The Planning Paradox: Eds and Meds, Municipal Revenues and Power
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Incentive Taxation

The Planning Paradox: Eds and Meds, Municipal Revenues and Power

Spreading Like Kudzu

Historic reality: in 1950, Cleveland Ohio had a population of nearly 1,000,000.  It had a tax base that was compact and served all sectors of the city well.  Great fortunes were made, along with the success of the working and middle classes. From the 1900s to the 1950s, great civic amenities became possible with this wealth.  John Rockefeller was only the largest source of foundations and gifts that made Cleveland not only a gritty industrial hub, but a place where one could become a more educated, cultured and involved citizen. 

Present reality: in 2012 the population has dropped below 400,000, the last time it was that low was just after the year 1900. The loss is second only to Detroit.  The tax base has shriveled. The population living in poverty is staggering; the abandonment of land from use – and the tax rolls – is legend.  Still, these palaces of civic virtue sit unaffected by the decline of an urban core that can no longer pay for them. 

Cleveland, Pittsburgh, Philadelphia, and many more all share this scenario,

Planning for the future. Planners in Cleveland and all over the struggling cities of the United States are charged with a Herculean task to reestablish urban cores.  Planners must use as base alloys for success land and institutions that are tax exempt.  In the past, the sentence "We'll get a grant for that" was the go to strategy.  No longer. 

Tax-exempt institutions – commonly called Eds and Meds – are generally assumed to be positives are generally assumed to be positives, especially when one reads glossy Chamber of Commerce style websites and reports often prepared by the Eds and Meds themselves .  

Yet this focus on nonprofit institutions has some clear and some opaque costs.  The higher wages paid by nonprofits is often touted in cities such as Pittsburgh and Philadelphia as a rationale for not minding the ever-growing presence of nonprofits.  This presupposes the benefit of having a tax system that collects much or most revenue for the municipality from people's wages.   Taxing wages is purely  a bad idea from a geographical economics perspective.  Wages are mobile, and if one doesn't have the blessing of tax exempt status, then the employer and the employees are also on the hook for every other tax in the community. 

Not paying property tax has a clear downside.  Like Morningside Heights next to Columbia, and like West Philadelphia next to the University of Pennsylvania, taxable properties disappear as the University expands. In the case of the city like Philadelphia, which is trying to wean itself away from the fallacy of wage taxation, the alternative of property taxation appears less reliable.  

The relationship between the municipality and the tax exempt entity slips ever more into a struggle for power and influence in the community.  Who controls the community in these instances, the government elected by the citizens or nonprofits answerable at best only to a board?

Planners lead the charge to create an economic development and community environment that will lead to more "ratable's" i.e. property on the tax rolls.  A good plan will overcome the paradox between town and gown, and assist the community in raising the revenue it needs for the city services for its citizens. That is the job of the city.  That job is not always in the self-interest of the not-for-profit.  What to do? 

Some towns, like New Haven Connecticut have an appropriately symbiotic relationship between town and university.  Yale University pays almost $10 million a year to the city. That's great, but it's due to one-on-one negotiations and personal relationships between the chief executives of both entities.  It’s not a system, and certainly not built for permanence. What is needed is a systemic method for nonprofit entities to be able to maintain your charitable purpose, but also pay their fair share for services like any other property owner. Allegheny County Pennsylvania, home to Pittsburgh, is wrestling with the preponderance of tax exempt properties midst traditional revenue streams being wrung dry.  The County executive is doing it piecemeal, without a rationalized method for deciding what the contribution from the not for profit should be. Interestingly, the biggest non profit is called only by its initials UPMC, as if its magnitude confers the acronymic majesty of such dead stars as USX (i.e. United States Steel). There are several ways out including raising wage taxes (which will tax the butcher the Baker and the candlestick maker as well), begging, glomming on to the economic magnet effect of the nonprofit by re-purposing surrounding vacant and blighted land, or levying a charge based upon the value of the land that the tax exempt entity owns. Why?  Anyone of goodwill knows that the Cleveland Clinic, Yale University, Massachusetts General Hospital etc. do good deeds.  

The land upon which they sit only provides a platform to do that good.  The land value has little to do with the charitable purpose of these nonprofits.  Therefore, instead of a traditional property tax or some of to use algorithm to determine an annual contribution (that can be terminated at any time), why not collect revenue based upon land value using the same formula that the rest of the city uses. A land tax on that basis is uniform, fair and efficient, and would go a long way to letting cities get back to the business of governing, planning and providing a framework for improved lives. 

For example, just using the exempt land values of Philadelphia, using the current property tax, an extra $45 Million could be raised; and transitional land value tax would raise just about double that.  We think that beats creeping annual tax hikes on everyone else.                        

8 Comments to The Planning Paradox: Eds and Meds, Municipal Revenues and Power:

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Mark Koerner on Tuesday, October 09, 2012 6:53 AM
Josh-- Even if the presence of non-profit organizations causes cities to lose tax revenue, I still support some kind of tax exemption for them--and for the standard reason: they're doing good deeds, and if you tax them, they will not be able to do as many good deeds. This is why at the federal level, donations to charities are tax-deductible and the charities themselves pay no corporate income tax. I think this is a good system. The local version of it is that non-profits should be exempt from local taxes, e.g., property taxes. I realize there is plenty of room for cheating here, as profit-oriented companies could call themselves "non-profits," but I think the IRS has a pretty good handle on this, and I don't see why local governments can't. I think that forcing "eds and meds" to pay their full weight in local property tax would force them out to more marginal land, making our cities more boring places. In New York's high-rent financial district, the historic Trinity Church, along with its historic graveyard (where Alexander Hamilton, among others, is buried), wouldn't last another year if it had to pay its weight in property taxes. The net result would be that that neighborhood would become a less interesting place, and the country as a whole would lose an important historic building. "Highest and best use" for whom? This is not to deny that a problem exists. I can imagine a small city like New Haven, Connecticut desperately needing tax money from Yale University--and deserving some, too, as it costs tax money to protect Yale from crime, fire, litter, snow-pile-ups, and God knows what else. Nevertheless, I'm skeptical about informal deals where the non-profit just decides to start paying the city a number somebody pulls out of a hat. The better idea would be some kind of formula. For example, every city could use historic data to figure out how much it generally costs to provide municipal services for each land-owning non-profit, and present each of them with a bill at the beginning of the year. For example, the Birthplace of Henry George presumably has a smaller "municipal services fiscal footprint" than the University of Pennsylvania, and each respective institution's annual "services bill" from the city could reflect that fact. Alternatively, a city could say, in effect: "Your institution only does good deeds inside its buildings--and not on its lawns or its parking-lots. So we will tax the open space around your buildings but not the land actually under the building." And I'm sure there are other ideas better than these.
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Joshua Vincent on Monday, October 15, 2012 2:21 PM
Dear Mark - I do agree wholly with the idea of the charitable purpose being exempt. I am concerned about the aggregation of land by the non-profits that are not directly involved with the purpose of the charity. Land serves as the platform, not the purpose. As I am sure you know, a weakened city cannot resist the gobbling of land by NFPs, New York City and Philadelphia only being a couple of examples

Danny Handelman on Saturday, February 23, 2013 9:45 AM
Corporations and individuals also do good deeds, so should they be exempt from property taxes? The land should be used for the living, not the dead. If a place becomes less interesting, fewer people would live there. But if cemeteries were replaced with mixed-use (residential and commercial) buildings, there would be more people, and lower housing, municipal and transportation costs.

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Well nice article... i see you have well highlighted the tax exemption and other economical issues in it.. Il be reading it to my commerce students for their next presentation to be prepared
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