Not-for-profit organizations may be called upon for additional payments and taxes as state and local governments weigh solutions for their budgets. These organizations are often exempt from paying property tax and may become targets for proposed budget solutions in part because of their collective size. In many metropolitan areas, not-for-profit organizations own a significant portion of the city’s property. Boston has roughly 50% of its property in tax-exempt hands. Estimates for New Orleans are even higher, with 67% of the city’s property exempt from taxation.
Taxpayer groups have argued that the size of the not-for-profit holdings puts an unfair burden on the entities that pay property tax. Not-for-profits benefit from property tax funded services such as police and fire departments, public road construction and trash pick-up; therefore, many believe that not-for-profits should also share in the cost. To address the burden, cities such as Boston have implemented voluntary payment programs. Others are considering whether to implement tighter regulations on the types of property permitted to be tax-exempt.
As a state and local tax concern, not-for-profit property tax discussions have been occurring at a local level. The conversation holds national influence, however. Should one city or state find a model of payment or taxation to be successful, others may want to follow suit.
State and local voluntary payments in lieu of taxes (PILOTs) ask that tax-exempt, private not-for-profits make voluntary payments instead of paying property taxes. The number of PILOT programs increased during the last twenty years as states and city governments grappled with their budgets. Analysis from 2012 indicates that at least 218 localities in 28 states have instituted PILOTs since 2000. The majority of payments come from university systems (67%), followed by hospitals (25%). Fees are often small, and in many scenarios, the amount of the PILOT is determined on a case-by-case basis.
Boston targets large organizations for PILOTs by asking not-for-profit organizations that own more than $15 million of property to make voluntary payments based on the value of their real estate property. Though not lucrative, the payment program does have a high participation rate. Boston raised $25.9 million in PILOT contributions in the 2014 fiscal year, which represented almost 75% of the amount it requested.
Other cities may be revisiting their PILOT programs in the near future. Philadelphia community members are asking the mayor to evaluate its PILOT program in order to get additional funds from the University of Pennsylvania, one of the two Ivy League schools not currently subject to a PILOT. Philadelphia instituted PILOTs for not-for-profits in the 1990s, but law changes in 1997 have greatly diminished the program’s returns.
Anchorage, Alaska also sees dollar signs in the PILOT option. Its Budget Advisory Commission estimates voluntary payments could add between $40 and $60 million to the city’s budget. Currently, Anchorage uses PILOTs, but only on a limited basis.
Mandatory Payments and Taxes
Other cities and states are moving beyond voluntary programs. PILOTs average less than 1% of the revenue collected in the jurisdictions that use the program.
Localities are looking at other ways not-for-profits can help address budgetary issues.
In Chicago, the solution in 2012 was to begin charging water and sewage fees to previously exempt not-for-profits to pay for infrastructure upgrades. To give a sense of scale, a 2010 Chicago Inspector General report listed the top 25 not-for-profits by exemption size; the largest had an exemption of $290,667.
Connecticut is considering a bill that asks not-for-profit hospitals and private universities to pay property taxes on their holdings.
Similar provisions that require a tax on tax-exempt organizations have failed in other cities. In 2011, New Orleans considered whether to collect taxes on up to 50% of a not-for-profit’s property and whether to remove exemptions from not-for-profit-owned property not used for a public purpose. Ultimately, the city did not move forward with either option.
Use of the not-for-profit owned property was also of interest to Baltimore City, Maryland. In 2014, Baltimore City began requiring every not-for-profit to submit paperwork triennially that certifies they are using the property they own to further their tax-exempt status.
Proposed bills in Montana and Texas are considering similar monitoring measures. In Montana, not-for-profits with property would be required to reapply for tax exemption every six years. In Texas, tax-exempt properties would be reviewed every six years. Additionally, the Texas bill would create a sunset provision for tax exemptions.
Handling the Pressure
Though it’s unlikely that any of the tax-related provisions will pass, not-for-profit organizations should prepare for additional scrutiny on their real property. Reports about tax dollars being “lost” on not-for-profit’s real property continue to surface; the Pennsylvania Department of the Auditor General recently estimated Allegheny County, which houses Pittsburgh, could generate $619 million if the total assessed value of the tax-exempt properties were subject to state and local taxes.
For more information about how voluntary payments or other state and local fees may affect your organization, please contact us here.
Carole Budyak is a Director at CBIZ MHM, LLC in our Chicago office. You may contact her at 312.602.6830 or email@example.com.