Interest in collecting payments in lieu of taxes (PILOTs) from charitable nonprofit organizations is likely to grow as cash-strapped municipalities seek additional revenue, according to a new report by the Lincoln Institute of Land Policy.
But cities and towns should collaborate with colleges, universities, medical facilities and other nonprofits that are exempt from paying property taxes, for greater consistency and transparency, according to Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests.
The report is the most comprehensive account of PILOT programs currently in use in 117 municipalities across 18 states. Large cities collecting PILOTs include Baltimore, Boston, Philadelphia, and Pittsburgh; Boston has one of the longest standing and most revenue-productive PILOT programs in the U.S. The payments made in these programs are voluntary, are typically only a fraction of what the institutions would provide if they paid property taxes, and constitute a very small percentage of overall revenues collected by municipalities.
Private universities, nonprofit hospitals, museums, soup kitchens, and churches are exempt from property taxation in all 50 states. In recent years, many cities have initiated and expanded PILOTs, and increasingly relied on charging user fees that can help pay for basic public services, from police and fire protection to streets and their maintenance. Some cities have even floated the idea of a controversial “tuition tax” in an effort to make up the property tax revenues that are not paid by colleges and universities.
“PILOTs can provide crucial revenue for certain municipalities, and are one way to make nonprofits pay for the public services they consume,” said the report’s authors, Daphne A. Kenyon and Adam H. Langley. “However, PILOTs are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits. In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation.”
The report includes a detailed review of case studies from around the country and makes the following recommendations:
- Municipalities must assess whether a PILOT program is appropriate. PILOTs are most appropriate for municipalities that are highly reliant on the property tax and have a significant share of total property owned by nonprofits. For example, a Minnesota study found that while PILOTs could increase revenue by more than ten percent in six municipalities in that state, there was negligible revenue potential from PILOTs for the vast majority of Minnesota cities and towns. Similarly, PILOTs are not appropriate for all types of nonprofits. PILOTs are most suitable for nonprofits that own large amounts of tax-exempt property and provide modest benefits to local residents relative to their tax savings.
- Municipalities should work collaboratively with nonprofits. The best PILOT initiatives arise out of a partnership between the municipality and local nonprofit organizations, because both sectors serve the general public and have an interest in an economically and fiscally healthy community. In some cities, case-by-case negotiation with one or several nonprofits is best, as is the case between Yale University and New Haven. In cities with a large number of nonprofits, such as Boston, creating a systematic PILOT program can promote horizontal equity among tax-exempt nonprofits and raise more revenue than negotiating individual agreements.
- Both state and local governments should consider alternatives to PILOTs. State governments should consider providing grants to local governments that host tax-exempt nonprofits to compensate them for their loss of property tax base, as is done in Connecticut. If states are unwilling to provide such grants, municipalities can consider alternative ways to raise revenue from tax-exempt nonprofits, such as increased user fees.
PILOTs address two problems with the property tax exemption provided to nonprofits. First, the exemption is poorly targeted, since it mainly benefits nonprofits with the most valuable property holdings, rather than those providing the greatest public benefit. Second, a geographic mismatch often exists between the costs and benefits of the property tax exemption, since the cost of the exemption in terms of forgone tax revenue is borne by the municipality in which a nonprofit is located, but the public benefits provided by the nonprofit often extend to the rest of the state or even the whole nation.
Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests is the latest Policy Focus Report published by the Lincoln Institute of Land Policy. The Lincoln Institute of Land Policy is a leading resource for key issues concerning the use, regulation, and taxation of land. Providing high quality education and research, the Institute strives to improve public dialogue and decisions about land policy.
Edited by Chris Graham. Chris can be reached at [email protected].
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