Property Tax and Non-Profits

Non-profit organizations are often exempt from paying property taxes on real estate or buildings they own.  Among these exempt organizations are not-for-profit hospitals and colleges.  The National Bureau of Economic Research estimated that the aggregate value of property tax exemptions for not-for-profit hospitals alone totaled $1.7 billion in 1994[i].  Some hospitals have since expanded into outlying, suburban communities where the cost of acquiring real estate is low, putting further pressure on municipalities to fund police, fire and other required services[ii]. 

In exchange for exemption from property taxes, many not-for-profit hospitals contribute funds to what’s known as the PILOT program, or “payments in lieu of taxes.”  Non-profits make voluntary payments to the program, which is then distributed back to municipalities to help pay for public services like police and fire.  However, the PILOT program has been criticized for a lack of transparency and an “ad hoc” process for calculating the amount of the payment that results in underpayments and huge variability among similar non-profits[iii].   Ultimately, the PILOT program was found to have “negligible revenue potential” despite tax-exempt properties ranging from 12 percent of the property tax base to as high as 60 percent of the total property tax base (if state government properties are included). 

The overarching reason for property tax exemption for non-profit organizations is commonly believed to be because non-profits are “contributing to the general welfare and [are] providing social goods.[iv]”  A 2010 court case called into question whether property tax should be exempt for good intentions.  The Illinois Supreme Court upheld the denial of property tax exemption to Provena Hospitals upon finding that the total “charity care” provided by the hospital amounted to only 0.723 percent of its revenue in a given year[v].  The court found that the vast majority of the facility’s funds came through private insurance, Medicare and Medicaid, or as direct payment from the patient, a funding structure not easily distinguishable from for-profit hospitals. 

Thomas J. May, the tax assessor for Hennepin County in 2008,commented on an earlier Minnesota court case that found that a daycare facility was no longer tax-exempt because they “weren’t giving enough away.”  May noted difficulties in distinguishing non-profits from for-profits from an assessor’s view largely because “there are so many different types [of non-profits], and many of them are doing the same thing for-profit groups that aren’t exempt are doing.[vi]”  In order for the daycare facility to be considered a non-profit or a “purely public charity,” the court ruled that it would need to charge “charity” customers less and that its rates would need to be lower than its competitors.

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[i] http://www.nber.org/papers/w6435

[ii] http://ctmirror.org/2014/02/27/house-speaker-make-ct-colleges-and-hospitals-pay-property-taxes/

[iii] https://www.lincolninst.edu/pubs/dl/1853_1174_PILOTs%20PFR%20final.pdf

[iv] http://www.citylab.com/work/2012/11/how-nonprofits-can-end-becoming-drain-city-budgets/3798/

[v] http://www.citylab.com/work/2012/11/how-nonprofits-can-end-becoming-drain-city-budgets/3798/

[vi] http://www.nytimes.com/2008/05/26/us/26tax.html?pagewanted=2&_r=0&ref=smithcollege