Oddest PILOT Proposal to Date: Tax Nonprofits, Cut Business Taxes

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January 24, 2013; Source: Bloomberg

It’s another day, so of course there’s someone in Pittsburgh clamoring for higher payments in lieu of taxes (PILOTs) from nonprofit property owners. This time, the push comes in the form of a bill being introduced by State Sen. Jim Ferlo (D-Pittsburgh) to tax nonprofits with more than 250 employees based on payroll size. Ferlo believes that “philanthropy and the goodwill don’t help the city…pay for collective bargaining awards for police…[or] for the asphalt.” The law would establish a 0.4 percent payroll tax for the largest nonprofits, compared to 0.5 percent for businesses. Ferlo’s bill would only apply to Pittsburgh.

Ferlo made it a point to mention that he didn’t consult with the nonprofit sector as he devised his payroll tax legislation. Maybe nonprofits would have pointed out to him that, in establishing a 0.4 percent nonprofit payroll tax while reducing the tax on for-profit business payrolls from 0.55 to 0.5 percent, his bill essentially asks nonprofits to indirectly subsidize the business sector. His bill would raise the tax bite on the University of Pittsburgh Medical Center, the University of Pittsburgh, and the West Penn Allegheny Health System while reducing the payroll tax charge to Wal-Mart, Mellon Financial, and Verizon, all among the top ten employers in the city. Whether one thinks hospitals and universities should pay more than they currently do, the argument that Wal-Mart, PNC, and Mellon should pay less suggests that Ferlo has the tax issue upside down in his head.

Ferlo charges that nonprofits receive the benefits of city services without paying their fair share of the costs. However, that perspective doesn’t give nonprofits credit for what they deliver—beyond tax revenues—in services to the public. The public gets further confused when it sees figures that suggest that one third of Pittsburgh’s property base is tax-exempt, but the proportion of that which is governmental agencies and facilities is rarely ever made explicit. As a result, the public thinks that the nonprofit sector owns one-third of the city and is somehow chortling that private homeowners and commercial property owners have to ante up for the bill.

The arguments go round and round, but where they end up, nobody knows. Ever since its young mayor, Luke Ravenstahl, took on nonprofits in an effort to find revenues to pay for the city’s pension fund shortfalls, Pittsburgh always seems to be one of the nation’s epicenters for the PILOTs struggle. Steel City officials like Ferlo and Ravenstahl cannot help but be aware of how some localities, such as Providence, R.I., have been credited by the likes of Moody’s with making progress on their budget deficits due to their ability to raise tax-like revenues from nonprofits.

The problem in this debate is that the different sides are like blind men trying to describe an elephant. David Thompson of the National Council of Nonprofits says that “nonprofits are struggling as much or more than the governments and don’t have the spare cash that’s presumed,” a statement that is clearly true for the nonprofit sector, but not quite that applicable to an Ivy League college in Providence or a massive medical center like UPMC in Pittsburgh. In contrast, Daphne Kenyon of the Lincoln Institute of Land Policy says, “Nonprofits do things that look like what for-profits do; they’ve become more entrepreneurial…So people think, why should they be completely tax-exempt? Why shouldn’t they make some contribution?”

While Kenyon is undoubtedly referring to hospitals, museums, and universities, that sentiment is often taken up by the taxpaying public to characterize all nonprofits, the vast majority of whom do not have for-profit business arms and, even if they do, rarely turn a profit from those ancillary functions. Tomorrow, someone else in Pittsburgh will pitch a new scheme for taxing nonprofits. In fact, tomorrow is almost here, as Mayor Ravenstahl prepares to officially appoint the members of a task force to negotiate a long term deal with the city’s nonprofit property owners by 2014. —Rick Cohen