Cashed-strapped governments threaten tax exemptions

State and local governments across the U.S., with their constitutional mandates to balance budgets, are looking at the property tax, sales tax and any other tax exemptions that nonprofits historically have received, which could drastically increase costs of operating nonprofits at a time when demands for services are up and nonprofits’ ability to pay new taxes is zero.

For example, the city of Madison, Wis. challenged the exempt status of all property that nonprofits rent to others and the Wisconsin Department of Revenue has seriously undermined the exemption statewide for nonprofits that own low-income rental housing.

Legislation or other measures that would have taken away nonprofit property tax exemptions was also introduced this year in at least four other states, which means at least 10 percent of the states have been actively probing the viability of taxing nonprofits.

Lest nonprofits in Hawaii feel safe, in April the Honolulu City Council introduced Bill 33, a measure that would have capped nonprofit property tax exemptions at an amount “up to but not exceeding $ _______ of assessed valuation.” 

Fortunately, all the bills appear to be dead. However, said Tim Delaney, president and CEO of the National Council of Nonprofits, “We may have just hit the tipping point, because these latest activities pile onto a growing list of other attempts to add new financial burdens on nonprofits.” These include:

• A noticeable increase in Payments In Lieu Of Taxes, or PILOT, proposals
• A proposal by a North Carolina Senate Committee to reduce aspects of nonprofit sales tax refunds
• A rising number of cities, Philadelphia for example, that have proposed to take away other benefits previously provided to nonprofits, such as slightly lower water, sewage and trash removal rates.

Nonprofits have strong arguments to oppose these measures. Jon Pratt, Executive Director of the Minnesota Council of Nonprofits came up with these:

• Does it really make sense to tax one public benefit activity to pay for another public benefit activity?  We don’t pay for the police by taxing the fire department, or pay for the fire department by taxing the parks.  The public supports these activities.  And where the activities have government funding, then these dollars are coming out of one pocket and into the other – an inefficient and nonsensical paper transfer.
• The public wants their charitable contributions to go for community services, not taxes.  Taxing these organizations has the effect of discouraging giving and volunteering.  Our community needs more of what these organizations and volunteers do, not less.
• The people who have donated land or funds for building projects want to know that they have the ability to last a long time, and not be eaten up over time by local fees and charges.  This is why cemeteries are exempt from paying taxes – as a permanent legacy – and the same is true for museums, services to children and health clinics.  Unfortunately fees tend to grow over time, so this is a true “camel’s nose under the tent” problem.
• The amounts being charged end up being a small contribution to local government budget but big to the nonprofit budget – they must cut seriously to pay this bill. 
• The wage issue in reality is that nonprofit workers make less on average than business and government.
• Yes, in some ways it would be fairer if everyone was paid the same throughout the economy … but that’s not the system we have, so nonprofits must compete for employee talent in an open market, like other employers – and still tend to pay less.

Elected officials, budget directors and professional managers have slashed budgets. “Thanks to federal Recovery funding, those cuts – while ugly and painful – have not been nearly as drastic as they otherwise would have been.” Delaney said. “But this next budget cycle – and maybe even later this year – state and local governments will be forced to raise new revenues.”

To increase revenues, legislative bodies can increase taxes or take away tax exemptions. Elected office holders tend to start by trying to maintain the status quo, then reduce budgets, then cut budgets some more, and then slash budgets – until ultimately they take away tax exemptions and/or increase taxes. Nonprofits must be alert and ready to respond.