Nonprofits deserve a lot more scrutiny

Current tax policy may make sense, but let’s investigate

THE ISSUE ARISES every so often, like a phoenix from the flames, especially around budget time.  This year was no different.  How do we, and how should we, tax nonprofit entities? Are nonprofit entities paying their fair share? Are nonprofit entities truly nonprofit?

Before we answer that question, we need to take a closer look at the nature of tax-exempt status.  Certain corporations have nonprofit status under the Internal Revenue Code, which exempts them from paying federal income tax on their profits.  No big deal, because, as the name implies, nonprofit corporations have no profits on which to levy an income tax.  At the state level, state statutes make those corporations and other similar entities exempt from state income taxation as well.

However, under state law, many of these same nonprofit entities, organized for hospital, religious, education, scientific, literary, or charitable purposes, are exempt from taxation on their real and personal property.  Generally, property taxes are used by municipalities to cover the cost of government and to pay for such services as libraries, schools, police and fire protection, ambulance services, road repair and maintenance, traffic management, snow removal, trash removal, and a myriad of other services upon which most, if not all, residents depend on a daily basis.

By not contributing to the cost of these services, the burden of paying for them is shifted to property owners that are not tax-exempt. In essence, a senior citizen on Social Security who owns a three decker in East Boston is subsidizing the operations of what are, in many cases, entities that may own millions (if not billions) of dollars in tax-exempt assets. In the case of Boston, somewhere north of 40 percent of its real property is exempt from taxation.  Some of these properties are owned by the federal government, which cannot be taxed (Maryland v. McCullough).  Others are owned by the Commonwealth and its political subdivisions, which cannot be taxed.  The rest are owned by an amalgamation of nonprofits, some of which would appear to have the ability to pay all, or at least a portion, of the real and personal property taxes that would be due and payable but for the tax exemption.

At a time when all taxpayers are being asked to dig a little deeper, shouldn’t we re-examine the nonprofit tax-exempt paradigm, at least at the local level?  The statutes creating the tax exemption for these institutions were originally passed by the Legislature in the mid-1830s.  One would think that economic conditions, and the financial condition of nonprofits, would have changed somewhat from that point to at least merit a periodic pubic dialogue about whether they should pay taxes.

In the past few months, two proposals were introduced in the Massachusetts House of Representatives that addressed the issue.  Rep. Stephen Kulik of Williamsburg introduced a bill that would require nonprofits to pay 25 percent of the real estate taxes that they would have to pay if they were not tax exempt.

Along those same lines, Rep. Dan Nangle of Lowell introduced a bill that would require nonprofits whose top five employees are paid cumulative salaries in excess of $2.5 million per year to pay 50 percent of the tax that would be payable if they were not tax exempt. The 50 percent level would hold for three years and then drop to 25 percent per year after that.

Certainly these proposals are a good start to the discussion. But are all nonprofits created equal?  Is there a difference between Massachusetts General Hospital and a small neighborhood health center?  Or between Boston University and Fisher College?  In the case of educational institutions, buildings containing classrooms, libraries, administrative offices, and athletic facilities should probably continue to be tax exempt.  But what about dormitories, which are basically residential properties?  To further complicate matters, every time that Harvard University or Boston University or Massachusetts General Hospital acquire additional properties, those parcels are shifted from the taxable category to the non-taxable category, placing additional stress on an already inequitable system.

Should we make distinctions between nonprofits? For example, should a nonprofit hospital corporation which owns in excess of $1.7 billion in tax-exempt real property and pays seven-figure salaries to its administrators be treated the same as a nonprofit struggling just to pay its bills? Or should a college that owns $1.9 billion in tax-exempt real property be treated the same as a private high school owning $19 million in tax-exempt real property? (All of these figures were taken from the city of Boston’s FY2016 Payment in Lieu of Taxes (PILOT) program, but since the entities being assessed are exempt from taxation, assessing officials may not commit personnel and other resources to arrive at the statutory 100 percent valuation number.  Actual aggregate assessed value and total tax loss to the municipalities may be much higher.)

Meet the Author

Paul DeBole

Assistant professor of political science, Lasell University
This is a complicated problem and the proper course of action may indeed be to leave things as they are.  But until we have a full and fair series of hearings on the issue, we will continue to bury our heads in the sand and allow an antiquated and possibly unjust system to remain in place.  The taxpayers and residents of Massachusetts deserve better.

Paul L. DeBole is an assistant professor of political science at Lasell College in Newton.