Search Penny Hill Press

Monday, April 2, 2012

Compensating State and Local Governments for the Tax-Exempt Status of Federal Lands: What Is Fair and Consistent?

Ross W. Gorte
Specialist in Natural Resources Policy

M. Lynne Corn
Specialist in Natural Resources Policy

The federal government owns significant amounts of land and resources that are exempt from state and local taxation. State and local governments provide a wide variety of services— education, social services, public safety, transportation facilities, utilities, and much more. These services are funded through intergovernmental transfers (federal grants to state governments and federal and state grants to local governments), user fees, and state and local levied taxation— property taxes, income taxes, sales and use taxes, excise taxes, severance taxes, and more.

Congress has established programs to compensate state and local governments for the tax-exempt status of federal lands. Some propose that “fair” compensation would provide payments that are equivalent to the taxes that would be paid if the lands were privately owned. Assessing such tax equivalency, however, is difficult because of the substantial variability in state and local reliance on and rates for the various types of taxes. Others suggest that “fair” compensation would provide payments that offset the costs imposed on state and local governments from the federal lands, although this would exclude payments for governmental services that are not paid by the beneficiaries (e.g., social services). Providing consistent payments is a challenge; permanent appropriations are the most stable, but are difficult to establish and create permanent obligations. Finally, which lands to include for federal payments may seem straightforward, but lack of precise data on the federal lands might compromise accuracy of payments, and federal responsibility for tax-exempt Indian lands is unclear.

A plethora of federal payment programs exist, enacted at various times and for various reasons over the past century. Some payment programs are based on numbers of Indian children or children of federal employees (about $1.3 billion annually), some on federal receipts (about $0.5 billion annually), and some on federal acreage (about $0.4 billion annually). Some of the receiptand acreage-based payments are broad, covering many federal lands, while others are quite narrow (e.g., based on sales of a particular resource within a limited area). Some are permanently authorized, and have mandatory spending authority (payments without annual action by Congress). Others require periodic reauthorization, annual appropriations, or both.

Although most of the federal payment programs were justified as compensation for the taxexempt status of federal lands, the programs poorly reflect state and local tax equivalency or state and local costs of providing governmental services. In some places, the payments probably exceed what a private landowner would pay; in others, the payments fall short of what many might consider “fair” compensation. These possibly inequitable results likely occur from differences in the congressional committees of jurisdiction over various lands and programs and over time, and because only some programs were established with mandatory spending authority.

The mandatory spending authority for two relatively large payment programs—the Secure Rural Schools and Community Self-Determination Act (SRS Act) program and the Payments in Lieu of Taxes (PILT) program—expired at the end of FY2011 and will expire at the end of FY2012, respectively. As Congress debates the reauthorization of the SRS Act, the mandatory spending authority of the PILT program, and other payment programs, it might consider the broader questions of what is fair and consistent compensation to state and local governments for the taxexempt status of federal lands.

Date of Report: March
22, 2012
Number of Pages:
Order Number: R4243
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.