How the West Was Bought: How a 'Simple' Payment to Compensate Local Governments Became an Uncontrollable Federal Subsidy

Abstract

The federal government owns and administers more than 1/4 of the land in the United States, most of which is located in the Western half of the country and most of which is not subject to local taxation. To counterbalance the negative fiscal impact of nontaxable federal land in the United States, Congress created a Payment in Lieu of Taxes program, known as PILT, to compensate local governments for the government services they provide. The U.S. Department of the Interior distributes PILT as lump-sum payments directly to local governments. In order to prevent overcompensation, PILT payments are limited by the amount that the local government units receive under other federal revenue sharing programs, many of which are based directly on the extraction of natural resources like oil, gas, and timber. PILT has one major problem though: the deduction provision doesn’t work. This is because only funds received by the unit of local government are deducted from PILT. Therefore, if the funds are passed through to a smaller governing agency, known as a service district, there is no deduction.The U.S. Department of the Interior should, through notice-and-comment rulemaking, clarify its PILT regulations to discourage states and local governments from subdividing themselves into smaller and smaller entities in order to maximize the amount of federal monies they receive. Many interested parties, including the National Association of Counties, argue that PILT should be expanded to cover all federal lands and to remove the deduction provision, while others hew to the other extreme, arguing that PILT should be eliminated entirely. The first argument completely overlooks the very real abuses perpetrated under PILT today while potentially increasing overcompensation; the second ignores the reality that local communities foot the bill to provide government services on federal land.Administering PILT in a manner that adheres to the spirit of deducting double payments would remove the incentive for inefficient governance and create an incentive to manage, rather than exploit, public lands. The Article offers a tentative proposal for the form such reform could take, as well as explaining why other reforms, such as statutory amendment or stricter enforcement, might be complicated by political expediency.