What’s fair in non-profits’ property taxes? Part 2, from Never to Sometimes
[Continued from yesterday's Part 1.]
Yesterday’s post introduced the little morality play of rich Brown and poor Providence, with the city asking Brown to pay more, voluntarily, because – well – the city needs the money.
But Taveras maintains the university should give more at a time when city taxes have gone up, services have been cut, schools have been closed — and he trimmed his own salary by 10%.
Aside from the non sequitur that Brown has no say in what the mayor is paid and the two things are utterly disconnected, the implied math is absurd, since it equates the mayor’s $13,000 contribution (and similar 10% cuts for his senior staff) with 300 times that much from Brown, or that the mayor’s 10% cut equal be matched by Brown making a 100% increase in what it pays.
Mayor Taveras announcing pays cuts and non-union job cuts
And the mayor will one day leave office, whereas Brown’s increased payments will presumably go on forever.
[This post uses two principal sources: Wall Street Journal (February 14, 2012; Arial font) and the Associated Press (February 18, 2012; Georgia font) – Ed.]
Central Falls’ receiver asking for pension cuts to avoid bankruptcy: he failed, and the city filed
[Two lengthy previous posts on property taxation of non-profit institutions occurred in 2010 about No representation without taxation (Part 1a, Part 1b and Part 2), and then in 2011 withThe Battles of Charities' Taxation (Part 1, Part 2, Part 3 and Part 4).]
Providence’s opening salvo places front and center the question, What is fair when it comes to local real estate taxes?
Negotiations on Brown’s voluntary payments resumed last week when Gov. Lincoln Chafee, a Brown alumnus, brought together Taveras and two of Brown’s highest-ranking administrators, President Ruth Simmons and Chancellor Thomas Tisch. Representatives from both sides say they are trying to reach a fair agreement.
Should there be a relationship between the taxes a non-profit pays and the municipal services it receives? Should rich non-profit property owners pay more even if they don’t consume services to match?
Of the eight approaches to non-profits’ PILOTs in our lineup, batting leadoff is this one:
We’ll start by laying down a bunt
1. None, out of the question
“Non-profits are exempt from income taxation so they should be exempt from all taxation.”
For non-profits, this is the best argument, and by any standards it is the simplest. Section 501(c)(3) institutions have been made exempt from income taxation because they have been found (by the Federal government) to serve a charitable public purpose; if so, then that purpose’s charitability should apply equally to all other forms of taxes, including municipal property.
In many states, that is embedded in the state’s constitution (17 states) or authorized by the constitution (25 states). In only eight states is the issue entirely open, and one of those eight is Rhode Island.
The city is supporting state legislation that could compel the universities and hospitals to pay more.
In politics as in chess, the threat is sometimes stronger than its execution. Mayor Taveras’s chances of persuading the legislature to grant him taxing power over the university may be low, but if he were to win the cost to Brown would be enormous. For the mayor, however, actually to have legislation submitted would be committal, and he might lose not only control over the process but also the possibility of succeeding. So he has, in fact, merely suggested legislation, not proposed it. Although the Providence city council “passed a resolution that would strip Brown of its tax-exempt status,” tax exemption is not granted by a city council and not within their power to remove, so the resolution is little more than grandstanding.
Mr. Taveras says he will go to the state legislature if talks with Brown don’t work out.
In short, he’s threatening but has done nothing more than threaten.
Threats, always threats
To get money out of Brown, he’ll have to do better than that.
2. Savings are passed through to beneficiaries
“Non-profits serve the public at lower cost than the market would, so anything they save in real estate taxes, they return to the community in cheaper prices for their services.”
Many non-profits can show their value to the community transparently, because they give out services for free or at nominal cost. Indeed, these requirements are typically written into state law regarding non-profits.
(This has always been the strongest claim for religious institutions, nearly all of whose services are free, widely available to the public, and needed.)
A university can try to claim that its costs are ipso facto inexpensive because it operates at breakeven, but that’s an internalized argument. Better would be a cost comparison with other schools, except that Brown, like all the Ivies, is an expensive place to attend – and, as far as I can tell, offers no discount for residents of Providence or Rhode Island. Is a Brown education ($53,100 annually) really that much more valuable than cheaper alternatives like Providence College ($35,700 annually) or URI ($12,700 in-state)?
Cities are hitting up hospitals and other nonprofits for voluntary payments, too, but wealthy colleges and universities are prime targets because they often serve students from all over the world, raising perennial questions about how much they give back to the local communities compared to what they get in services, Ms. Kenyon said.
Lacking a direct price comparison, Brown could argue its public service by pointing to additional admissions from Providence, or reduced tuition or generous scholarships to residents of Providence or Rhode Island.
No preferred treatment for our grandsons and grand-daughters?
Providence central high school girl’s field hockey team, 1934
Curiously, Brown has not made this case (yet) – and a super-fact search indicates no preferences for Rhode Islanders or Providence high schoolers – and hence it has been wrong-footed and is playing defense against the city of Providence.
Providence points to Yale’s agreement with New Haven, Conn., as it seeks to pressure more out of Brown. Yale spokesman Michael Morand [Of Yale's revealingly named 'Office of New Haven and State Affairs' – Ed.] said the university pays more than $12.1 million a year to the city, including voluntary payments and property tax.
What is the point of citing another city and another Ivy? Should Yale ‘point to’ Brown and decide it will lower its payments to New Haven?
3. Fees for city services
“Non-profits should pay taxes equal to the services they receive directly from the city.”
Ms. Kenyon said PILOTs are important in places like Providence that have lost industry, rely heavily on the property tax for revenue and where a significant portion of land is occupied by nonprofit institutions.
As other businesses shrink, the temptation becomes strong to tax the hardy.
You know they can afford it … just go ahead, tax ‘em a little
Cities say campuses cost a lot in services.
Really? For what? I’ve always had the impression that universities do most of their own services themselves.
Reducing Providence’s police requirements since 1764
Princeton University boosted its local voluntary payments and contributed $300,000 toward a new firehouse late last year after a debate with the New Jersey community over how much it should pay in place of property taxes.
That at least makes logical sense: Princeton needs firefighters. City governments exist to provide their inhabitants with services – infrastructure and utilities, police and fire protection, and public schools. Brown doesn’t need the schools; it has its own campus police force; it maintains its own inner roads and power plants. What does Brown need for which it relies on Providence?
Providence spends more than $36 million annually providing public services to nonprofits that collectively own $3 billion in tax-exempt property.
That’s deceptive, because the non-profits who do consume services are likely to be hospitals (water, sanitation, and power) and churches.
Rhode Island and Connecticut also have state-funded PILOT programs, in which municipalities get state money to cover unrealized income from their tax-exempts. Providence received $23.1 million this fiscal year, according to Ortiz.
Oops. There goes 90% of Providence’s moral high ground.
And I was making so much progress, too
If the City of Providence is receiving $23 million from the state, how then has Providence been hurt by its presence? Especially given that Brown beings thousands of young people to town each year, young people who will spend their money in the community.
4. Taxable empire-building
“Non-profits should be exempt for their mission-critical properties, but when they venture into ancillary businesses, those should pay tax like anyone else.”
One palace tax-exempt, the rest taxable
A non-profit will have a core business – for universities, it’s education – but that platform of both physical infrastructure and a community of smart, hard-working people generates many opportunities for ancillary businesses, ranging from the macro (research laboratories) to the micro:
Under a 2003 “memo of understanding,” [Brown pays] taxes on properties not used for educational purposes, such as its for-profit bookstore.
At one basic level this makes total sense: a university that branches into other endeavors shouldn’t have an unfair competitive advantage against normal businesses providing the same goods and services. Although the university can argue that the profits it makes from the ancillary business flow through to students in the form of lower tuition, that claim is indirect when set against the ‘unfair competition’ argument.
Similarly logical is the next component: creating a PILOT to extend taxation of land ‘bought in’ to the university’s non-profit sanctuary:
Brown now pays the city a total of about $4 million a year, which is made up of $2.5 million is voluntary payments and $1.6 million in fees on land it leases or owns but doesn’t use for educational purposes.
When a non-profit buys property that was previously on the tax rolls, then the city loses revenue as a result, and hence the non-profit’s land acquisition will have unintentionally harmed the city. Creating a PILOT to replicate the city’s lost revenue stream will make the city economically indifferent, and that seems a sensible thing.
[The city] also supports a bill that would allow the collection of property tax from nonprofits on buildings they own but don’t use for educational or health care purposes.
That legislation makes sense. Otherwise a university could redeploy its real estate assets into more for-profit activities, in effect shedding its public responsibility while preserving its real estate tax advantage.
But I can keep all my bennies, can’t I?
[Continued tomorrow in Part 3.]