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.

So there is increasing pressure on local governments to act, as reflected in an article on the front page of today's New York Times. 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.

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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.

Some universities pay money to their cities in lieu of taxes, to preserve good relations with the community. But most nonprofits pay nothing.

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.

The wrong thing is probably to force the issue. The Times 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.

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?

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.

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.

Robert Wechsler
Director of Research-Retired, City Ethics