A Whole New Tax Game


(May 2012)

Do Philadelphia non-profits pay their fair share for City services? For those who say non-profits should pay more, a recent court ruling could be (as the kids say) a game changer. The only question for the future might be, "what will be the name of the game?"

As in cities across the country, non-profit organizations in Philadelphia are exempt from many taxes including the Real Estate Tax. That public largesse is in recognition of the public service that non-profits perform in tending to the needs of the citizenry. However, as they operate, those non-profits also generate costs for the City. Every hospital that tends to the needs of the sick also creates traffic on City streets. Every university that educates students also requires policing. 

In some cities, officials have argued that some non-profits (especially those with annual budgets that run into the hundreds of millions of dollars) should make a Payment In Lieu Of Taxes (PILOT) to help offset some of the costs borne by their host municipalities. In cities like Boston, large non-profits make sizable contributions.  PILOTs are expected to generate more than $20 million in cash and another $20 million in community services for beantown this year. With budgets stretched to their limits, that kind of revenue can do a lot to help reduce tax burdens or expand service-delivery efforts.

Two decades ago, Philadelphia aggressively pursued similar payments -- even threatening to challenge the non-profit status of those institutions that refuse to pay -- and entered into agreements with many larger non-profits to generate much-needed revenues.  In 1995, Philadelphia generated more than $9 million from PILOTs.

But, state legislators reacted and defined non-profit status to make it much more difficult to threaten an institution's status, which severely weakened the City's bargaining position. Thus, the City's PILOT program wilted and the City generated less than $400,000 from PILOTs last year.

This status quo was upended recently by a court case that challenged the non-profit organizations’ tax-exempt status.  The Pennsylvania Supreme Court ruled that non-profits must pass a strict test to demonstrate that they operate free from a profit motive, which might help the City be more aggressive in seeking money from its non-profits.  For those who believe the City is being shortchanged by non-profit institutions -- or that the City could use an infusion of revenues -- this ruling could open the door to greater pressure to pay more.

So if non-profit institutions have lost protection from threats to their non-profit status, the City could aggressively renew its PILOT program. But, if the game has changed, we can wonder what will be the name of the game moving forward.

Will it be "Wheel of Fortune?" Without legislative protections, many non-profits might find it hard to argue that all of their operations are purely charitable in nature. Will the City use its new leverage to convince Philadelphia's notable institutions to pay millions each year to help pay for the municipal services they consume?

Will it be "The Price Is Right?" While most other cities generate the vast majority of their tax revenues from the Real Estate Tax, Philadelphia gets most of its revenues from the Wage tax. With non-profits representing its largest employers, will the City decide it might be unwise to impose additional costs on the non-profit goose that lays the golden tax-revenue eggs?

Will it be "Let's Make A Deal?" Philadelphia has a grand but self-defeating tradition of playing favorites and allowing some to play fast-and-loose with the rules the rest of us must abide by. Will the City approach the question of renewing its PILOT efforts on a case-by-case basis where political ties and back-room deals determine who pays what?

Given recent reports of the City providing free utility service to some non-profits, I sincerely hope that the Nutter administration stays far away from arbitrary decisions and sweetheart deals. If this lawsuit gives the City the ability to create a long-term PILOT program, it is critical that any future effort be reasonably and fairly administered across the board. We cannot afford to play games with tax policy.