By John McGee, Principal at McGee Consulting
The recent reports in the Chronicle of Philanthropy on the new Minnesota law defining who might qualify for state and/or local tax exemption reminded me of the various steps the state legislature of Pennsylvania has taken over the years. Twenty-five years ago Pennsylvania began looking at ways to involve the non-profit community in supporting payment for public services that they consumed. The state government made a two-pronged effort to achieve this.
The first, which still exists in various communities throughout the United States, was PILOT (Payment In Lieu of Taxes). The second was a litmus tax for granting non-profit status for state and local purposes to organizations.
PILOT was predicated on the idea that nonprofit organizations, who are exempt from property taxes, consume services that are funded through the property tax. Therefore, they should voluntarily support the municipalities whose services they consume by making a payment in lieu of a property tax assessment. But what is the value of tax-exempt property and how is it determined? The answers to these questions and other related ones were all over the map, according to a 2006 study conducted by the Chronicle of Philanthropy. So the idea of PILOT can be very hard to apply when one does not have valuation criteria to even request, let alone expect, such a donation. Passing legislation is one way to compel compliance or cooperation with the PILOT concept.
The second approach was driven by an attempt to define what a ‘public charity’ is, and then exclude those who did not meet the criteria from receiving tax exemptions. Even before the problems of applying PILOT became clear, Pennsylvania began addressing this issue. Pennsylvania was driven in part by Hosp. Utilization Project v. Commonwealth of Pennsylvania, 487 A.2d 1306 (Pa. 1985) which established a 5-pronged criteria to qualify for exemption. The standards set down by the Court continue to be litigated and legislated. The legislative battle to define what “purely a public charity” is has raged on for some time and in many states. Defining and implementing a standard across the whole Commonwealth has been, and continues to be, a challenge, as I suspect Minnesota will find.
Minnesota, like Pennsylvania, drafted and enacted legislation designed to clarify application of a court decision. In Pennsylvania’s case, the law – Act 55 of 1997 “The Institutions of Purely Public Charities Act” - continues to be discussed, and issues inside it are continuously litigated. The reason for this is not a lack of good intentions on behalf of the parties that constructed the legislation. Rather, it is the continued conflict between the need of communities to expand their sources of tax revenue and the desire (and, in many cases, the survival needs) of nonprofits not to be burdened with the taxes in question.
As pressure mounts in this poor economy to find new sources of public revenue, more states and localities will resort to either directly taxing public charities or drafting legislation that contains multi-step criteria that appears to provide safe haven for non-profit organization but that may in reality expose more of them to the potential loss of their local and state tax exemptions.
