Government: New Fees & Taxes

New National Council Special Report: State Budgets Threaten Nonprofits

As state governments across the country grapple with severe budget deficits, many are placing extraordinary burdens on nonprofits. On March 16, the National Council of Nonprofits released a special report, State Budget Crises: Ripping the Safety Net Held by Nonprofits, documenting how states are delaying contract payments to their nonprofit partners, slashing funds for essential programs, and imposing new fees and taxes on 501(c)(3) organizations. The report encourages leaders of governments, foundations, and nonprofits to work together to address challenges posed by state budget crises.

In attempting to balance their severe budget shortages, some state and local governments have proposed taking money from nonprofits in different ways, including imposing new taxes on tax-exempt nonprofits, treating tax-exempt property as taxable, seeking new “payments in lieu of taxes” (PILOTs), and charging new fees.

Why It Matters to Nonprofits

The nonprofit community recognizes the budget challenges that state and local governments are facing; we experience them every day. Like governments, nonprofits are struggling to maintain services to their communities. In so doing, they earn their tax exemptions every day. Governments cannot impose new taxes and fees on nonprofit organizations without diminishing the impact that the nonprofits have in their communities. As a nonprofit leader in Minnesota said: "Nonprofits have tax exemption for a reason — they provide service to the community that lessens the burden on government. We are partners with government and the community. But as these additional fees and assessments get assigned, it comes out of our donated dollars and resources."

New Property, Sales, and Other Taxes

• The Illinois Supreme Court March 18, 2010 upheld the denial of property-tax exemption for Provena Covenant Medical Center because the hospital did not provide enough charity care under the state law.
• The Hawaiian House of Representatives proposed legislation to abolish the nonprofit exemption from the state's general excise (sales) tax. The Hawai'i Alliance of Nonprofit Organizations opposed the bill, explaining, "Nonprofits are able to provide these services more cost-effectively than the state, but taxing them would add tremendously to their costs, resulting in a cutback to services." The National Council shared HANO’s concerns and submitted a statement to the state legislature pointing out that the proposed bill would "only serve to further erode the social safety net at a time when it is stretched desperately thin and needed more than ever." The Legislature deferred its decision on the legislation, but reconsideration remains possible.
• There has been an effort in Honolulu to raise the minimum property tax that nonprofits pay. Even though smaller nonprofits are swept up in the provision, the public is viewing the issue through the lens that large nonprofits should pay. The Honolulu Advertiser published an editorial that was generally supportive of nonprofits but argued in favor of raising the fee on nonprofits. 
• Legislators in Kansas considered a bill to eliminate sales tax exemptions for nonprofits. The proposal was aimed at addressing the state’s budget deficit and would have raised an estimated $182 million. 

New Fees & Charges

• A division of the North Carolina General Assembly has recommended legislation allowing state agencies to withhold 2% of state grants to nonprofits to fund accountability and oversight.
• Allegheny County Commission (Pennsylvania) voted unanimously to impose $13 million in fees on tax-exempt property. The County Executive, however, vetoed the tax, saying it was illegal under Pennsylvania law. When the county solicitor agreed that the tax was unconstitutional, the Commission backed off, although several commissioners reportedly vowed to search for other ways to get money from nonprofits.
• Even though Minnesota law recognizes that nonprofits lessen the burden of government and therefore exempts nonprofit property from taxation, Minneapolis officials adopted a "streetlight" fee on establishments to thus sweep in churches and other nonprofits.
• In Kingston (New York), local officials are looking to follow this emerging trend of charging nonprofits for local services. The garbage collection fee, unofficially dubbed "pay-as-you-throw," would raise nearly $1 million in revenue for the city. Local officials have also considered additional fees for public safety and other municipal services.

Payments in Lieu of Taxes (PILOTs)

• Palo Alto (California): City officials are seeking an exchange with Stanford University over approval of zoning permits to allow the university to rebuild Stanford Hospital and renovate and expand Lucile Packard Children's Hospital. The city is seeking $30 million dollars for infrastructure improvements in addition to the $124 million in community benefits already provided by the university.
• Boston (Massachusetts): A mayoral task force has recommended that major tax-exempt landowners voluntarily contribute to the city of up to 25% of their estimated tax liability.
• St. Louis (Missouri): The city is seeking voluntary payments from some of the city's larger nonprofit institutions.
• Albany (New York): The City Council unanimously approved an ordinance to create a Commission on Public-Private Budgetary Cooperation. The new Commission is charged with reviewing the “fiscal impact of tax-exempt entities on the city’s tax base,” and with making recommendations “regarding financial contributions to be made by tax-exempt entities in support of essential city services.”

What Nonprofits Can Do

Find your State Association and get involved to address these and other developing issues in your state. Tell your organization’s story and explain the impact that losing your tax exemption would have on your ability to meet your mission.