Editor’s Note: Nonprofits vary widely in terms of their impacts, both intended and unintended, on the communities in which they are located. This argues for a discriminating approach to the issue of PILOTS. In Connecticut, for instance, Yale University’s $12.1 billion endowment stands in stark contrast to the condition of the 32.6 percent of New Haven children living below the official poverty line (U.S. Census 2000). Yale University now contributes $18 million in annual PILOT payments and an additional $2 million in non-exempt real estate taxes to New Haven, making it New Haven’s second largest taxpayer.  A healthy PILOT payment ensures that the local community is not, by virtue of foregone local taxes, subsidizing to an unfair degree the broadly accrued public benefit of educating a student body that comes from and will eventually locate themselves all over the world.

The assets of U.S. nonprofits have grown significantly in the last decade, and now exceed $1.6 trillion (not including private foundations or religious congregations).1 Since land and buildings make up the largest part of these charitable assets, and are traditionally exempt from paying property taxes, changes in state and local property tax policy have major implications for nonprofits as they do for the tax bases of municipalities where a good portion of property is held by large institutional nonprofits such as universities and hospitals.

In the current recession, 45 states are facing 2002 budget deficits totaling $40 billion, and the fiscal pain is just beginning. Cutting state aid to local governments is a common response to deficits, further squeezing already strapped city budgets. Facing difficult choices between laying off public employees and programs or raising taxes, many local governments would prefer a third path: to broaden the base by adding additional property to the tax rolls.

In 2001 this fiscal stress motivated Baltimore city officials to propose an eight percent “energy tax” targeted on charitable and religious institutions, and in the last year has led jurisdictions in Vermont, Minnesota and Pennsylvania (among others) to seek taxes, fees and “voluntary” payments from nonprofits. In Montpelier, Vermont, where the recent solicitation of payments truly was voluntary, few, if any, nonprofits agreed to pay. In Baltimore, on the other hand, the tax proposal was dropped when the largest nonprofit institutions, including Johns Hopkins University (the city’s largest employer), agreed to make “voluntary” payments of $20 million to the city over four years.

Similar payments are made by nonprofit colleges, hospitals and museums in many parts of the U.S., but why? What would lead tax-exempt organizations to agree to make such substantial “voluntary” payments to local governments? The answer to that question, and how this tension will increasingly confront nonprofits, lies in a complex interaction of history, politics, law, local finance and public opinion.

The nonprofit defense to tax proposals has generally been that their charitable activities benefit the public through their services, that they have limited funds, that donors do not expect their contributions to be taxed, and that they provide more public benefit with their resources than would be possible with their tax dollars. While benefit to the public is generally a strong argument for tax exemption, the contrast between strapped city budgets in New Haven and Baltimore, and growing, well-endowed nonprofit institutions such as Yale and Johns Hopkins is vast.

This growing tension was the genesis for Property-Tax Exemption for Charities, a new book edited by Evelyn Brody, a law professor at Chicago-Kent College of Law (published by the Urban Institute Press). This book places the 50-state varieties of nonprofit property tax exemption in context, including a detailed examination of the administration of PILOTs in Philadelphia and Hartford. The Philadelphia experience is a clear illustration of the forces at work on both sides of the issue, and the financial and public relations ramifications.

In 1994 the popular mayor of Philadelphia, Ed Rendell, launched a “Voluntary Contribution Program” to seek funds from medical, cultural and educational (universities) nonprofits in the city to help the city cope with a fiscal crisis.2 Philadelphia residents paid 12.3 percent of their income for local taxes in 1994, among the top 10 highest per capita and per family tax burdens in the U.S., while the assessed value of nonprofit property in the city grew from $1.2 billion in 1963 to $3.1 billion in 1993.

One key aspect of the Philadelphia program was that the Mayor’s office recognized that charities and nonprofits were important contributors to the local economy and community, and made positive statements about these organizations in public and in forums organized for the Philadelphia nonprofit community. When nonprofits objected to the initial name of the program, Payment-in-Lieu-of-Taxes/Services-in-Lieu-of-Taxes (PILOT/SILOT) Program, as admitting that these were taxable entities, the city changed the name to Voluntary Contribution Program.

By 1995, 50 nonprofit institutions signed five-year agreements to make monetary contributions to the city and school district equal to 33 percent of the regular property tax rate, and were eligible to offset a third of this with services. In five years the program generated $28.7 million in cash and $27.3 million in services from institutions including the American Law Institute, Episcopal Hospital, LaSalle University and the University of Pennsylvania. In return, the city agreed not to contest the overall property tax exemption of any organization that signed the agreement.

Philadelphia’s Voluntary Contribution Program exempted human services and arts organizations that easily met the test of “purely public charity” (the Pennsylvania Constitutional five-prong test for property tax exemption). Local nonprofits dubbed the notices giving this status as “home free” letters.

Changes in the health care economy and 1997 legislation clarifying and expanding the definition of Pennsylvania’s “purely public charity” test for property tax exemption (Act 55) weakened the city’s hand in obtaining voluntary payments. Beginning in 2000 the city offered a 50 percent reduction in payments by health care institutions, and so far many fewer organizations have been willing to continue their participation in the scaled-back program, since there is less legal pressure since the passage of Act 55.

The charts to the right of Philadelphia and Boston’s receipts from PILOTs shows the payments’ volatility over time, indicating their limited value for cities over time as a growing or even reliable source of revenue. This information has not yet been published elsewhere. These figures raise questions that require further examination.

Philadelphia’s success in generating revenue attracted attention from other jurisdictions, including requests for information from Washington, D.C., Albany and Buffalo, New York, and Baltimore, Maryland.

In Boston, with a concentration of nonprofit institutions of higher education, private schools and hospitals, city government continues to collect a substantial part of its budget from nonprofit property holders. Payments in 2001 included $5,254,081 from Boston University, $1,808,466 from Massachusetts General Hospital, $1,430,746 from Harvard University, and $39,556 from the Museum of Fine Arts. Harvard University also pays substantial amounts to the City of Cambridge, where most of its land and buildings are located.

Historically, real property owned by nonprofits and used for charitable purposes has been exempt from property taxes in every state, though the definitions and tests for what constitutes charitable purposes varies from state to state. Since property taxes are a state and local instead of a federal matter, charitable tax exemptions are established in state constitutions and interpreted by the courts, frequently with multi-part tests such as in Pennsylvania.

Exemptions are provided for many different reasons—historical, philosophical, convenience, and economic. Nonprofits aren’t the only entities exempt from tax, nor do they benefit the most from such exemptions. Property taxes are not levied on federal, state, and even city buildings and roads, and many cities exempt large corporations from paying property taxes as incentives to attract or retain large employers. Farmland and property owned by senior citizens and the disabled are typically taxed at lower rates or provided certain exemptions.

As more local jurisdictions are making payment requests, the financial and political question for nonprofits will be whether they should agree to make a PILOT. While the reasons vary greatly, they can be grouped into the following broad categories: public relations, civic duty/goodwill, coercion, and compromise. The Achilles heel for many organizations comes when they want to move or expand, when local jurisdictions can use their leverage over zoning to make their request for payment a precondition for approval. Pressured nonprofits feel they are being coerced or blackmailed, but often are unwilling to publicly or legally contest the action because it would hold up a new building project, capital campaign or expansion.

Other organizations find equally strong reasons to decide not to make a PILOT. These reasons include: nonprofit property is constitutionally not includable in the tax base; that most local government expenses are general and not directly in service of property; they cannot afford it; lost revenues diminish services that can be provided to the community; donors didn’t intend money to be spent on taxes; and nonprofits provide so many other public benefits.

Brody’s Property-Tax Exemption for Charities provides the most detailed and comprehensive review of the rationale and practice of U.S. law on this subject, and concludes with a series of commentaries that make clear that the issue is far from settled. Both sides of this dispute—local governments and nonprofits—need the money for what everyone agrees are good and worthwhile causes.

For local governments, redress is complicated by the fact that the political venue for exemption decisions is usually determined under state law, while it is the localities, rather than the states, that suffer from the lost revenue. In a concluding commentary, University of Connecticut law professor Richard D. Pomp suggests seven possible solutions he feels could “strike a better balance while staying within the present [property tax] structure.”3 These options are:

1. Require the permission of the local jurisdiction before any taxable property can be bought by a tax-exempt organization,
2. Phase in the tax exemption whenever taxable property is bought by a tax-exempt organization,
3. Phase out the exemption after a certain period,
4. Limit the number of acres qualifying for the exemption,
5. Set a dollar limit on the amount of property that can be exempt,
6. Impose a user charge for exempt property, and
7. Have the state make payments to jurisdictions containing tax-exempt property.
Of course, none of these “solutions,” or even a combination of them, will completely satisfy the localities or the
nonprofits. However, they do help define the outside range of public policy choices and underscore why nonprofits might prefer “voluntary” systems of payments to local government over legislated limits.
While individual PILOT fights have been documented, there is little cumulative research as to the scope of the problem or the trend in revenue generated and jurisdictions involved.
The National Council of Nonprofit Associations (NCNA) Policy Resource Center is tracking PILOT proposals and implementation.

Please e-mail NCNA to report information from your locality about PILOTs. Updates will be posted to the NCNA Web site (www.ncna.org) and to the network of state associations of nonprofits that monitor and lobby on nonprofit tax issues.

1. National Center for Charitable Statistics. “Public Charities and their Finances circa 1999.” Washington, DC: Urban Institute. (nccs.urban.org)
2. This discussion is based on Chapter 9 in Brody’s book.
3. Richard D. Pomp, “The Collision Between Nonprofits and Cities Over the Property Tax: Possible Solutions,” Comment 5, Property-Tax Exemption for Charities, page 387.

Abby Levine is a public policy analyst for the National Council of Nonprofit Associations. Jon Pratt is the executive director of the Minnesota Council of Nonprofits.