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.Â 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.
Maybe we need to keep an internal “balance sheet” on our clients. If government billed my church, my response would be to submit what my church has done for the community. Hopefully they at least balance.
What many in the public sector do not realize is that (1) Without many of the social services non-profits provide, the burden would fall back on the public sector. So if the public sector has to take over some of the services, and some of the non-profits go away, there is a double hit, no one to tax, and a new financial hit to the public agency (medical, police, child protection, etc.) (2) Social services non-profits not only provide badly needed services, but they also generate payrolls, which ripple thru the community, which generate sales taxes, fees, etc. I think before any governmental body thinks about removing tax exemptions for non profits, they should have a test of "the law of unintended consequences", to find out the real gain or loss. And the point in the article about where churches would stand is a very interesting one. I would think a government entity would have to apply its rule across the board, or face a discrimination law suit. The non-profit sector also has to stay engaged in their community, and question the management of government entities. One of the best ways to do this is to be involved with the local Chamber of Commerce, whose principles are, among other things, to look after and encourage good public governance in the interests of the community. Bill Walters Crossroads Diversified Services, Inc.
I’m not so sure about the Chamber of Commerce being a good advocate for many nonprofits. Most of the local ones pay dues which support the national chamber which is very pro-business and anti-worker/consumer/environment. My local chamber is very much against health reform, minimum wage, air pollution control, and paying the taxes needed to support community services and amenities for low income people.
Another small example from the west coast: King County Public Health has revoked the not-for-profit fee for kitchen permitting, doubling those fees for all not-for-profits who use a kitchen. Ouch.
Amazing that governmental agencies can devote so much ingenuity to raising minimal amounts of money (to them, not to nonprofits) from nonprofits! Thanks for the information.
Dear Anonymous, I hope I didn’t imply that we should be apologetic for our sector’s growth and success or that nonprofits should always be poor and struggling. I didn’t mean either. But I do get concerned about bravado when the reality is that most nonprofits, 9 out of 10, are small, and that doesn’t even count the less-than-$5,000/revenue groups that don’t even register. The fact that we’ve grown because government has failed to do what it is supposed to is true, but troubling.
In community development (my old field), I remember quite well the growth spurt in number and sometimes size of CDCs occurring during the Reagan Administration, clearly not because Silent Sam Peirce was pushing more money toward CDCs. Given the slim balance sheets and frequently negative operating margins of many nonprofits, including some of the best, we need to portray ourselves as neither more than we are nor less, but accurately so that decision-makers, the press, and the public better understand not only what nonprofits can deliver, but what the variegated nonprofit sector really is.
A very helpful article, but short on policy prescriptions or suggestions. What do you suggest–hold the line on any PILOT efforts/; work to insure that the 90 percent of small non-profits are exempted?; work to eliminate the bad actors. The article doesn’t give much direction to the obvious very different approaches to the problem by our sector.
Dear Anonymous: You’re right, we didn’t give a lot on policy prescriptions. You’ll get excellent advice and direction on policy prescriptions at the National Council on Nonprofits (http://www.councilofnonprofits.org/) and most of its member state associations.
I think the article suggested, however, that we aren’t going to be able to shake. So the elements of a strategy, obviously adjusted to local/state conditions, involve the following: educating the public about the nonprofit tax exemption (that is, why do we have this concept of “tax exempt”, what does the public get as a result of the tax exemption given to nonprofits and what do we lose if fees and taxes are imposed on nonprofits); document the chaos and inequities in the current system of ad hoc taxation and fees imposed on nonprofits; and work on revenue generation strategies (recognizing that states and municipalities are dealing with antiquated, inadequate systems for raising revenues, and that system must be fixed).
Regarding the latter, I suggest you look at the Chicago Tribune op-ed done by Valerie Lies of the Donors Forum in Illinois (an NCN member) making a cogent argument for nonprofits to begin working in partnership with state and local governments (and their associations) to fix the revenue side of the budget problem (http://www.chicagotribune.com/news/opinion/letters/chi-100317lies_briefs,0,6960971.story). Re bad actors, look at the decision in the Illinois courts this week to strip the Provena Medical Center of its tax exemption (http://www.chicagobusiness.com/cgi-bin/news.pl?id=37496), they don’t help nonprofits make the argument.
Hi Rick, thanks for this great article. I take to heart your observation that when we try to gain credibility by noting how large of a sector we are, we actually welcome more scrutiny regarding taxation. I temper that with the thought that we shouldn’t be apologists for our successes and for our growth as a sector. Part of our growth has been due to the devolution of service delivery from government to the nonprofit sector– a trend that government has initiated. Also, I challenge the notion that we should always be poor, struggling, deferential and diminutive in nature. Through advocacy and education, we can hopefully change this power dynamic. At the moment, we’re positioned as the weaker, and we play it well.
The City of Boston has convened a PILOT Task Force that just produced a draft proposal prepared by the City Assessor’s office. The Assessor made the case for a predictable PILOT income stream the City deems reasonable.
formula. The proposed formula would require each non-profit to pay the equivalent of 25% of what they would pay in taxes for tax exempt land if taxed, less a credit of up to 50% for certain eligible community benefits. The increase would be staged incrementally over five years.
Add in this example from a state senator in New York pitching taxes on nonprofits: http://www.timesunion.com/AspStories/storyprint.asp?StoryID=912420
Robert Egger writes:
Rick (as usual) provides staggering examples of why nonprofit groups, from every corner of the community, and from every discipline, MUST come together and unite their votes. As I type, the US Chamber of Commerce (a nonprofit) is about to launch a $50 million effort to get its 6 MILLION members to vote for or against candidates it deems as for or against the business agenda.
There are 14 MILLION employees of America’s nonprofit sector. When will we adopt a Chamber attitude and rally together to actively participate in, as Rick suggests, "how states raise money and finance critical social programs".
I urge anybody who is interested in this effort to consider joining the V3 Campaign (www.v3campaign.org). Out goal is to go beyond talk and generate active participation in any and all of the 36 Governor’s races this year.
Somewhere down the road, NO candidate will be considered viable if they do not have a detailed plan for how they will utilize the energy, ideals and entrepreneurial energy of nonprofits to achieve their vision. Let’s make that happen sooner rather than later.
I suppose the real issue is that government entities are not willing to cut unnecessary services that is driving up their costs. That is the real solution, but not practical because the government represents and "serves" people who all want a piece of the pie. The people do not seem to be able to comprehend that they are paying for these services and at the same time losing their liberties.
I cannot see anything will change, unless there is a major catastrophic failure of government that makes it cut unnecessary costs. Clearly, the country is getting no leadership on this from Washington…
Dear Emily: I had the Neenah example in my original draft of the article. It is an important one that demonstrates how the focus on “rich” nonprofits like the “eds and meds” can easily include small struggling nonprofits like yours. That’s the challenge that makes this an issue for the entire nonprofit sector, not just the universities and hospitals;
Thank you for publishing this column. Our tiny, volunteer-run 501(c)(3) nonprofit, Orphan Animal Rescue & Sanctuary, in Neenah, Wisconsin, is required to pay an annual PILOT to the City of Neenah in order to maintain our special use permit for our pet adoption center. The City justified this by saying we utilize public safety, public works, public health and city wide forestry services. Our first year we are required to pay $400; second year $425; third year $475. After the third year, the amount will change based on the percentage increase in the City’s tax levy (roughtly 2 -3% per year).
We receive no governmental funding; we survive on $5 and $10 donations and selling homemade craft items to stay afloat. I certainly hope our case is not a precedent for other struggling small nonprofits. Emily Anderson, OARS, email@example.com
Thanks for reminding readers about the report from the National Council of Nonprofits. What NCN’s report addresses that this article didn’t quite as much is what should the nonprofit sector actually do–strategically and tactically–to respond to these continuing threats to the tax exempt sector’s legal and fiscal condition. NCN suggests that nonprofits unite in their advocacy on these issues (p. 11) citing examples of action by state nonprofit associations in Minnesota, Massachusetts, Illinois, Connecticut, and Arizona. All the examples are positive and worth learning from. But the states and localities are in a prolonged fiscal freefall due to the molasses-like economic recovery. In light of the continuing attacks on nonprofits–from both parties (see State Senator Espada’s call for nonprofits in New York to kick in money toward defraying budget gaps), what strategies are likely to work? We think it’s not simply a matter of opposing cuts. State and local budgets are broken systems. We need to rethink and organize around how states raise money and finance critical social programs. Unless we focus on the revenue side in addition to the expenditure side, we’ll be facing broken state and local government systems that will prey whenever they can on nonprofit resources.
Great column. The National Council of Nonprofits released a related report yesterday that documents many of these trends and argues that government is actually hurting itself by targeting nonprofits for additional revenue. See: http://www.councilofnonprofits.org/sites/default/files/Special-Report-State-Budget-Crises-Ripping-the-Safety-Net-Held-by-Nonprofits.pdf
Yes, there is an exceptional amount of revenue-raising creativity evident in these attacks on nonprofits. Take a look at streetlight fees in Fargo ND (http://hpr1.com/feature/article/like_a_thief_in_the_night/), it’s not just Minneapolis on streetlights. As other evidence of creativity, how about Ohio’s corporate franchise fee that has led to costs that have compelled hospitals to lay off staff (http://www.marionstar.com/article/20100304/NEWS01/3040303/-1/newsfront2/Fee-1-million-less-for-hospital-biz). I hope lots of Avocado readers add to these examples and tell us what they see happening around the nation.
On the bright side — wow, I had no idea our legislators could be so creative!
On the dark side — we really do need to be vigilant and band together.
Very revealing and thoughtful article. Yes, we do need to catalog all such actions or else we will pay the price.Thanks for starting the dialogue.