Taxing the Tax-Exempt

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Tax Day is approaching, and we will soon hear a rising chorus of criticism of large corporations such as Verizon and General Electric that don’t pay their fair share.

That’s as it should be, but there is another group of big entities that also dodge taxes but receive a lot less scrutiny: major non-profit institutions such as universities and hospitals.

Strictly speaking, giant non-profits are not dodging taxes, since they are largely tax-exempt. But that’s precisely the problem. These rich and powerful institutions increasingly behave like for-profit corporations yet are given privileged status under the tax laws. At a time when governments at all levels are desperate for revenue, that privilege is no longer a given.

The latest battleground over non-profit tax exemption is Providence, Rhode Island, where Mayor Angel Taveras has been trying to get local institutions such as Brown University to do more to help the struggling city. The Ivy League college has been making voluntary payments to the city, but Mayor Taveras wants Brown, which has an endowment of about $2.5 billion, to play a greater role in averting the possibility that Providence could end up in bankruptcy. Brown’s facilities in Providence are reported to be worth more than $1 billion, which would mean $38 million in revenue for the city if they were taxed at the commercial rate. Brown is paying about one-tenth of that amount. The mayor’s effort has won support from students at Brown, who have recently held rallies calling on the university to pay its fair share (photo).

It probably comes as a surprise to many that Brown is paying anything at all to the city. Providence’s arrangement with Brown is part of a limited but growing trend among cash-strapped local governments to persuade big non-profits to make voluntary payments in lieu of property taxes, or PILOTs. These are cousins of the PILOT agreements that for-profit companies often negotiate with localities when they are receiving large property tax breaks but want to be sure (often for public relations purposes) they are contributing something to vital local services such as schools and fire departments.

A 2010 report by the Lincoln Institute of Land Policy found that localities in at least 18 states have negotiated PILOT deals with non-profits. This often occurs quietly, but Providence is not the only city that has gotten into a high-profile tug-of-war with large tax-exempt institutions. Perhaps the most contentious case is Boston, home to numerous universities and hospitals with deep pockets.

Boston, where more than 50 percent of the land is tax-exempt, has made limited use of voluntary PILOTs for several decades. Although the city’s program was said to be the largest in the country, it was generating modest amounts of revenue.  In FY2008 the total was about $30 million, but half of that came from the Massachusetts Port Authority, which runs Logan Airport and the Port of Boston; the rest came from about two dozen healthcare and educational institutions.

In 2009 Boston Mayor Thomas Menino decided to shake things up by forming a PILOT Task Force. The group issued a report in December 2010 recommending that the city seek to enlist all non-profits owning property worth at least $15 million into the PILOT system with payments equal to 25 percent of what their tax bills would be if they had no exemption. The city eagerly agreed, and last year it began sending letters to several dozen major non-profits asking them to pay up.

Boston inspired other Massachusetts cities such as Worcester, home of Clark University, to join the PILOT bandwagon. (Cambridge did not need inspiration; it has been collecting voluntary payments from Harvard, whose assets now exceed $40 billion, since 1929).

The Boston approach has also generated a lot of criticism from those who argue that sending out letters pressuring non-profits for specific sums is not exactly voluntary and may be tantamount to putting those institutions back on the tax rolls, albeit at a discounted rate.

As much as non-profits may grumble about PILOTs, these payments are quite benign compared to the fate that has befallen some hospitals: the complete loss of their tax-exempt status. For years, healthcare activists have charged that many non-profit hospitals were not functioning as true charitable institutions and should thus not enjoy the privilege of tax exemption.

In 2004 officials in Illinois sent shock waves across the hospital industry by revoking the tax-exempt status of Provena Covenant Medical Center in Urbana. Six years later the state supreme court upheld that determination. In the intervening period, some other Illinois hospitals lost their exempt status and the question of whether non-profit hospitals were doing enough to deserve tax exemption became an issue at the federal level, thanks to relentless efforts by Iowa Sen. Chuck Grassley.

The issue flared up again recently in the wake of a front-page New York Times article reporting that major New York non-profit hospitals have been providing little in the way of charity care, even though on top of their tax exemption they are allowed to tack a 9 percent surcharge on their bills to pay for such care.

Whether as the result of PILOTs or loss of exempt status, increasing numbers of large non-profits will probably find themselves paying more of the cost of government. This is good news for revenue-starved public officials, but how long will it be before these non-profits decide to follow the lead of their counterparts in the for-profit world and begin seeking subsidies to offset those obligations?

Cross-posted from the Dirt Diggers Digest

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