Tax Foundation urges reforms after ‘arbitrary’ Brown-Prov. deal

May 14th, 2012 at 5:00 am by under Nesi's Notes, On the Main Site

During the long months Providence and Brown University spent discussing money, city officials refused to break out exactly how much cash they wanted from each of Providence’s seven tax-exempts to reach their $7.1 million goal. The mayor said on Newsmakers this weekend he doesn’t like to negotiate in public.

That, according to The Tax Foundation’s I. Harry David, is precisely the problem with these sorts of agreements.

Citing a much-discussed 2010 Lincoln Institute of Land Policy study [pdf], David warns that payment-in-lieu-of-taxes (PILOT) agreements “are often secretive, haphazard, arbitrarily calculated, and an unreliable source of funds in the long-term.” He continues:

PILOT payments are less than what a nonprofit would pay if it was not tax exempt, but more than what it is obligated to pay as tax exempt organizations (i.e. zero). Because of this, PILOTs might be viewed either as a subsidy or as a tax. … Viewed either way, the payment is in an arbitrary amount.

The debate over PILOTs resembles the debate over whether to give nonprofits tax-exempt status as charitable organizations. The argument against the exemption is that it violates the benefit principle: nonprofits should pay the government for the services they use. And we have previously made the argument that giving some organizations tax-exempt status gives them a competitive advantage over similar organizations that are not tax-exempt.

As a Tax Foundation paper noted in 2005, ”Most 501(c)3 charities … are neither charitable, in the sense of relying mostly on altruistic gifts, nor providers of public goods.” Locally, both Brown and the Lifespan hospital group are both classified as 501(c)3 charities by the IRS.

David goes on to suggest some possible changes lawmakers could make to rationalize the way they structure these organizations’ contributions to government revenue. They could remove the tax exemption for charities altogether, or at least define “charity” more narrowly.

Alternatively, “if the system of tax exemptions and PILOTs remains, PILOTs could be made to conform to a uniform and transparent standard,” David suggests. That echoes the Lincoln Institute, which suggested cities with a significant amount of tax-exempt property (like Providence) should have a systematic, uniform PILOT program.

Boston, which has one of the oldest and most lucrative PILOT programs in the nation, formed a PILOT Task Force that proposed a new voluntary program in 2010. Here’s how the Land Institute summarized it:

Members of Boston’s PILOT Task Force have established a 25% standard, whereby the city would seek PILOTs equal to 25% of the property taxes that would be owed if the nonprofits’ properties were fully taxable. This goal was set “since approximately 25% of the City’s budget is allocated for core City services such as police protection, fire protection, and public works—services consumed by tax-exempt institutions” (City of Boston 2009, 26).

The Boston task force also said nonprofits only be included in the program if they owned at least $15 million in assessed property value. The city assessing department “seamlessly implemented all of the recommendations” with the 40 affected; law professor Eric Lustig details the aftermath in this New England Law Review article.

• Related: Taveras sees deal soon to get city cash from another hospital (May 11)

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5 Responses to “Tax Foundation urges reforms after ‘arbitrary’ Brown-Prov. deal”

  1. Mr. Fish says:

    Is this the same tax foundation that is funded by the Koch Brothers? The ones that fund ALEC? HMMMMMM.

  2. Jake says:

    One problem with the Boston standard is that accurate valuations of tax exempt property are harder to determine than it appears and still subject to fairly wide fluctuations. Taveras, and Cicilline before him, were wise to seek stable, predictable payment streams rather than see this source of revenue plunge in down real estate markets.

  3. Mr. John says:

    “During the long months Providence and Brown University spent discussing money, city officials refused to break out exactly how much cash they wanted from each of Providence’s seven tax-exempts to reach their $7.1 million goal. The mayor said on Newsmakers this weekend he doesn’t like to negotiate in problem.”

    Ted… You should change the last word to “public”

  4. IHeartWellstone says:

    Ted,

    I love your work but on this one I think you omitted some qualifying information about the Tax Foundation important to the integrity of this story. The Tax Foundation should have been identified as a right wing or at the very least a conservative organization. A quick google search will get you to their board of directors list which is made up of Koch Industries, Exxon Mobile, and former President Bush economic advisers. Moreover I believe the Tax Foundation contributes to ALEC. Together these two organizations are part of right wing policy nexus at the RI State House and nationally.

    The Tax Foundation was created in 1937 to fight back on FDR’s agenda (Remember Social Security and the Wagner Act were passed in 1935).

    I think the readership should know where on the ideological spectrum organizational spokespeople fall.