UPMC, Non-Profit PILOTs and Land Value Tax

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Lots of PA’s older core cities are struggling with non-taxable properties these days, and because of the recent Supreme Court ruling, we’re seeing more interest in trying to collect some kind of taxes from non-profits. Scranton is looking at ways to collect revenue from non-profits, and over in Allegheny County there’s been a lot of really excellent coverage of UPMC’s various PILOT agreements with municipalities who are not the city of Pittsburgh.

The point of the tax-exemption for non-profits is basically to say that the services they provide are as good as what the government might otherwise have done with that money. I have some problems with that, but if that’s what you believe, it makes sense to exempt things like salaries and benefits and programmatic expenses from taxes. It doesn’t make sense to exempt the land non-profits use. The land and buildings they use still consume local government services, and there’s a clear opportunity cost. Pittsburgh might prefer to have a high rise that contributes to the tax rolls on a downtown plot of land, instead of one of UPMC’s buildings. You don’t want the city tax code encouraging non-profits to overconsume land, which seems to be what’s happening with UPMC.

I think Joshua Vincent has the right solution to this problem:

Some towns, like New Haven Connecticut have an appropriately symbiotic relationship between town and university. Yale University pays almost $10 million a year to the city. That’s great, but it’s due to one-on-one negotiations and personal relationships between the chief executives of both entities. It’s not a system, and certainly not built for permanence. What is needed is a systemic method for nonprofit entities to be able to maintain your charitable purpose, but also pay their fair share for services like any other property owner. Allegheny County Pennsylvania, home to Pittsburgh, is wrestling with the preponderance of tax exempt properties midst traditional revenue streams being wrung dry. The County executive is doing it piecemeal, without a rationalized method for deciding what the contribution from the not for profit should be. Interestingly, the biggest non profit is called only by its initials UPMC, as if its magnitude confers the acronymic majesty of such dead stars as USX (i.e. United States Steel). There are several ways out including raising wage taxes (which will tax the butcher the Baker and the candlestick maker as well), begging, glomming on to the economic magnet effect of the nonprofit by re-purposing surrounding vacant and blighted land, or levying a charge based upon the value of the land that the tax exempt entity owns. Why? Anyone of goodwill knows that the Cleveland Clinic, Yale University, Massachusetts General Hospital etc. do good deeds.

 

The land upon which they sit only provides a platform to do that good. The land value has little to do with the charitable purpose of these nonprofits. Therefore, instead of a traditional property tax or some of to use algorithm to determine an annual contribution (that can be terminated at any time), why not collect revenue based upon land value using the same formula that the rest of the city uses. A land tax on that basis is uniform, fair and efficient, and would go a long way to letting cities get back to the business of governing, planning and providing a framework for improved lives.

 

For example, just using the exempt land values of Philadelphia, using the current property tax, an extra $45 Million could be raised; and transitional land value tax would raise just about double that. We think that beats creeping annual tax hikes on everyone else.

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7 Responses to UPMC, Non-Profit PILOTs and Land Value Tax

  1. thereisnorule6 says:

    this only works if all communities adopt this taxation or these businesses could move to where they are not taxed.

  2. Jon says:

    I don’t think so. Location decisons are more complicated than that.

  3. Karel Minor says:

    Jon, this is a old chesnut for you. All your examples are large hospitals and universities. Yale’s 2.7 BILLION dollar annual budget is hardly somehow representative of the average non-profits. In reality, most non-profits are vastly smaller, like in the million or less range. You also misstate the reasoning for the exemption. It is not that non-profits provide service cheaper, it’s that they provide services which, in thier absence, would likely fall to government. Regardless, all of these claims miss some very concrete realities and I will give you an example of one from my non-profit in the City of Reading (America’s poorest and most dangerous- woohoo!).

    Reading has been trying to get non-profits to pay property taxes voluntarily. Before we decided to decline, we did some analysis and found that we pay more now than we would if we were a for profit business or a residential property. Why? Because non-profits are staff intensive, meaning that more earned income tax is paid to the municipality than at the average for profit business. You may not be aware that the non-profit sector is the largest employment sector after government in PA. In our case, it came out to about $9,000 a year going to the city in wage taxes alone. If we were to sell our property to a for profit, such as a kennel or a vet – we are an animal shelter- the staffing levels would plummet, as would the tax revenue returned to the city via income tax, both income tax for resident employees and wages taxes for all employees. If we sold our place as a residential property, the total property tax bill would be one third what just our wage tax brings the City. Plus, the locals who we hire (and non-profits are also often a disproportionate hiring opportunity for locals) would lose their jobs since many commute to work on foot or mass transit. You’ve written enough on transit to know that’s a hard reality.

    As a charity, that extra few thousand on top of what we are already paying in wage taxes might be enough to make us consider moving to the suburbs, which have lower property and wage taxes (if any wage taxes) so we would come out ahead and the City would come out behind. Plus, the services we do provide their residents would not be replicated and would either fall to government of be abandoned, further diminishing quality of life.

    It is utterly simplistic to point to Yale and think that translates to the real world for the average charity. It’s kind of like pointing to Mitt Romney and saying that because he’s rich, a poor man should pay the same amount as him, regardless of income. OK, that doesn’t work since we know Mitt pays less than a poor man, but you get my drift.

    • phillydem says:

      Interesting read, Karel. Thanks for posting.

      The biggest problem for urban areas are the colleges and hospitals. IIRC, there have been court cases and the decisions all point to these two entities having their tax exempt status revoked IF the cases ever are heard by higher courts. That’s why colleges and hospitals are willing to negotiate and do PILOT (payment ILO taxes) programs.

      Your organization sounds like it did a good analysis. Maybe you guys should copyright the program and sell it to other small non-profits or municipalities to use in making decisions. :)

    • Jon says:

      I don’t think non-profits should pay wage taxes, just real estate taxes, and only on the land value portion, not the building.

  4. Karel Minor says:

    That assumes local governments base decisions on real data! I have a feeling that the trend of GOP dumping government responsibilities on to non-profits will continue and the big city Dem trend of trying to tax non-profits will also continue. Then we in the non-profit world will continue our trend of taking a harder business based line on our decisions by necessity and we will make location decisions based on something as simple as a few thousand dollars in tax expense which means the difference between providing a little less mission or health care coverage for our employees and move our operations to more tax friiendly environments, just like “real” businesses. Jon may be right that it’s not merely as simple as that, but it makes the decision a heck of a lot easier and that’s worse for cities than keeping us and not getting property taxes.

    PS- I don;t see much talk about finding other means of keeping the taxes and protecting non-profits. We opened a facility on private property. The municipality did not lose tax revenue and the charitable donor can take advantage of alternative tax breaks via charitable deductions by returning the lease payment as a donation. That’s one way to incentivize keeping non-profits local AND allow for some tax break- which would come from the federal government. Or….how much city owned property is sitting empty? Why aren’t those properties being given on extended no cost lease to non-profits? Wage taxes would flow to the city via a property which they obviously don’t tax. There are many other good ideas out there which would allow for the desired benefit all around without screwing anyone.

    • phillydem says:

      There probably needs to be distinctions made among non-profits. Today, colleges and hospitals are not what one thinks of as non-profit/social service organizations. UPMC, U Penn, Temple, Pitt, Penn State, etc, these are huge money-making enterprises. While they do do charity work, that’s not their focus or even a primary objective. They are big businesses and deserved to be taxed as such. While a small animal shelter might be able to pack up and move, UPMC is so big as to make a move elsewhere more trouble than its worth.

      Where I live, one of the biggest employers is a small, private, christian college. It values its ability to discriminate in hiring and student selection so much that it refuses all federal money just so it won’t have to comply with federal mandates.
      Why should a college like this be exempt from local property tax?