A layman’s explaination

  • Kentucky’s constitution requires the tax rate for each property type. be set and for everyone to pay that rate.
  • Local governments in Kentucky and other states use Industrial Revenue Bonds (IRB) to pay for long-term capital improvements.
  • For example, a local government can raise the funds necessary for a new sewer line extension by issuing Industrial Revenue Bonds (IRB). Part of the sewer line’s user fees will pay off the bond’s original debt plus interest.
  • The Commonwealth of Kentucky can not charge taxes on property owned by its sub-governments. Therefore, when a local government (typically a county or city) owns property, it is not subject to Kentucky’s state taxes on property.
  • Industrial companies soon approached local governments and asked if the local government would issue an Industrial Revenue Bond to build a new facility. The industrial company offered to then lease the new facility from the local government.
    • The local government expected
      • Increased local economic activity
      • lease payments to retire the Industrial Revenue Bond (IRB).
    • The industrial company expected their lease payment would be lower than if no Industrial Revenue Bonds (IRB) were used because:
      • Local government often had a better credit rating than the industrial company and ability to borrow money at a lower interest rate
      • Owners of Industrial Revenue Bonds (IRBs) often pay lower income taxes on interest income from an IRB.
      • Kentucky can not charge state property tax on property the local government owns. (Thus minimizing state property tax)
  • Because some local governments ended up owning facilities whose value was less than the money owed, an Industrial Revenue Bond (IRB) can be structured so the local government has zero credit risk.
  • Local governments often ask for Payments In Lieu Of Taxes (PILOT) so the local community can share in the benefits the Industrial Revenue Bonds provide the industrial company.
  • The amount of the PILOT revenue is solely subject to negotiations between the local government and the industrial company. Each local government has complete discretion over how it uses the PILIOT revenue it receives.