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.