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.

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

Thanks to KABF.

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Clear Standards for Charity Care for Nonprofit Hospitals

03-11-top7-UPMC-Logo*750Little Rock    For millions there is a collective sigh of relief as 6-3 affirmation of the Affordable Care Act subsidies for low income Americans sinks in and allows us to stop pinching our arms about whether or not this is real. If there’s anything we’ve learned, it’s that the Supreme Court can “giveth,” as it did with Obamacare, and it can “taketh away,” as it did with the Presidency some years ago. More than 1200 rural hospitals, many of them nonprofits, were reportedly ecstatic at the decision since many, if not most, run deficits every year, so knowing there is going to be insurance matters hugely. Other hospitals and health insurers were also relieved.

For the more than 30 states still not operating exchanges, and in most cases not having expanded coverage for their uninsured who would be eligible for expanded Medicaid, this decision should mean that it’s time for an end to posturing and some serious business. In the meantime, the urgency of compelling tax exempt, allegedly nonprofit hospitals to provide their fair share of charity care to justify their shopping cart full of benefits in many states, is immediate.

It was initially intimidating to look more deeply at the giant University of Pittsburgh Medical Centers (UPMC) after my visit there recently because of its size and scope. Fortunately in some early window shopping, our Pittsburgh affiliate stumbled immediately on a fascinating document written by a locally prominent law firm at the request of the Alleghany solicitor on whether or not UPMC truly qualified for any sales, property, or other tax benefits based on alleged nonprofit and charitable status. The 13-page memorandum said it would be a lift given the firepower UPMC would bring to the battle, but firmly argued throughout the review that according to Pennsylvania law and court decisions they felt there was no doubt that UPMC did not meet all of the required five tests.

For a minute let’s just look at the tests, rather than at UPMC or any other hospital’s failures, because the Pennsylvania courts provide a useful guide everywhere for judging nonprofit hospitals and others.

· Advances a charitable purpose;
· Donates or renders gratuitously a substantial portion of its service;
· Benefits a substantial and indefinite class of persons who are legitimate subjects of charity;
· Relieves the government of some of its burden; and
· Operates entirely free from private profit motive.

When the modest average nationally for the provision of charity by nonprofit hospitals is 6% and hospitals are routinely failing this measure even under the most bend-over-backward liberality, we clearly have a problem. UPMC for example seems to toggle between a bit over 1% and 3% using a standard that goes way past liberality in counting things as charitable. The vast array of for profit enterprises nested in so many of these hospital systems as well as their lengthy and harsh recitation of procedures to squeeze every penny from the poor, would seem to disqualify many on the “private profit motive” count. Defining a “substantial portion” as even 6% also seems a bridge to far to stretch to define something as charitable. Seeing their service area and client base as a “substantial…class…who are legitimate subjects of charity,” would also leave many institutions lacking as they shutter inner city facilities and build grant suburban monuments to their pride and profit, rather than their mission.

Nonetheless, these five rules in Pennsylvania might be useful in setting the standards for hospitals everywhere, even if Pennsylvania hasn’t quite gotten around to enforcing their rules within their own boundaries yet.

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Please enjoy Compound Fracture by My Morning Jacket.  Thanks to Kabf.

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