Some cities and towns burdened by diminished state aid may want to look toward agreements with non-profits, universities and other charitable organizations currently exempt from paying property taxes for an additional source of revenue, according to a new report.
A study released Tuesday by the Lincoln Institute of Land Policy found that some, but not all, communities could find an untapped revenue stream in PILOT programs, or payment-in-lieu-of taxes, to help pay for public services that have been stretched thin during the recession.
The institute predicted that interest in PILOTs will likely grow as municipalities seek creative ways to find additional revenue to support services like police and schools, but urged leaders to collaborate with non-profits for “greater consistency and transparency” in these programs.
The agreements, which charge tax-exempt universities, non-profits and other charitable organizations a fee, have been found in some cities, including Boston, to be an important revenue stream, albeit much smaller than if those institutions were to pay taxes on their property value.
The Massachusetts Department of Revenue conducted a survey in fiscal 2003 that found that tax-exempt charitable and educations institutions owned property worth $22 billion across Massachusetts, or 3 percent of the state’s total property value.
The payments made in these programs are voluntary and typically amount to only a fraction of what the institutions would provide if they paid property taxes. They constitute a very small percentage of overall revenues collected by municipalities, according to the report, but could still be a resource for some communities in the future.
“PILOTs can provide crucial revenue for certain municipalities, and are one way to make nonprofits pay for the public services they consume,” he report’s authors, Daphne A. Kenyon and Adam H. Langley, said in a statement. “However, PILOTs are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits. In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly, and unproductive litigation.”
The survey, titled “Payments in Lieu of Taxes: Balancing Municipal and Nonprofit Interests,” amounted to a comprehensive look at PILOT programs nationwide and where they have or have not worked for communities.
PILOTS are used more heavily in Massachusetts, which has a thick network of non-profits, than in any of the 18 states where similar agreements can be found, according to the report, with over 80 municipalities in the Bay State employing some type of PILOT agreement with a non-profit.
Large cities pursuing systematic PILOT programs include Boston, Philadelphia, Baltimore and Pittsburgh.
The cities of Boston and Philadelphia have the two largest estimated values of tax-exempt properties owned by non-profits as a percent of total property value, according to the report. The Boston assessing department recently reported that property owned by universities and medical institutions totaled 14 percent of the total assessed value of property in the city.
In Boston, the city currently has PILOT agreements with 16 educational institutions and 12 hospitals, with the largest PILOT payments coming from Boston University, Massachusetts General Hospital, Harvard University, Brigham and Woman’s Hospital and Tufts Medical Center.
Boston University pays the city nearly $4.9 million a year in PILOT payments, about 8.5 percent of what the university would owe if it paid normal taxes on its property, according to the report. Harvard pays about $2 million annually, or 5 percent, while Massachusetts General Hospital has an agreement for $2.2 million a year, about 5.6 percent of what it could owe in property taxes.
The city collects $14.8 million a year in PILOT payments from education and medical institutions who own property worth over $12.7 billion, amounting to just 4.3 percent of the potential revenue available if that land could be taxed. Overall, the city collects $15.7 million in PILOT payments, less than 1 percent of revenues for the city budget.
In Massachusetts, the state constitution authorizes the Legislature to give charitable exemptions on property taxes, typically extended to medical facilities, educational institutions and other non-profits and charities considered to be serving the public good.
The Legislature has from time to time debated ways to make non-profits pay more for the services they consume and efforts to make non-profits pay more have faltered in the face of strong lobbying against such proposals.
In April, the House rejected a plan sponsored by Rep. Paul Kujawski (D-Webster) to tax college endowments at a 2.5 percent rate for any funds in excess of $1 billion. The tax would've hit eight big private colleges in Massachusetts with an estimated $830 million tax, Kujawski said. Kujawski had argued that large non-profit institutions needed to do more to help their communities and help the state through its budget crisis.
The report suggests that host communities typically bear a disproportionate burden because the cost of the exemption in terms of lost tax revenue borne by the municipality, but the public benefits provided by the non-profit sectors, including jobs, income taxes and workforce development, often extend to the rest of the state.
The report makes several recommendations, including tasking municipalities to determine whether they could benefit from a PILOT program. The authors said that in Minnesota a study found that the benefit would be negligible for a vast majority of municipalities because of the concentration of non-profits, large hospitals and universities in certain cities.
PILOTs generally work better for institutions that own large, valuable tracts of land in their communities, according to the report.
The report also suggests that some cities may want to approach PILOT agreements on a case-by-case basis with one or more non-profits, while other cities like Boston with strong concentrations of non-profits can benefit from a more systematic program that promotes equity in payments for all participants.
While PILOTs can be a part of the solution, the report also calls for state and local governments to consider alternatives such as state grants to local governments that host tax-exempt non-profits.