Stopping the Free Ride for Nonprofits on Property Taxes

New Orleans   Talking recently about greater accountability for nonprofit hospitals with a health expert from Massachusetts, she kept bringing up PILOT programs and why they were important in funding health care expansion in her state.  PILOT in the tax world stands for “payments in lieu of taxes.”  It perked my interest to find out how prevalent such payments might be, so let’s take a look.

First, the backstory.  All of the states in these United States offer property tax exemptions of one kind or another to tax exempt nonprofits.  Nonprofit educational institutions and hospital combines dominate their specific industries.  In cities where they are important service providers and employers, their historic and institutional footprint often also makes them significant landholders.  If these property holdings were taxed in the same way that other real estate properties, either residential or commercial, are taxed, the revenues received by their home cities would be a game changer for all citizens.

All of these “payment in lieu of taxes” situations are voluntary.  Some are wrested from nonprofit operators by cities using leverage when the institutions want to build or develop on public land.  Others have been able to negotiate PILOT arrangements when nonprofits are involved in what otherwise would be classified as for-profit enterprises like running food and lodging establishments.

A working paper by several people at the Lincoln Institute for Land Policy offered the most comprehensive view.  They undertook some exhaustive research and found that “218 localities in at least 28 states since 2000” have collected such payments and “these payments are collectively worth more than $92 million per year.”  Not chicken feed, but not a cure-all either.

The Lincoln Institute also found that most of the action is in the Northeast, more specifically in Massachusetts and Pennsylvania.  They mention that if Palo Alto in California, the home of Stanford University and health system in the West were separated and Baltimore was not included in the South, then 95% of PILOT revenues are collected in the northeast.  They also were clear that the bulk of the money comes from universities rather than hospitals.  The working paper indicates that “the majority of revenue comes from just 10 organizations: Harvard University, Yale University, Stanford University, Brown University, Boston University, Massachusetts General Hospital, Dartmouth College, Brigham & Women’s Center, Massachusetts Institute of Technology, and Princeton University” in that order.  Sadly, not a lot of money goes to local entities from what the researchers found.  Where they could get the numbers, they concluded that the payments were less than 1% of tax revenues.

Given the robust competition between nonprofit and for-profit hospital chains, it was surprising to see the small potatoes most of these tax-exempt operations are providing in local revenues.  Senator Chuck Grassley (R-IA) made this point a cornerstone of his contribution to the Affordable Care Act.

Seems like a lot of cities would be well advised to make PILOT a major goal for revenue enhancement, especially given the contention of how much charity really exists in charities.


Please enjoy John Fogerty’s The Holy Grail (featuring Billy Gibbons of ZZ Top).

Thanks to KABF.