Rethinking Property Tax Exemptions

According to the Minnesota Office of the Revisor of Statutes, Statute 272.02 designates property tax exemption to 97 different uses. These uses, ranging from nursing homes to churches to non-profit organizations to schools, tend to be uses that people believe produce positive societal externalities. By allowing such uses to be exempt from paying the property tax, the state hopes to incentivize the continuation of such uses.

from Lincoln Land Institute Report

In the Providence, Rhode Island, non-profits are exempt from paying a property tax. However, with the capital city of Providence facing bankruptcy, this policy is under renewed scrutiny. Providence is home to several major tax exempt institutions-- including three hospitals and four universities. The biggest of these is Brown University. A 2010 City Council Report by the Providence Commission on Tax Exempt Institutions, shows that tax exempt institutions render 35% of the land in the city un-taxable.

Mayor of Providence, Angel Taveras, has called on these institutions to pay a combined total of 7.1 million dollars to the city. This 'Payment in Lieu of Taxes (PILOT)' is, according to a Lincoln Institute of Land Policy Report, already widely used around the country by municipalities housing many tax exempt institutions. The PILOT program is a voluntary payment from tax-exempt organization to the municipality and is often far less than the organization would have to pay if it was taxed at a normal rate.

Does the PILOT program provide enough to make up for the Providence budget shortfall? According to a Boston Globe article, if taxed at the same rate as the rest of Providence, Brown University would owe an annual 38 million dollars to Providence. In fact, while many non-profits would have trouble paying property taxes, Brown University actually has a larger operating budget than the City of Providence:

The operating budget this fiscal year in Providence — a gritty city with high unemployment that has struggled to replace its defunct manufacturing economy — is about $614 million, down 4 percent from last year. The budget of Brown — a campus of stately brick buildings in a neighborhood called College Hill — is $865.2 million for the coming fiscal year, up more than 3.2 percent. Its endowment earned an 18.5 percent return last fiscal year, growing to $2.5 billion. (Boston Globe).

Additionally, Brown University and other major tax-exempt non-profits use city resources to a greater extent than an average tax-paying citizen. But, removing tax exempt status from private educational institutions comes at a significant risk. While major institutions such as Brown University would be able to weather the blow, smaller institutions might not-- and the benefit to the community they provide might be worth the cost of their tax exemption status.

Some additional resources about the PILOT program and tax exemption status' for universities can be found HERE and HERE