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If Philadelphia’s big non-profits –Penn, Drexel, CHOP, and Jefferson Hospital et al. – seem a little jittery these days when people talk about them contributing to the local tax base, they have reason to be.
A recent state Supreme Court ruling has made it easier for local governments to tax hospitals, colleges, senior citizen apartments and other non-profits that currently don’t pay a dime in state and local taxes.
It’s universally known as the Pike County case because the appellant, who usually gets top billing in a court case, is a tongue twister: Mesivtah Eitz Chaim of Bobov, Inc., which runs Camp Moshava.
Camp M, as officials in PikeCounty call it, is a 61-acre summer camp established by the Bobov Orthodox Jewish community in Brooklyn, N.Y. It applied for tax-exempt status and was denied by Pike County officials, who argued that the camp was not a “purely public charity” as defined by previous court decisions.
In a 4-3 ruling, the high court agreed with the county and today Camp M pays $54,000 in property taxes to the county and local school district.
With its 2012 ruling, the Supreme Court opened a new round in an old fight over who gets to determine what is an exempt charity and what is not.
The legislature took the upper hand in the matter by passing a 1997 law that gave it the power. The state then adopted rules and regs that generally are considered less stringent that the court’s criteria– for instance, any entity run by a religious organization is considered de facto a non profit. Under the state standard, Camp M would be a non-profit.
Act 55 also said that once the state Revenue Department made the determination of profit or non-profit when it came to state taxes – local governments had to follow that ruling.
With the Pike County case, the Supremes swept all of that away. It reserved to the courts the right to determine what a charity was and what was not, saying the judicial branch had sole authority to determine the meaning of the clause in the state Constitution on charities.
In previous rulings, the court set up five criteria for determining an “institution of purely public charity.” To use the language in the Pike Count decision, in order to an entity to be considered a charity it must:
- Advance a charitable purpose;
- Donate or render gratuitously a substantial portion of its services;
- Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
- Relieve government of some of its burden; and
- Operate entirely free from private profit motive.
Now, apply that test to the brand new YMCA down the road or the expensive senior-living center on the other side of the town or the local hospital that regularly rakes in a healthy profit.
Suppose, as former Mayor Ed Rendell has suggested, the city approach the big local non-profits to provide money to help the Philadelphia public schools via PILOTS – Payments in Lieu of Taxes? PILOTS are what they say they are – voluntary contributions made by institutions in lieu of being taxed.
As law professor Evelyn Brody has written: “PILOTS represent a compromise between the parties using what leverage they have available and negotiating in light of the hazards of litigation.”
With its Pike County ruling, the Supreme Court lessened the “hazards of litigation” for local governments, thereby increasing their leverage in getting concessions.
Brody is an expert on the dry, but important topic of tax-exempt status. She has written multi-page papers that say, in so many words, that the pressure is on big non-profits to contribute PILOTS or pay taxes as local governments get more and more pressed for money.
It’s especially relevant for Philadelphia which, according to the Lincoln Institute of Land Policy, has the highest percentage of tax-exempt property in the nation, measured in terms of dollars value. It is 11 percent here, compared to just over eight percent in Boston, which ranked No. 2.
The large non-profits are not defenseless babies when it comes to protecting their interests. They have friends in high places.
A bill has been duly introduced in the Pennsylvania Legislature and is currently sailing through the Senate and House that would, in effect, tell the Supreme Court to go jump into the lake and re-assert Act 55 as the controlling law.
The bill is backed – enthusiastically – by non-profits.
The change won’t happen overnight. For the legislature to trump the court, the state Constitution must be changed. To do that, the proposal must pass two consecutive sessions of the legislation and then be approved by the voters in a referendum.
The earliest that could happen would be 2015 or 2016.
Still, that’s enough time for local governments to extract PILOT agreements from their local non-profits if they have the political will to take on the big non-profit players in their communities.
The choice would be simple: would you prefer to pay voluntary PILOTS or would you rather be taxed at the full rate, just like poor Camp M in Pike County?
Philadelphia Colleges say they perform a public service by educating Philadelphia‘s high school graduates. AxisPhilly has done a reality check on those claims. You can read the results here.