Property Tax Post: Nonprofit Tax Breaks: Are They Beneficial or Burdensome?


As we approach the end of the year, most property owners have probably already dished out their state property tax payments. Generally, the authority to impose property taxes comes from a state’s statutes or constitution and is often extended by the state to local governments such as cities, counties and school districts. The same state laws enabling local governments to impose and collect property taxes generally also restrict their taxing authority in certain instances. One particular instance concerns the imposition and collection of taxes on property owned by nonprofit organizations.   

Virtually every state offers some sort of property tax exemption for nonprofit organizations, whether by way of state constitution or state legislation. In Maryland, for example, real property of a nonprofit charitable, fraternal, educational or literary organization is not subject to taxation if the property is necessary for and actually used exclusively for a charitable or educational purpose promoting the general welfare of state residents. New York State also provides a mandatory property tax exemption for certain property owned by nonprofits for religious, charitable and educational purposes, among others.

The rationale for providing the exemptions stems from the presumption that nonprofit organizations provide social good. State governments are relieved of the additional fiscal responsibility of providing its citizens with services and benefits that nonprofits deliver, according to a Lincoln Institute of Land Policy report. Goodwill Industries, for instance, “served more than 37 million people across the globe, providing jobs for over 312,000 people and facilitated online training to over 35 million people”  in 2015, according to Tharawat Magazine.

Despite the benefits that these organizations provide, their property tax exemptions have frequently been criticized. Some critics argue that that because the value of property owned by tax-exempt nonprofits is often considered in determining the valuation of property in a particular geographical area or jurisdiction, the property values of surrounding non-exempt property are driven up, and so are the owners’ tax bills. New Jersey, for example, requires that tax-exempt religious or charitable property must still be included calculating in property tax valuations in a neighborhood, as do New York and Rhode Island.

For these reasons, some taxpayers have a legitimate reason to ask whether these tax breaks are actually beneficial.  After all, the services that tax-exempt organizations provide, no matter how useful, are not exclusive to the taxpayers in the jurisdictions where their property is located. 

To address this issue, a few states have negotiated agreements with larger or more lucrative nonprofits requesting that the organizations tender voluntary “payments in lieu of taxes (PILOTs).” Under a PILOT program, the government may recoup some of the property tax revenue lost because of a nonprofit’s exemption, as the Lincoln Institute of Land and Policy report explains. Proponents assert that PILOTs will at least cover the costs of services and benefits that are paid for by taxpayers and consumed by tax- exempt organizations.

PILOTs seem like an equitable means to enable local governments to recover the costs of the benefits and services consumed by nonprofits, but it does not appear likely that PILOTs will facilitate the recovery of property tax revenue because these payments will only account for a small portion of lost tax revenue. As is the case with any tax exemption, determining the benefits of allowing property tax exemptions for nonprofits with the burden of less tax revenue is always a tricky policy balancing act. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think nonprofit organizations should pay property taxes?

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