As the country struggles with a sluggish economy and escalating debt, federal and state lawmakers have gone to extremes to cut costs and try to balance budgets. Nationwide, local governments are now feeling the squeeze from that lost revenue, and are targeting nonprofit organizations through payments in lieu of taxes (PILOTs), fees, and other assessments and legislation in order to fill the widening gaps in their local budgets.
Large nonprofit hospitals and universities around the country have been asked by city leaders to make voluntary payments based on their property values, said Steven Hoffman, MT, CFP, EA,
blogger and former member of the Internal Revenue Services’ Advisory Committee for Taxation for the Tax Exempt/Governmental Entities.
“Many of these institutions have been making PILOT’s for years, but this is a change by [municipalities] that seems to lend itself more to a tax bill,” Hoffman said in an email to Nonprofit Business Advisor. “Some nonprofits were asked to pay 25 percent of what they would have owed as property tax if the property were not tax-exempt; in cities like Pittsburgh, with approximately one quarter of all the parcels of land in the city classified as tax-exempt, [the city] has taken a similar approach to requesting more money from nonprofits; and in Boston, [the city’s] approach is designed to increase payments to the city from the $15 million they paid to $48 million over the next five years.”
These PILOTS will cut into money used for programs, Hoffman said, particularly impacting smaller nonprofits at a time when there is a skyrocketing demand for services.
Nickels and dimes Jeannine Fox, deputy public policy director at the Minnesota Council of Nonprofits, said in recent years, her nonprofit members have been confronted with increased costs associated with fees as local governments take the brunt of state attempts to solve burgeoning deficits. Cities there are assessing everything from streetlights to garbage pickup in an attempt to make up for the shortfall in their budgets, the deputy director said.
“At this point it’s happening from municipality to municipality. Local governments do this because they have the authority [here] to assess these fees,” Fox said. Municipalities are currently going after local nonprofits that are generally a small portion of the tax-exempt rolls, making up about 4.2 percent of all exemptions, she said.
“This is not a huge revenue-raiser for local government, and [the fees] can have an adverse affect on the communities that local governments are charged with serving,” Fox said. “It seems like a short-term fix for local government but it may actually wind up weakening their own delivery systems for not a lot of gain.”
Fox said the assessments are troubling. For example, in the case of larger nonprofits, such as those with assets of $10 million or more, programs and services make up vast the majority of the organizations’ budgets — much of which is funded by government fees and contracts — so it raises the question of donor intent. “People don’t give money with the intent of it going to government,” Fox said. “They give that money with the intent of it going into programs and out the door into the community.”
She recommended that local nonprofits and local municipalities, who are closest to each other on the ground, stand together and exert pressure on state and federal decision-makers in support of a “balanced approach” that might include more appropriate sources of revenue.
“Nonprofits understand the situation that local governments are in,” Fox said, “but they don’t think that nickel-and-diming nonprofits is the way to solve the issue.”
Lisa Maruyama, executive director, Hawaii Alliance of Nonprofit Organizations (HANO), said for the last three years, her organization has battled the state legislature over a bill introduced that would revoke the general excise tax.
“Largely because we’re in an economic slump, the legislature is leaving no stone unturned looking for money,” Maruyama said. “At the beginning of each session, the legislature introduces a comprehensive bill that would remove tax-exemptions and tax credits for many industries. We’re not singled out, but we’re asked to take our fair share.”
During the latest session that wrapped up in May, Maruyama said nonprofit advocates were able to remove nonprofit organizations from the industries bound for complete tax revocation, but they had to concede to temporary removal of the exemption of the general excise tax (GET) — of 4.166 percent — on growth income from trade exhibits and displaced bases of conferences and conventions.
“This particularly affects intermediary organizations like HANO, whose bylaws dictate that they need to meet with members. Bar associations and trade associations — these 501(c) 4 and 501(c) 6 associations will see the biggest impact,” Maruyama said. “It was our bitter pill that we needed to swallow in order to keep intact the whole tax exemption.”
Another worrisome trend Maruyama said she sees involves city and county governments that are taxing nonprofit organizations with real property. HANO is currently tracking three separate bills going through the Honolulu city council, she said: One will raise an annual city administrative fee to process paperwork around a nonprofit organization’s property; another proposes a capped exemption of $500,000 on the value of property; and one that proposes an exemption on properties valued over $500,000.
Larger threats to the sector
But what may be most troublesome about these taxes, fees and assessments is the attitude that government officials — and in some instances the public — are taking when it come to these rising costs, Maruyama said.
“The tenor is changing… and people are beginning to embrace these notions that nonprofits should be grateful for their exemptions and in return pay user fees,” said Maruyama. “Whether it’s streetlight usage or garbage pickup, there’s that wondering out loud by public officials that, ‘We won’t go there yet, but that’s intriguing,’” she said.
Fox agreed. She said it’s important to keep in mind that there is a conflict with the historical, and in some cases, constitutional practice of exempting nonprofits and charities from taxes in exchange for serving the public good.
“We have a bargain with the IRS and other governments that in exchange for our tax-exempt status and serving the public good, we have limits on our lobbying and a complete prohibition on political activity,” Fox said. “The [assessments] feel like a back door attempt around that social contract between nonprofits and local governments.”
Finally, those facing these challenges have concern about the sector as a whole.
Fox said she is concerned about the diverse nature — large and small — of the nonprofit sector that could cause an internal divide over the issue of taxes, fees and PILOTs. For instance, local governments in Minnesota are going after large, nonprofit property owners, who have the reserves to absorb assessments and who put up little resistance to the changes municipalities are making, while small, community-based social service providers, who could be devastated by the fees, are left holding the bag. This can create friction within the sector, she said.
Such a divide may already be taking root.
Hoffman said it’s a growing trend he sees across the country. There are nonprofits — which rely on tourism and patient visits to hospitals — that are in favor of these fees, assessments and PILOTS, Hoffman said, “and these organizations argue that their success depends on a safe, well managed city.”
In one instance, he said, a medical center is supporting increased payments even though their contribution will soar from $167,000 to $3.1 million over the next five years.
For more information
Steven Hoffman is the former director in the Business and Finance Division for West Virginia University. He publishes a Tax Update Newsletter for Nonprofit organizations that is distributed to small and mid- sized nonprofit organizations around the United States and has served on the Advisory Committee for Taxation for the Tax Exempt/Governmental Entities Division of the IRS. To learn more, see his LinkedIn profile. Jeannine Fox is the deputy director of public policy at the Minnesota Council of Nonprofits and has spent over a decade working in nonprofit and government direct service organizations. Steve@TheTaxTranslator.com