Wednesday, January 6, 2010

Debate on PILOTS, the sequel

OK Darryll.

I agree completely that Pittsburgh would engage in much "wailing and gnashing of teeth" if Carnegie Mellon threatened to pull out of the city.  And I agree that an institution like Carnegie Mellon is far better for the Pittsburgh economy than a vacant lot.

But I disagree that this is relevant to the issue.  The question isn't whether Carnegie Mellon is better than an empty lot.  Virtually all for-profit businesses could make the same claim.  Carnegie Mellon and other wealthy charities whine that their presence produces more benefits than the loss of tax revenue from exemption, so they shouldn't be asked to contribute to city services.  Well, OK, but any large for-profit business could claim that their presence benefits the community more than the taxes that would be lost if they were exempt - in fact, many for-profit businesses claim just this in attempts (often successful) to get an abatement of property taxes for some period of time if they move to a particular area (and giving such abatements is almost universally condemned by economists as terribly bad economic and public policy).  

So if the test for exemption is "you're entitled to it any time your external economic benefits outweigh the loss of property tax revenues," then Microsoft should be free of property taxes, as well as any of the remaining steel mills in the Pittsburgh area.  Or put another way, how would you feel if Microsoft told Redmond, WA "Hey, guys, we're gonna move unless you exempt us from paying property taxes."  Wouldn't you say something like "Hey, Microsoft, you can't do that!  You're not entitled to get a free ride on property taxes!  That's blackmail!"?  I don't think you'd say "Well, OK, Microsoft you obviously bring more economic benefit to Redmond than the property taxes are worth, and having you there is better than having an empty lot, so you deserve an exemption."

So the question for me is simply "When can an entity legitimately claim that it deserves a government subsidy in the form of abatement of property taxes."  I'd answer that question by saying that Tiffany's clearly does NOT have such a legitimate claim, even if they bring billions to the local economy, and that a threat by Tiffany's to move unless their property taxes are abated is economic blackmail.  If one view's Carnegie Mellon as the educational equivalent of Tiffany's, then I'd give the same answer to them.

Now if you want to argue that education is a social good that must be supported by the government (including support by abating property taxes) even when the education is being "sold" at premium prices, OK.  Then you win.  (Though I'd obviously disagree that an organization selling education at premium prices necessarily has a legitimate claim to government subsidization).  But don't try to argue that Carnegie should get a property tax exemption because having them is better than having an empty lot.  That's true of virtually any for-profit business, as well.


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I was in New Orleans last week and so missed this great exchange while it was happening. Happily for me it's still here.

My view is that the exemption is the product of path-dependency: it was put in for churches, and now (like many entitlements) has entrenched defenders. There are some normative defenses, but they're weak.

The comparison to tax abatements offers (to my mind) a descriptive but not normative explanation. As you both surely know, tax abatements are largely a zero-sum game, but jurisdictions do it because the political price to officials of failing to compete are substantial. So one plausible answer is that the local exemption is normatively undesirable but politically inevitable. But this assumes that non-profits could credibly threaten to relocate; yet empirically, non-profit relocation is rare (and sometimes limited by restrictive trusts, etc.).

In any event, I think Daryll's argument is basically a Gergen-ish claim that a local subsidy for public goods produces spillovers in excess of the tax cost of the subsidy. But it's very unlikely, in my view, that that can be true of many local charities, especially considering many also produce negative externalities (e.g., social insurance produces moral hazard).

I think instead most of the benefits of subsidized charity are in improved competition for local government. I can see that being a desirable goal for local voters, if not for the local officials. I can also see why a *state* government would enact a local-property-tax exemption (as, for example, Florida and many other states heavily regulate the collection of local property taxes) as a way of producing more experimentation and competition among sub-state actors, which the state can then glom onto and expand when they see successes.
But, considering that much of the benefit is external to the local jurisdiction, the fairer way to do this would be a state-level subsidy, rather than forcing the local community to bear the cost.

Or, anyway, that's my five-minute take.


Posted by: BDg | Jan 14, 2010 11:22:45 AM

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