Taxes, Fees, and PILOTs (Payments in Lieu of Taxes)
Every state exempts some or all of the properties owned by charitable nonprofits from property taxes. However, despite a lack of legal authority to do so, some municipalities attempt to impose discriminatory taxes or fees on nonprofits, or demand so-called “voluntary” payments in lieu of taxes (PILOTs). Different jurisdictions call the assessment different terms – taxes, fees, or PILOTs – but the goal is the same, to divert nonprofit resources away from mission and into government coffers.
Why it Matters
The nonprofit community recognizes the budget challenges that state and local governments are facing; nonprofits experience them daily. Like governments, nonprofits are struggling to maintain services to their communities. In doing so, they earn their tax exemptions every day. Governments cannot impose new taxes and fees on nonprofit organizations without diminishing the impact that 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.”
Where We Stand
Charitable nonprofit organizations throughout the United States are dedicated to the public good; their work improves lives, strengthens communities and the economy, and lightens the burdens of government, taxpayers, and society as a whole. Consistent tax policies at the federal, state, and local levels are critical to the success of charitable nonprofits in pioneering and implementing solutions to community problems and aspirations. The National Council of Nonprofits is committed to preserving the tax-exempt status of organizations contributing to the well-being of their communities. In practice, this commitment means... [o]pposing the imposition of fees, payments in lieu of taxes (PILOTs), and taxes on tax-exempt organizations.
National Council of Nonprofits 2017 Public Policy Agenda
A Tale of Three Cities
Nothing reveals the challenges tax-exempt nonprofits face at the local level better than their 2011 experiences dealing with policymakers who were so desperate for money that they seized at any justification for grabbing charities’ funds without resort to consistent principles. Boston, without authority of law, demanded payments in lieu of taxes from larger nonprofits. In Chicago, the Mayor declared that while he regarded taxing nonprofits a non-starter, he nonetheless intended to require nonprofits to start paying certain fees to the city. New Orleans [4]’ Mayor rejected PILOTs and fees as unworkable and inappropriate, but called on the Louisiana Legislature to allow the city to directly tax the property of charitable nonprofits. These three Mayors proffered three contradictory rationalizations for filling their budget holes. Their shared similarity was the practical effect each scheme would have on local communities: diverting already committed and vitally needed resources away from nonprofit missions – money contributed to deliver programs and services for individuals and local communities.
Status
The following contain lists of challenges to the work of nonprofits across the US. For even more up-to-date information on taxes, fees, and PILOTs, subscribe to Nonprofit Advocacy Matters.
- Taxes
- Fees
- Payments in Lieu of Taxes (PILOTs)
Latest News
Some local governments are asking nonprofits for “voluntary” payments. While that is one alternative we must be careful that calling something “voluntary” truly means it is so, and not a de facto obligation for struggling nonprofits.
It is a generally accepted principle of public policy that when you tax a transaction or an item, users do or use less of it. Taxing nonprofits would mean we would have fewer services for people with behavioral health problems and addictions, fewer arts and cultural associations, fewer shelters for victims of domestic violence and a loss of many other services.
Taxing nonprofits will not solve municipal fiscal troubles. It will hurt our communities and the people who live in them.
The CEO of the Massachusetts Nonprofit Network, Jim Klocke, said it would oppose the bill.
“Nonprofits are doing a lot, they’re being asked to do a lot more, and resources available to them are shrinking or on the brink of shrinking,” he said, noting that several Trump administration proposals would cut funding to the nonprofit sector and reduce incentives for charitable giving.
Nonprofits also say they provide community services that reduce the burden on government, such as caring for the disadvantaged. Their tax-exempt status preserves their revenue for charitable work, they note.
For all those reasons, Klocke said, “this is the wrong time to take money away from nonprofits.”
Connecticut has become ground zero for immediate action on proposals to change the rules on tax exemption on the property owned and used by charitable nonprofits. One bill would retroactively (back to October 2016) repeal the exemption for property owned by hospitals in the state. The legislation would also allow municipalities to levy a property tax on nonprofit hospitals. Hospital leaders testified in unity against the measure, emphasizing their purpose as a safety net for communities and the need for legislative and budgetary policies that advance and not undermine their missions.
A separate measure, heard last Friday, would authorize local governments to decide whether to tax property after it changes ownership or use. A mayor and other supporters compared nonprofit property tax exemption to developers asking for a tax abatement and how negotiations must take place. The CT Community Nonprofit Alliance responded in its written and oral testimony that “this proposal would be a cataclysmic change in state policy.” The state association of nonprofits continued, “It would stop some nonprofits from expanding – put differently, it would prevent them from meeting a rising demand for life-sustaining services.”
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What Nonprofits Can Do
Find your State Association and get involved to address these and other developing issues in your state. Share Your Story of Nonprofit Impact and explain the impact that losing your tax exemption would have on your ability to meet your mission.
Additional Resources
- "From the Fault Line on Nonprofit Property-Tax Exemptions," David L. Thompson, National Council of Nonprofits Blog, February 9, 2015.
- "Bryant's Mandatory Payment Another Black Eye for State," David L. Thompson, The Valley Breeze, July 31, 2013.
- The Charitable Property-Tax Exemption and PILOTs, Urban Institute (2012)
- Letter from the Alliance for Nonprofit Excellence (Memphis, TN) regarding Payments in Lieu of Taxes and Nonprofits (2012)
- State Budget Crises: Ripping the Safety Net Held by Nonprofits, National Council of Nonprofits (2010)
