Nonprofits Asked to Pay Voluntary Taxes

If you had the option of paying your taxes, would you choose to pay them? What if your local government asked you to make some sort of payment to help with services like police and fire protection, would you help?

There has been a growing trend of local governments asking tax-exempt organizations that own property to make voluntary Payments in Lieu of Taxes (PILOTs) as a substitute for property taxes, which nonprofits are generally exempt from paying. There are about 100 cities in 18 states that collect some type of PILOT. Boston, for example, has one of the most established PILOT programs and collected $15.7 million in 2009. Much of this amount came from universities and hospitals, although some arts and cultural organizations also paid in, including $99,400 paid by the Boston Museum of Fine Arts. According to a 2010 report by the Lincoln Institute of Land Policy that researched the PILOTs in Boston and around the country, there are some major issues with these efforts. For example, the report found that “PILOTs are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits. In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation.”

Another study done in Minnesota – looking at how PILOTs would affect the state – found that PILOTs would only work in a few cities, as many nonprofits don’t own property. However, some Minnesota cities do charge fees to nonprofits to help cover city services they use – Minneapolis has a street lighting fee and St. Paul charges a right-of-way assessment fee for snow removal and road maintenance.

At a time when local governments are struggling to pay for basic services like police and fire departments, I can understand how they might look to programs like PILOTs to find ways to fill in budget gaps. However, this would likely only work for a few larger organizations that own property. And it raises the question of equality in determining who should pay and how much.

I fear that by infringing on nonprofits’ tax exemptions, people will get the wrong perception about why nonprofits deserve certain tax breaks and start demanding more from them, even though they save the community money by providing services that the local government would otherwise provide. This was the case in Peterborough, N.H., when the Peterborough Board of Selectmen challenged the tax-exempt status of The MacDowell Colony – an arts organization that provides an arts-in-residence program on its 450-acre property – when the nonprofit refused to provide a PILOT. The MacDowell Colony took the case before the New Hampshire Supreme Court and won, however perceptions about the organization’s benefits were likely hurt in the process.

Even if nonprofits are willing and have the capacity to help out their local governments by providing PILOTs, they face the risk that the government will put pressure on them to give larger amounts – currently happening with Boston’s PILOT program. Many nonprofits are already stretched thin and still providing great community benefits, so how much more can we really ask of them?

Boston targets non-profits to help fill budget hole
Lincoln Institute of Land Policy Report
Cities try to talk tax-exempt groups into paying voluntarily