Tax Battles

At a recent rally in front of Baltimore City Hall, activists sang, chanted, and otherwise voiced their view that the city’s major nonprofit institutions weren’t “paying their fair share” of property taxes.

The gathering came as the City Council explored renegotiating an agreement under which 14 nonprofit universities and hospital systems voluntarily pay the city a total of $6 million per year. Those payments are in lieu of the estimated $120 million they would owe if they were not exempt from taxes on their real estate holdings.

The voluntary agreement doesn’t expire until 2026. But with state lawmakers considering a plan to allocate $4 billion in new school spending in Maryland by 2030—including $329 million from the city of Baltimore—leaders in that city are eyeing nonprofits as a potential source of additional revenue. And they are not alone. Other cities, under various fiscal pressures, are also seeking to collect more revenue from payments in lieu of taxes (PILOTs), a tool used broadly in the Northeast and Midwest.

In Boston, home to the largest and most lucrative PILOT program in the country, incoming City Council President Kim Janey used her inaugural address to announce the formation of a committee that will reconsider the terms of the city’s decade-old PILOT guidelines. And newly elected New Haven, Connecticut, Mayor Justin Elicker campaigned on the promise of asking Yale University to increase its annual contributions from $11.5 million to $50 million on property worth roughly $6.6 billion within the city limits—a nearly fivefold increase, but still a fraction of the taxes a non-exempt property owner would owe. New Haven, which has one of the highest levels of tax-exempt property in Connecticut, has long struggled with finances and is facing a $50 million budget gap.

“I will be having very lively conversations with the university, because I think that the vast majority of New Haven residents feel like Yale can be doing much more to contribute to the city,” Elicker said upon taking office in January.

The relationship between nonprofits and cities is complex and occasionally contentious. Colleges, hospitals, and other organizations provide valuable services and benefits at little or no cost to cities, from health care to student housing. They are also often major economic engines. To acknowledge the fact that they rely on city services and infrastructure, many agree to make these voluntary payments. While it can be tempting to ask for more, experts caution against bringing nonprofits back to the table too frequently or too soon after an agreement has been reached.

“Cities should not be trying to renegotiate PILOTs on a regular basis,” says Adam Langley, associate director of tax policy and data initiatives at the Lincoln Institute of Land Policy. “It’s an issue of credibility and trust between the local governments and nonprofits.”

Langley cowrote a Policy Focus Report and Policy Brief on PILOTs with Lincoln Institute Resident Fellow Daphne Kenyon. The two say the long-term nature of most PILOT agreements, which typically cover a span of five to thirty years, helps provide a predictable revenue stream for cities and a known budget number for nonprofits. But there are some cases when it makes sense to revisit PILOTs before the specified renewal date. In 2011, for example, Providence, Rhode Island, was facing a $110 million budget deficit and possible bankruptcy. After Mayor Angel Taveras raised taxes, closed some public schools, reworked labor contracts, and suspended cost of living adjustments for public pensioners, he successfully negotiated PILOTs worth an additional $48 million over 11 years from the city’s seven largest nonprofits. “Everyone was taking a hit,” says Kenyon. “So within that context, revisiting a multiyear agreement would be more sensible.”

In Boston, the urge to revisit the current agreement is dictated less by a crisis and more by concerns about the role of “community benefits” in the funding formula. The city’s PILOT model asks nonprofits that own property worth more than $15 million to pay 25 percent of what they would have paid in real estate taxes. But it allows them to cover up to 50 percent of that payment with services that directly benefit residents of the city, such as scholarships, cultural events, preventive medical care, and the development of safe, affordable housing.

While giving credit for community benefits is considered a best practice because it acknowledges that nonprofits provide services that would otherwise not exist or would come out of city budgets, it’s also a primary target of Janey’s inquiry. “Some of our nonprofit partners use ‘community benefits’ in a loose way,” she recently told reporters.

Even if cities negotiate new agreements, there is no guarantee that nonprofits will pay. In fiscal year 2019, Boston requested a total of $109.1 million from nonprofits including schools, cultural institutions, and hospitals but received only $86.7 million—$34.2 million in cash and $52.5 million in community benefits. (In the first year after the guidelines were enacted, nonprofits contributed $21.9 million in cash and $21.9 million in community benefits.)

The difference in the amounts requested and received has to do with the voluntary nature of the payments. “This is not a tax assessment,” says David Thompson, vice president of public policy for the National Council of Nonprofits. “It’s not legally or constitutionally required. This is an ask.”

For her part, Janey sees the shortfall in collections as another reason to reexamine the structure of the program. “We’re leaving millions of dollars on the table that could be invested in our schools and housing and our roads,” she has said. “But we also need [local nonprofits] to do their fair share and contribute their full amount in terms of the PILOT.”

Kenyon and Langley suggest that it’s valid to ask whether the benefits counted as contributions are actually ones the community wants and needs. They also say a decade is a reasonable amount of time to go back and assess a PILOT program. But the process works best, they say, when officials approach it in a collaborative spirit.

“Public shaming is sometimes used to try to compel nonprofits to make contributions,” says Langley. “I don’t see a lot of evidence that’s an effective strategy.”

Instead, they recommend communicating respectfully, justifying the amount of a requested payment, and, when possible, earmarking PILOTS for public services consistent with a nonprofit’s mission.

Thompson agrees. He suggests officials approach nonprofits as partners and ask for contributions related to specific budget needs that directly affect the organizations. For example, an institution located in a high crime area might help pay for an increased police presence in the city. Or a city might put PILOT payments from a university toward improvements to public parks located near campus, as happened in Worcester, Mass.

“Nonprofits are problem solvers in our communities,” Thompson says. “It helps if you come with an approach of, ‘Can you help us? We propose increasing spending, but we also encourage you to solve this with a mission-based activity.’”

Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center. 

Photograph: Baltimore is one of several cities seeking higher contributions from tax-exempt nonprofits in the face of fiscal pressures. Credit: Opacity via Flickr CC BY 2.0.