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Brown University, PILOTS, and Tax-Exemptions

4 min readBy: I. Harry David

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 taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , 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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. 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 exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. 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.