Nonprofits should see writing on the wall

City budget: Mayor's attempt to help balance it with levy on tax-exempts follows nationwide trend.

May 15, 2001

HAS OPEN SEASON on nonprofits been declared? You would think so from the reaction to the effort by Mayor Martin O'Malley and the City Council to extend an energy tax to hospitals, churches and philanthropic organizations. Some businesses already pay the 8 percent levy, but residential users and manufacturers don't.

In their eagerness to tap tax-exempt organizations for revenue, Baltimore politicians have plenty of company.

In Pittsburgh, the growth of tax-exempt institutions is an issue in today's mayoral primary. The stage was set by the city controller, who charged that "the only reason why taxes in the city are higher is because of tax-exempt regional facilities."

In Worcester, Mass., members of the City Council have expressed concern about the continued expansion of colleges and hospitals into surrounding neighborhoods. Every time a property is taken off the tax rolls, someone else -- residents or the business community -- has to pick up the slack.

In the Milwaukee area, politicians are upset about tax-exempt mega-churches gobbling up some of the best commercial land.

"I don't think many mayors and city council people want to pick on God," says a representative of the League of Wisconsin Municipalities. "But I think they need to be candid with taxpayers on what the impacts of churches and other nonprofits are on the tax base."

Roughly 600 nonprofits operate in Baltimore City. They include huge conglomerates such as Johns Hopkins and the University of Maryland, as well as such shoestring operations as soup kitchens and storefront churches. It is estimated that 75,000 jobs -- or one out of every five employment opportunities in the city -- are provided by these nonprofit institutions.

The idea of levying an energy tax on such organizations is "bad policy and bad for Baltimore City," says Peter Berns, executive director of the Maryland Association of Non-Profit Organizations.

A hospital lobbyist is even more direct: "It's a foot in the door. Once you change the principle [of exemption], it's just a question of how much you are going to pay every year."

About one-third of Baltimore's real estate is tax-exempt. Owners include municipal, state and federal governments, nonprofit medical, educational and religious institutions as well as foundations. If that land and all of those buildings were taxed, the city could net an extra $190 million a year.

Baltimore's high percentage of tax-exempt real estate is not unusual.

The bite of tax exemptions is so considerable in Connecticut and Rhode Island that local communities receive aid from those states to help compensate for the lost property tax revenue.

In Massachusetts, Boston and Cambridge have worked out arrangements for payment in lieu of taxes (PILOT) with nonprofit organizations.

Acknowledging their reliance on public services, some tax-exempt organizations elsewhere have voluntarily started making PILOT remittances to their hometowns. In Brunswick, Maine, for example, Bowdoin College contributes $75,000 a year. In New Haven, Conn., the far bigger and wealthier Yale University forks over more than $19 million a year to compensate the city for a variety of public services. But the separate Yale-New Haven Hospital does not pay a penny.

For more than a decade, Baltimore officials have looked enviously at the revenue potential of tax-exempt holdings. Repeatedly, there has been talk about a citywide PILOT program. Right now, only about 50 low-income elderly apartment buildings make annual contributions instead of paying property taxes.

The idea of an energy tax also has surfaced before. It grows from some politicians' view that in the end many thriving nonprofits are no different from regular businesses, except that they do not distribute their returns to shareholders. In Maryland, Montgomery and Prince George's counties extend some type of energy tax to nonprofits. Elsewhere, Chicago, Detroit and San Francisco are among cities collecting it.

The Baltimore City Council's final budget vote is still a few weeks away. Last-minute juggling is possible, but at present the requisite 10-member majority seems to support an energy tax on nonprofits.

When hospitals, for example, cry poverty, some council members argue that they could actually benefit from an energy tax that bolsters law-enforcement efforts. "When crime goes down, there will be fewer emergency-room admissions," one politician reasons.

Whether or not an energy tax is passed this year, the handwriting on the wall is clear: Baltimore has reached the point in its declining fortunes where municipal government needs help from entities that have traditionally been exempted from taxes.

Such an expectation is fully defensible. It becomes unreasonable only if the mayor and the City Council act as though the city can tax its way to prosperity, doggedly refusing to recognize the broader implications of Baltimore's continuing high population loss.

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