Monday, January 3, 2011

IF PILOTS ARE NORMATIVE IS PROPERTY TAX EXEMPTION NON-NORMATIVE?

The Georgia Alliance of Community Hospitals recently issued a report attempting to head off any efforts by the Georgia legislature to tamper with or even repeal the property and or sales tax exemption provided to large nonprofits.  The report takes the bait, as it were, with regard to PILOTS and property tax exemption.  The bait, I think, is the notion that nonprofits should quantify the benefit they provide in exchange for property tax exemption.  Its bait because nonprofits can't possibly win in a cost/benefit contest.  The Chattanooga Times Free Press reports on a growing trend that is hardly good news for large, commercialized nonprofits:

All Georgia tax credits and exemptions are in the spotlight this year.The Georgia Legislature created the Special Council on Tax Reform last year and charged it with examining the tax credits and exemptions, said Sarah Beth Gehl, with the Georgia Budget and Policy Institute.  The state has hundreds of tax exemptions on the books, some decades old, that haven't been evaluated recently for effectiveness, she said.  "Often we put these credits and exemptions in place and we never look at them again," she said. "We need to go back and evaluate and examine these and make sure we're getting the return on investment. ... That doesn't mean we're going to cut all of them, but it means we're going to really hold them accountable."  Perdue spokesman Bert Brantley said the attention to exemptions represents a new level of budgetary scrutiny.

Right before Christmas, Professor Mayer authored an interesting post concerning Boston's task force on Payments in Lieu of Taxes (PILOTS).  The task force had recently issued a 130 page report.  I have not read the report yet but I am in the midst of asking myself why and whether states should exempt large land-owning nonprofits (i.e., hospitals and universities) from property taxes at all.  The question was slightly different when it first occured to me.  Why should large commercialized nonprofits be exempt from any taxes, income, property or otherwise?  I am sludging my way through a paper on the topic and have at least determined that the justification for property and income tax exemption are not necessarily the same.  The initial question was too broad because justifications for income tax exemption do not necessarily work for other exemptions and yet if the question is accurate one can comfortably stop once the case for income tax exemption is made. 

Comfortable but probably wrong.  The cost/benefit analysis relating to income and property tax exemption give dissimilar results.  And as a result, we might easily and more accurately conclude that income tax exemption is justifiable but property taxation is not.  That is where my paper is stuck.  So far I have spent a lot of time wondering whether property tax exemption is defensible using the mindset of federal income tax exemption.  For one, though, the cost of income tax exemption is so much lower.  Hence, the benefit necessary to justify income tax exemption need not be so readily apparent or quantifiable.  As costs increase, and perhaps there is a tipping point at which property taxation can no longer be justified, the benefits must increase too.  Stereotypically, nonprofit stakeholders disdain cost/benefit analysis not because they can never win but because it is difficult to quantify the intangible benefits provided by nonprofits and therefore nonprofit stakeholders who fall into the trap of cost/benefit, law and economics analysis . . . well, can never win.  Unlike me, they should not take the cost/benefit bait, thinking they can win and thereby justify property tax exemption.  The battle may be won with respect to income tax exemption and even then the losers are not satisfied that the battle should be over. 

If you take a look at the Boston PILOT task force websight you will find presentations such as this one, wherein the task force is provided with cost/benefit data regarding nonprofit hospitals and universities within their midst.  Its fair to say, probably, that the train has left the station with regard to PILOTS, a fact which worries me because once PILOTS become normative, it does not take much more to conclude that property tax exemption is no longer justifiable, at least once a nonprofit reaches a certain level of ownership or wealth.  Once PILOTS are normative, aren't property tax exemptions "non-normative?"  My problem is that I have been resisting this notion by reference to income tax exemption and the rationale usually offered to support that exemption.  Doesn't work with regard to property taxation though.  My real point, though, is that is probably too late to stop the PILOT train and so now colleges and universities have to deal with the 800 pound gorilla in the room.  Why should you be exempt from property taxes at all, especially if you meekly comply when chastised and made to pay back that which you have "stolen" from the cookie jar.  The Boston PILOT task force website is essentially a record of the sophisticated ways large cities have been able to chastise large commercialized nonprofits for their apparently unjustified tax exemption.  Brief nods are given to efforts to quantify the benefits generated by colleges and universities but one is only fooling oneself to think that nonprofits can ever win in a cost/benefit, law and economics playing field. Make no mistake, though, the cost/benefit analysis will never cut the mustard.  Large, commercialized nonprofits have already wasted too much time thinking PILOTS would remain limited to larger northeastern cities and even if they don't, nonprofits can always be show enough benefit to justify the cost of property tax exemption.  The Georgia Alliance's report is evidence of how Utopian the former notion (that PILOTS will largely be confined to big cities in the northeast); more importantly, it is an effort that cannot save property tax exemption anywhere.  The lesson to be learned from law and economics is we better think again or soon admit that property tax exemption -- once the "tipping point"  arrives -- is unjustifiable.

dkj

 

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