Do Nonprofits Have “Unfair Advantage” That Justifies PILOTs?

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September 6, 2012; Source: The Motley Fool

The Motley Fool is a multimedia financial services, news, and information resource, committed it says, to the interests of the individual shareholder/investor. Motley Fool contributor Dan Caplinger’s author tagline states that he “supports charities as long as they’re being charitable.” Does that mean something in terms of how he views “The Coming Battle Between Nonprofits and Government,” the topic of his current article for the Fool? Caplinger suggests, “one set of institutions that has largely gone unnoticed in the tax debate has become a high-profile target for tax hikes: nonprofit charitable institutions.” Unnoticed? That’s a hard case to sell in Pittsburgh, Pa., Boston, Mass., or Providence, R.I., where local governments are scheming to find ways of taxing otherwise tax-exempt property owners.

Caplinger very briefly goes over the arguments for taxing nonprofits, including the burdens their users (such as students) place on local government services and infrastructure, but adds one that isn’t often raised in local tax debates: “(S)ome argue that nonprofits have an unfair advantage over for-profit businesses providing similar services,” he says, citing the advantages that nonprofit colleges have over for-profits like DeVry or that nonprofit hospitals have over for-profit competitors such as HCA and Tenet Healthcare.

“Voluntary” payments in lieu of taxes (PILOTs) are one of the options for getting revenues from nonprofit property owners, but Caplinger suggests that these are really “one-off” strategies that may not have long-term replication prospects. Nonetheless, he argues, “as some of the biggest players in many local economies, tax-exempt nonprofits need to consider whether the benefits they give local townspeople truly outweigh the costs.”

The article is brief, but Caplinger’s inclusion of the nonprofits-competing-with-for-profits trope is worth watching. Are municipalities going to be arguing that the tax-exempt property owners they are trying to tax are really functioning like for-profits in the world of business competition and should thus be treated like for-profits? Have NPQ readers been hearing pushback from for-profit businesses complaining about competition from nonprofits?—Rick Cohen

  • David L. Thompson

    Dan Caplinger of Motley Fool states a truth: “tax-exempt nonprofits need to consider whether the benefits they give local townspeople truly outweigh the costs.” The problem with the article though is that nonprofits do that every day. And that is the key point I made in the Urban Institute paper that Caplinger cites approvingly. Charitable nonprofits aren’t given tax exemption because they are nice people. They earn it by being dedicated to the public good – alas, no return for Motley Fool investors – and by giving up their rights to profits, privacy, and politics.

    But as for competing with businesses, we need to remember that hospitals and colleges were all nonprofits originally. Lately, smart business people have figured out how to turn a profit in the same fields.That doesn’t mean that the long-standing model has changed, only that some people playing by the rules have learned how to do more than cover their costs. Nothing wrong with that. But there is something wrong with trying to undermine institutions dedicated to their communities in order to help others turn a profit.