,773,776 | $1,419,021 | $1,080,000 | 0.9057 | 0.9057 | 0.8626 | 0.7130 |
| 7 | $1,688,470 | $1,350,776 | $1,080,000 | 0.8880 | 0.8880 | 0.8375 | 0.6663 |
| 8 | $1,604,058 | $1,283,246 | $1,080,000 | 0.8706 | 0.8706 | 0.8131 | 0.6227 |
| 9 | $1,523,346 | $1,218,677 | $1,080,000 | 0.8535 | 0.8535 | 0.7894 | 0.5820 |
| 10 | $1,446,080 | $1,156,864 | $1,080,000 | 0.8368 | 0.8368 | 0.7664 | 0.5439 |
| 11 | $1,370,991 | $1,096,793 | $1,080,000 | 0.8203 | 0.8203 | 0.7441 | 0.5083 |
| 12 | $1,296,731 | $1,037,384 | $1,080,000 | 0.8043 | 0.8043 | 0.7224 | 0.4751 |
| 13 | $1,221,115 | $976,892 | $1,080,000 | 0.7885 | 0.7885 | 0.7014 | 0.4440 |
| 14 | $1,156,289 | $925,031 | $1,080,000 | 0.7730 | 0.7730 | 0.6810 | 0.4150 |
| 15 | $1,096,874 | $877,499 | $1,080,000 | 0.7579 | 0.7579 | 0.6611 | 0.3878 |
| 16 | $1,036,236 | $828,989 | $1,080,000 | 0.7430 | 0.7430 | 0.6419 | 0.3624 |
| 17 | $976,243 | $780,995 | $1,080,000 | 0.7284 | 0.7284 | 0.6232 | 0.3387 |
| 18 | $916,828 | $733,463 | $1,080,000 | 0.7142 | 0.7142 | 0.6050 | 0.3166 |
| 19 | $856,191 | $684,952 | $1,080,000 | 0.7002 | 0.7002 | 0.5874 | 0.2959 |
| 20 | $796,198 | $636,958 | $1,080,000 | 0.6864 | 0.6864 | 0.5703 | 0.2765 |
| 21 | $736,783 | $589,426 | $1,080,000 | 0.6730 | 0.6730 | 0.5537 | 0.2584 |
| 22 | $694,485 | $555,588 | $1,080,000 | 0.6598 | 0.6598 | 0.5375 | 0.2415 |
| 23 | $661,499 | $529,199 | $1,080,000 | 0.6468 | 0.6468 | 0.5219 | 0.2257 |
| 24 | $627,868 | $502,295 | $1,080,000 | 0.6342 | 0.6342 | 0.5067 | 0.2109 |
| 25 | $594,882 | $475,906 | $1,080,000 | 0.6217 | 0.6217 | 0.4919 | 0.1971 |
| 26 | $561,252 | $449,001 | $1,080,000 | 0.6095 | 0.6095 | 0.4776 | 0.1842 |
| 27 | $528,266 | $422,612 | $1,080,000 | 0.5976 | 0.5976 | 0.4637 | 0.1722 |
| 28 | $494,635 | $395,708 | $1,080,000 | 0.5859 | 0.5859 | 0.4502 | 0.1609 |
| 29 | $461,649 | $369,319 | $1,080,000 | 0.5744 | 0.5744 | 0.4371 | 0.1504 |
| 30 | $428,018 | $342,414 | $1,080,000 | 0.5631 | 0.5631 | 0.4243 | 0.1406 |
| 31 | $417,040 | $333,632 | $1,080,000 | 0.5521 | 0.5521 | 0.4120 | 0.1314 |
| 32 | $417,040 | $333,632 | $1,080,000 | 0.5412 | 0.5412 | 0.4000 | 0.1228 |
| 33 | $417,040 | $333,632 | $1,080,000 | 0.5306 | 0.5306 | 0.3883 | 0.1147 |
| 34 | $417,040 | $333,632 | $1,080,000 | 0.5202 | 0.5202 | 0.3770 | 0.1072 |
| 35 | $417,040 | $333,632 | $1,080,000 | 0.5100 | 0.5100 | 0.3660 | 0.1002 |
| 36 | $417,040 | $333,632 | $1,080,000 | 0.5000 | 0.5000 | 0.3554 | 0.0937 |
| 37 | $417,040 | $333,632 | $1,080,000 | 0.4902 | 0.4902 | 0.3450 | 0.0875 |
| 38 | $417,040 | $333,632 | $1,080,000 | 0.4806 | 0.4806 | 0.3350 | 0.0818 |
| 39 | $417,040 | $333,632 | $1,080,000 | 0.4712 | 0.4712 | 0.3252 | 0.0765 |
| 40 | $417,040 | $333,632 | $1,080,000 | 0.4619 | 0.4619 | 0.3158 | 0.0715 |
Table 3: input numbers and calculations for the inflation =2% and discounting = 3% cases. Column 6 = Column 2*Column 4*Column 5. Column 7 = Column 3*Column 4*Column 5.
| col 1 | col 2 | col 3 | col 4 | col 5 | col 6 | col 7 |
| Undiscounted Annual Change | Discounted and inflation adjusted | |||||
| Year | Needs-Based Funding Reduction | PILOT Revenue | Inflation factor (2%) | discount factor (3%) | Needs-Based Funding Reduction | PILOT Revenue |
| 1 | $1,204,369 | $720,000 | 1.0000 | 1.0000 | $1,204,369 | $720,000 |
| 2 | $1,689,142 | $1,080,000 | 0.9804 | 0.9709 | $1,607,788 | $1,027,984 |
| 3 | $1,621,969 | $1,080,000 | 0.9612 | 0.9426 | $1,469,494 | $978,473 |
| 4 | $1,553,723 | $1,080,000 | 0.9423 | 0.9151 | $1,339,866 | $931,347 |
| 5 | $1,486,194 | $1,080,000 | 0.9238 | 0.8885 | $1,219,905 | $886,491 |
| 6 | $1,419,021 | $1,080,000 | 0.9057 | 0.8626 | $1,108,669 | $843,795 |
| 7 | $1,350,776 | $1,080,000 | 0.8880 | 0.8375 | $1,004,521 | $803,155 |
| 8 | $1,283,246 | $1,080,000 | 0.8706 | 0.8131 | $908,340 | $764,473 |
| 9 | $1,218,677 | $1,080,000 | 0.8535 | 0.7894 | $821,087 | $727,653 |
| 10 | $1,156,864 | $1,080,000 | 0.8368 | 0.7664 | $741,901 | $692,607 |
| 11 | $1,096,793 | $1,080,000 | 0.8203 | 0.7441 | $669,500 | $659,249 |
| 12 | $1,037,384 | $1,080,000 | 0.8043 | 0.7224 | $602,738 | $627,498 |
| 13 | $976,892 | $1,080,000 | 0.7885 | 0.7014 | $540,254 | $597,276 |
| 14 | $925,031 | $1,080,000 | 0.7730 | 0.6810 | $486,934 | $568,509 |
| 15 | $877,499 | $1,080,000 | 0.7579 | 0.6611 | $439,666 | $541,128 |
| 16 | $828,989 | $1,080,000 | 0.7430 | 0.6419 | $395,356 | $515,066 |
| 17 | $780,995 | $1,080,000 | 0.7284 | 0.6232 | $354,527 | $490,259 |
| 18 | $733,463 | $1,080,000 | 0.7142 | 0.6050 | $316,915 | $466,647 |
| 19 | $684,952 | $1,080,000 | 0.7002 | 0.5874 | $281,700 | $444,171 |
| 20 | $636,958 | $1,080,000 | 0.6864 | 0.5703 | $249,345 | $422,779 |
| 21 | $589,426 | $1,080,000 | 0.6730 | 0.5537 | $219,625 | $402,417 |
| 22 | $555,588 | $1,080,000 | 0.6598 | 0.5375 | $197,046 | $383,035 |
| 23 | $529,199 | $1,080,000 | 0.6468 | 0.5219 | $178,647 | $364,587 |
| 24 | $502,295 | $1,080,000 | 0.6342 | 0.5067 | $161,398 | $347,027 |
| 25 | $475,906 | $1,080,000 | 0.6217 | 0.4919 | $145,554 | $330,313 |
| 26 | $449,001 | $1,080,000 | 0.6095 | 0.4776 | $130,711 | $314,405 |
| 27 | $422,612 | $1,080,000 | 0.5976 | 0.4637 | $117,104 | $299,262 |
| 28 | $395,708 | $1,080,000 | 0.5859 | 0.4502 | $104,367 | $284,849 |
| 29 | $369,319 | $1,080,000 | 0.5744 | 0.4371 | $92,716 | $271,129 |
| 30 | $342,414 | $1,080,000 | 0.5631 | 0.4243 | $81,821 | $258,071 |
| 31 | $333,632 | $1,080,000 | 0.5521 | 0.4120 | $75,883 | $245,642 |
| 32 | $333,632 | $1,080,000 | 0.5412 | 0.4000 | $72,229 | $233,811 |
| 33 | $333,632 | $1,080,000 | 0.5306 | 0.3883 | $68,750 | $222,550 |
| 34 | $333,632 | $1,080,000 | 0.5202 | 0.3770 | $65,439 | $211,831 |
| 35 | $333,632 | $1,080,000 | 0.5100 | 0.3660 | $62,287 | $201,629 |
| 36 | $333,632 | $1,080,000 | 0.5000 | 0.3554 | $59,287 | $191,918 |
| 37 | $333,632 | $1,080,000 | 0.4902 | 0.3450 | $56,432 | $182,674 |
| 38 | $333,632 | $1,080,000 | 0.4806 | 0.3350 | $53,714 | $173,876 |
| 39 | $333,632 | $1,080,000 | 0.4712 | 0.3252 | $51,127 | $165,502 |
| 40 | $333,632 | $1,080,000 | 0.4619 | 0.3158 | $48,664 | $157,531 |
| SUM ==> | $30,530,730 | $42,840,000 | $17,805,674 | $18,950,618 |
Hi,
Would it be possible to incorporate into your analysis the increase in property tax revenue which would occur because of replacing the inverters and batteries during the project life? I like your analysis, but those 2 items will need replaced during a 40 year project life and I don’t know what they cost or their impact on resetting the curve on taxable asset value/cash flow collection versus a PILOT. I think the average life of those 2 items is 15 years each.
Thank you.
Larry Mily, Jr.
Great question Larry, and thanks for sending it. I was trying to reproduce what the Novogradac and Buckeye Institute had done, and neither of those studies examined updating capital over time. Making an assumption that the real value increases in the future with capital investment would certainly change the dynamics, but note that this is one area where the tax treatment is specified fairly clearly by law. Also given the pace at which solar technology is advancing, I would imagine that after 15 years, the operator may wish not only to update their equipment, but increase the capacity on the same acreage, so the PILOT payments may change as well.
There are other fundamental issues than this. No one has let the public know that all of our electric bills will be going up to “help” subsidize this project. Another key factor is the amount of sunshine Ohio provides in any given year not to mention the potential catastrophic potentials that Ohio weather may be impact these panels in the next 40 years. We will be walking on egg shells and “Hope” that nothing goes wrong. The money may look nice but do not be fooled by the inefficiencies and potential environmental harm that looms around this project. We are not a sunshine state folks. It makes no sense for our County.
Thanks Trina for the comment. With respect to your electric bill, it’s not going up to help subsidize solar projects. As a rule, solar energy is cheaper than coal because of the environmental regulations on coal. It is true that the environmental regulations on coal (for sulfur dioxide, mercury, NOX, and particulates — but not CO2 since CO2 is not regulated) have driven electricity costs up over the years, but few Americans would want to roll back those regulations in order to have cheaper electricity and worse air. Solar energy is cheaper than natural gas when natural gas prices are high, but not when they are low. Given that natural gas is now the marginal source of electricity in Ohio, watch natural gas prices if you want a good gage to your electricity price (if you buy your electricity on the market). Growing consumption for electricity combined with growing exports will put long-term pressure on natural gas in the Midwest.
So, solar is not driving up electricity costs. It is true that solar is subsidized with federal tax credits and/or incentives. Taxpayers are paying for it for sure in their annual income taxes, but their electricity bills are lower as a result.
[…] economics professor Brent Sohngen, who has been researching the economics of solar development and looked at the numbers after hearing about the […]
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[…] economics professor Brent Sohngen, who has been researching the economics of solar development and looked at the numbers after hearing about the […]