August 28, 2011; Source: The Virginian-Pilot | The continuing debate about whether to assess property taxes on the real estate owned by nonprofits in Suffolk, Virginia has prompted the local newspaper, the Virginian-Pilot, to suggest that the local government’s approach is to “pick [the] pockets of nonprofits.”

Here is the backstory: The Obici Healthcare Foundation wants approval of a tax exemption for its property, including an impressive new office. Suffolk City Manager Selena Cuffee-Glenn’s advice to the City Council is that Obici should be taxed because it “is supported by an investment portfolio that exceeds over $93 million (sic).” The V-P translates the letter to mean, “The Obici Foundation should pay $16,251 in annual property taxes because it can afford to.”

After a recitation of Obici’s philanthropic support this past year—such as $57,313 to expand the SISTAS AIDS prevention program, $43,200 to make insurance available to kids in the Smart Beginnings program, and $37,290 to Suffolk’s own Department of Social Services—the V-P editorial raises an interesting question:

What is most troubling in this reassessment, however, is the notion that the city’s evaluation of a charity’s finances should matter. While the administration is at it, will the city now be in the business of combing the books of local religious charities? What about nonprofits with trouble making ends meet? Who gets to decide whether they pay? And what about charities neighbors dislike—a drug treatment center or a facility for troubled youth?

The deep-pockets issue is always lurking behind local governments’ efforts to tax nonprofit property. Typically municipalities look to universities and hospitals, eyeing their endowments, fundraising, and sometimes related business income earnings. Is that the rationale for taxing nonprofits? Identify the moneyed ones, impose a tax on them, and ignore the others? Will municipal officials be able to accurately distinguish between better-off and less well-off charities?

This is where the argument favors the nonprofit property owners. Real property is taxed based on its assessed value. If there is a use restriction on the property, it is factored in and correspondingly reduces the taxable valuation. If the use restriction is that the property is to be used for the charitable purposes of a federally and state-designated tax-exempt entity, that use restriction should mean that the property is tax exempt, period—regardless of whether the nonprofit’s balance sheet is healthy or its cash flow is positive.—Rick Cohen