Governments Finding Creative Ways to Chip away at Tax Exemptions

January 27, 2013; Source: Star-Tribune

“Where will it end?” asks Jon Pratt in relation to the proliferating practice of municipalities coming up with all kinds of devices to tax nonprofits (full disclosure: although he had no involvement in this newswire whatsoever, Jon Pratt is an editorial advisor for Nonprofit Quarterly). Pratt, the executive director of the Minnesota Council of Nonprofits, lists only some of the various instruments local governments have come up with as mandatory taxes on nonprofit property owners that are, under the law, exempt from property taxes: “Snow removal fees? Street maintenance fees? Lighting fees? You could take the entire municipal budget and divide it into a thousand pieces. Then the whole concept of tax exempt is gone.”

His question is critically important, as the movement of local governments to tax nonprofit property owners has begun to drift from simply targeting wealthy nonprofit landowners such as hospitals and universities toward taxing nonprofit property owners of any sort—as the Star-Tribune notes, even storefront charities.

The Star-Tribune cites some of the newest methods localities have devised to get tax-exempt nonprofits to pay up. For instance, in Mankato, Minn., the plan is to require all property owners to pay for city streetlights (a practice followed by 25 other Minnesota cities). Bemidji, Minn. and other nearby cities and townships are trying to form a fire district to be financed by a fire protection fee to be paid by all property owners, including nonprofits. The key behind the Mankato and Bemidji plans is that the revenue-raising instrument is structured not as a property tax, which would exempt nonprofits, but as a user-fee, which doesn’t exempt nonprofits.

This kind of approach necessitates removing or unbundling the function of street lights or fire protection from the services that are bundled together to be paid for by property taxes and convert them to a service paid for through a fee on users—and it may be that nonprofits may not be as exempt from fees as they are from property taxes. One of the earliest examples in Minnesota is St. Paul’s “dust fee,” originally created because of the problem of dirt roads in 19th and early 20th century St. Paul. Over the years, this was converted to a roadway maintenance fee, paid for by nonprofit and for-profit property owners alike and generating 12 percent of the revenues in St. Paul’s general fund.

Notwithstanding Minnesota’s fee-based creativity, most municipalities still try to exact payments in lieu of taxes (PILOTs) from nonprofit property-owners that are ostensibly voluntary. However, local governments can make a tax-exempt property owner’s decision to turn down a PILOT request exceptionally uncomfortable.

David Thompson of the National Council of Nonprofits described these multiple fees—along with all-but-mandatory PILOTs—as a violation of the “social compact” between nonprofits and government. That compact includes the notion that nonprofits are exempted from taxes because they provide services that government would otherwise have to pay for or because nonprofits function to strengthen community life.

The problem that nonprofits face isn’t just due to troubled municipal budgets. There is also the challenge of explaining the nonprofit sector’s unique role in society, which is at the heart of the social compact. Nonprofits must battle against the notion that there is little that nonprofits do that couldn’t be provided without much loss by for-profits (nonprofit hospitals and for-profit hospitals, nonprofit colleges and universities versus for-profit universities, nonprofit service providers versus the proliferation of for-profit social entrepreneurs who say that they can do the same thing as nonprofits with more efficiency and at lower costs). Nonprofits need to deal with problems in their social compact with society beyond municipal fee and tax exactions.—Rick Cohen

  • Douglas Knight

    The social compact is shifting. And it is due to the need for revenue, a re-assessment of budgetary priorities, and many other factors. But the top factor? The one that makes this a solvable issue? Politicians look to where influence and votes are the highest – and affect change the other way. Nonprofits are looked at for these “municipal fees” because it seems to make political sense: here are property “owners” who don’t pay taxes here, so charge them fees there. Adding to this decisions making? Nonprofits do not rally influence or votes that can alter political landscape. It isn’t based solely in economics or parity… it’s based in political reality. So we yell and scream, maybe “march on city hall” a time or two. But these can be deflected, diluted. We want political leaders to see the value, know the voice, and see the strength of the nonprofit sector? Then we must elect candidates who believe in this social compact. This is the purpose of CForward.

    Minnesota nonprofits constitute 13.8% of ALL statewide private employment. That is a hefty number, if focused and seen as a force for community power through economic impact and strength. Mr. Cohen is correct about our unique role in society. We are businesses, we are impact centers, we are job creators, and we are direct/indirect service providers. We must lift our collective voice to those in power and say, “Our Work Matters. Our Values Strengthen Community. Our Voices and Votes Will Be Heard at Elections.” This article led off with a question, “When will this end?” It will end when we elect those who see us as ASSETS, not EXTRA. No Profits Without Nonprofits.