Some of the most highly valued real estate belonging to educational organizations is exempt from property tax. That seems reasonable, right? These organizations often provide substantial benefits to the communities where they reside. However, the looming question is whether it’s fair for an institution to own the most valuable property in a community, exempt from tax, while the surrounding residents pay the difference in missing tax revenue? New Jersey residents have already challenged Princeton University’s tax-exempt status, and others are following their lead.
Princeton residents first filed a lawsuit in 2011 challenging the university’s tax-exempt status. Bloomberg reported this past May that “two dozen Princeton homeowners joined a five-year-old lawsuit challenging the university’s property-tax exemption for several years.” The article also noted that “[t]he outcome could cut homeowners’ annual property taxes, averaging $17,699, by a third.”
University leaders are putting up a good fight to maintain Princeton’s tax-exempt status. The Princeton University website explains that in addition to being the largest taxpayer in the municipality of Princeton, the university makes an annual voluntary cash contribution to the municipality. Princeton also contributes funds to construct and renovate affordable housing, and it makes cultural and athletic events available to community residents.
Other high profile universities are enrolled in “payment in lieu of taxes” (“PILOT”) programs, where the institution is asked to pay a percentage of the taxes it would have paid if it were not tax-exempt. Harvard University is enrolled in Boston’s PILOT program, which requires voluntary payments from tax-exempt institutions with property valued over $15 million. The program also allows each institution to reduce the amount paid under the PILOT program by up to 50 percent, with a “community benefits deduction.” According to a recent article by the Washington Post, Harvard owns 650 buildings totaling approximately 25 million square feet and pays $5.9 million under the PILOT program, in addition to taxes paid on non-exempt property. Consider that in 2009, Harvard had “almost $1.5 billion in property in Boston proper…and would have had to pay $40 million in property tax for the year, if it did not have an exemption.”
Princeton isn’t the only institution under scrutiny. Connecticut legislators are proposing with S.B. 413 and S.B. 414 to revoke Yale University’s property tax-exempt status. Yale representative Richard Jacob contends that the proposed taxes would “diminish the University’s ability to carry out its charitable mission and to enable and support growth in New Haven.” The Washington Post reported that “Stanford University holds one of California’s largest property tax exemptions, with about $8 billion worth of property removed from the tax rolls.” This results in an annual tax break of approximately $80 million.
Some taxpayers argue that the community services and benefits provided by the universities are not enough considering the amount of revenue to be gained. Hopefully, policymakers can find an appropriate balance to create an option that works for everybody.
Continue the discussion on LinkedIn: Is it fair that educational institutions have property tax exemptions that equal millions in tax savings?
For more information about state tax issues, sign up for a free trial on Bloomberg BNA’s Premier State Tax Library.
By Cynthia N. Wells
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