Mission Creep: the tax-exempt sector threatens to engulf older cities
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Incentive Taxation

Mission Creep: the tax-exempt sector threatens to engulf older cities

The November 2012 Governing magazine edition provided a very rough overview of the extent of nontaxable real property in major American cities.
 
What properties are most often exempt? Generally property owned by charitable organizations (Code section 501(c)(3)), Public charities, Private foundations, Social welfare organizations (section 501(c)(4)), Agricultural/horticultural organizations (section 501(c)(5)), Labororganizations (section 501(c)(5)) and Business leagues (trade associations) (section501(c)(6)) and all lands and other property owned by the town, states and the United States Government.  
 
Remember, each individual State determines what is permanently exempt, or temporarily abated. Cities may also make these determinations when they are not clearly subject to Dillon's Rule
 
Because of Dillon, the state may impose exemption statutes that are demonstrably ruinous to localities particularly larger conurbations; the more tax exemption, the smaller the tax base. 
 
This can force cities into several less than desirable options:   
 
Raising wage or business taxes making these areas less competitive -
Increasing homeowner and for-profit business property taxes to support the lost revenue from exempt properties makes the exempt areas less competitive and attractive- 
Over-reliance on sales taxes can have a negative impact on retailand are well-known as regressive (the State of Delaware boasts of its sales-taxfree retail climate) -  
Other ways to maintain revenue in a city with much tax exemptionis to introduce or increase “Fee-for Services” such as trash collection, sewerage, orneighborhood improvement districts; often a regressive move for businesses andresidents. Finally, PILOT (Payment In Lieu Of Taxes) programs which “request” the exempt properties to pay for city services and the loss of taxable land is not a strategy with a successful track record
 
So, how can a jurisdiction realize vital revenues from exempt properties without drastically changing constitutions, laws or relationships with those exempt entities? The Center for the Study of Economics would suggest a logical and moderate implementation of the property tax that would not affect the charitable purpose of Universities, Hospitals not-for-profits,etc. 
 
For example, a University building is indeed carrying out aneducational/charitable purpose. The land underneath is not. It is a place forthe charity to stand. Its value is created by location and community-purchasedservices and infrastructure. From Harrisburg to Hartford, UrbanTools has created a tool to permit exempt properties to fulfill their purpose while at the same time contributing to the community in which it prospers.

2 Comments to Mission Creep: the tax-exempt sector threatens to engulf older cities :

Comments RSS
Mark Koerner on Sunday, November 25, 2012 2:11 PM
Josh-- I am not quite understanding what UrbanTools advocates in terms of getting non-profits to pay their fair share of taxes to local governments. It looks to me like the plan is to exempt buildings belonging to non-profits from taxes while increasing taxes on the land the non-profit buildings stand on. This seems like a massive tax increase for non-profits, one that might well push charities, educational institutions, etc., out of the central cities, or, in some cases, out of business. To take a concrete example, is UrbanTools saying that New York University (a not-for-profit organization that survives via tuition and private donations) should pay the roughly same amount of property tax on the land it is situated on as a hypothetical massive investment bank (or some other Fortune 500 corporation) that has its corporate headquarters across the street from NYU, assuming the corporation's buildings cover an equal footprint? Wouldn't this be devastating to NYU? Couldn't it force NYU to move to a suburb or an exurb to avoid such high property taxes? I think that there must be a better way than this to get NYU to pay for the costs it imposes on the City of New York.
Reply to comment
 
Danny Handelman on Saturday, February 23, 2013 9:32 AM
There will be a market pressure for the non-profits to use the land more efficiently if the non-profits contribute more in property taxes, and the existing property taxpayers will not have to contribute as much, permitting them to spend more in the local economy. If the exurbs and suburbs were to also adopt land value taxation, there would be a relatively level playing field, and exurbs and suburbs would gradually become urban (assuming that zoning and impact fees don't significantly impair infill projects). If the urban areas only adopt land value taxation, there would be an acceleration of decline of the exurbs and suburbs, as they are not economically competitive when a disproportionate amount of construction occurs in urban areas, which will also experience a decline in housing and transportation costs.

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