Illinois continues to struggle with its budget. The state’s most recent stopgap budget expired on December 31, 2016. To perhaps break up the political logjam, Illinois senators of both political parties have begun...
- The Tax Policy Blog
- Brown University, PILOTS, and Tax-Exemptions
Brown University, PILOTS, and Tax-Exemptions
Although Brown University is a non-profit institution and is exempt from paying property taxes to the city of Providence, Rhode Island, it still makes payments of $4 million per year to the city. This week the city convinced Brown University to pay $31 million more over the next 11 years. To put this in perspective, if Brown had to pay the commercial property real estate tax, it would owe about $38 million per year. The city will raise a total of nearly $100 million by collecting these payments in lieu of taxes (PILOTs) from nine of the city's tax exempt organizations.
Generally, municipal governments exempt universities, hospitals and other nonprofits from paying property taxes. But the government is often partially compensated for lost tax revenue by collecting PILOTs either from the exempt organizations or from the state government. As for colleges and universities, a 'significant minority' pay PILOTs, according to the Lincoln Institute. In Brown's case, the state government used subtle coercion to increase these payments by considering legislation to require PILOTs from tax exempt organizations. In another example of coercion, Baltimore threatened to tax hospital and dorm beds at Johns Hopkins University if it didn't agree to a PILOT arrangement. Cities have increasingly considered turning to non-profits after the recession put a dent in their other revenue sources.
Proponents of PILOTs argue that these agreements correct two imbalances in the tax system. If nonprofits paid taxes, nonprofits with valuable land holdings pay an arbitrarily higher tax than other nonprofits. The other imbalance is that while local governments foot the bill to provide services such as policing or fire protection to universities, the benefits of those services go to university students from all over the country. The payments also satisfy governments' desire to raise revenue. One official in Syracuse worried that hospitals "gobbled up property that used to be taxable."
Although these imbalances may exist, governments should also consider the hazards of PILOT agreements. A study by the Lincoln Institute concluded that they are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.
PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax. An example where many would view the PILOT as a subsidy is New York City, where the City financed construction of Yankee Stadium with tax exempt bonds and then paid the IRS a small fraction of the taxes it would have paid if they had issued taxable bonds. With Brown, on the other hand, if you believe that universities should be tax exempt, you might view the PILOT as a tax. Viewed either way, the payment is in an arbitrary amount.
The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt. An example is that the tax code treats Harper's, Mother Jones, and some other magazines as 'charitable providers of educational materials.' If the rationale for tax exempt status is that the public has an interest in promoting education and certain other activities, one can argue that competitors of Harper's already promote these activities without the help of tax exempt status. As with PILOTs, governments' treatment of nonprofits is arbitrary.
There are a number of reforms that might mitigate concerns with whether and how to raise revenue from nonprofits. First, removing the tax exemption for charities would remove the differential treatment of similar organizations. We recommended a somewhat less dramatic change in our 2005 paper on the federal charitable deduction:
Most 501(c)(3) charities [...] are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods. This analysis suggests lawmakers should explore ways to curtail the definition of tax exempt charity, and exclude groups that are now benefiting unfairly [...].
Third, if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.
Recent Blog Posts
Related State Articles
- Lunch links: Mileage Vs. Gas Tax Experiment Begins in Colorado; Recounts Coming in Maine on Marijuana and Income Tax; Rhode Island Considers Catching Up with Neighbor States on Marijuana Legalization
- Lunch Links: Live TF Updates Tonight on Presidential Debate; Trump Plan Questioned on Whose Taxes Get Raised; IRS Stiffens Security for Online Access; Revenue Updates for North Dakota and Rhode Island
- Lunch Links: Congressman Beats State Tax Commission; Rhode Island Revelations; Paying Property Taxes with $1 Bills
- 1 of 30
- next ›