The exemption from property tax for charities, despite its long history, has been little studied and is poorly understood. Recently, threats from revenue-starved municipalities and other local governments have mounted, whether as frontal attacks on the charity exemption or as demands for payments in lieu of taxes.1 Meanwhile, property-owning charities such as hospitals, universities, and even cultural institutions seem to have transformed themselves into big businesses, making the public receptive to modifying the exemption. This book places the debate about the exemption in a larger context. The chapters that follow describe the economic, legal, social, and political forces at work, presenting different points of view and speculating on the future directions of reform.
In this age of global electronic commerce and the Internet's assault on sovereign borders, a study of the property-tax exemption for charitable organizations may seem quaint. However, just as a tossed ball poised at the height of its flight appears to have stopped, the issues in this study will accelerate in importance in the coming years. The same economic forces undermining the traditional income- and sales-tax bases will also magnify the importance of the property tax, whose base is fixed and easily measured (Youngman 1998).2 More subtly, economic and social changes put increasing pressure on our accepted notions of the boundaries of the nonprofit sector.
The few previous books on the nonprofit property-tax exemption surfaced in times of economic and social strain. From the earliest years of our republic, fears of a voraciously expanding religious sector have sporadically produced furious debates over the extent to which churches should render unto Caesar—or even own property at all (see Robertson 1968). The near-bankruptcy of New York City in the late 1960s and 1970s prompted Alfred Balk's influential work, The Free List (1971), and Peter Swords' response, Charitable Real Property Exemption in New York State (1981). Most studies of tax benefits for charity, when they consider property-tax at all, include it along with the range of special income-tax rules for charities. (See, for example, John Colombo and Mark Hall's stimulating The Charitable Tax Exemption, 1995, considered by Grimm in chapter 13 of this volume.) Similarly, a popular recent work based on a series of articles in the Philadelphia Inquirer found little data on property-tax exemption, and, instead, aimed its anti-exemption guns on income-tax exemption (see Gaul and Borowski 1993). The occasional state and municipal studies of the effects of property-tax exemption—one as long ago as 1922 (Adler), but most dating from the 1970s and 1990s—also lament the paucity of data while expressing concern over an eroding tax base.
In recent years, as the number and economic influence of nonprofit organizations have grown, academic research has struggled to keep up. Some of the questions are definitional: What makes nonprofit organizations distinct from businesses and governmental entities? Some involve policy implications: Do mutual-benefit nonprofits merit less public support—and narrower tax exemptions—than charitable nonprofits? Some are simply matters of data gathering: How many nonprofit organizations are there? None of these questions is easy to answer.
Despite this surge in academic interest, the issue of property-tax exemption has remained in the anecdotal dust. The topic suffers from a myriad of research handicaps. As a threshold matter, the property tax itself is of bewildering complexity and variation due to deliberate reliance on local decisionmaking and administration.3 Compared with the federal income tax, the property tax—with its amalgamation of thousands of local (sometimes overlapping) jurisdictions and combinations of caps and equalization formulas—is nearly impenetrable, and administration can vary dramatically from the law that appears on the statute books. Property-tax exemptions, too, follow definitions and limitations somewhat different from exemptions under the federal income tax, and can seem ad hoc. Finally, assessors have little or no incentive to assess the value of property held by nontaxpayers, so even valuations that do exist can lack reliability.
To remedy the scholarship gap, this book brings together authors from a range of disciplines to assess what we know—and why we cannot yet know more—about the property-tax exemption for charities. The 13 chapters present legal, economic, political, historical, and municipal-administration perspectives. Several of the authors disagree on some basic premises, so this book offers a variety of perspectives rather than a synthesis of views.4
Most important, the chapter authors demonstrate how public perception differs sharply from reality. Three features characterize the current property-tax exemption for charities. First, the data, while sparse, suggest that exemptions granted to nonprofit organizations constitute only a small fraction of total exemptions. Notably, the largest category of exempt property belongs to governments. Second, municipal demands for "voluntary" payments in lieu of taxes (PILOTs) occur only sporadically; even where PILOT programs exit, they raise comparatively little revenue. Third, and paradoxically, the press treats the charity exemption as front-page news.
How do we reconcile these findings? The title of this book suggests that a war rages over this issue—so where are the battles occurring? If "all politics is local," then no tax system is more political than the property tax. Averages mask the widely varying impact of exemptions on particular communities and of taxes or PILOTs on particular nonprofits. Moreover, the property tax falls on narrowly defined local populations, while the benefits of a particular charity's activities may be enjoyed more broadly. Finally, as charities engage in a wider range of activities—some indistinguishable from those engaged in by taxpaying entities—public support for exemption crumbles. Much to the nonprofit sector's consternation, tax exemption has come to be viewed as a subsidy granted by government, rather than an inherent entitlement of the organizational form.
Illustrating these issues, the Fairfax County, Virginia, board of supervisors recently amended guidelines to permit national charities, as well as local ones, to apply for property-tax exemption. In December 1999, the board approved exemption, worth over $300,000 a year, to the National Wildlife Federation, which has an annual budget of $82 million. One county supervisor praised the Federation for being a good citizen by providing local environmental and educational programs. A dissenting supervisor, however, contended, "We're just giving away taxpayer money to an organization that doesn't need it and shouldn't get it.... I'm delighted they do what they do, and I'm delighted they're in Fairfax County. And I think, like everybody else, they ought to pay their taxes." Similarly, a member of the Virginia General Assembly, whose approval would still be required, commented, "We have typically turned down people who have got large staffs and salary commitments as inappropriate for government assistance...." The Federation's spokesman defended its application: "We think that the conservation, education, and advocacy work that the organization does is exactly the kind of exemplary work that the state of Virginia and the county of Fairfax want to encourage.... Yes, it's a bigger exemption, but I think that means we're also doing that much more good." Finally, the president of Citizens for Sensible Taxation complained, "Are [county officials] going to cut spending by $300,000? If they aren't, who is going to pay it? It's going to be Joe Citizen" (O'Hanlon 1999; Stokeld 2000).5
In general, property-tax exemption for charities has long been a story in the Northeast, whose cities are strictly bounded, lack open land, and host large nonprofit sectors. In recent years, though, the twin pressures of school-finance reform and tax-limitation initiatives (such as Proposition 13 in California and Proposition 2-1/2 in Massachusetts)6 have increased the focus on exempt-property classifications across the country. Most recently, we saw the collapse of a high-level effort to find a federal solution to electronic commerce's threat to state coffers (Johnston 2000; Rigsby 2001). These developments suggest that the property tax will become more important as a source of state and local government finance—and that exemptions for charities will grow as an area of contention.
Chapter Findings
Part I: Framework and Structure
This book sets the stage with two initial chapters laying out the legal and political landscape of property-tax exemption for nonprofit organizations. In chapter 1, Janne G. Gallagher, deputy general counsel of the Council on Foundations, describes the basic legal structure of the exemption, including the relationship between the states and their local governments in recognizing or conditioning exemption. As a threshold matter, property-tax exemption is granted at the state level (often in the state constitution), but the effects are felt locally. While state laws vary in their terminology and details, they have several features in common: In general, exempt property must be owned and operated by a church or a nonprofit educational, charitable, or, in some states, health care institution, exclusively for exempt purposes. While states sometimes exempt benevolent organizations, the nonprofit tax exemption is essentially a charity tax exemption. Federal section 501(c)(3) status often helps, but such status is not always sufficient, and chapter 1 explores different state definitions of "charity." In addition, exemption is generally not available for property leased (but not owned) by a charity, nor is it available for (most) investment property; some states deny exemption for "excess" property; and some states apportion tax for property used in part in an unrelated business. Finally, Gallagher introduces the range of local government demands for payments in lieu of taxes and in-kind services in lieu of taxes (SILOTs), and discusses the differences between taxes and special assessments and user fees.
While economic analysis and legal interpretation are crucial to understanding the status and effects of tax exemptions, the decision to relieve specific property from a general tax burden is inherently and primarily political. As Joan M. Youngman, Lincoln Institute of Land Policy senior fellow, shows in chapter 2, the political debate is made all the more contentious by the impact of large national trends, such as changes in the health care industry, on the most local of taxes on tangible, visible property. The chapter analyzes current political issues concerning property-tax exemptions from two perspectives. First, Youngman examines questions arising from the nature of the tax itself—its hybrid nature as a general levy and as a payment for property-related services, the uncertainties of the valuation process, and the proliferation of tax abatements of various types. Second, she considers recent developments that have exacerbated contemporary conflicts over nonprofit property-tax exemptions, including changes in the role of cultural institutions, growth in the size and professionalization of the nonprofit sector, and increasing public scrutiny of nonprofit operations. Because these trends also affect the governmental and business sectors just as much as, if not more than, they affect nonprofits, the chapter concludes that the vigorous political debate does not necessarily indicate any diminution in public support for charity property-tax exemptions.
Part I concludes with two chapters examining the economics of the issues. As New York University economics professor Dick Netzer explains in chapter 3, the importance of property-tax exemptions for charities as a matter of public-finance policy—and as an economic benefit to the exempt charities—depends on how important the property tax is in local government finance and on what has happened to the base of the tax (i.e., the value of taxable property). The property tax declined as a source of local government revenue from roughly two-thirds of the total in 1932 to one-fourth in 1980, but it has stabilized since then. The factors that produced the decline seem not to be major grievances any longer, so the tax will likely remain an important revenue source for years to come, rather than a trivial tax whose burden charities would barely feel. On the other hand, the base of the tax has narrowed, in part because of the enactment of tax preferences for individuals, designed to reduce the tax's unpopularity. Indeed, effective—even harsh—state limitations on local tax rates and levies are now widespread. Accordingly, exemption for charities may rankle more today.
Netzer explains that the property tax is, and always has been, a tax that finances identifiable benefits to local residents (and to some businesses), and in so doing increases rather than reduces land values. To the extent that this is the case, exemptions for charities seem no more reasonable than exempting them from paying for the private goods and services they use, if we view property-tax exemptions as justified by a "base-defining" concept (see Brody, chapter 6 of this volume). However, if we view exemptions as a form of subsidy (and one that is easier operationally than direct cash payments), then exemption could be justified regardless of the benefits that property taxes finance. An important consideration, however, is that the subsidy is financed by specific local governments and paid to charities whose services may benefit mainly people who do not live in that city.
Finally, Netzer asks whether the property owned by charities constitutes a rising share of potentially taxable property. The aggregate data do not show this to be true. Data for the few places in which such data are readily available (and at least somewhat reliable) show that, on a statewide basis, exempt nonprofit property is a very small percentage of taxable property (for example, 2.5 percent in California), and very small, indeed, relative to government-owned property, much of which belongs to federal and state agencies. However, the percentages are much higher in some cities, notably (again) in the Northeast. A significant share of the tax-exempt property of charities typically is owned by religious organizations, including both houses of worship and religiously affiliated health and social service organizations.
The available data are explored further in chapter 4 by Joseph J. Cordes, professor of economics at George Washington University and research affiliate at the Urban Institute, and his co-authors, Marie Gantz and Thomas Pollak, of the Urban Institute. Again acknowledging that hard data are scarce, the authors arrive at a rough "order of magnitude" of between $8 and $13 billion nationally for the annual value of charity property-tax exemption, or between 1.3 percent and 2.1 percent of the total revenue received by public charities that filed federal tax returns. The authors find wide variation by state and across jurisdictions within states. In addition, they estimate that this dollar amount should be increased by an additional one-third to represent real estate owned by churches.
Because only charities that own the property they occupy enjoy the exemption, these authors also examine the own-versus-rent question. A tax-exempt organization cannot use income-tax deductions for either depreciation or rent. Thus the financial benefit from ownership exactly equals the value of the property tax that the entity need not pay. However, other things being equal, nonprofit organizations have an incentive to rent rather than own when the property-tax rate is low and when the depreciation system is relatively generous. Many economists believe that, unlike the situation in the early 1980s, current depreciation rules approximate economic depreciation, so today the property-tax exemption provides an unambiguous incentive to own rather than rent. In addition, chapter 4 discusses the impact of exemption on nonprofit organizations' decisions about where to locate. While the tax exemption has no effect on the locational decisions of nonprofits that rent, nonprofits that own do not have a tax incentive to avoid jurisdictions with high property taxes.
Lastly, chapter 4 examines whether the property-tax exemption encourages nonprofits to undertake commercial ventures and allows nonprofits to compete unfairly with for-profit businesses. The authors cite both theory and empirical evidence that imply that the property-tax exemption can provide a financial incentive for some nonprofits to engage in commercial ventures they might otherwise avoid, but the authors conclude that the driving force behind investments in commercial activities is the ability to earn superior financial returns, rather than the ability to enter a market and "unfairly" undercut the competition.
Part II: Contrasting Theories of Exemption Law
The next three chapters examine the development of the current structure of the nonprofit property-tax exemption. In chapter 5, Stephen Diamond, a professor at the University of Miami School of Law, explores the history of the property tax and of property-tax exemption for charities. The origins of the philanthropic tax exemption are problematic: What is an exemption when there is no theory of universal taxation? Did the exemption flow from the state support of churches? Did the exemption reflect the absence of income, similar to the frequent exemption for undeveloped land?
Diamond finds that the exemption initially reflected a clear qualitative desire that exempt institutions should not disappear through tax liens, although no one made a quantitative assessment of the institutions' value to the community. It was only after the Civil War, when Protestants noted that elaborate Catholic churches were receiving a larger benefit, that the exemption was conceptualized as a quantifiable subsidy. The national debate over church exemptions in the 1870s, and again in the 1890s, belied the notion that such exemptions were covert subsidies. They were not subject to annual review, but neither were many direct grants. In sum, Diamond concludes that, over time, we have seen the commodification of the tax exemption.
Chapters 6 and 7 delve into the legal rationales for exemption. First, Evelyn Brody, professor of law at Chicago-Kent College of Law and associate scholar at the Urban Institute, presents contrasting theories of property-tax exemption. The base-defining theory views exemption not as a grant but rather as the correct treatment of what the property-tax system is seeking to tax. This theory views the state as respecting the independence of the charitable sector by refraining from taxation. Alternatively, property-tax exemption can be viewed as a subsidy that should be subject to the same scrutiny as direct subsidies. Nevertheless, she points out, if exemption is a subsidy, it is an odd form of subsidy: The exemption is worth the most to charities that own the most property in the most heavily taxed jurisdictions. To Brody, either the base-defining theory or the subsidy theory might best be understood under a "sovereignty" perspective—that the civil government treats the charitable sector as something akin to an independent sovereign entitled to operate without being taxed.
The base-defining theory appears to offer the higher wall against attack, but charities' unwillingness to debate the fairness and efficiency of exemption frustrates municipalities, which may respond by challenging exemptions. Under a subsidy rationale, states might feel more free to tinker with the types of activities they wish to subsidize. In practice, some charities compromise by making voluntary payments in lieu of taxes. Fiscal pressure can also be relieved by having the states compensate municipalities that host exempt charities (see Carbone and Brody, chapter 10 of this volume). For churches, Brody finds, the constitutional attitude has evolved from a laissez-faire accommodation of religion to a subsidy theory of exemption, in which religious organizations merge into the larger universe of exempt organizations and thus are both subject to neutrally applied tax regimes and entitled to neutrally granted exemptions.
In chapter 7, Deirdre Dessingue, associate general counsel at the U.S. Catholic Conference, discusses the "wall" between church and state, and the ramifications of recent Supreme Court cases on public financing of parochial schools. She explores the specific types of religious organizations that actually enjoy exemption as churches, including places of worship, seminaries, central administrative headquarters, and parsonages; youth and adult clubs, mission societies, and conventions or associations of churches; charitable, educational, and social welfare agencies serving the general public as well as members; and all other religious organizations, particularly those not affiliated with any church or group of churches.
Part III: The Economic War within the States: Exemption Battles and PILOTs
The book next turns to mechanisms adopted by local municipalities to offset some of the revenue lost because of exempt properties. Chapter 8 contains the results of the first nationwide study of the use of nonstatutory, negotiated payments in lieu of taxes by nonprofit organizations. The author, Pamela Leland of the YWCA in Wilmington, Delaware, used written and telephone communications with municipal finance directors and community leaders in the 73 sampled cities. The sample comprised the 50 largest cities in the United States, plus the largest city in any state not already included. Leland found that, at least in the large cities, PILOTs seem to be neither widespread nor growing rapidly, as charities fear. However, she cautions, it is difficult to discern informal arrangements between local governments and charities. Moreover, the picture might be different in small college towns and other municipalities where a large nonprofit institution owns a disproportionate share of property.
We next turn to the municipal perspective, focusing on cities in the Northeast. In chapter 9, David B. Glancey, chair of Philadelphia's Board of Revision of Taxes, describes the Philadelphia Voluntary Contribution Program, a 1994 initiative of the mayor's office. From the city's viewpoint, this program was a cautious response to a national phenomenon: the dramatic expansion and changing character of the tax-exempt nonprofit sector. The program recognized that while nonprofits play a vital role in Philadelphia's economy, they also increase service demands on the city's already overburdened local tax base. The Voluntary Contribution Program, which was officially terminated at the end of 1999, attempted to encourage tax-exempt nonprofit organizations to return to the city a limited measure of what the city provided them in essential tax-supported services.
While this arrangement worked over its initial five-year term, by renewal time the economic picture for both the city and the nonprofit sector had changed, with nonprofit hospitals coming under particular stress. Meanwhile, in 1997, the Pennsylvania legislature had adopted a statute designed to reaffirm charity exemption, while encouraging charities to enter into voluntary agreements with municipalities. As a result, Philadelphia—effectively waiving its share of the voluntary payments in favor of the school district—offered to reduce by 50 percent the annual contributions requested of health care institutions, and will consider individual hardship cases. Cash renewals have fallen from $5 million to $800,000 (with service levels remaining constant).
In chapter 10, Nicholas R. Carbone, director of the Connecticut Institute for Municipal Studies, and Evelyn Brody provide a case study of Hartford, Connecticut, and explain the development of an innovative state-level solution. The leader of the Hartford City Council in the 1970s, Carbone initiated the expansion of Connecticut's PILOT program to cover nonprofit hospitals and universities. The state had already been compensating municipalities for the presence of state-owned exempt property, but since 1978 it has paid PILOTs for these private parcels as well. Over the years, the legislature has been increasing the rate at which the PILOTs are paid; because of recent budget surpluses, the state now pays 77 percent of the tax that would otherwise be paid by exempt nonprofit hospitals and universities. (This is, as in the past, a higher rate than that paid on state-owned property.) While the state payments, as increased, have gone a long way to smoothing town-gown relations, the PILOT program depends on annual legislative appropriations, and nothing guarantees that Connecticut will continue to spend any surplus this way. Connecticut's pioneering policy of paying PILOTs for nonprofit hospitals and schools has been copied only (and not to the same degree) by neighboring Rhode Island.
Chapter 10 also describes additional approaches adopted by Hartford to make up for tax revenues lost because of local charities. First, the city has engaged in ad hoc negotiations with churches, in the 1970s to obtain the use of church premises for senior services, and more recently to recruit parishioners as volunteer tutors. Second, and controversially, Hartford has placed a moratorium on zoning approvals for new social service charities in the central business district, which it is trying to "gentrify." Third, Trinity College has joined a growing trend by center-city nonprofit property owners—notably universities—to pour funds into local community development. This represents a reversal of the traditional "siege mentality" of universities located in undesirable neighborhoods, and reflects, no doubt, some self-interest on the part of schools competing to attract young students (Grunwald 1999).
Chapter 11, by historian Peter Dobkin Hall, Hauser lecturer in public policy at Harvard University's John F. Kennedy School, explores the contingent character of tax exemptions through a historical case study of New Haven, Connecticut. The fiscal dilemmas of this well-studied city represent those of municipalities in which commercial and manufacturing enterprises have been replaced by a nonprofit service economy. The chapter considers the evolving use of tax exemptions in five periods: 1750 to 1819, 1820 to 1879, 1880 to 1940, 1940 to 1960, and 1960 to the present. The discussion examines how the tax treatment in each period was shaped by the following "contingencies": (1) the scope, scale and role of governments; (2) recognized boundaries between public and private actions, and the legal capacity of entities; (3) organizational populations and ecologies; (4) the public's sensitivity to taxes, corporate citizenship, and accountability; (5) the distribution of benefits provided by various levels of government and by exempt entities; and (6) social differentiation and the role of exempt entities.
Part IV: Exploring Future Directions
The book concludes with two chapters that speculate on future possible approaches to property-tax exemption for charities.
In chapter 12, Woods Bowman, associate professor of economics at DePaul University's Public Services Graduate Program, explores how financial relief to municipalities might be achieved short of total repeal of the charity exemption. As an alternative to PILOTs, he proposes a one-time charge on exempt property, analogous to oft-utilized development impact fees, that would be assessed when property is taken off the rolls. The charge would be equal to the assessed value removed, which he demonstrates equals the net economic impact on the host community. He likens the impact of exemption to an "exit tax" on capital leaving the community.
In addition, Bowman urges that policymakers design such a community-impact compensation program to include government-owned property, which is worth two-and-a-half times as much as charitable property; after all, a great deal of public property is dedicated to charitable purposes (e.g., universities, community colleges, and hospitals). Finally, he explores the desirability of instead allowing charities to provide negotiated services in lieu of taxes, which could be a superior solution for both sides.
In our concluding chapter, Robert T. Grimm, Jr., of the Indiana University Center on Philanthropy, looks at the ramifications of proposals to narrow the types of owners entitled to exemption. In chapter 13, he explores the justifications and impact of narrowing the property-tax exemption to charities that produce a significant amount of public/collective goods (instead of including self-supporting commercial charities that often produce mostly private goods). His study applies nuanced models for determining a nonprofit's production of public goods to five major nonprofit industry groups in Indianapolis: arts, culture, and humanities; education; environment and animal-related; health; human services; and public benefit. Grimm also addresses commercial nonprofits' particular issues. Most notably—and not surprisingly, to those who have followed the trend in charity financing—Grimm finds that if a reasonably high level of support from donations (such as 50 percent, or even 30 percent) were imposed as a condition to property-tax exemption, few of the best-known charities would remain exempt.
Commentaries
To supplement the issues and perspectives set out in the main chapters, at the end of this volume we present commentaries from Daniel Salomone, David Sjoquist, Edward Zelinsky, Peter Swords, and Richard Pomp.
Daniel Salomone, executive director of the Minnesota Taxpayers Association, uses examples from Minnesota to illustrate the difficulties of applying the property-tax law. The lack of an accepted rationale for the tax, not to mention the exemptions, raises problematic practical issues as well as political disagreements over fairness, efficiency, and administrability. The lesson he draws is, essentially, that in the clash between charities and municipalities, "charities win"—although, as he comments, the charity exemption means little when so many other types of exemption exist. As part of a larger tax reform proposal, the administration of Minnesota governor Jesse Ventura recently proposed rationalizing the ad hoc and uneven use of PILOTs by adopting a standardized, statewide formula for measuring the cost of basic local services, and permitting municipalities to choose to assess these fees on nonprofit property. However, political pressures forced the administration to abandon this aspect of the governor's plan, illustrating the difficulty of achieving reform.
David Sjoquist, professor in the School of Policy Studies at Georgia State University, applies a public-choice framework to the chapters in part III to explain how municipalities, charities, and their supporters will behave. He identifies specific factors, in addition to the general free-riding tendencies and other collective problems of organizing a lobbying effort, that affect behavior. Demands for taxation or PILOTs, he finds, depend on the amount of tax involved and its importance relative to other revenue sources; the level of existing fiscal stress and the need for the next dollar; the degree to which local residents benefit from the nonprofits' activities; the lobbying strength of those served by or contributing to the nonprofits; the nature of nonprofit services, and whether they are available from for-profit providers; the distribution of nonprofits throughout the state; and the lobbying power of those adversely affected. Factors influencing nonprofit resistance to taxation or PILOTs include the amount of tax or PILOTs at issue; the extent to which local nonprofits own rather than rent their property; fears of the slippery slope, and the effects on other favored treatments from an erosion of exemption; the public relations value of being seen as contributing to the community; and the fear of worse treatment in the future.
Edward A. Zelinsky, professor of law at Yeshiva University's Benjamin N. Cardozo School of Law, puts the exemption for charities in the context of the larger property-tax system designed to accommodate a variety of pressures. He describes such devices as exemptions, caps, circuit breakers, income-tax credits, state transfer payments to municipalities, and PILOTs, all of which operate to ameliorate the full tax theoretically imposed on property owned by farmers, the elderly, homeowners, and others. As a practical result, political opposition to the property tax has been blunted, thus "[immunizing] the tax from outright abolition."
Peter Swords, executive director of the New York Coordinating Committee, expands on the base-defining theory of exemption. As a matter of tax policy, the tax base properly comprises only money and wealth used and available for private, personal ends, such as residences and industrial and commercial property. (By "tax base" he means amounts above the costs of compensating the government for services provided to property, including exempt property.) However, at some point, tax policy merges with democratic theory: When should people be taxed on income or wealth transferred to privately controlled charities? In the end, Swords concludes, this is a moral choice: Upon whom and what is it fair to lay the burden of tax?
Richard Pomp, professor of law at the University of Connecticut Law School, begins by celebrating the political skills of author Nicholas Carbone. Pomp served as academic advisor in the efforts led by Carbone (described in chapter 10) to address the fiscal pain caused by the expansion of exemptions from the Hartford tax base. As a scholar of state and local taxation, Pomp explains the virtues of statutory clarity, vigilant enforcement, and an examination of the scope of existing exemptions. He believes exemptions should be narrowed unless the state is willing to make compensating payments, as he helped achieve in Connecticut. Moreover, Pomp favors replacing the property-tax exemption with explicit cash subsidies, in order to avoid the "irrationalities" that result under current law. Short of such a radical reconfiguration, in order to allow municipalities to protect their tax base when nonprofits acquire taxable property, Pomp proposes an array of legislative options: case-by-case local denial of exemption; phase-ins and phase-outs of exemption; acreage and dollar limits; and user charges.
Future Research
While nominally focused on a narrow issue, this book serves more broadly as a case study of many of the political, economic, and legal challenges facing the nonprofit sector today. Indeed, we hope that this book will stimulate nonprofit researchers to expand the scope of their inquiries and draw formerly uninvolved researchers into the conversation. Private philanthropy can exist uneasily in democratic society, raising basic questions about how wealth is earned and allocated. The increasingly complex regulatory and funding ties between governments and nonprofit organizations blur the sectoral boundaries (see Boris and Steuerle, eds., 1999; Salamon 1995). Nor can nonprofit entities be easily distinguished from for-profit or public entities on the basis of activities, since many groups tend to be involved in the same activities, from hospital care and nursing homes to education and certain forms of entertainment (Weisbrod, ed., 1998). Politically granted outcomes, including special legal treatment for nonprofit organizations under property-tax laws, ultimately depend on social legitimacy.
Acknowledgments
This volume grew out of a panel of papers that I presented with Woods Bowman and Robert Grimm on "Property-Tax Exemptions and Payments in Lieu of Taxes" at the 26th Annual Conference of the Association for Research on Nonprofit Organizations and Voluntary Action (in Indianapolis, Indiana, December 6, 1997). Urban Institute Senior Scholar C. Eugene Steuerle, who chaired that panel, encouraged me to develop the topic into this collection. I am also grateful for the support of the Urban Institute's Center on Nonprofits and Philanthropy, and the enthusiasm of its director, Elizabeth Boris. This book is made possible by additional project funding from the Lincoln Institute of Land Policy. The authors appreciate comments and suggestions from attendees at a June 2000, book conference in Washington, D.C., especially from our discussants: David Brunori, Daniel Salomone, Richard Steinberg, John H. Bowman, Jay Rotz, David A. Brennen, Richard D. Pomp, David Sjoquist, Jeffrey Chapman, Bill Stafford, and Ingrid Stafford. Finally, all participants in this project appreciate the organizational skills of the Urban Institute Center on Nonprofits and Philanthropy's Sarah Wilson.
Notes
1. While this volume does not deal explicitly with the sales and use tax, exemptions for charities raise similar concerns. At one 1995 conference for nonprofit organizations, "Panelists told the assembled charity and foundation representatives horror stories of soup kitchens, nursing homes, colleges, and religious organizations losing their property-tax and sales-tax exemptions and even of attempts to slap taxes on Girl Scout cookies" (Stokeld 1995, 924).
2. "Randy, governments will always find ways to collect taxes. If worse comes to worst, the IRS can just base everything on property taxes—you can't hide real estate in cyberspace" (Stephenson 1999, 841). As Vito Tanzi recently discussed, the pressures for open economies to confine their coverage to immobile factors could lead to reduced capital income taxes, and hence reduced public welfare spending (Tanzi 1995).
3. As Glenn Fisher observed, "achieving uniform taxation required a degree of centralization and professionalization of administration that conflicted with deeply held political values" (Fisher 1996, 6).
4. Indeed, it is sometimes difficult to agree even on rhetoric. At the June 2000 book conference for this volume, charity partisans were heard characterizing PILOTs (payments in lieu of taxes) as "extortion," while municipality supporters used the term "contributions."
5. A bill exempting the Federation's property was signed by the governor on March 24, 2001, effective July 1, 2001 (HB 72, incorporated into HB 2128), shortly after the opening of the Federation's $20 million headquarters building (Rein 2001).
Meanwhile, in Massachusetts, Harvard University came under withering local criticism after it acquired a $162 million office complex called the Arsenal, a Superfund site cleaned up with the help of $100 million in taxpayer money (Kocian 2001). The town, fearing that Harvard will convert the property from taxable to exempt purposes (such as dorms or classrooms), "angrily rejected Harvard's first draft payment-in-lieu-of-taxes offer" (ibid.). Increasing the pressure on Harvard to negotiate is a state bill, currently in committee, that would permit a municipality to require a nonprofit to pay taxes on any new property that accounts for at least 1 percent of its tax category (ibid.).
6. See generally O'Sullivan, Sexton, and Sheffrin (1995).
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