The first blog in a two-part series about an odd new city-revenue scheme. Next time: a case study of Providence, Rhode Island.

Imagine a cash-strapped city government asking a tax-exempt local college to help them with their revenue problems by voluntarily paying property taxes. It sounds absurd—but payments in lieu of taxes, or PILOTs, are gaining popularity in municipalities across the United States. The cities raise the point that certain charities—notably hospitals and educational institutions—are some of the largest landowners around, and have greater capacity to contribute to the costs of local government than food banks and homeless shelters. This leads to interesting questions about why governments offer property tax exemption at all. Are PILOTs an important reassessment of the government-charity relationship or merely a crude attempt to collect money?

Property taxes are the main source of revenue for most metro areas. The property tax is also one of the few taxes directly linked (in part) to important public services, such as water utilities and local police enforcement. Thus, it is easier to point to government services which real-estate-owning charities might be receiving but not paying for, and to draw the conclusion that this shifts the burden to other taxpayers.

Some cities have reacted by attempting to redefine their legal definition of charity, applying (or seeking court approval of) tests requiring tax-exempt organizations to benefit the local community; converting some portion of the property tax into user fees; and, increasingly, requesting payments in lieu of taxes. In the latter case, local governments ask individual or categories of charities to voluntarily pay a portion of the taxes from which they are exempt under state law.

A “voluntary” payment of taxes may sound oxymoronic, and it is. Nonprofits might make payments because they want to maintain a good relationship with local governments or see this as an extension of their charitable purpose. However, sometimes nonprofits have complained of improper tactics such as being denied permits by the government to induce their cooperation. Large nonprofits argue that the services they do provide that relieve the burden of government should be taken into account. They also complain that requests for PILOTs are often haphazard and not applied even-handedly. Finally, nonprofits may fear being treated as a source of money whenever the municipality digs itself into a deficit—a poor precedent.

The relationship between cities and their nonprofit organizations is currently being reexamined across the country, and both sides have strong arguments in their favor. For further discussion of this issue, see materials and audio from Urban Institute’s event “State and Local Budget Pressures: The Charitable Property-Tax Exemption and PILOTs.” Also, my next blog post will examine PILOTs on the ground in Providence, Rhode Island.