Tax Foundation urges reforms after ‘arbitrary’ Brown-Prov. deal

During the long months Providence and Brown University spent discussing money, city officials refused to break out exactly how much cash they wanted from each of Providence’s seven tax-exempts to reach their $7.1 million goal. The mayor said on Newsmakers this weekend he doesn’t like to negotiate in public.

That, according to The Tax Foundation’s I. Harry David, is precisely the problem with these sorts of agreements.

Citing a much-discussed 2010 Lincoln Institute of Land Policy study [pdf], David warns that payment-in-lieu-of-taxes (PILOT) agreements “are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.” He continues:

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax. … Viewed either way, the payment is in an arbitrary amount.

The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt.

As a Tax Foundation paper noted in 2005, “Most 501(c)3 charities … are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods.” Locally, both Brown and the Lifespan hospital group are both classified as 501(c)3 charities by the IRS.

David goes on to suggest some possible changes lawmakers could make to rationalize the way they structure these organizations’ contributions to government revenue. They could remove the tax exemption for charities altogether, or at least define “charity” more narrowly.

Alternatively, “if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard,” David suggests. That echoes the Lincoln Institute, which suggested cities with a significant amount of tax-exempt property (like Providence) should have a systematic, uniform PILOT program.

Boston, which has one of the oldest and most lucrative PILOT programs in the nation, formed a PILOT Task Force that proposed a new voluntary program in 2010. Here’s how the Land Institute summarized it:

Members of Boston’s PILOT Task Force have established a 25% standard, whereby the city would seek PILOTs equal to 25% of the property taxes that would be owed if the nonprofits’ properties were fully taxable. This goal was set “since approximately 25% of the City’s budget is allocated for core City services such as police protection, fire protection, and public works—services consumed by tax-exempt institutions” (City of Boston 2009, 26).

The Boston task force also said nonprofits only be included in the program if they owned at least $15 million in assessed property value. The city assessing department “seamlessly implemented all of the recommendations” with the 40 affected; law professor Eric Lustig details the aftermath in this New England Law Review article.

• Related: Taveras sees deal soon to get city cash from another hospital (May 11)

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