Cities pressure nonprofits to pay up or lose tax exemption

PILOT health care tax | Truth in Health CareCash-strapped cities are beginning to wake up to a new revenue source in their midst: the local not-for-profit hospital. Increasingly, city fathers are trying to persuade nonprofit hospitals to voluntarily kick in a percentage of the savings they get from their property tax exemption.

Emily Badger, at Co.design, explains the history behind this movement:

The idea that nonprofits shouldn’t have to pay taxes is centuries old. But it originated to protect small charitable organizations that might not have survived without the help of the state. Many of today’s nonprofits are big business, particularly universities and hospitals.

Nonprofit status makes institutions exempt from many types of taxes.  But the loss of property tax revenue, in particular, can have a debilitating effect on cities. In Hartford, CN, for example, 50 percent of city property is exempt from taxes. The same is true in Boston.

Hospitals choose to chip in to avoid legal challenge

Why, though, would a hospital contribute voluntarily? To avoid what’s happened in New Jersey. In a landmark 2015 case, a judge declared that Morristown Medical Center was operating like a for-profit enterprise and was undeserving of tax-exempt status. Since then, more than 40 New Jersey communities have filed tax appeals against local hospitals. In late July, Overlook Medical Center in Summit, NJ, became the latest to reach a settlement, agreeing to pay almost $800,000 a year until 2023, in return for keeping its nonprofit, tax-exempt status.

Cities often decide to get aggressive with a not-for-profit if it is planning an expansion. In Indiana last year, the city of Westfield began negotiations with Riverview Health after the hospital announced plans to build a new outpatient facility on prime commercial property. The negotiation succeeded. In return for city approval, Riverview agreed to make what is called “payment in lieu of taxes.”

Agreements are usually negotiated one at a time

Most payment-in-lieu-of-tax (PILOT) deals are ad hoc affairs, like the Riverview agreement. And for years, that’s the approach Boston pursued, negotiating PILOT agreements with individual nonprofits one at a time. In 2011, however, the city decided to ask every nonprofit owning property valued at more than $15 million to make standardized payments based on a formula using the assessed value of their property and the cost of providing city services to them.

Right now, most PILOT programs are concentrated in the Northeast—Philadelphia, Providence, Pittsburgh, Boston, Baltimore.  And most, including Boston’s, are struggling to keep hospital participation dependable in what is, after all, a voluntary program.

But cities do have leverage, and the situation in New Jersey proves it. It’s just a matter of time before other cities catch on to the fact that providing city services to non-taxpaying institutions isn’t the best deal in town.

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