Private colleges, nonprofit hospitals, museums, soup kitchens and churches are exempt from property taxes. As cash-strapped host municipalities look for more revenue, their interest in collecting payments in lieu of taxes (PILOTs) from charitable nonprofit organizations will grow, according to a report by the Cambridge, Mass.-based Lincoln Institute of Land Policy.
In recent years, many cities have expanded PILOTs and “user fees” to help pay for basic public services such as police and fire protection. PILOT payments are voluntary and usually amount to just a fraction of what the institution would contribute if it paid property taxes.
The report’s authors, Daphne A. Kenyon and Adam H. Langley of the Lincoln Institute, note that PILOTs offer one way to make nonprofits pay for public services they consume, but they “are often haphazard, secretive, and calculated in an ad hoc manner that results in widely varying payments among similar nonprofits.”
The report offers an account of PILOT programs in 117 municipalities across 18 states and notes:
• PILOTs are most appropriate for municipalities that are highly reliant on the property tax and have a significant share of total property owned by nonprofits. PILOTs are most suitable for nonprofits that own large amounts of tax-exempt property and provide modest benefits to local residents relative to their tax savings.
• The best PILOT initiatives grow out of a partnership between the municipality and local nonprofit organizations, because both have an interest in an economically healthy community. In cities with a large number of nonprofits, such as Boston, creating a systematic PILOT program can promote equity among tax-exempt nonprofits and raise more revenue than negotiating individual agreements.
• State and local governments should consider alternatives to PILOTs. State governments should consider providing grants to local governments that host tax-exempt nonprofits to compensate them for their loss of property tax base, as is done in Connecticut.
The report suggests that a tax-exempt nonprofit may decide that reaching a PILOT agreement will help avoid any formal challenge to the organization’s tax exemption.