Non-Profit Leadership: Taxing Non-Profits

Posted by Matthew Thomas

In the past five years, many municipalities have struggled with tax funding. Declining real estate values, the continuing decline of American manufacturing and the increased costs of pensions and other payroll-related expenses have crippled local governments across the country. This has led some local leaders to look at some hitherto unusual (if not unorthodox) approaches to funding.

Of late, it is not unusual for politicians to propose taxing non-profits that had previously been tax-exempt at a local level. This, along with the parallel issue of ending, or significantly reducing, the charitable deduction on federal income taxes, challenges the non-profit funding model and their means of operation.

For the moment, let's focus on the idea of taxing non-profits themselves.

Providence, Rhode Island, for instance, proposed imposing property taxes on non-profit universities and hospitals in order to cover part of a significant budget shortfall. While the negotiations mostly backed off to be "PILOTS" (Payments In Lieu of Taxes), the drumbeat has continued that non-profits cost city budgets significant amounts of money, and therefore, should pay property taxes. In particular, some challenge that wealthy non-profits (typically hospitals and colleges) should not receive local tax-exemptions at all. Urbana, Illinois, along with its County Board, for instance, has challenged the property-tax-exempt status of both of the hospitials in the city in the last couple of years (with some level of deafening silence toward the state university that is also property-tax exempt).

In all of this conversation, it appears that the old assumptions about the social contract between governments, charitable organizations and the general public have broken down.

  • No longer is it assumed that charitable organizations benefit the community in a complementary way to government, and therefore receive privileges, like government organizations, to be tax-exempt.
  • No longer is it assumed in all cases that charities actually benefit their communities and the public good.
  • No longer is there mutual respect between the two types of organizations that they are working together to make their communities healthy and vibrant.

Now, new assumptions seem to be in place, at least in the minds of some:

  • That churches and charities are leeches on the public services carried out in communities;
  • That churches and charities serve their own interests, not those of the public;
  • That governments are more effective at taking care of public ills than charities and churches are.

It seems now, then, that the onus is on steward leaders of the charitable and religious organizations in local communities:

  • to explain what they are doing, and how it benefits the public;
  • to actually do things that benefit the community, not just their most stalwart members;
  • to deliver upon their vision of community transformation and the amelioration of social ills to bring actual results, rather than just stay busy doing it.

Then cities might again see churches and non-profits as benefitting their communities in a way that complements the services the governments themselves provide.

Then perhaps communities will challenge the arrogance that often grows out of the powers to tax, arrest and adjudicate that has led to the apotheosis of government in the eyes of some.

Until then, charities and churches have some work cut out for them to justify what was once a norm.

Until then, the PILOTS might be the best way for a few larger non-profits to show good faith to governments that once would have supported them.

If your organization is interested in the strategic work needed to reposition in changing times, we would be interested in working with you to do so. Click the link below to continue the conversation.

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Topics: Matthew Thomas, Design Group International, Tax-Exempt, Non-Profit Leadership, Local Government