Taxing nonprofits

April 28, 2003

TWO YEARS ago, 23 tax-exempt Baltimore nonprofits, led by the Johns Hopkins University, pledged to help the cash-strapped city by voluntarily paying $20 million over four years in lieu of taxes. It was to be a one-shot deal, but already whispers are being heard at City Hall about extending it.

And why not? Why shouldn't huge nonprofit corporations pay their share of city services, even if their real estate is tax-exempt?

Baltimore is not the only city confronted with this dilemma.

As the number of nonprofits nationwide has exploded, their tax avoidance has increasingly become a political hot potato. In Philadelphia, a face-off took place a decade ago, when then-Mayor Edward G. Rendell vowed to limit tax exemptions to "purely public charities." He threatened to challenge other nonprofits' status in the courts unless they started paying for city services.

Certainly, such hostility is not needed in Baltimore, but the larger issue is not going away. It pops up every time a nonprofit makes a major real estate deal. Johns Hopkins' recent acquisition of a 68-acre corporate campus in Mount Washington is an example. So are its real estate maneuvers in the Charles Village and Wyman Park areas that involve some properties currently on the tax rolls.

The nonprofits' voluntary 2001 agreement with City Hall still has two fiscal years to go, but talks about extending and formalizing it must start now. The reasonable expectation among leading politicians is that the city's financial hardships will require further assistance from such big nonprofit players as Hopkins - which alone is paying more than half of this year's $6 million commitment - as well as the University of Maryland Medical System and a bevy of other medical institutions and private colleges.

The most logical - and desirable - way to deal with this issue is for Mayor Martin O'Malley's administration to develop a comprehensive compact with nonprofits. That would set the ground rules for payments in lieu of taxes and identify the organizations that are expected to make them.

The same goals can also be achieved through bilateral understandings. That is what has happened in Cambridge, Mass., with the Massachusetts Institute of Technology, which started making payments in lieu of taxes as early as 1928, and with Harvard University.

Yale University in New Haven, Conn., follows that model. The university (excluding the hospital that carries its name) operates its own police force but pays the city $2.1 million a year for fire protection. Moreover, the state of Connecticut pays New Haven $20 million a year to compensate for Yale's property tax exemptions.

Baltimore-area nonprofits perform many admirable services that benefit the community: They feed the hungry, they clothe and shelter the homeless. Colleges and universities tend to the sick and offer intellectual and recreational stimulation.

But providing those amenities is not enough to relieve an organization of its larger community obligations because it operates on a nonprofit business model. Surely, there are tradeoffs for the city as well as for the institutions, and long-term agreement is in the best interests of both.

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