In an economy where
local governments are stretched to the financial
, officials are looking for ways to boost tax revenue.
Increasingly, one set of institutions that has largely gone
unnoticed in the tax debate has become a high-profile target for
tax hikes: nonprofit charitable institutions.
An August 2012 publication from the Urban Institute Center on
Nonprofits and Philanthropy, which examined in detail the huge
impact that large nonprofit institutions like universities and
hospitals can have on the local community, makes the specter of
taxation loom even larger.
As the Urban Institute paper notes, large nonprofits that are
exempt from taxation present a huge challenge to municipalities.
On one hand, they often represent a huge economic opportunity for
a city or town, especially in small towns that rely almost
exclusively on a college or hospital for their citizens'
employment and income.
Yet those benefits don't come free. Having thousands of
students can put a huge burden on traditional city services like
police and utilities, yet when universities aren't subject to
property taxes on the buildings and land they own, other town
taxpayers can get left footing the bill.
The issue isn't limited to small towns. Philadelphia has more
than 10% of its total property value owned by nonprofits, while a
host of other cities, including Boston, New York City, and
Denver, weigh in at more than 5%. With so much of their tax bases
exempt from property tax, these cities face challenges to stay in
healthy financial condition.
Moreover, some argue that nonprofits have an unfair advantage
over for-profit businesses providing similar services. For
(Nasdaq: APOL) ,
) , and other
don't automatically get the same tax exemption that most
nonprofit institutions of higher learning enjoy. Similarly, many
hospitals are nonprofit, putting
for-profit health facility companies
) at a competitive disadvantage.
One solution that is gaining popularity involves getting big
nonprofits to pay local taxes voluntarily. With "payments in lieu
of tax" or PILOTs, a nonprofit institution negotiates with a
municipality to come up with reasonable compensation for the
services the local government provides.
One problem with PILOTs is that they tend to involve one-off
solutions to a particular problem rather than a comprehensive
policy intended to cover nonprofits broadly. But in
Massachusetts, where these arrangements are much more common, the
city of Boston has had a PILOT program in place for more than 85
years that currently generates about $15 million a year in extra
property tax revenue. Although that amount is less than 1% of the
city budget, smaller towns like Bristol, R.I., and Lebanon, N.H.,
get a much larger share of their budgets covered by PILOTs.
Even with innovative ideas like PILOTs, the tax-revenue
shortfalls that local governments are facing aren't likely to go
away anytime soon. Although cities and towns still get
substantial support from state governments, the amount of money
they receive from federal sources has fallen dramatically over
More recently, the bursting of the housing bubble has
depressed property values, reducing tax bases considerably and
contributing to local governments' revenue woes. Moreover, as
governments scramble to try to fight unemployment, the packages
they put together for large employers to attract them to build
factories or other facilities in their areas often
include tax incentives that lead to reductions in
property tax revenue
for the localities involved. For instance, a proposed
Royal Dutch Shell
(NYSE: RDS-A) plant could cost one western Pennsylvania town
about 7% of its annual budget due to lost property tax revenue.
Similar enticements have gotten increasingly competitive given
high unemployment levels.
The result has been increased tension about local government
finances. As bankruptcy filings in California for Stockton,
Mammoth Lakes, and San Bernardino raise fears that they could be
just the tip of the iceberg for a broader jump in municipal
bankruptcies nationwide, it's clear that cities and towns can't
afford to leave any potential vehicle for tax revenue
In many areas, it would've been unheard of even to consider
taxing charities. But as some of the biggest players in many
local economies, tax-exempt nonprofits need to consider whether
the benefits they give local townspeople truly outweigh the
costs. If not, then voluntarily making payments in lieu of tax
may be the best solution for everyone.
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Fool contributor Dan Caplinger supports charities as long as
they're being charitable. You can follow him on Twitter
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