If Congress tried to take away the tax exemption from nonprofit 501(c)(3) organizations, our sector would be united and up in arms. But instead we are besieged with hundreds of local attacks on the tax exemption from cities, counties, and states. In this article we'll briefly look at some of the attacks being mounted by financially starved local and state governments trying to get extra nickels and dimes from financially starved 501(c)(3) charities. And we'll conclude with some thoughts on how we inadvertently give ammunition to these attackers.
How many ways can you balance a governmental budget on the backs -- or finances -- of nonprofits? Nearly every week, all across the country, different levels of government devise strategies -- sometimes ingenious, occasionally pernicious -- to get tax revenue from already-strapped nonprofits. These include taking away property tax exemptions, adding employee headcount taxes, charging nonprofits "streetlight fees," and more.
Creating or hiking fees: Because governments have much greater flexibility in applying "fees" as opposed to "taxes," localities are finding ways to charge nonprofits for streetlights and anything else they can think of. In Yakima, Washington, the Yakima Health District ended the exemption of nonprofit-sponsored food booths at community fairs and church bazaars; this will yield the Health District all of $10,000 per year. And in two Minnesota cities -- Minneapolis and Rochester -- government is increasing the fees it charges nonprofits for streetlight use. In Minneapolis, this will raise an additional $104,000 for the city . . . hardly enough to balance the budget.
Taking off from charging nonprofits for streetlights, other localities are starting to charge nonprofits for police and fire services and even fire hydrants. Localities in Indiana have enacted nonprofit fees for consumption of public services such as police and fire. In Pennsylvania, State Senator Wayne Fontana has introduced legislation that would allow municipalities to charge nonprofits an "essential services" fee. In the village of Pewaukee, Wisconsin, the local government turned the local hydrant tax into a fee which then allowed them to levy the fee against otherwise tax exempt nonprofits and churches.
And think of the effort of the speaker of the New Jersey state Assembly to hit nonprofits in Camden -- only nonprofits and only in Camden -- with a $100 tax on each employee. In a devastated urban center where the nonprofit sector provides most essential services, this reads like no more than a slap at nonprofits and their hard working employees.
Attacks on the property tax exemption
Nonprofit property owners are in theory exempt from paying property taxes, at least on the properties they own and use for tax-exempt purposes. But many local governments are trying to charge nonprofits "payments in lieu of taxes" or PILOTs. Sometimes localities have a formula in mind; in other cases, they negotiate PILOTs on a case-by-case basis.
In a recent example of such attacks, a consortium of 102 nonprofit property owners in Pittsburg is negotiating with the city, to which it has already paid a $14 million lump sum payment in lieu of taxes (PILOT) for 2005 through 2007. The consortium's offer of $5.5 million for the period 2008 - 2010 has been rejected by the mayor as insufficient.
Typically, the target of PILOTS are large institutional nonprofit property owners such as hospitals and nonprofit universities. But not every nonprofit property owner is a Harvard University or Mass General Hospital. For example, a Billings, Montana nonprofit purchased a hotel to be used as a pre-release residential and treatment facility for female ex-offenders. Partly to mollify neighbors who objected to the placement of the facility and likely as a way to raise money, the mayor promised that the nonprofit would pay a $40,000 PILOT on the property.
Even more troubling for nonprofits than across-the-board PILOTS is the make-it-up-as-you-go calculation of PILOTs from community to community. Is Harvard's $2.2 million PILOT payment plus $5.2 million payment for water and sewer to Cambridge fair and proportional compared to Yale's $7.5 million to New Haven or Vanderbilt's $2.5-$3 million payment to Nashville? Shouldn't the PILOT paid by nonprofit hospitals in Pittsburgh, say, be commensurate with the PILOT charged in Lancaster, both localities in the same state, governed by the same nonprofit legislation?
Charging student and patient taxes as ways to tax nonprofit schools and hospitals
One way to charge nonprofits is to institute taxes on students and patients: because so many schools and hospitals are nonprofits, such taxes are predominantly taxes on nonprofits. In university-dominated Boston, a member of the City Council this summer proposed requiring nonprofit colleges to pay $100 per semester for each of their students without permanent Boston addresses (who presumably aren't paying taxes in Boston). At the New Jersey League of Municipalities conference in November, the mayor of Montclair (home of Montclair State) got 100 of his peers to endorse a plan for $100 per student fees. And the mayor of Athens, Ohio thinks he could generate $1 million a year from his proposed $25 per semester charge on the 20,000 student Ohio University.
In health care, Georgia Governor Sonny Perdue inserted a 1.6 percent tax on hospitals' patient revenues into the proposed FY2011 state budget, to generate an estimated $247.8 million from hospitals plus another $131.3 million from nursing homes.A In 2009, the state of Colorado's legislature toyed with a fee that would result in an additional 5.5 percent charge on each hospital patient's bill.
Bad behavior by hospitals hurts nonprofit cause
Because nonprofits, for-profits and governments all operate hospitals, nonprofit hospitals have been regulated for "charity care" and other activities to justify their tax exemption. But some nonprofit hospitals' ill-spirited actions and poor records on charity care continue to make a target of the nonprofit sector as a whole. As just one example, a Catholic hospital in Illinois (Provena Covenant Medical Center) is fighting a challenge to its property tax exemption. The Attorney General charged that Provena offers little charity care for the indigent, and in fact concealed the availability of charity care, and chased uninsured low-income patients for bills using debt collection agencies, lawsuits, and arrests. But Provena lost at the appellate court level (which said, pointedly, that charity has become "magical gibberish to sanctify any socially beneficial use of property that a court deems worthy of subsidy").
In Honolulu, according to one nonprofit leader, the poor behavior of another nonprofit hospital has sparked an effort to repeal the property tax exemption for all nonprofits. Nonprofits have come together to distinguish between the big institutional property owners and the community nonprofits. In Pittsburgh, the University of Pittsburgh Medical Center's tax exemption has been challenged given its hundreds of millions of dollars in annual profits, and its 2009 plan to close its facility in the devastated community of Braddock. In an interesting contrast to the Hawaii situation, local activists are working with legislators (incorporated as the nonprofit Save Our Community Hospital) to sue to have the state remove UPMC's tax exemption.
The politics of taxing nonprofits
Compared to the large budget gaps governments are facing, the nonprofit tax levies generate relatively inconsequential amounts. If the totals are so tiny, why would localities spend so much effort to get so little money? The motivations are more than financial:
Questioning the tax exemption itself: In Hawaii, the Speaker of the state House of Representatives talks about suspending or revoking nonprofit tax exemptions, regardless of the type of organization or function: "Repealing exemptions spreads the pain more evenly," he says. The statement of the Indiana Association of Cities and Towns that nonprofits are getting municipal services "for free" suggests that many politicians really don't understand fundamental issues of what nonprofits do and why federal and state law accords them tax exempt status.
Seeing the nonprofit sector as rich, low-hanging fruit: There are about 1.9 million tax-exempt organizations recognized by the Internal Revenue Service (and thereby do not pay corporate income tax) with about 1.2 million classified as 501(c)(3) public charities (see Table 25 there) (and thereby in addition receive tax-deductible donations). But for many government officials, they are interchangeable organizations that could be paying taxes. And some see the few big wealthy ones as representative of the revenue-generating capacity of the entire sector, even though 9 in every 10 public charities take in less than $1 million a year.
Tax-hungry municipalities might not care that the nonprofit property owner is a profit-making nonprofit hospital or, in the case of Neenah, Wisconsin, the Orphan Animal Rescue and Sanctuary, slapped with a request for a PILOT when it applied for a special use permit for its pet adoption center.
What about taxing churches?
As willing as some politicians are to take aim at nonprofits, they are skittish about the often bigger category of exempt property owners: religious institutions. It's politically easier to tax a student from out of town than to ask the local church or synagogue for PILOTs, or to seek legislation taking away the property tax exemption from all nonprofits (thereby including congregations). The example of Salt Lake County, Utah's proposed application of a $1,000 public safety service fee on churches as well as other institutions is a rarity. Nonetheless, churches and other congregations, taken together, are often among the largest tax-exempt landowners in many communities.
What to do?
We cannot turn back the clock to a mythical better time when governments flush with dollars were willing to let nonprofits be tax-exempt. Even if the Great Recession is ending, for at least the next period, the new reality will include efforts to chip away -- or steam shovel away -- the nonprofit tax exemption.
One way we in the sector inadvertently do ourselves harm is when we try to gain respect by emphasizing how big we are: how many employees the sector has, how many assets are in foundations and other nonprofit institutions, and so forth. When we look like a behemoth of money, we look more and more like a target for taxation and fees.
In particular, this is true because we so seldom differentiate ourselves -- the community nonprofit sector -- from the "Eds and Meds": the universities and hospitals. Just as family farms insist on differentiating themselves from agribusiness, we in community nonprofits need to educate policy makers about the different segments of the nonprofit sector.
Most nonprofit associations and policy-making coalitions are organized around fields or around populations, such as associations of child welfare providers or of orchestras. There are fewer such coalitions that span the nonprofit sector organized at municipal, county, and state lines -- the levels at which attacks on the tax exemption are most occurring. Alertness, banding together, and active participation in policy must be part of our new reality lest we see the tax exemption -- and the value of nonprofit endeavor that is the rationale for it -- erode and disappear.
Rick Cohen writes this Blue Avocado Investigates column for every other issue of Blue Avocado.
Editor's note: We hope our national associations will do more to catalog hotspots and call people to action around the myriad tax exemption attacks around the United States. The National Council of Nonprofits has continuing coverage on its site; the Independent Sector is planning a briefing for members in a few weeks.