Monday, August 23, 2010

Attack of the Tax-Exemption Killers

Say it again, the economy is bad for state and local government, and legislators, council members and municipal managers are scrambling to figure out how to make up shortfalls and prevent layoffs.  This is going to be another two-part article because of the original length.  Rick Cohen, nonprofit advocate in DC brings a prespective to nonprofit issues that nobody else can quite match.  Nonprofits cannot afford to be nickeled and dimed to death.  Every penny that goes out the door in taxation and fees results in lost services.  Pass this one around.  Bunnie

Attack of the Tax-Exemption Killers
by Rick Cohen

This article is reprinted with permission from Blue Avocado, a practical fast-read magazine for community nonprofits. Subscribe free by sending an email to or at

If Congress tried to take away the tax exemption from nonprofit 501(c)(3) organizations, our sector would be united and up in arms. But instead we are besieged with hundreds of local attacks on the tax exemption from cities, counties, and states. In this article we'll briefly look at some of the attacks being mounted by financially starved local and state governments trying to get extra nickels and dimes from financially starved 501(c)(3) charities. And we'll conclude with some thoughts on how we inadvertently give ammunition to these attackers.

How many ways can you balance a governmental budget on the backs -- or finances -- of nonprofits? Nearly every week, all across the country, different levels of government devise strategies -- sometimes ingenious, occasionally pernicious -- to get tax revenue from already-strapped nonprofits. These include taking away property tax exemptions, adding employee headcount taxes, charging nonprofits "streetlight fees," and more.

Creating or hiking fees: Because governments have much greater flexibility in applying "fees" as opposed to "taxes," localities are finding ways to charge nonprofits for streetlights and anything else they can think of. In Yakima, Washington, the Yakima Health District ended the exemption of nonprofit-sponsored food booths at community fairs and church bazaars; this will yield the Health District all of $10,000 per year. And in two Minnesota cities -- Minneapolis and Rochester -- government is increasing the fees it charges nonprofits for streetlight use. In Minneapolis, this will raise an additional $104,000 for the city . . . hardly enough to balance the budget.

Taking off from charging nonprofits for streetlights, other localities are starting to charge nonprofits for police and fire services and even fire hydrants. Localities in Indiana have enacted nonprofit fees for consumption of public services such as police and fire. In Pennsylvania, State Senator Wayne Fontana has introduced legislation that would allow municipalities to charge nonprofits an "essential services" fee. In the village of Pewaukee, Wisconsin, the local government turned the local hydrant tax into a fee which then allowed them to levy the fee against otherwise tax exempt nonprofits and churches.

And think of the effort of the speaker of the New Jersey state Assembly to hit nonprofits in Camden -- only nonprofits and only in Camden -- with a $100 tax on each employee. In a devastated urban center where the nonprofit sector provides most essential services, this reads like no more than a slap at nonprofits and their hard working employees.

Attacks on the property tax exemption

Nonprofit property owners are in theory exempt from paying property taxes, at least on the properties they own and use for tax-exempt purposes. But many local governments are trying to charge nonprofits "payments in lieu of taxes" or PILOTs. Sometimes localities have a formula in mind; in other cases, they negotiate PILOTs on a case-by-case basis.

In a recent example of such attacks, a consortium of 102 nonprofit property owners in Pittsburg is negotiating with the city, to which it has already paid a $14 million lump sum payment in lieu of taxes (PILOT) for 2005 through 2007. The consortium's offer of $5.5 million for the period 2008 - 2010 has been rejected by the mayor as insufficient.

Typically, the target of PILOTS are large institutional nonprofit property owners such as hospitals and nonprofit universities. But not every nonprofit property owner is a Harvard University or Mass General Hospital. For example, a Billings, Montana nonprofit purchased a hotel to be used as a pre-release residential and treatment facility for female ex-offenders. Partly to mollify neighbors who objected to the placement of the facility and likely as a way to raise money, the mayor promised that the nonprofit would pay a $40,000 PILOT on the property.

Even more troubling for nonprofits than across-the-board PILOTS is the make-it-up-as-you-go calculation of PILOTs from community to community. Is Harvard's $2.2 million PILOT payment plus $5.2 million payment for water and sewer to Cambridge fair and proportional compared to Yale's $7.5 million to New Haven or Vanderbilt's $2.5-$3 million payment to Nashville? Shouldn't the PILOT paid by nonprofit hospitals in Pittsburgh, say, be commensurate with the PILOT charged in Lancaster, both localities in the same state, governed by the same nonprofit legislation?

Rick Cohen writes this Washington Nonprofit Insight column for every other issue of Blue Avocado.


  1. Bunnie, thanks for sharing Rick's article. It is a great reminder of the complexities and scope of issues that non-profit managers have to manage. Some amazing individuals can be found leading these organizations.

  2. I suspect that for-profit companies are also getting some of these same fees imposed on them. For those fees that are to pay for services used by the nonprofit organization, there is an argument that could justify the fees (although the negative impact will be felt). However, it was enlightening to read about non-service taxes like the "per employee" tax. I am having a more difficult time understanding those. Thanks for getting permission to repost this informative article.