Nonprofits should make payments in lieu of taxes
In my hometown of Newton, the city could gain $8.25 million
WITH THE NEW YEAR, a new governor, and a new Legislature getting back to business, there are a lot of policy issues before them. I’d like to highlight legislation dealing with payments in lieu of taxation by organizations exempt from the property tax. The bill has been filed by Sen. Adam Gomez of Springfield and Rep. Erika Uyterhoeven of Somerville for a second time. It could easily be overlooked again, but really should be a priority for passage this year.
The bill would allow cities and towns, if they choose, to require an annual payment from those usually exempt from property taxation, but whose holdings are valued at $15 million or more. Such entities could be asked to make a PILOT payment that would be 25 percent of the commercial property tax that would have been due, but for it being held by an exempt organization.
Cities would be free to decide if certain nonprofit owners should be completely exempt from a PILOT payment (e.g. houses of worship) and/or whether they could offset some of the 25 percent obligation with other in-kind services—often referred to as community benefits. This law is modeled on the current PILOT scheme in Boston which uses these numerical levels and allows for a community benefit offset for half of the assessed PILOT payment. The main payers are primarily larger health care and educational institutions, the so-called meds and eds.
There has been much in the press recently, including a series of articles in the New York Times and a recent podcast that raise some fundamental questions about the grant of tax exemptions to non-profit hospitals in particular. And my colleagues at the Lown Institute have received a good deal of press coverage for their creation of a fair share spending index, suggesting that there is a wide gap at many hospitals between the value of taxes foregone and what they return in terms of real community benefits.
And whatever one’s feelings are about the idea of granting full income tax exemption to nonprofit health care and education institutions—excusing any sort of property tax payment seems much less defensible from a policy perspective. Witness the recent agreement in late 2021, where Yale University agreed to increase its annual PILOT payments substantially by making $140 million pledge over six years to provide cash to its home city of New Haven, Connecticut – acknowledging that it has an essential role to help provide financial support for city services it uses and to support future economic development.
One important strand of thinking behind the proposed state legislation is that, like other businesses, these nonprofit institutions gain real value from publicly supported police and fire protection services and as well as from services tied to streets and sanitation. Especially in larger cities, where the burden of municipal services is often substantially underwritten by ever-growing property taxes, and where large swaths of property may go untaxed when held by government or private, non-profits, PILOT programs have arisen via local government pressure, particularly in the Northeast. A 2016 report by the Lincoln Institute of Land Policy notes the trend and indicates Boston collects more PILOT revenue than any other US city.
The main challenge with the PILOT program in Boston is that some of the nonprofit hospitals and universities who are subject to making payments do so only at a level which is less than 12.5 percent of full property taxes–which would be the minimum due. So, that is why the law proposed by Gomez and Uyterhoeven, which would end the voluntary nature of the payment scheme, seems attractive to civic advocates who really want to protect current property tax payers from bearing all the burdens for raising additional city revenue.
But even for those of us who live in smaller cities and towns, this proposed law also has some incredible promise to help with local government finances.
Consider the city of Newton, where I live. I called our city assessor’s office and was provided a list of all exempt property owners whose value is $15 million or more. If I focus on only the private non-governmental-owned property that is not held by any religious house of worship or non-profit cemetery corporation, I’m left with 13 nonprofit owners who could be subject to a Newton PILOT payment if this enabling legislation passes, and the Newton City Council elects to create such a scheme.
Applying commercial property tax rates to the current property value assessments and then taking 25 percent of this amount, over $8.25 million could be generated annually from a PILOT program in Newton, with the two largest PILOT contributors being Boston College ($4.3 million as compared to its longstanding arrangement in place now for many years, which pays the city $100,000 per year for its exempt property) and Newton-Wellesley Hospital ($800,000).
The estimated total of $8.25 million is likely conservative, as many of the exempt properties are slated for re-evaluation in the next year. Of course, Newton could also choose to allow some community benefit offsets—which in theory could reduce this figure by whatever amount of offset the city were to allow.
Just this past week, the Newton Public School interim superintendent announced a $8 million budget gap for the upcoming school year, leading to a discussion of up to 50 teaching positions needing to be cut for next year. This upcoming March, a $15 million tax override goes before Newton voters, which in part is to help with this school budget challenge and some other operational costs plus capital monies to help rebuild two schools.
But if the PILOT program was already in place delivering additional revenues on an annual basis, quite likely the school budget problem and the need to further burden current property tax payers via an additional override could be much more easily managed by the city.
There are many other towns and cities where a PILOT scheme would seem to be a win-win proposition for both generating needed municipal revenues and also creating a fairer system of shared responsibility for supporting the provision of key city services. Our larger non-profits gain from these services, but have thus far avoided any payment responsibility for them.
While the proposed legislation does not force cities and towns to create PILOT schemes, it seems this common sense piece of legislation should attract many legislators from communities around the state, and hopefully could gain passage during this year.
Paul A. Hattis is a senior fellow at the Lown Institute.