December 22, 2013; Washington Post

The Washington Post wades into the conflict between cash-strapped local governments and community-based nonprofits over revenues in an article by reporter Susan Svrluga. It’s an issue that the Nonprofit Quarterly has been looking at for some time.

The article starts off with a now-familiar tale: In Loudoun County, Virginia, located in metropolitan Washington, D.C., Ken Falke and his wife donated 37 acres of land and $1 million to help start a retreat where wounded service members could recover with their families. They assumed that the retreat would be exempt from property tax, as is the case with many nonprofits across the country.

But instead, the county hit them with a $20,000 tax bill. It is yet another example of a dilemma that many local governments nationwide are dealing with as they recover from the Great Recession: whether or not nonprofits should pay taxes or other fees. The Post reports that earlier this month, after contentious debate, the board of supervisors voted to again consider tax breaks for new nonprofits, after years of denying them.

For nonprofits, taxes are another overhead expense taking scarce funds away from their mission of helping people and communities in need. For local governments, especially those with lots of nonprofit institutions, such as churches, universities, hospitals and charities that don’t pay property taxes, it’s a hit on the tax rolls and less revenue.

“The recession hit,” David L. Thompson, vice president of public policy for the National Council of Nonprofits, told the Post. “And all of a sudden, nonprofits that were the anchor of the community and greatly praised by policymakers started being treated as scofflaws not paying their fair share.”

Virginia’s law is unique, in that it gives local governments the authority to grant or deny property-tax exemptions to some types of nonprofits. Most Northern Virginia counties no longer grant the exemptions, so nonprofits like soup kitchens and health clinics have to pay taxes on the property they own. Other municipalities across the U.S. have found other ways of getting more from nonprofits, including fees for city services.

“In Loudoun County, which debated the issue this month, some supervisors said the county needs every dollar. Taxing nonprofits, they said, was good fiscal management. But others said nonprofits fill gaps in government services—helping the homeless, the elderly, the mentally ill—and should, as a result, be exempt,” said the article.

“We should, as a community, thank them for the good work they do and not have them worrying about paying property taxes when they’re out there trying to fundraise,” board chairman Scott K. York told the paper. That is a sentiment often used to justify the tax exemption.

The Post goes on to discuss non-profit tax policies at a number of metropolitan Washington jurisdictions, as well as in some other large cities, especially those with numerous non-profit institutions, such as Boston. It’s a mixed bag, and many do not grant them, or seek payments in lieu of taxes (PILOTs). The article goes on to talk about the state (and diversity) of the nonprofit sector in America:

“Nonprofits are one of the fastest growing sectors of the economy, booming even during down times. Some are shoestring operations, but others have massive endowments, prime real estate, sleek headquarters and lobbyists. Many have ardent supporters who can pack public hearings to pressure local politicians. And with the recession forcing public officials to scramble for revenue, local governments around the country have been looking at ways to get money from nonprofits.”

“In 2009, researchers estimated that property tax revenue forgone because of charitable tax exemptions totaled between $17 billion and $32 billion in the United States,” wrote Svrluga, who reports that about two-thirds of nonprofits said they have been hit by new payments to local governments in the past two years, according to a national survey by the Center for Civil Society Studies at Johns Hopkins University.

The decisions to exempt nonprofits from taxes are often controversial. Some say that they deserve the breaks because they help the community and its people, the very same constituents served by local government. Others point to large medical, educational and community development organizations that “act a lot like for-profit organizations [and] compete with for-profit firms.”

In states where local governments are heavily reliant on property tax revenue, exemptions can have a big impact. However, in western states like California, where municipalities rely less on property taxes and more on sales taxes, such exemptions are less of an issue. In D.C., more than a third of the property is tax-exempt, and a commission is proposing a new tax per employee to the D.C. Council get revenues from large nonprofits, such as hospitals and colleges.

In cities where a large percentage of the local real estate is owned by nonprofits, critics claim that the tax burden falls more on individuals and businesses than it does in other places. But others argue that these organizations help residents and save local government money in the process.—Larry Kaplan