Michigan Bill Seeks to Fix Ambiguities of Nonprofit Property Tax

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October 18, 2016; Crain’s Detroit Business

The Michigan Senate is seeking to unify the property tax exemption for nonprofits across all municipalities in the state. Senate Bill 960 will amend the General Property Tax Act to identify which organizations qualify as nonprofits and thereby receive a property tax exemption, creating yet another layer of contention about this hot button issue that other states lack.

As it stands today, it is left to individual municipalities to identify which organizations qualify for the exemption. This lack of uniformity in Michigan has led to confusion among nonprofits and municipalities. This confusion, in turn, leads to appeals, which lead to expensive and lengthy court cases.

The bill, after two years in development, is based on one of the legal challenges, Wexford Medical Group v. City of Cadillac, decided by the Michigan Supreme Court in 2006. To qualify for property tax exemption, a charity would need to qualify under two of four criteria based on the Wexford decision:

  • The charitable nonprofit offers services to the public without discriminating based on an individual’s ability to pay, health or other factors and has a specific policy established to assure its services are available to all of those in need.
  • It is organized to advance education, advance religion, promote health and wellness, relieve poverty, erect public buildings or other public works, promote a governmental purpose or alleviate burdens or responsibilities that would otherwise be borne by the government.
  • It charges no more for its charitable services than is reasonably necessary to maintain the operation of the organization and has a specific policy established.
  • It has an overall nature that promotes charity, regardless of the amount it devotes to charitable activities on an annual basis.

Should this legislation be enacted, it will simplify the tax laws in Michigan, making it easier for qualifying charitable nonprofits to obtain property tax exemption and operate within the state. With such a sweeping proposed change, some groups will benefit, while others will not.

Winners

  • Nonprofits that operate in Michigan: The unification of property tax law across all municipalities will free existing nonprofits from the potential costs of appealing tax decisions. This is a clear benefit to existing nonprofits in that it eliminates a cost, all things being equal. Finances not spent on legal fees and taxes for this purpose can be spent elsewhere.
  • Nonprofits that might want to operate in Michigan: The equivocal nonprofit, e., the nonprofit that is on the fence about entering Michigan, will be better off. With a potential cost eliminated, new nonprofits may consider entering Michigan when they might have found it prohibitive otherwise.
  • Groups aided by nonprofits (maybe): In theory, any money that a nonprofit does not have to spend on legal fees and taxes can be put to use helping others.

Losers

  • Nonprofits that operate in Michigan that newly are required to pay property tax because of this new legislation.
  • Nonprofits that operate in Michigan if new nonprofits begin to operate in Michigan: It is unlikely that Senate Bill 960 will by itself increase the funds available for nonprofits in Michigan. If new nonprofits enter Michigan, that will mean more competition for government and charity dollars. The potential loss of revenue for existing nonprofits could be offset by the reduced legal costs, so it is unclear if it would be a net gain, loss, or draw.
  • Municipal Government: This bill would take away the ability of local governments to independently decide what constitutes a nonprofit, and therefore, which organizations should pay property tax. Which leads to…
  • Municipal Coffers and Projects: If this new legislation reduces the number of nonprofits that are obligated to pay property taxes, it would represent a clear loss of tax revenue for local municipalities and local government programs. This can be seen by looking at those who have voiced support for the bill: “The Michigan Department of Treasuryand others, including the Michigan Municipal League, Michigan Townships Association and Michigan Association of School Boards, opposed the bill.”

In general, SB 960 would most likely benefit nonprofits and cost municipalities some taxes and a degree of autonomy. It certainly clarifies the rules that nonprofits will play by, which is a good thing.—Sean Watterson