Illinois and the amazing disappearing property tax exemption

When Harold Pollack wrote about the recent Illinois Department of Revenue decision to withdraw property tax exemptions from three hospitals, he naturally focused on the impact of the decision on health care.  But those of us who work in other areas of the nonprofit sector are worried by the decision as well–or, if we aren’t, we ought to be.

Though the Revenue Department’s ruling and the Supreme Court decision on which it was based both concern hospitals, there are now working their way through the Illinois court system a pair of cases challenging the property tax exemptions of luxury retirement communities.  The plaintiffs are taxing districts which would otherwise be collecting big bucks from the communities, one of which is located on prime Chicago Gold Coast real estate–just around the corner, as it happens, from Northwestern’s Prentice Women’s Hospital, which will now (barring court intervention) have to pay property taxes on its equally valuable swath of land.  Lower courts have already ruled both retirement facilities unworthy of property tax exemption, and lawyers involved in both cases expect victory in the face of appeal based on the precedent of the hospital cases.

So what’s really going on here?  Certainly withdrawing tax exemptions from wealthy organizations sitting on expensive land makes sense from the standpoint of municipal budgets, which here as elsewhere are stretched beyond breaking.  So the Illinois Department of Revenue is following Willie Sutton’s [apocryphal] advice to go where the money is.

But what the Illinois Supreme Court has now said is that there are only three categories of tax-exempt real property under the Illinois Constitution: schools, churches and “charities.”  Further, the Court said, a “charity” is not simply any nonprofit organization, or even any nonprofit organization entitled to 501(c)(3) status and tax-deductible donations under the Internal Revenue Code.  A “charity” for Illinois property tax purposes is an agency that gives things away.  How many things?  Worth how much?  This remains unclear: perhaps a “charity,” like “pornography,” is simply something a court knows when it sees it.

And if the question is, “Are you a charity?” will the YMCA of Metropolitan Chicago be able to pass muster?  Will the Museum of Contemporary Art?  Will the Lookingglass Theater?  All three are located within spitting distance of the now-taxable hospital and retirement home.  So they’re likely targets for the next round of investigations.  What do they give away?  Worth how much?

(Just to confuse things even further: the Illinois constitutional standard is that only church property used for religious purposes is exempt; supplementary holdings are not.  I’m not aware of a parallel ruling about schools, but would expect the same standard to apply.  So if a charity owns property not used for charitable purposes–like, oh, vacant property the YMCA may someday use as a camp–will that be taxable?  If so, then it’s not even enough to be a charity–you have to be doing charity.)

As a consultant to charities, I’m supposed to be jumping up and down and screaming about this terrible precedent; but actually I’m not.  It’s long past time for us to ask the question whether arts organizations are genuinely charities.  (I’d ask the same question about well-endowed educational institutions and churches, but the Illinois Constitution prevents me from getting any reward for doing so.)  My only concern is how unaware nonprofit executives and Board members seem to be of the implications of these decisions.  Asked about her agency’s risk of having its property taxed, one executive dismissed the issue: “We’re a nonprofit–everything we do is charitable.”

Well, no.

This argument is playing out around the country.  What’s unique about Illinois is that the discussion is taking place in the courts rather than the legislature or the city council.  This interferes with any effort by nonprofits to rouse public opinion–or even themselves–in defense of their privileges.  Instead, the property tax exemption is going the way of the Cheshire Cat, bit by bit until there’s nothing left but the smile.

Let the Illinois nonprofit beware.

Comments

  1. dave schutz says

    So if nonprofits join actual forprofit businesses in scampering across the line to Wisconsin, who is left? I commented on Harold Pollack’s post and what I said is even closer to the point on yours: ‘Our system of property tax and property tax exemptions is pretty incoherent: in some cases the benefit of the nonprofit’s services is local, and sort of matches the jurisdictional lines of the communities asked to forgo revenues, in some cases the nonprofit may be some rich man’s museum of old Cord motorcars, where the benefit is spread over other old Cord aficionados nationwide (and THEY are a charitable class, right?!) or, more sympathetically, a charity distributing private aid in Central America. In either case, it’s not clear that, say, Fresno has a charitable interest in these places.

    Some ‘nonprofit’ hospitals are awfully cozy, and pay high salaries and put local grandees on the board. Not terribly sympathetic, if they are refraining from paying taxes to a strapped jurisdiction. The tax deduction for charitable donations has similar problems – again, museum for old Cord motorcars, why am I paying higher taxes so some guy can have this fun toy?’

    The tax exemption for nonprofits privileges the charitable tastes of the rich – they get to have people poorer than they absorb the costs of municipal services while they, well, display 90-year-old cars in museums. Or Contemporary Art, in your example. I’m in favor of charity, but I would like to have some review of the extent to which it is to be subsidized, if at all.

  2. Ohio Mom says

    Why single out arts organizations? Why are they more suspect than say, recreation organizations like The Y or the Jewish Center? Or historical societies and sites? Or museums of science?

  3. Michael O'Hare says

    This is a complicated bunch of questions, including not only what activities and firms we wish to subsidize to do what, but whether we want to subsidize them with a discount on their use of real estate, or on their use of other property. Why is it better for society for a museum to have more building than an equivalent cost of docents and curators? Why should a community theater that rents its hall pay more for it than the one that owns a building? Readers who want to go deeper into this can look at Feld et al, Patrons Despite Themselves.

  4. Michael O'Hare says

    If we expect museums to start paying property tax, I hope we also recognize that the collection is just as much a capital asset used to create value as the stamping machine in a factory, and tax it as well.

  5. EB says

    I have provided advice to two nonprofit (but not exactly charitable) organizations in Illinois during the past year; one wanted to take its property off the tax rolls, the other wanted to keep it off. The upshot is that it’s not hard to start giving stuff (or services, or cultural experiences) away; what’s hard is to figure out how much is enough. There are informal standards on this issue, and lawyers can advise on this, but they are hard to apply in specific instances. Hospitals definitely need some method to spread the burden of ininsured patients around. I have far less sympathy for cultural institutions which, no matter how important their missions are (and I do believe that they play a really important role) look an awfully lot like clubs for aficionados more than they do charities.

  6. Ohio Mom says

    The purpose of a museum is to hold the objects that tell of our shared heritage in trust for us. The reason they need what Michael O’Hare calls “more building” is because they collect, preserve, study and interpret either works of art, artifacts, natural specimens, etc., and they have to put those objects somewhere, and somewhere safe. If any of the objects are replaceable, they are generally not easily replaceable.

    If you started taxing the collections, many museums would find themselves in the position of having to sell off parts of their holdings. I imagine a lot would end up in private hands (especially perhaps in these days of the new gilded age) and unavailable to both the public and scholars Important sets of objects, where each object provides information about the others, that is, where the total is more than the sum of the parts, would be broken up and the value of the set would be lost forever.

    I’m not sure how the pioneer wagon I saw this summer in the museum under the St. Louis Arch “creates value” in the way a stamping machine does, though I suppose that it can create a moment that is valued by the viewer. But it’s very hard to monetize that to any significant degree. The old saying about knowing the cost of everything and the value of nothing comes to mind.

    I’m finding this thread depressing. Isn’t the idea that there *is* a commons, that not everything should be private, that Magaret Thatcher was wrong and there *is* such a thing as Society, is in enough peril these days without the Reality-Based Community piling on?

  7. Henry says

    Just for the record, it was obscenity, not pornography, of which Justice Stewart said, “I know it when I see it.” Obscenity is a legal term that refers to pornography that is not protected by the First Amendment. Pornography is not a legal term; it is a class of literature (using “literature” broadly).

  8. dave schutz says

    Ohio Mom – let’s talk about Michael Milken’s prostate. Or, mine. Mine is working fine, as far as I know (knock wood), his is cancerous. He’s a very rich man, and has put a lot of money into prostate cancer research. As a late-middle-age guy with a prostate, I think it is swell that research is being done on this cancer. Is this the right place to put these resources? Where else might we choose to put money? Breast cancer? Malaria? Dengue fever? Right now, Milken gets exempted on taxes for the money he puts into prostate research – it’s a charitable taste of the rich, 40 per cent or so subsidy. I kind of prefer prostate cancer research to a Cord Automobile Museum, but, you know, I would. Under current policies, they get the same magnitude of support, the Cord Museum and the Prostate Institute. Is that okay with you? I think it’s not okay with me.

  9. Anomalous says

    The USA has made a “decision” that rather than the government taking charge of promoting/prividing cultural/recreational/educational/medical/etc. services that are the things that hold civilization togeather, we promote a nonprofit/volunteer model that allows interested and dedicated amatures and professionals to colaborate in creative and inovative ways. To do this we created the nonprofit corporation. It is a more expensive way to keep a society running but what they lack in efficiancy they make up for in diversity and passion. Or that’s the theory.

    Now if we start pulling the props out from under that teetering scafolding we will soon face large gaps in sevices both necessary and desirable that will need to be filled and the filler of last resort is the dreaded GOVERNMENT (Oh my God, It’s the “G” Word!)

    Do a lot of nonprofits abuse the privilege? You betcha. Are nonprofits sometimes formed to turn rich peoples hobbies into a tax sheltered scam? It happens. Could a lot of nonprofits be better managed? Sure enough.

    But the altervative is a third world country or socialism.

    And let me add that I was on the front lines of incorporating a 501(c)(3) and it felt like the IRS had a flashlight and told me to bend over. They are diligent and take the charitable status seriously. If a municipality has a problem with the tax exempt status of an organization they can (as any citizen can) take it up with the IRS. That is the appropriate and sane place to investigate the legitamacy of a nonprofit and it’s mission. Legitamate complaints will be taken seriously.

    We have a system. It has pros and cons. If we don’t think it is what we want we can dismantle it and rebuild. In the meantime recognize that if we try to monkey around with the foundation we are likely to pull the whole thing down on our heads. I know that is the Tea Party dream but if it happens I don’t think anybody is going to like the result.

  10. Anonymous says

    Won’t have time for an appropriately considered reply until much later today but for now:

    Okay, Michael O’Hare, you have some good arguements against the current policies concerning ART museum de-accessioning, that doesn’t mean all museums are art museums, or that there shouldn’t be *any* profesional policies or guidelines on this matter, or that we should enact laws (i.e., taxing the value of collections) that would actively promote what amounts to the eating of cultural and scientific seed corn.

    Thank you Anomalous for so clearly pointing out that this is the system we have, and putting what good it does in jeopardy might not be the best idea right now. That is one of the things I was trying to say in my other comment, but obviously did not succeed in doing so.

  11. Ohio Mom says

    Anonymous at 6:59 was me.

    Rereading Anomolous’s post, there’s not much to add. Except maybe, public schools are facing many threats at the moment but even if every non-profit paid property taxes the threats would still be there. That’s because the threats have to do with privatizing as many schools as possible.