Hold Hands, Sing Kumbaya and Avoid Taxes

The least studied, hence least understood, component of 21st-century America’s political economy may well be the rise of the not-for-profit sector of the economy. While real GDP grew by 38% from 1995 to 2010, real total revenues reported by charitable nonprofits registered with the IRS grew by 65%. Nationally, medical services and education, two vast sectors dominated by not-for-profits, accounted for 15.1% of all employment in 2010.

A new study, “Property Tax Exemption for Nonprofits and Revenue Implications for Cities,” explores the impact of the growth of the not-for-profit sector upon municipal finances. Not-for-profit exemption from property taxes can blow a big hole in municipal budgets, especially in metropolitan areas such as Pittsburgh, Philadelphia and Boston where medical services and education exceed 20% of employment (and probably a  higher percentage of economic activity). Arguing that the rise of not-for-profits displaces a greater tax burden on homeowners and for-profit businesses, the authors present a variety of arrangements, from municipal-service user fees to Payments In Lieu Of Taxes (PILOTs), to avoid the hollowing out of the tax base.

In Virginia, the challenge is particularly acute in jurisdictions such as Blacksburg that are dominated by a large educational institution, or in the case of Charlottesville, by a large educational institution coupled with a large not-for-profit health care system.

The rise of the not-for-profit economy is significant in other ways not touched upon in the paper. E M Risse refers to not-for-profits as “institutions” in his Estate Matrix, as opposed to “agencies” (government) and “enterprises” (corporations). Institutions include, among others, foundations, labor unions, professional and trade associations, universities, hospitals, museums, political parties, political action committees, conservation advocates, chambers of commerce and other consumption advocates, churches and think tanks.

A growing “institutional” economy means that an ever-larger chunk of the supposedly private sector is exempt both from the wealth-extracting exertions of the federal government and from the Darwinian, for-profit imperative to innovate, boost productivity or die. Not-for-profit status is a great tool to channel the economy’s energy into socially beneficial uses. But the not-for-profit-ication of U.S. society does not augur well for economic dynamism, growth of the tax base and fiscal sustainability.


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2 responses to “Hold Hands, Sing Kumbaya and Avoid Taxes”

  1. An even larger issue is the grey market, off the books economy, which is probably several times larger than the not for profit economy.

  2. My locality went after the local health care giant over property assessments, special use permits, etc. They reached an “agreement” which basically means they pay a fraction of what they should in terms of their assessed values, etc.

    Three months after the dust settled City Council is considering an idea, floated by the non-elected school board, to raise the meals tax another 1% for funding purposes. Get real. This wouldn’t even be an issue if everyone, especially the largest landowner paid their fair share.

    One can’t help but ask, are you a non-profit simply for the betterment of your cause or partly for the tax breaks?

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