The Ethics of Taxing Nonprofits' Property
One of the most frustrating problems many cities and counties face is
all that untaxable land owned by nonprofit organizations. Some states,
such as my state, Connecticut, pay local governments part of what they
lose out in property taxes, but when things are hard, as now, and the
taxes are most sorely needed, there's less in the kitty to hand out.<br>
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So there is increasing pressure on local governments to act, as reflected in <a href="http://www.nytimes.com/2008/05/26/us/26tax.html" target="”_blank”">an article </a>on
the front page of today's New York <span>Times.
</span>And this pressure has recently led to what a law professor
studying this issue, Evelyn Brody, calls an explosion of challenges to
charities to defend their tax-exempt status.<br>
<br>
<a href="http://www.cityethics.org/node/445">Click here to read the rest of this blog entry.</a>
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<span><br>
<span></span></span>The nonprofit field has
been changing. Organizations are looking more and more like businesses,
and businesses are increasingly getting involved in what used to be
strictly nonprofit fields, such as hospitals and even education.
According to the article, 88% of nonprofit revenues come from sales and
fees for services. Nonprofit status is often the competitive difference
between two otherwise very similar companies. Take book publishing. A
university publishing house pays no property taxes on its offices or
its warehouse, while another publishing house that publishes similar
books pays taxes on both. University publishing houses used to be able
to say they published loads of obscure academic monographs at a loss,
but this is much less true than it used to be.<br>
<br>
Some universities pay money to their cities in lieu of taxes, to
preserve good relations with the community. But most nonprofits pay
nothing.<br>
<br>
What is the right thing to do? It's a difficult matter. In most cases,
what is a tax-exempt organization is determined by state law, so local
governments usually can, at best, interpret the law, although only
within the limitations of how courts and the state taxing authority
have already interpreted it.<br>
<br>
The wrong thing is probably to force the issue. The <span>Times</span> article mentions one
egregious example: the Northampton, Massachusetts assessor argued that
Smith College engages in sex discrimination (in favor of women) and
thus should not be tax-exempt.<br>
<br>
A better approach is to focus on businesses run by a university, which
are not central to its educational goals, such as a skating rink owned
by Connecticut College in New London, Connecticut. What about
dormitories or apartment buildings owned by a university? A museum
store outside a museum? Or a hotel owned by a hospital?<br>
<br>
The best approach, I think, is not to simply assess a building, but to
work with the organization to come to some kind of agreement, either
payments in lieu of taxes or particular properties to be taxed. It's
better for relations between the community and the organization to have
decisions be announced jointly rather than making assessments or going to court.<br>
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But now really isn't the time to be doing this. Most nonprofits are
feeling the same pinches as local governments. Some larger
organizations, such as universities, are doing fine, but contributions are down, government grants are at best
stagnant, and fewer people are able to pay the fees. The best time
to work out payment plans is when the economy is in better shape.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>