Vermont’s Payment in Lieu of Taxes (PILOT) program is a little-known but highly impactful system that determines how much state funding municipalities receive to offset lost tax revenue due to tax-exempt state properties. While the program is meant to provide financial relief to cities and towns, it disproportionately benefits larger municipalities while leaving many smaller communities struggling to cover basic services. At the same time, the high number of nonprofits in Vermont further erodes the property tax base, shifting the financial burden onto homeowners and small businesses.

What Is the PILOT Program?

PILOT is a state-run reimbursement system that compensates local governments for property tax revenue lost due to the presence of state-owned, tax-exempt properties. This includes:

• Government buildings
• State-owned land
• Universities and public colleges
• Correctional facilities

Since municipalities rely heavily on property taxes to fund essential services—schools, police, fire departments, road maintenance, and infrastructure—PILOT payments exist to partially fill the funding gap left by these tax-exempt properties. The money for PILOT comes from the state budget, meaning Vermont taxpayers statewide are footing the bill for these reimbursements.

Who Benefits the Most?

The way PILOT payments are calculated favors urban areas with higher property values, meaning that cities like Burlington and Montpelier receive the lion’s share of PILOT funds, while smaller rural towns with state-owned properties often receive significantly less.

For example:

• Burlington, which is home to the University of Vermont (UVM), UVM Medical Center, and numerous state facilities, receives millions in PILOT payments every year.
• Montpelier, Vermont’s capital, also gets a substantial portion of PILOT funding due to the concentration of state government buildings.
• Meanwhile, smaller towns that host prisons, state forests, or state office buildings often get little to no compensation, despite the strain these properties place on municipal services.

This means that Vermont’s rural taxpayers are subsidizing PILOT payments that disproportionately go to larger municipalities, despite these towns having their own financial challenges.

The Hidden Problem: Nonprofits and Lost Tax Revenue

While PILOT covers some of the tax revenue lost due to state-owned properties, it does nothing to address the larger issue of Vermont’s high percentage of tax-exempt nonprofit organizations.

Vermont has one of the highest ratios of nonprofits per capita in the United States, with thousands of organizations benefiting from property tax exemptions. Some of the biggest beneficiaries include:

• Hospitals and universities (e.g., UVM Medical Center)
• Environmental groups and land trusts (which remove large parcels of land from the tax rolls)
• Social service nonprofits (homeless shelters, advocacy groups, etc.)

While many of these organizations provide important services, the fact that they don’t pay property taxes means that the tax burden falls even harder on homeowners and small businesses. Towns with a high concentration of nonprofits, such as Burlington, lose millions in potential tax revenue every year—yet there is no equivalent PILOT system to compensate them.

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How the PILOT Formula Leaves Rural Towns Shortchanged

The PILOT program is calculated based on the assessed value of state-owned properties and the local Common Level of Appraisal (CLA). The problem?

• Cities with higher property values and higher tax rates (like Burlington and Montpelier) receive more money from PILOT because the formula prioritizes the lost tax revenue from high-value properties.
• Smaller, rural towns with lower property values receive significantly less compensation—even if they are hosting prisons, state office buildings, or other state facilities that place financial burdens on local services.

As a result, small towns across Vermont are left with unfunded liabilities for services that tax-exempt properties require, such as fire, police, road maintenance, and emergency services.

What This Means for Vermont Taxpayers

1. Vermonters statewide fund PILOT payments through the state budget, meaning your tax dollars help subsidize local budgets in places like Burlington and Montpelier.
2. Homeowners and businesses are picking up the slack—as state and nonprofit properties avoid paying property taxes, more of the burden falls on private property owners.
3. Small towns hosting state properties get shortchanged, often receiving less compensation than what they lose in tax revenue, leading to higher local taxes or service cuts.

How Vermont Can Fix the PILOT System

1. Expand PILOT to Include Large Nonprofits – Hospitals, universities, and large nonprofits should contribute a “fair share” payment to the municipalities that provide them with services.
2. Adjust the PILOT Formula – Instead of favoring cities with high property values, the formula should take into account the actual cost of services that tax-exempt properties require.
3. Introduce a Tiered Taxation Model for Nonprofits – Organizations that function more like businesses should contribute to municipal budgets while still maintaining partial exemptions for true charitable organizations.

Conclusion

Vermont’s PILOT program was meant to help local governments offset lost tax revenue, but in practice, it has favored larger cities while leaving smaller towns underfunded. At the same time, Vermont’s large nonprofit sector continues to remove millions of dollars in property value from tax rolls without contributing to municipal budgets. The result? Higher taxes on homeowners and businesses.

Vermonters deserve a more equitable PILOT system—one that fairly distributes state reimbursements and addresses the financial impact of nonprofits. Without reform, taxpayers will continue to carry the burden of funding services for tax-exempt institutions without adequate compensation from the state.

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Dave Soulia | FYIVT

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