Exempts' Tax Status Under Scrutiny as States Feel Money Woes

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By Colleen Murphy

Aug. 18 — Just because an organization is exempt from taxes doesn't mean it should get all city services for free.

That is the message some cities have sent to nonprofit organizations over the last several years, and it is a sentiment that is likely to continue as states feel budget pressure, several attorneys and state tax researchers told Bloomberg BNA. Because nonprofits don't pay property tax, a payment in lieu of tax (PILOT) can help close the gap between the city's lost revenue and the services a nonprofit draws upon.

Making a PILOT may also be just the beginning for nonprofits, as several states are considering whether to scrap the property tax exemption altogether. Local governments lose out on 4 percent to 8 percent of total property tax revenue each year due to the exemption, according to a report released this month by the Lincoln Institute of Land Policy.

“I definitely think the issue of PILOTs specifically, and more generally the question of what type of financial contributions nonprofits should making to state and local governments, is one that is being increasingly asked, and we’re going to continue to see more activity on that,” said Joseph Crosby, a principal at MultiState Associates Inc.

Feeling Pressure

There is “increasing recognition” that while nonprofits are beneficial to cities, there should be some arrangement to defray costs from the services they consume, Crosby said.

“Is their mission in itself sufficient to overcome the cost imposed on the local community through the need for services? I don't know that there’s a single answer,” he said.

But while a PILOT might benefit a city, it can also raise financial concerns for nonprofits.

As government funding for some nonprofits has decreased, “expecting those same cash-strapped charities to make payments in lieu of taxes threatens their ability to be sustainable and deliver on their mission,” Ellis McGehee Carter, an attorney at Carter Law Group PC, said in an e-mail. And if those organizations are unable to deliver necessary services, the entire community is hurt as a result, she said.

Matthew Hamill, senior vice president of the National Association of College and University Business Officers, said one challenge that comes with PILOTs is that “there can seemingly be no end in sight.”

“It’s difficult for not-for-profits to feel that whatever they might agree to and pay in 2016 could be radically different in just few years—not to their advantage,” he said.

Any agreement should be reached carefully—though negotiations can become contentious, said Adam Langley, a senior research analyst in the Department of Valuation and Taxation at the Lincoln Institute of Land Policy. If conversations go south, a nonprofit might turn away.

“The obvious downside for the local government there is that these are major institutions in their communities, major employers, they provide lots of benefits—you don’t want to antagonize what is really the good guys in the community,” he said.

The Largest PILOTs

Town-Gown Issue

Still, some PILOTs make sense—such as a wealthy college making a payment to a town if it would otherwise “threaten the town's survival” by not contributing to the tax base, Carter said.

Several of the largest PILOTs in recent years come from universities, according to data from the Lincoln Institute. Harvard University made a PILOT worth $10 million in 2012. Yale University made an $8.1 million PILOT that year, according to the data.

In a more recent situation, Syracuse University in April reached a deal with the city of Syracuse to contribute $7 million over five years, with the majority funding city services, the Associated Press reported. The university was previously making $500,000 payments annually to the city, according to a 2011 agreement.

The issue has also reached Capitol Hill. Lawmakers, in a letter requesting details on endowment spending, asked several dozen institutions in February if they have made any PILOTs in the past. The Committee on Ways and Means is still reviewing the responses, which tie into a broader focus on tax treatment of endowments (97 DTR G-2, 5/19/16).

Bigger Worries

But making a PILOT might not be the biggest concern for nonprofits, as some states have recently been reconsidering property tax exemptions entirely.

Maine Gov. Paul R. LePage (R) proposed last year to ax some large nonprofits' property tax exemptions, the Wall Street Journal reported. The state Legislature didn't adopt the proposal, but LePage “remains interested” and may revisit it in the next session, his spokeswoman said.

Dozens of residents in Princeton, N.J., joined a 5-year-old lawsuit in May challenging Princeton University's property tax exemption, which could cut annual property taxes for homeowners by a third. Legislation that would have revoked the tax-exempt status for certain land owned by Yale University failed in May (86 DTR G-3, 5/4/16).

The New Jersey Tax Court stripped Morristown Memorial Hospital of its exemption in June 2015. Atlantic Health System, which owns the center, will pay the town $15.5 million over the next 10 years, NJ Advance Media reported.

“I worry this is going to keep tumbling and getting bigger and bigger,” said Michael Paff, a New Jersey-based lawyer at Paff Law Firm.

In January, the Illinois appellate court in Carle Found. v. Cunningham Twp., 2016 BL 2324, struck down the property tax exemption for hospitals. The Illinois Supreme Court will resume hearing cases in September—though it isn't known if it will schedule an oral argument, said Scott Metcalf, a partner at Franczek Radelet PC.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com

For More Information

Text of the report, “Nonprofit PILOTs (Payments in Lieu of Taxes),” is at http://src.bna.com/hRU.

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