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.