Wednesday, February 14, 2018
Fershee: The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy
My friend and colleague Josh Fershee recently posted this piece on SSRN, which is cross blogged at the Business Law Prof Blog under the screaming headline, “These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind!!!!!” Okay - I added the exclamation points. And the bold. Alas, there are no cat pictures or bad high school year book photos of celebrities, but there is an important discussion about impact of the existence of social enterprise entities on traditional for profit businesses engaged in social activity. The abstract:
The emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.
The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.
Wednesday, June 21, 2017
There have been some interesting developments from the states relating to their bread and butter issues of governance, fundraising, and property tax exemptions, as well as a new law in Texas relating to sermons.
With respect to governance, another round of amendments to the New York Nonprofit Revitalization Act went into effect last month (except for one provision that went into effect on January 1st of this year). The amendments clarified a number of important provisions as well as relaxing some of the stricter rules in the original Act, including those relating to related party transactions. For a helpful summary, see this National Law Review article by Pamela Landman (Cadwalader) and Paul W. Mourning (Cadwalader). One interesting nonprofit governance case under the Act is Schneiderman v. The Lutheran Care Network et al., in which New York Attorney General Eric Schneiderman's office challenged the management fees charged by The Lutheran Care Network (TLCN) to one of its affiliates, in part because TLCN had exercised its authority over the affiliate to render the members of the affiliate's board of directors identical to the members of the TLCN board. The trial court rejected the AG office's position, citing the business judgment rule and the presumption that corporate officers and directors act in good faith, regardless of the decision by TLCN to make the affiliate board's membership mirror that of the TLCN board. The March 13th opinion does not appear to be publicly available, but for coverage see the Albany Times Union stories from March 21st, January 13th, and last October 1st.
NY AG Schneiderman office's was more successful in pursuing a fundraising-related claim against the Breast Cancer Survivors Foundation, Inc. (BCSF) and its President and Founder Dr. Yulius Poplyansky. In that case, the resulting settlement closed the "shell charity" BCSF nationwide and resulted in nearly $350,000 to be paid to legitimate breast cancer organizations. The settlement is one result of a broader NY AG "Operation Bottomfeeder" initiative aimed at such charities. The Nonprofit Quarterly noticed a troubling aspect of this case, however: the person apparently behind BCSF was Mark Gelvan, who has "a long history of such activity" and who also was banned for life from such fundraising by none other than the NY AG's office 13 years ago. What additional penalties he may face is unclear, as the investigation into BCSF is apparently continuing.
Turning to property tax exemptions, last year I mentioned that the Massachusetts Supreme Court was considering what counts as sufficiently "religious" use of real property to qualify for exemption as a house of religious worship under Massachusetts law. We now have an opinion in Shrine of Our Lady of La Sallette v. Board of Assessors, and religious organizations in Massachusetts can (mostly) breath a sigh of relief. While exemption statutes are strictly construed, the court rejected a narrow reading of the statute at issue here that would have subject some supporting facilities to tax. In doing so, the court stated "we recognize that a house of religious worship is more than the chapel used for prayer and the classrooms used for religious instruction. It includes the parking lot where congregants park their vehicles, the anteroom where they greet each other and leave their coats and jackets, the parish hall where they congregate in religious fellowship after prayer services, the offices for the clergy and staff, and the storage area where the extra chairs are stored for high holy days." The court then concluded that because the welcome center and a maintenance building both had a dominant purpose connected with religious worship and instruction they were fully exempt from tax, contrary to the position of the Board of Assessors, which had limited full exemption to a church, chapels, a monastery, and a retreat center. It agreed with the Board, however, that a safe house for battered women (leased to a another nonprofit for this purpose) and a wildlife sanctuary did not meet this test (although if the proper application had been filed, they might have been exempt because their dominant purpose was charitable). More coverage: WBUR News.
Finally, one other religious organization-related state law development. Several years ago attorneys for the mayor of Houston subpoenaed the sermons of five pastors who opposed a city ordinance banning discrimination based on sexual orientation during litigation relating to an attempt to repeal the ordinance. She dropped the subpoenas in the face of nationwide criticism, and the ordinance was repealed by Houston voters in November 2015. Nevertheless, the Houston Legislature and current Texas Governor Greg Abbott felt it was important to bar Texas government officials from ever compelling the disclosure of sermons in the future, and so they enacted legislation along those lines last month.
Friday, April 7, 2017
South Carolina State Representative Bill Herbkersman has introduced legislation that will require some nonprofits to make more frequent and more detailed disclosures about their financials. The bill covers entities organized under the South Carolina Nonprofit Corporation Act (Chapter 31, Title 33). The proposed bill reads:
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 11-1-130 SO AS TO REQUIRE CERTAIN NONPROFIT CORPORATIONS THAT RECEIVE MORE THAN ONE HUNDRED DOLLARS IN PUBLIC FUNDS TO SUBMIT A QUARTERLY EXPENDITURE REPORT TO THE AWARDING JURISDICTION, AND TO PROVIDE THAT THE AWARDING JURISDICTION MUST MAKE THE REPORTS AVAILABLE TO THE PUBLIC.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Chapter 1, Title 11 of the 1976 Code is amended by adding:
"Section 11-1-130. (A) Any entity organized pursuant to Chapter 31, Title 33 that received more than one hundred dollars in public funds from a state agency or political subdivision in the previous calendar year or the current calendar year, must submit a quarterly expenditure report to the jurisdiction awarding the funds.
(B) The expenditure report must include:
(1) the amount of funds expended;
(2) the general purposes for which the funds were expended; and
(3) any other information required by the jurisdiction so as to increase the public's knowledge of the manner in which the funds are expended.
(C) The expenditure reports must be made available by the awarding state agency or political subdivision in accordance with the requirements of Chapter 4, Title 30; however, the entity receiving the funds is not subject to such disclosure provisions."
SECTION 2. This act takes effect upon approval by the Governor and applies to any public funds received thereafter and within three calendar years thereof.
Proponents claim that because South Carolina nonprofits employ ten percent of the state workforce and are the recipient of over 130 million volunteer hours, South Carolina citizens deserve a more accurate accounting of what these organizations do with their money. It is further claimed that because of inconsistent reporting requirements, it is difficult to compare and assess different organizations, thus making hold them accountable a daunting task.
David A. Brennen
Tuesday, April 4, 2017
Missouri joins the company of Illinois, Georgia, Massachusetts, Michigan, and New York on a list of states whose Governors have set up nonprofit groups to help raise money for their campaigns. These nonprofits, organized as 501(c)(4) entities, allow said organizations to avoid disclosing who their donors are, and how they spend their money. However, these organizations may not spend more than half of their money on political activities, a rule monitored by the IRS.
Some commentators believe these 501(c)(4) organizations are being formed to circumvent campaign finance laws. In an attempt to close this loop-hole, Missouri state Senator Rob Schaaf has sponsored a bill to require such groups to identify their donors. Senator Schaaf believes increased transparency in funding will be a step in the right direction, stating “I think it’s a problem that [political candidates have] this desire to keep the sources of [their] money hidden.”
Those with opposing views, such as Republican consultant Greg Keller, believe that donors have the right to have their identity kept private. Keller stated “I think [501(c)(4)s] are becoming more common, that’s what I believe happens with campaign finance law. I think that every single time you try to micromanage how people are funding political organizations, you end up with more politics, not less.”
Campaign finance is a delicate issue unlikely to be resolved in the near-term. Former Missouri GOP chairman John Hancock believes that “as long as the law allows you not to disclose who your donors are, I think you’re going to see this replicated all across the country.” Time will tell if the trend continues to spread into other states.
David A. Brennen
Monday, April 3, 2017
A recent article explains the decision of the Illinois Supreme Court to overrule the appellate court that determined a 2012 state law that exempted nonprofit hospitals from paying property taxes was unconstitutional. The law in question allows nonprofit hospitals to avoid paying property taxes if the value of their charitable service exceeds the value of the property taxes that would have been collected but-for the statute.
Although the Illinois Supreme Court remanded the case, they did not explicitly rule on the constitutionality of the law. Therefore, Illinois nonprofits should be reluctant to rejoice just yet. At issue is what is considered “charity” for a nonprofit hospital. Ultimately, the Illinois Supreme Court ruled the appellate court overstepped its authority when it ruled the constitutionality issue was separate from the rest of the case.
For the time being, nonprofit Illinois hospitals may still enjoy their tax exemption. However, the long-term ramifications of this litigation are far from certain.
David A. Brennen
Tuesday, January 24, 2017
The Supreme Court of Illinois is hearing arguments to determine the constitutionality of a 2012 law which exempts not-for-profit hospitals from paying property taxes, as long as their charity provided is at least equal to their property tax liability.
Some Illinois municipalities believe the hospitals are in fact making a profit, and should be held accountable for their fair share of property taxes. These municipalities believe the exemption may only be constitutionally granted if the property is used exclusively for charitable purposes.
The hospitals under review, however, argue that under the constitution the “exclusive use for charitable purposes” standard may be met as long as the hospital is “made available to all who need it regardless of ability to pay.”
Clearly this ruling will carry important policy implications that will impact the landscape of the health care industry. 156 of Illinois’ approximately 200 hospitals carry a not-for-profit status. Further, a report furnished for this case indicates that 47 Chicago area non-profit hospitals received property tax exemptions worth $279 million.
David A. Brennen
Thursday, January 19, 2017
Haskell Murray, one of our co-conspirators over at the Business Law Prof Blog, recently wrote about a recent post by Rick Alexander, the head of Legal Policy at B Lab (of B Corp certification fame) on Benefit Corporations. Here's Prof. Murray's post:
Over at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Rick Alexander has a post on benefit corporations. I plan to post some comments on Rick's post next week, when I have a bit more time, but for now, I will just bring our readers' attention to the post and include a small portion of his post below:
Benefit corporations dovetail with the movement to require corporations to act more sustainably. However, the sustainability movement often treats the symptom (irresponsible behavior), not the root cause—the focus on individual corporate financial performance. Proponents of corporate responsibility often emphasize “responsible” actions that increase share value, by protecting reputation or decreasing costs. Enlightened self-interest is an excellent idea, but it is not enough. As long as investment managers and corporate executives are rewarded for maximizing the share value of individual companies, they will have incentives to impose costs and risks on everyone else.
Personally, I would argue that part of the root cause is that corporate financial performance is not required to appropriate take into account societal externalities, such as pollution - the true root cause. Nothing is going to make a corporation be a good citizen if it doesn't want to do so, even if it could under a benefit corporation structure. But that's just me. I am really looking forward to Prof. Murray's thoughts, and will try to post them when I see them.
Friday, December 16, 2016
A new development in the NY bill (reported on yesterday) aimed at increasing transparency in 501(c)(3) and 501(c)(4) organizations has emerged. Citizens Union of New York has filed suit in federal court challenging the new law, claiming the regulations impede on their right of free speech. The group argues the law “’chills’ speech by forcing donors to choose between ‘exercising speech . . . and subjecting themselves to burdensome obligations and public disclosures.’” The organization further believes the disclosure requirements will dissuade donations, directly impacting their operations. Will other non-profits in New York feel the same?
David A. Brennen
Thursday, December 15, 2016
New York Governor Andrew Cuomo signed into law Bill No. A. 10742/S. 8160 in an effort to increase transparency between donations coming from 501(c)(3) organizations going to 501(c)(4) organizations.
Some of the upcoming changes for 501(c)(4) organizations include a dramatically decreased amount (decreasing from $50,000 to $15,000) of funds spent on lobbying that triggers a source of funding report, and added more details to be included in said report.
Among other things, 501(c)(3) organizations now must fill out detailed reports for gifts to 501(c)(4) organizations that are greater than $2,500.
A detailed memo from the Lawyers Alliance for New York outlines the implications for non-profit organizations and exactly what the new regulations are.
David A. Brennen
Sunday, December 11, 2016
Legislation has been pre-filed in South Carolina by State Senator Tom Davis in an attempt to double a tax credit program that helps fund disabled students’ private education. The Legislation also plans to offer an additional $25 million in tax credits for the donors whose money would allow poor children to go to private school.
Senator Davis introduced the legislation in response to a South Carolina Supreme Court case where it was declared the state was not doing enough for poor, rural students and their schools. Davis believes making private schools a realistic option for many students is a step in the right direction.
The proposal would offer more tax credits to those who donate to a nonprofit that “makes private school tuition grants to students with disabilities or those who live in poverty.” These credits would allow the donor to reduce their state taxes by up to 60 percent.
South Carolina currently offers up to $10 million in tax credits for donations helping disabled students. The expansion would expand that offering to $25 million, and grant another $25 million specifically for impoverished students.
Whatever program the state ultimately adopts, hopefully it provides students with the quality education they both require and deserve.
David A. Brennen
Wednesday, November 16, 2016
Last month Princeton University announced that just days before trial was scheduled to begin it had settled the property tax exemption lawsuit brought by several local residents. As detailed in the announcement, Princeton committed to both pay millions of dollars to Princeton homeownersover six years through a tax credit and to also make over $1 million in contributions over three years to a local nonprofit to help economically disadvantaged residents obtain housing. The total cost to Princeton will be over $18 million.
While the settlement resolves Princeton's property tax exposure for recent years, it leaves open the possibility of suits challenging the university's property tax exemption at some point in the future. It also of course does not resolve the lawsuits currently pending against 35 nonprofit hospitals brought by local officials and challenging the hospitals' exemptions from property taxes, although at least two of those hospitals have already settled the claims against them. Legislation to try to resolve those suits has apparently stalled in the New Jresey Legislature.
Tuesday, October 11, 2016
A recent article by Martin Levine highlights the struggle to define the line between providing education about issues and lobbying for specific legislative outcomes. The center of the controversy revolves around a complaint filed in 2012, when the Center for Media and Democracy and the Common Cause complained to the IRS that the American Legislative Exchange Council (ALEC) was incorrectly classified as a 501(c)(3) organization.
The ALEC characterizes itself as an organization “dedicated to advancing and promoting the Jeffersonian principles of limited government, free markets and federalism at the state level. ALEC accomplishes this mission by educating elected officials on making sound policy and providing them with a platform for collaboration with other elected officials and business leaders.”
The ALEC’s opponents, however, paint a different picture of the organization, claiming “the primary purpose of the organization is to provide a conduit for its corporate members and sponsors to lobby state legislators.”
As evidence of this lobbying, opponents of the ALEC point to a string of tax deductible donations from EXXON to the ALEC totaling over $1.7 million. The ALEC’s official position on climate change only leads to increased suspicions. According to the ALEC, there is no threat to the public from climate change or increased greenhouse gasses. In fact, the ALEC has stated that global warming is beneficial, claiming that “during the warming of the past 100 years global GDP has increased 18-fold, average life span has doubled, and per capita food supplies increased.”
While this information is certainly not determinative of foul play, it does provoke one to question the line between information providing and lobbying.
Monday, October 10, 2016
As noted last week, charities that solicit a significant amount of funds from residents of a state are required to register with the state’s attorney general, and provide some financial information. Complying with all of the nuances of the varied state requirements is burdensome, and many organizations fail to follow all of the rules.
Deciphering all of the state laws is hard enough; now add to this complexity the reality that the tens of thousands of cities, counties, and other local governments often can impose their own requirements in addition to those imposed by their states. For example, the City AND County of Los Angeles, for example, have a lengthy set of regulations for charitable solicitors that differ from those of the State of California.
Compliance with all of these city laws is expensive and enforcement spotty, but there are many dutiful organizations that spend tremendous energy on trying to comply, lest they be the next target of a suddenly-energetic Attorney General or City Solicitor.
Below the jump, I’ll profile the uniquely burdensome—and doubtlessly unconstitutional—set of charitable registration requirements that the City of Toledo, Ohio continues to implement.
Wednesday, August 10, 2016
The NY Times is running a series of articles on the influence donors, particularly large corporations, appear to have over research conducted by some prominent think tanks. As its front page articles on August 8th and August 9th detail, many researchers associated with think tanks are paid consultants or lobbyists for corporate clients, and many think tanks also receive contributions directly from corporations that have an interest in the research the think tank is conducting. Some of the think tanks identified have either admitted to lapses in oversight or adopted more stringent conflict of interest and disclosure policies, but it is not clear how widespread such admissions or changes are within the think tank community.
While in theory reaching research conclusions that are helpful to donors or clients could constitute providing prohibited private benefit on the part of the think tanks, which are generally tax-exempt under Internal Revenue Code section 501(c)(3), the connections detailed in the articles seem too tenuous to support such a claim. This is especially true given both that proving a solid link between a donation and research results is difficult and that the think tanks identified generally engage in a broad range of research projects, only a small portion of which may be tainted by donor influence. Similarly, while some think tanks then arrange for meetings or conferences centering on their research and attended by government policy makers that might constitute lobbying for federal tax purposes, most such events likely fall outside of the technical definition of lobbying and the few that may not are almost certainly within the limited amount of lobbying permitted for tax-exempt charitable organizations such as think tanks.
Nevertheless, the stories are troubling because they throw into question the ability of government policymakers to rely on such research, as noted by Senator Elizabeth Warren in a video the NY Times posted with these stories. In its regular Room for the Debate feature, the NY Times therefore invited a number of commentators to suggest possible ways to address the concerns raised in its stories. Suggestions ranged from greater transparency about possible conflicts (including a certification process), better internal procedures to ensure unbiased research results, greater skepticism regarding those results on the part of journalists and others who report or rely on those results, and a diversification of funding sources (including ensuring various governmental funding sources) to support such research. I frankly am skeptical of transparency, certification, and internal procedure improvement if only because it may be too difficult for busy lawmakers, much less journalists and other members of the public, to shift through various disclosures or to determine what certification schemes or particular think tanks are reliable. I believe the diversification of funding sources idea has more promise, particularly if there are (nonpartisan) ways for government agencies to provide such funding conditioned on accurate, unbiased results. Bottom line, this strikes me as not a narrow federal tax issue but a larger issue about how to incentivize truth telling in public policy research.
Following up on David Brennan's previous blog post and thanks to a comment from a reader, I can now report that a conference committee of the Massachusetts legislature removed the provision in a pending economic development bill that would have kept property acquired by nonprofits on the property tax rolls for four years if the property had been taxable before the nonprofit's acquisition. The provision at issue in what was then Bill H.4483 read as follows:
SECTION 127. Chapter 59 of the General Laws is hereby amended by inserting after section 2D the following section:-
2E. Any charitable organization or educational institution otherwise exempt from the payment of property taxes pursuant to section 5 of chapter 59, or any nonprofit charitable corporation or public charity otherwise exempt from the payment of property taxes, that purchases real property that was subject to taxation under said chapter 59 at the time of the purchase, shall pay property taxes on the assessed value of said property for a period of 4 years after the purchase, the amount of said property taxes paid to be phased out as follows: in the first year, 100 per cent of the property tax; in the second year, 75 per cent of the property tax; in the third year, 50 per cent of the property tax; and in the fourth year, 25 per cent of the property tax.
In the final bill, renumbered as Bill H.4569 and currently pending before the governor, this section has been deleted.
Friday, August 5, 2016
Twin Cities Pioneer Press reports that two private colleges alone in Minnesota have combined endowments of over $1.5 billion. This seems wonderful in a time where education budgets are on the chopping block. However, critics of the colleges and universities contend the institutions need to be less scrooge-like and spread the wealth to meet the financial needs of their students. “Private foundations with nonprofit status must spend five percent of their fund’s value each year under federal law.” But, this requirement does not apply to colleges and universities.
As of 2013, there were 138 educational institutions with over $500 million in endowment. A study of 67 private schools revealed that just over half of those schools did not meet the 5 percent mark required by other nonprofits. With an estimated 40 percent of college students receiving Pell grants, it is clear that there remains unmet financial needs for students.
An official from one of the colleges studied said “it’s unfair to expect colleges to spend their endowments at the same rate as charitable nonprofits. If a college’s endowment earns 7 percent but they spend 5 percent, it won’t grow fast enough to keep up with inflation.”
Time will tell if the Legislature will require colleges and universities to meet the five percent mark as their nonprofit peers must. With the rising cost of education, one can assume debate will arise sooner than later.
Thursday, August 4, 2016
A recent post on Non Profit Quarterly by Ruth McCambridge explains tensions between nonprofits in big cities (Such as D.C. in this article) and the legislature. In Washington D.C., nonprofits occupy over $10 billion worth of real estate, which could generate over $111 million per year in tax revenue. Instead, the district collects nothing from them.
Two universities in the district alone account for $48 million in uncollectable property tax revenue. The District is considering the idea of making a change requiring payments in PILOT form, but has been pondering this idea for nearly fifty years.
Undoubtedly, these institutions bring an immense amount of revenue to the District, through research, attracted talent, and general expenditures by students and faculty. However, it is not clear if these benefits outweigh the costs of not receiving property taxes.
It is estimated that currently 28 different states have municipalities that collect PILOT payments; however these payments amount to far less than what the property taxes would have been worth.
It will be interesting to see if the legislature changes the current set up. Between the federally owned tax-exempt buildings, and those occupied by nonprofits, the district is missing out on over one billion dollars of tax revenue.
Tuesday, August 2, 2016
A recent development in California leaves the status of a local non-profit blood bank in question. However, Hemopet is not your typical blood bank, it is a blood bank for animals. Founded in 1986, Hemopet was the nation’s first 501(c)(3) non-profit blood bank and quickly grew to national scale. Currently, Hemopet supplies 40% of the nation’s emergency canine blood, and saves the lives of thousands of dogs each year.
In 1965, a law was enacted that exempted blood banks from taxation. Unfortunately, animal blood banks were not around at the time. A recent audit by state officials led to the conclusion that Hemopet should not be considered tax exempt, and that they owed over $80,000 in unpaid taxes. A bill is set to be presented to the California Assembly Committee on Appropriations on August 3rd that will clear up the status of the non-profit. Dr. Jean Dodds, president and founder of Hemopet, believes that if the bill passes requiring Hemopet to pay the $80,000 they will be forced to shut down. In addition to the potential shortage on emergency canine blood, closing Hemopet would leave over 200 Greyhounds homeless and 45 people would lose their jobs.
Hemopet officials are encouraging Californians to contact the Assembly Committee on Appropriations to voice their support for the organization.
Sunday, July 31, 2016
Proposed legislation in Massachusetts would potentially shake-up the current state of their local non-profits. The proposal would make it necessary for current non-profits to begin paying property taxes, and continue to do so for the next four years (churches and houses of worship remain exempt). Currently, non-profit organizations are exempted from paying property tax, but occupy more than 13 percent of taxable property within the state. The proposal is a small part of an overall economic stimulus plan that seeks to provide over $700 million in assistance throughout the state.
Proponents of the legislation argue that aggressive land purchases by larger non-profits make it more difficult for smaller entities to find land. They also believe exempting the non-profits ultimately raises property taxes for others in the community. Opponents believe that taxing non-profits will make it necessary for them to cut back on their services provided, and could lead to employees being laid off. This could have a wide impact, as non-profit jobs are an estimated 17 percent of the state’s workforce (approximately 500,000 jobs), and pay more than $30 billion in wages.
Although both sides present compelling arguments, it is imperative for policy makers to thoroughly analyze the true impacts of their decisions. It will be interesting to see what how the good people of Massachusetts respond to this proposal.
Monday, May 23, 2016
A recent article on proposed Delaware legislation highlights the complexities and competing objectives lawmakers face when deciding if a nonprofit should be exempt from paying local property taxes. Here, the decision is whether or not to add the Milford Housing Development Corporation, EJB Inc., and Martha and Mary’s Place Inc., to the current list of 76 nonprofits in Delaware that currently enjoy being exempt from local property tax. These entities provide housing and/or drug treatment services to community members in need. While these organizations undoubtedly provide essential public services, granting these entities tax exempt status can have negative effects on other public services.
For example, the Milford Housing Development Corporation paid almost $30,000 in property taxes last year. To further add to the conundrum, almost all of those funds were appropriated to a local school district. In times of financial hardship, policy makers are faced with tough decisions and must balance different objectives in deciding where tax revenue should come from, and what that revenue should benefit. A thorough cost-benefit analysis must be undertaken to determine the full reach of granting an entity tax-exempt states, including both positive and negative effects. Granting an entity tax-exempt status, or deciding to appropriate tax funds to a particular area, almost inevitably means that another worthy entity will bear the cost.
Some municipalities try to alleviate this burden by requiring those entities that are designated tax-exempt to pay set fees to contribute back to the greater good. However, this can hinder the accomplishment of the entity’s purpose and cause due to a lack of funds.
Ultimately, it would take an army of professionals to make a “perfect” decision on who should be granted tax-exempt status, and who should bear the cost of that status. Even then, by the time a thorough analysis has been undertaken, the state or municipality will likely be facing different needs as a community. Policy makers must employ great foresight in making these tough appropriation decisions.