The Property Tax Exemption for Nonprofits and Revenue Implications for Cities

THE PROPERTY TAX EXEMPTION FOR NONPROFITS AND REVENUE IMPLICATIONS FOR CITIESBy Daphne A. Kenyon and Adam H. LangleyThe Lincoln Institute of Land PolicyNovember 20111 2The nonprofit sector accounts for roughly one-tenth of the U.S. economy, whether measured by employment or by total spending (Walker 2005), and has grown faster than the rest of the economy in recent decades. For example, while real GDP grew by 38 percent from 1995 to 2010, real total revenues reported by charitable nonprofits registered with the IRS grew by 65 percent.2 Municipalities that host charitable nonprofits benefit in many ways from their presence: they are often major employers that also provide important services for local residents and attract visitors to the community. But the nonprofit sector can also impose fiscal hardships on cities. Properties owned by chari-table nonprofits and used for a tax-exempt purpose are exempt from property taxes under state law in all 50 states even though municipalities still need to pay to provide these nonprofits with public services like police and fire protection and street maintenance (Gallagher 2002, 3).3 For cities heavily reliant on the property tax, the exemption of nonprofits from property taxation means that homeowners and busi-nesses must bear a greater share of the property tax burden. Sherlock and Gravelle (2009) estimated that in fiscal year 2009, property tax revenues forgone due to the charitable exemption were between $17 and $32 billion nationally, or roughly 4 to 8 percent of total property taxes.4 Many cities whose economies used to be dominated by manufacturing have seen relatively mobile for-profit businesses leave their cities, while colleges, universities, and medical centers that are tied to their location due to fixed capital investments and other factors remain in place (Penn Institute for Urban Research 2009, 148). For example, the 2010 Commission to Study Tax-Exempt Institutions in Providence, Rhode Island, found that tax-exempt institutions had been expanding in that city over the last decade, particularly in education, healthcare, and social services, while the manufacturing and finan-cial services sectors were shrinking.5 While not all education and healthcare businesses are nonprofits, examining the shift in the employment base from manufacturing to this sector can illustrate how a city’s industrial mix is changing and becoming more reliant on nonprofits. Nationally, the share of workers employed in manufacturing fell from 16.2 percent to 8.9 percent between 1990 and 2010 while the share working in education and health services grew from 10.0 percent to 15.1 percent. Table 1 shows these employment changes for the 25 largest metropolitan areas in the United States, with metropolitan areas ordered from highest percentage employment in education and medical services to lowest.The Property Tax Exemption for Nonprofits and Revenue Implications for Cities1 Based on a paper prepared for the Fiscal Future of the Local Public Sector conference June 2–3, 2011, at the George Wash-ington Institute of Public Policy and sponsored by the Brookings Institution, the George Washington Institute of Public Policy, the Lincoln Institute of Land Policy, the National League of Cities, and the Urban Institute. The authors are grateful to Bethany Paquin for her able research assistance and to discussants and other conference participants for their helpful comments.2 Data for nonprofits are from the National Center for Charitable Statistics for August 1995 and August 2010, which includes public charities and private foundations. Real charitable nonprofit revenues grew from $825 billion to $1.36 trillion over that period. Nominal values were adjusted using the CPI for all urban consumers and real values are expressed in 2010 dollars.3 For the most part, nonprofits are exempt from sales and income taxes as well, but the state and local revenue forgone from these tax provisions is less than for the nonprofit exemption from property taxes (Kenyon and Langley 2010, 19).4 From the U.S. Census Bureau’s FY 2008 Annual Survey of State and Local Government Finances, published 2009.5 “A Call to Build the Capital City Partnership for Economic Growth,” a report to the Providence City Council from the Commis-sion to Study Tax Exempt Institutions, November 2010.Urban Institute | November 2011 Metropolitan AreaEducational and Medical ServicesManufacturingPercent of Total Nonfarm Employment (2010)Percentage Point Change (1990–2010)Percent of Total Nonfarm Employment (2010)Percentage Point Change (1990–2010) Pittsburgh21.05.67. 8-4.8 Philadelphia20.76.56.9-7. 0 Boston20.55.08.0-7.9 Baltimore18.76 .14.9-6.3 New York18.46.34.4-6.5 St. Louis17. 38.58.2-8.9 Detroit16.56.510.8-7. 8 Tampa15.93.25.2-4.4 Minneapolis15.85.710.2-5.3 Miami15.44.43.4- 6 .1 National15 .15.08.9-7. 3 Chicago15.05.39.5-7.7 Cincinnati15.03.610.5-7. 5 Portland14.44.311.1-6.0 Phoenix14 .15.26.5-6.9 San Francisco13.23.56.2-3.2 Los Angeles1