PJ staff report
With the recession hangover still plaguing cities and towns across the U.S., more municipalities are looking to nonprofits to help plug budget gaps, a new study says.
By seeking “payments in lieu of taxes,” cities and towns aim to recoup some of the revenue they otherwise would collect from landowning nonprofits like hospitals and universities.
Rather than demand such payments, municipalities should collaborate with local nonprofits to craft optimal arrangements, says the study of 117 cities and towns with alternative-payment programs, conducted by Lincoln Institute of Land Policy.
Nonprofits in all 50 states are exempt from paying property taxes, which typically are used to pay for city services like fire, rescue and police forces, and street maintenance.
To recoup some of those costs, particularly from larger institutions like universities and medical facilities, many municipalities are asking nonprofits to kick in or are charging user fees.
Payments in lieu of taxes, known as PILOTs, can provide much-needed revenue for cities and town, the report says, but they must be used carefully.
“PILOTs are often haphazard, secretive and calculated in an ad-hoc manner that results in widely varying payments among similar nonprofits,” the report’s authors say in a statement. “In addition, a municipality’s attempt to collect PILOTs can prompt a battle with nonprofits and lead to years of contentious, costly and unproductive litigation.”
To maximize success of PILOTs, the report says, such payment programs should be used where there is a good fit between the municipality and the nonprofit.
Cities and towns that are highly dependent on property-tax revenue, and that also have a high percentage of their land owned by nonprofits, are good candidates for PILOTs.
And nonprofits that own large amounts of tax-exempt property, but provide “modest benefits to local residents relative to their tax savings,” are better targets than other nonprofits, the study says.
State governments should consider providing grants to municipalities that host nonprofits, as is done in Connecticut, to compensate for the lost tax revenue.