Don’t Throw the (Over One Million Dollar) Baby Out with the Bath Water

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In lawyer David Simon’s call to abolish property tax exemption for “rich” nonprofits, he argues stridently that Illinois property tax exemptions reflect another example of unfair privileges, this time for “wealthy” nonprofits like the University of Chicago and Northwestern University.  He thus advocates for granting property tax exemptions only to nonprofits owning property valued at less than a million dollars.  His bright-line rule seemingly eliminates the highly problematic political schemes such as those found in PILOTs (“Payments in Lieu of Taxation”) which some state and local governments have adopted. But his commentary ignores the long history of nonprofit tax exemptions, the extensive societal benefits (including both financial and intangible benefits) resulting from such exemptions, and other key policy considerations. 

The vast majority of nonprofits are nothing like these educational behemoths.  Nevertheless, nonprofit organizations are increasingly challenged to justify their usefulness as charities, valuable educational organizations, and religious organizations.  Although nonprofits’ usefulness could aid in securing donor support and property tax exemption, it is neither the main reason why property tax exemptions should continue nor why they are more affordable, in the long run, than imposing property taxes on nonprofits as a blanket rule.

As an initial matter, property tax exemption reflects a long-standing acknowledgment of the many benefits provided by nonprofit institutions, including the promotion of civic virtues, morality, care for the needy and disadvantaged, education, and other valuable good works. As the U.S. Supreme Court recognized in its 1970 Walz v. Commissioner ruling, nonprofits can provide extremely important beneficial and stabilizing influences in community life.  Likewise, Harvard President Charles Eliot argued over a century ago that nonprofits bring incalculable benefits to our civilization, improving society in innumerable ways that the government cannot.  Based on this reasoning, state laws uniformly provide broad property tax exemptions to charitable, religious, and educational organizations.

Second, a key consideration for exemption approval is often whether a nonprofit offsets government burdens – that is, whether the nonprofit provides services that the government must otherwise provide (e.g., charitable nursing home care, schools, parks and recreation).  Since government is not taxed on its real estate, neither should nonprofits that engage in what would otherwise be government activities - often more efficiently and effectively than the government.  This point rings particularly true here in Illinois, with state government in such extreme disrepair that many nonprofits have been forced to close or drastically cut back on their services due to lack of and/or delayed government funding.  The lesson is clear: it is best these days to pursue private philanthropy to fund charitable activities (while offsetting government burdens in the meantime).

Third, property tax exemption reflects the public policy principle that organizations without commercial income should not be required to pay taxes, such as churches that rely on tithes and offerings and organizations primarily supported by donations and by providing non-commercial services.  Charitable contributions thus provide revenue sources to nonprofits, but they should not be taxed thereon.  Significantly, nonprofits that operate certain activities “with a view to profit” (in property tax exemption legal parlance, such as charging fees for parking) will not qualify for property tax exemption under most state laws including Illinois, nor will any portion of a nonprofit’s property used for such non-qualifying purposes.  (Note that Northwestern is a different case, since its exemption is per legislative charter).

Fourth, property tax exemption avoids sticky issues surrounding government involvement in nonprofit activities, particularly those of religious institutions.  As a matter of well established constitutional law, the government must not become “excessively entangled” in religious issues such as whether an organization is engaged sufficiently in religious activities (e.g., worship versus other activities).  As Justice O’Connor observed, our country’s leaders have “accorded religious exercise a special constitutional status,” with all agreeing that “government interference in religious practice was not to be lightly countenanced” (City of Boerne v. Flores 1997).  More broadly, as Chief Justice John Marshall famously recognized long ago in McCulloch v. Maryland: “The power to tax is the power to destroy.”  These strong constitutional and policy arguments recognize the many benefits that religious institutions provide to society—not least of which is the promotion of robust and meaningful communities in our pluralistic society.  Imposing property taxes on religious organizations thus would run counter to historical and constitutional precedent and oppose well established public policy.  It also would undermine and weaken the quality of service to those in need, civil dialogue in the public square, and the ability of many to pursue human flourishing.

Simon’s draconian approach ignores the tremendous public policy considerations favoring continued exemption, as well as the law that operating property for commercial “view to profit” purposes disqualifies a nonprofit property owner for exemption (no matter how laudable its cause).  These public policy considerations not only predate our current legal system, but also recognize that many of the societal benefits provided by nonprofits should be protected from the whimsical application of legislative grace (or even the grace of Mr. Simon).  Are there problems with the legislative mechanisms put in place to help maximize the benefits to civil society?  Of course—just as with all products of our legislative system.  But categorically abolishing property tax exemption for each and every nonprofit simply because it may own property worth more than $1 million is not the right answer.