As the need for new revenue deepens, cash-strapped cities may be increasingly likely to turn to colleges, as well as other nonprofit groups, to make payments in lieu of the taxes on the property they use for educational purposes. However, municipalities and local nonprofits should work to hammer out payment plans that are transparent and predictable, according to a new report by a research organization based in Cambridge, Mass.
The report, by the Lincoln Institute of Land Policy, acknowledges that such plans may not make sense for all communities, such as those in which nonprofit groups do not own large amounts of tax-exempt property. And the think tank suggests that state and local governments should consider alternatives to such compensation agreements, which are known as PILOTs, for payments in lieu of taxes. ...
Private colleges and other nonprofit organizations, such as hospitals, churches, and soup kitchens, are exempt from paying property tax in all 50 states. The forgone revenue from the property-tax exemption could total as much as $32-billion nationwide.
But as municipal budgets have been stretched thin, mayors and local politicians have called on colleges and other such groups to compensate cities and counties more for the services they use.
A survey by the Lincoln Institute found that PILOT programs have been used in 117 municipalities and 18 states since 2000.
Many of those agreements, however, appear to be haphazard, secretive, and calculated in an ad hoc manner, the authors found. Even within the same city, payments can vary significantly. Harvard University, for example, pays Boston nearly $2-million annually, while Boston College contributes less than $300,000 through the program.
What's more, payments in lieu of taxes typically generate relatively little revenue, as a share of overall municipal budgets, and often are not a reliable long-term source of funds. In the 2009 fiscal year, PILOT payments from tax-exempt nonprofits accounted for just 0.66 percent of Boston's total municipal budget. ...
There are alternatives to payments in lieu of taxes, the authors note, such as charging municipal-service fees to tax-exempt groups or levying special tariffs, such as tuition taxes, on groups that use nonprofit services. Such taxes and fees, however, are open to court challenges. Most recently, public officials in Pittsburgh backed away from creating what would have been the nation's first tuition tax after the city's largest nonprofit organizations, including Carnegie Mellon University and the University of Pittsburgh, agreed to make voluntary payments.