Capital for a Capitol Host City Gains Momentum

The economic and social impacts of having a state capitol located in your city has long been a discussion topic of elected officials and local municipalities. Faced with a significant budget shortfall in the years ahead, the City of Salem is exploring all options to fill a funding gap estimated to be at least $14 million in the next fiscal year, and escalating in the years that follow.

Last fall the city hastily approved an income tax plan that was quickly met with intense opposition from residents, businesses and even the governor. Signatures were gathered to put the tax on the ballot where it was ceremoniously thumped with about 82% of the vote.

Regrouping, the Salem City Council formed a Reserve Task Force comprised of business, civic and community members to develop funding alternatives. 

“I believe this Revenue Task Force is premature,” said Julie Hoy, Salem City Councilor. “The City needs to look at its budget and priorities and do a better job of explaining how they are doing everything they can to keep costs down, before looking for more revenue. Residents are tired of seeing money thrown at problems with no results.”

The Reserve Task Force has a report due in July, but other efforts are currently underway.

Rep. Tom Andersen (D-Salem) and his Salem-area legislative colleagues introduced HB 4072 in the 2024 session designed to initiate a discussion on whether, and by how much, the State of Oregon should pay Salem for providing the essential police, fire and emergency services to state facilities and employees, and help reduce a portion of that funding gap.

Since the State of Oregon does not pay property taxes to the city, the cost burden falls squarely on other taxpayers. A mechanism for mitigating that burden was sculpted decades ago by the federal government when it designed Payments in Lieu of Taxes (PILT). Under the federal program, the government pays various state and local governments a stipend for the burdens caused by federal property ownership, primarily lands managed by the Department of the Interior.

Numerous states have adopted some versions of a PILT program to address the cost impacts associated with state-owned property. New York, New Jersey, and Washington are just a few of the states that provide their capitol-host cities with financial aid as compensation for the provision of city services.

Rep. Andersen says the state property in Salem has a “back of the envelope” value of about $1.8 billion were it to be on the tax rolls. “That represents about 7% of the acreage of Salem,” Andersen noted.

There is a precedent for considering a PILT for Salem. Rep. Kevin Mannix (R- Salem) said he was a freshman legislator back in 1989 when the Legislature made a one-time appropriation of “about $500,000,” in recognition of the costs provided to the state by the city.

Salem Mayor Chris Hoy says the city’s budget resources are uniquely challenged.

“Our three largest employers don’t pay property taxes,” he said. “They are the State of Oregon, Salem Health and the Salem-Keizer Public Schools,”

Governor Tina Kotek is sympathetic to Salem’s plight but noted the construction of a balanced formula is the key. The presence of the state capitol in the city also serves as a significant economic engine. 

“I think the state should have some role to help support the City of Salem,” Kotek said in January when addressing members of the Salem Chamber of Commerce. “The problem is how you calculate it. I would like to be supportive.”

The issue is likely to be addressed comprehensively in the long legislative session in 2025.