Over the course of history, many rationales and principles have developed to justify tax exemption for nonprofit property owners.With respect to charitable property tax exemption in the United States, a recent court decision illustrates one principle in spades: that of quid pro quo. To expand in plain English (beyond “this for that”), it means that a property tax exemption applicant would be wise to amply demonstrate how it will relieve government burdens in return for exemption, based on its charitable activities. By doing so, exemption applicants are more likely to receive favorable consideration by taxing authorities and courts, which are becoming increasingly more skeptical of such sought-after exemption privileges.
The case was filed by Advance Housing, a 501(c)(3) public charity that provides supportive housing and services for mentally disabled individuals. Advanced Housing argued that it qualified for exemption from property tax for fourteen residential properties used in its programs. Advance Hous., Inc. v. Twp. of Teaneck, 74 A.3d 876 (N.J. 2013). The New Jersey Supreme Court agreed, explaining as follows. “[T]he charitable work done by the private entity will spare the government an expense that ultimately it must bear, … ‘[T]ax exemption exists as a quid pro quo for the production by the private, nonprofit sector of goods and services that absent exemption would be the burden of the government.’” (Emphasis added.)
Applying this principle, the Court first noted the New Jersey Governor’s recent Task Force on Mental Health, which determined that New Jersey is woefully underequipped to handle the state’s numerous psychiatric patients who are ready for discharge. The Court further noted that in response to the Task Force’s findings, the Governor issued an Executive Order promoting treatment alternatives such as permanent supportive housing. Given this context, the Court reasoned, “In line with the Executive Order, Advance Housing provides permanent supportive housing. Advance Housing is playing a role in fulfilling an articulated State policy of deinstitutionalizing the mentally disabled. In doing so, it also is relieving the State of the expense that it would otherwise bear in housing and caring for the mentally disabled.”
The Court considered other factors and examined the applicable statute. But the factor that ultimately seemed to sway the Court’s decision was quid pro quo: favorable property tax exemption in exchange for the organization’s relief of the governmental burden to provide for the mentally disabled.
Courts and taxing bodies do not always state this hallmark qualification element so clearly, but this quid pro quo principle underlies many charitable exemption decisions. Nonprofits seeking property tax exemption thus should showcase not only how their charitable programs improve the lives of people and the communities in which they live, but the extent to which its programs thereby alleviate government burdens. Such relief may include educational programs, activities that reduce societal ills such as crime and homelessness, medical services to the poor, and other valuable community benefits. Ideally, the taxing authorities should be able to easily see the underlying quid pro quo. Organizations that clearly articulate such a compelling story will be more attractive candidates for exemption from taxation.