Hereâ€™s a new wrinkle in the ever-popular saga â€œTaxation of the Tax Exemptâ€:Â members of the Scranton City Council threaten to withhold zoning changes from owners of tax-exempt property unless they make â€œvoluntaryâ€ PILOTS (Payments In Lieu Of Taxation).Â Â I’m certainly open to the notion that non-charitable tax-exempt organizations should have to pay property taxes, even as I acknowledge that the definition ofÂ â€œcharitableâ€ remains contested.
But letâ€™s settle these issues in open political debate, with nonprofits able to make their case that they are truly charitable, and/or that their contribution to the public good entitles them to property tax exemption whether or not theyâ€™re charitable in some strict definition of the word.Â Just for the sake of being reality-based, letâ€™s not torture the concept of â€œvoluntaryâ€ by suggesting that a payment extorted in return for rezoning is somehow a free-will contribution to the public fisc.
Cross-posted to nonprofiteer.net
22 thoughts on “Voluntary, as in “You’ve Been Volunteered””
I agree, but note one warning: Non-profits may, in due course, seek out “tax havens” in which to operate, just as commercial businesses do when they demand tax breaks from states and localities.
Look at Johns Hopkins University. Hopkins, via the University, the medical school, and the School of Pubic Health, provides significant economic benefits to Baltimore City. I firmly believe that the University should pay something to defray the services it receives. However, Hopkins has legs. It already has an Applied Physics Lab in Howard County and its School for Advanced International Studies in D.C. Various specialty clinics and surgicenters are located in the counties surrounding the City. Hopkins also operates the Johns Hopkins Medicine International which advertises that it “facilitates the global expansion of the Johns Hopkins Medicine mission.” If you go to the website, you will see that it has operations all over the world, some of them openly carrying the Hopkins “brand.” http://www.hopkinsmedicine.org/international/about/
Hopkins is not about to pull up its facilities in Baltimore by the roots. However, once the City cuts back on its subsidies to Hopkins via the erosion or total abolition of Hopkins’ tax exempt status, it will likely find that a good deal of the new growth occurs outside of the City.
The implication of what you are saying is that no large business or rich person should be expected to pay taxes lest they pack up and leave. What we need are national tax rates with a fixed percentage being returned to the states on a per capita basis. That’s the only way to stop this race to the bottom.
Turning a race to the bottom to a race off shore.
I am not saying that “no large business or rich person should be expected to pay taxes lest they pack up and leave.” What I am saying is that, all things being equal, a tax burden will cause a business, even a non-profit one, to move its operations. That can be a rapid shift or, as is likely the case with auto production, a creeping, gradual shift. And, yes, CharlesWT is correct–the tax system has to be structured so that there is no race to the bottom/offshore.
One thing that can mitigate the problem is for the federal government to invest in infrastructure to enhance business performance. The President was right when he said that successful businesses owe much of their success to public infrastructure. A good deal of that has to be in “new” infrastructure: a more efficient power grid, inexpensive, very high speed (both up and down) Internet connectivity, etc. And, of course, the old infrastructure, freight trains, roads that support large fleets of fuel efficient freight trucks, should not be ignored. If a country has a better infrastructure than other countries, all things are no longer equal and somewhat higher taxes will not present the same incentive to leave.
Not only this, but the property tax exemption overwhelmingly favors wealthy charities that have been able to accumulate sizable property holdings. Smaller charities that operate out of smaller digs pay rent to a non-exempt landlord, and thus indirectly, pay property tax. Not all countries are going to exempt charities from property tax, and honestly, if states were smarter, they would at least allow municipalities to charge use fees that no one can be exempt from, or to establish a lesser tax that can be imposed on all property owners, even the charities.
Happily, most nonprofits are less mobile than Hopkins. The Art Institute of Chicago isn’t moving to Gary, nor is the University of Chicago or its hospitals. Most decisions to locate new facilities out of town are based not on the availability of a property tax exemption but on the availability of property (e.g. Fermilab as well as the Applied Physics Lab you mention).
For-profit businesses extort millions of dollars each year from gullible municipalities (like Chicago) which believe the businesses (like the Board of Trade) will pick up and leave if they’re fairly taxed. Let’s not spread this infection to nonprofits as well.
“Iâ€™m certainly open to the notion that non-charitable tax-exempt organizations should have to pay property taxes, even as I acknowledge that the definition of â€œcharitableâ€ remains contested.”
At least insofar as it concerns the “land” component of real-estate taxes, all organizations, charitable or otherwise, should pay property taxes.
I’m not sure why land is inherently more taxable than buildings. In fact, a number of nonprofits assure their continued immunity from property taxes by renting their land from the municipality. Is there some reason why the Metropolitan Museum shouldn’t pay taxes on the Temple of Dendur just because the dirt beneath it is part of tax-exempt Central Park?
It’s not a new wrinkle. PILOTS have been around for a long time. Nonprofits may exist for the public good, but they define the public good in terms of their mission. They are just as happy to impose externalities in pursuit of their mission as for-profit entities. PILOTS, then, are generally a successful extortion scheme by the payee. Sometimes, the extortion is more genteel; sometimes less so. (“Nice hospital building you have there. It would be a shame if the fire department weren’t around when you need it.”) Not that there is anything wrong with extortion, mind you.
The new wrinkle isn’t the existence of PILOTs but the notion that they can be enforced by use of the zoning power. But your point about the externalities of nonprofits is a powerful one: whatever their adherence to their own mission, they should also be assessed in terms of their impact on the broader public good.
“We’ll let tax-exempt organizations build a parking lot if and only if they agree to pay municipal parking taxes” is logically exactly the same as “We’ll let anyone build a parking lot if and only if they agree to pay municipal parking taxes”. The reason the city is only imposing conditions on zoning variations for non-profits seems to be that the same conditions already apply to everyone else. Since I think cities ought to have the power to apply uniform rules to for-profits and non-profits alike, I don’t see the point in fussing about the procedure they use to implement the policy (as long as the means and result are fair) or the language they use to describe it.
But nonprofits and for-profits aren’t equivalent, and therefore there’s no particular virtue in treating them alike. By hypothesis, For-Profit Corporation A provides 50 jobs; Nonprofit Corporation B provides 50 jobs and $100,000 worth of free medical care. If you treat those two institutions uniformly you’re exalting form (“corporation”) over substance.
I am not up on what sorts of tax exempt orgs people are upset about, except for religious ones. I gather that most hospitals, f.e., give away a lot of care. (Though some of them also chase poor sick people for the rest of their lives.)
However, I do think that getting something re-zoned is a real benefit. It is not something that should be thought of as automatic, such that orgs that are basically freeloading (maybe) need to get all het up about being asked to contribute something in exchange.
I agree though that that is not “voluntary.” I’m not sure though that it should be illegal, either. (Is it?) It’s a bit of a pickle, really.
Actually the central battle is about the number of hospitals which don’t “give away a lot of care.” Plenty of nonprofit hospitals regard themselves as having met their public-good obligation by treating Medicaid patients, for whom reimbursement is lower than patients who are privately insured. The Illinois Supreme Court recently made clear that for a hospital to be considered a tax-exempt charity, it must actually give away a certain amount of care, leaving it to the Illinois Legislature to determine what percentage of care would be considered adequate.
Similar questions are raised about luxury retirement communities: almost every state exempts “nursing homes” from property taxation, but should that really apply to upscale developments with grand pianos in their lobbies? The owners of such a luxury development in Chicago aren’t even trying to argue that it’s a charity; instead, they’re arguing that its ownership by an order of Catholic sisters makes it exempt as a religious institution. We’ll see if they succeed.
Yes, having something re-zoned is a real benefit, and it’s often an opportunity for municipalities to get other things they want. But there are limits on this, such as the takings clause of the 5th and 14th Amendments: at what point do demands in exchange for rezoning become confiscation of property? And if the power isn’t limitless with respect to for-profit owners, it shouldn’t be for nonprofit owners either, even if the municipalities have more leverage over the latter. It’s not especially good public policy to squeeze money out of poor agencies and leave rich ones alone.
I see a difference between a museum housing some guy’s vanity collection and hosting parties for him and all his buddies, and a free clinic for indigent. If Scranton’s going after the National Museum of Stutz-Bearcat Motorcars, I’m with them. If the Scranton Free Dispensary, not so much.
Okay; but what about the Scranton Museum of Art, or the Scranton Regional Theater? (Both imaginary places though no doubt Scranton has art museums and theaters aplenty.) Clearly they’re in the public good (and not just “vanity collections”) but are they charitable enough to deserve property tax exemption? And how do we tell?
I think your understanding of zoning laws in general and Pennsylvania tax-exemption laws in particular are lacking. Extracting something in return for granting a variance is normal. There are usually some state law restrictions on how the process can work, but this kind of “pay to play” is often the only real power a locality has over not just tax-exempt organizations, but any real estate developer. So if you want the developer to contribute to a fund to pay for new schools that are needed as a result of hundreds of new houses with families with children — well, you are usually prohibited by law from levying such a “tax.” Instead, you get it when the developer (as they almost always do) asks you to lift restrictions on lot size and on and on and on. This is not made more nefarious because the entity seeking the exemption pays nothing in the way of taxes. Indeed, it seems to me to be a lot less nefarious.
And Scranton — well, I didn’t grow up there, but I grew up and still have many family members in a comparable old line Pennsylvania town. The percentage of land that is exempt from property tax in cities like Scranton as a result of Pennsylvania laws is astonishing and much, much higher than residents of other states could possibly imagine. Hospitals get all kinds of tax revenue from taxpayers, they benefit in many ways from services provided by localities, and they contribute not a penny in the only real revenue generation that a city is permitted to engage in.
I would weep for more deserving recipients of sympathy.
I’m ignorant about many things, but as it happens I used to be a zoning lawyer. I’m well aware of the negotiations which go on as property owners seek new zoning. I still think it’s the wrong forum for making a determination of public benefit or charitability, not because it’s “nefarious” but because it takes a general social question and makes it susceptible to completely idiosyncratic answers, depending on the zoning officials or City Council people or property owners involved.
The percentage of land exempt from property taxes in all American cities is amazingly high–some estimates put it at 40%. I don’t argue that all property-tax-exempt institutions ought to stay that way–far from it. But the best way to determine what constitutes sufficient public good to justify exemption (or sufficient use of public resources to justify deprivation of exemption) is not on a case-by-case basis. There ought to be uniform and understandable standards for the maintenance of tax exemption, so that agencies which play by the rules can plan their fiscal futures with some confidence, and agencies which choose not to can pay the price.
I don’t “weep” for these agencies at all; I merely advocate that standards be promulgated before rather than after the fact. Not even good laws can be applied ex post facto.
With a good Comprehesnive Plan that is a tively implemented through the zoning ordinance, the payments may not be idiosyncratic or dependent on persons and personalities. I would think that a well-formulatedcomp plan is perfectly capable of reviewing the fiscal health of the city and relating the grant of zoning permissions to fiscal pluses and minuses that would accrue therefrom, and the fiscal impacts could be measured rationally if not perfectly. A rational connection is usually all that’s required to support a legislative act like zoning.
What happens is that the state ties the hands of the municipality even if it cripples the municipality financially, as has happened in too many places in Pennsylvania, where well-connected non-profits lobby intensively to avoid taxes. You posit a perfect solution that is beyond the grasp of the city in this case, which has current needs. As Betsy says, in most cases, the municipality applies these “gimmes” on a fairly even basis — that is, it typically demands the same things on the same terms. That is certainly the case where I live — currently, if you apply for a variance on density or some other basis, you know you are going to be asked to underground utlities, improve sidewalks, contribute to an affordable housing fund, agree to a parking plan, and so on, depending on the perceived value of the variance and the nature of the project. I used to feel the way you do and then I saw the process up close and realized that it was almost unavoidable for it to work this way unless states ceded more power to local governments to establish the kind of neutral rules you are advocating.
Is this no way to run a railroad, or is it the only way to run a railroad? By definition, when a charitable institution requests a rezoning there’s a question raised about whether the new use the land will be put to still fit the original charitable purpose of the institution. If it doesn’t, there’s an argument to be mad for changing the institution’s PILOT bill. The alternative might be a thorough audit of the institution’s operations and a requirement to split off the for-profit operations from the nonprofit ones. But that would be incredibly intrusive, especially if done on an ongoing basis. So you pick your poison.
(I grew up in a town dominated by a university and various other tax-exempt institutions; at one point there was a fairly big kerfuffle over whether the university golf course was a core part of its educational mission — solved as might be expected, by a change in PILOT.)
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