PILOT Programs – The Nonprofit Property Tax

      If it walks like a duck and quacks like a duck…    

In an era of waning revenue streams and increasing demand for government services, some cash-strapped municipalities cast a longing eye at nonprofits’ real property as a missed source of revenue.  Through Payment in Lieu of Taxation (“PILOT”) programs, states and municipalities encourage – and sometimes require – nonprofits to pay what they consider the nonprofit’s “fair share.”   PILOT programs, however nicely packaged, are still essentially property taxes.  The trend toward PILOT programs in the last fifteen years should concern the nonprofit sector because of the potential for substantial financial implications, as explained herein. 

Background

PILOT programs have long been used to compensate localities for lost property tax revenues.  Historically, both state and federal governments have utilized PILOTs to reimburse municipalities containing exempt state- and federally-owned land.[1] In addition, some large educational nonprofits for decades have made voluntary PILOT payments to municipalities to help offset their considerable use of municipal services.  For example, Harvard and MIT have made voluntary payments to the City of Cambridge, Massachusetts since 1928.[2]   

Recently, use of PILOT programs has increased dramatically.  From 2000 to 2010, eighteen states implemented PILOT programs affecting nonprofits.[3]  However, these programs have not gained universal approval; some states have expressly declined to implement PILOT programs.  Florida, for example, determined its PILOT program statute violates Florida’s constitution.[4]  The overall trend, however, favors PILOT programs for nonprofits.  Municipalities continue to pressure state legislatures to assist local communities facing tough economic realities.

Voluntary PILOT or Mandatory Tax?

Are PILOT programs truly “voluntary” or in practice a mandatory tax?  As some authors have put it, “Unhappy governments can make life difficult for nonprofits by limiting access to local public services, failing to relieve burdensome local regulation, or challenging tax exemptions on the basis of whether nonprofits properly pursue their exempt purposes. In such environments nonprofits may feel considerable pressure to accede to local requests for PILOTs.”[5]

Some states simply drop any pretense of choice and make PILOT requirements mandatory under state and municipal law.  For example, the Massachusetts legislature is presently considering a bill (HB 2584) that would give municipalities the right to require nonprofits like schools and hospitals to pay 25% of the property tax they would owe if they were not tax-exempt entities.  If adopted, the bill could significantly affect nonprofits.  For example, one local school that paid the town $858.89 in 2014 anticipates an increase to nearly $150,000 per year.[6]  Another nonprofit school with substantial land holdings estimates its PILOT payment to cost an additional $462,000 per year.[7]

Supporters of the Massachusetts bill laud its flexibility and argue that municipalities will have the ability to exclude certain nonprofits, such as small charitable organizations.  Such assurances, however, ring hollow.  Any exceptions made by localities would be completely discretionary.  The bill thus contains no inherent protections for smaller nonprofits facing the threat of localities ravenous for new revenues.  The lack of such protections and the substantial financial impact make the Massachusetts bill and other similar PILOT programs all the more problematic.

The Massachusetts example is not unique.  Some studies estimate that “for the more than 150,000 U.S. nonprofits with greater than $500,000 of real property… annual tax exemption was worth an average of 19 percent of their total revenues.”[8]  Such PILOT programs will likely stifle nonprofit activities, particularly with regard to activities requiring real property ownership.[9] 

Nonprofit organizations should remain aware of this new trend and alert to legislative efforts to enact PILOT programs in their states.   Nonprofit leaders should be ready to challenge PILOT programs where possible.