Tax Exempt Myopia

The City and County are justifiably working assiduously to assess and collect taxes from large non-profits that actually have for-profit operations or that do not meet the Supreme Court’s five part test to qualify as tax exempt. Too bad both the City and County have long supported and promoted some of the worst examples of tax dodging by for profit enterprises.

And what would that be? Think Heinz Field, PNC Park and CONSOL Arena to name three. With combined property value approaching a billion dollars, these structures represent over $25 million in foregone property tax revenues owing to the tax exempt status of the facilities.

Ironically, one of the complaints about UPMC has been the high salaries of some of its top officials. Why ironic? Consider the yearly pay of many of the athletes performing in the three venues. Several are well above the $5 million mark that has raised so much ire when attached to the head of UPMC. This is not to justify the UPMC head’s compensation. For a tax exempt non-profit, it is does seem out of touch with a prudent approach to pay.

But the point is that the teams and the players using the tax exempt facilities are in effect being subsidized by the low rent they pay to utilize them. If a market based rent were being paid, the total for the three facilities could be above $50 million year, some of which would be used to pay taxes if the facilities were not tax exempt. So, the taxpayers get hit twice. They put up the preponderance of the money needed to build the structures, get no property tax revenue and pittance for rent.

Now that is a sweet deal.

Another Tax Plan for Pittsburgh’s Non-Profits

Noting that non-profits in the City of Pittsburgh own a lot of property and employ a lot of people but are tax exempt and not a lot of them participate in helping the City through payments in lieu of  taxes, a state Senator has supported extending Pittsburgh’s Payroll Preparation Tax (PPT) to non-profits having 250 or more employees. 



The PPT is a flat rate levy of 0.55 percent on the total payroll of businesses within the City. This tax was imposed by Act 222 of 2004, signed into law on December 1 of that year, and was part of a package of tax reforms that led to abolishing the mercantile tax and the business privilege tax-two very onerous taxes that were not based on company earnings and were quite punitive for some businesses.


Act 222 of 2004 does mention charitable organizations.  It says they should calculate the PPT but would only be liable for activities that do not meet the requirements of the IRS Code or the state’s law on public charities. The law also notes that nothing in the Act would prevent a non-profit from making agreements with the City to provide services or make voluntary payments.


The Senator’s memorandum on the proposed legislation states that his proposal would reduce the PPT on for-profits to 0.5 percent and levy the PPT on large non-profits at a rate of 0.4 percent.  The memorandum notes that non-profit employers with more than 250 employers account for over 70 percent of all non-profit employment in the City.  Governmental entities including authorities were not subject to the tax when the Act was written and will not be in the future in light of the constitutional provision exempting government entities.


The issue of extending the tax to non-profits was debated prior to Act 222 becoming law.  Indeed, the first Act 47 recovery plan for Pittsburgh noted “there are constitutional impediments to levying this tax on charitable organizations… [and would likely] lead to litigation between the City and the institutions.” 


Pittsburgh is the only municipality in the Commonwealth to have a payroll preparation tax (it was created only for Cities of the Second Class and Pittsburgh is the only one in that class) but there are large non-profits in other corners of Pennsylvania.  A 2009 study by the Legislative Budget and Finance Committee identified 183 municipalities that are home to either a non-profit general acute care hospital, a private four year college or university, a state related or a state owned college or university, or some combination of the four. 


Could a selected group of non-profits in one city be subject to a tax that only exists in that Pennsylvania city?  Can that city treat non-profits differently based on their size?  Why should a charitable organization with 250 employees pay the tax but those with 249 employees not?  Even more to the point, since the Pennsylvania Constitution allows tax exempt status for charitable organizations as defined in statutes adopted by the General Assembly, how would it be constitutional to allow a municipality to levy a tax on charitable organizations that have been granted exempt status under Pennsylvania law?  These are just some of the long list of technical and legal questions raised by the proposal that will have to be addressed by legislative committees if the bill ever reaches the committee hearing stage.  


Moreover, there can be little doubt that in the event the proposed legislation moves forward, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax, especially the larger ones currently in the crosshairs of the proposed tax bill.  These groups have many loyal and powerful friends who will point out all the good the non-profits do for Pittsburgh to help maintain its high rankings in many desirable amenities and in their attention to community needs.  These friends will almost certainly importune Harrisburg so as to make sure this bill never gets out of committee. 


It is unknown and perhaps unpredictable at this point whether the proposed PPT reduction on for-profit businesses will prompt that sector to mobilize and urge the Legislature to adopt the lower tax rate planned for them as part of the scheme to levy the PPT on non-profits. 


None of this means there are no legitimate questions about what constitutes a qualified charitable organization.  Take for instance the rise of the mega-hospital such as UPMC where revenues have, on occasion, exceeded expenditures by large amounts or when a university steps over the line into areas of for-profit activity.


Now would be the perfect time for the Legislature to review and update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly what constitutes for-profit and non-profit activities.  The Legislature can and should work on assisting taxing bodies in determining what if any for-profit activities exempt organizations are involved in. It might be as simple as requiring charitable organizations to file with state and local taxing bodies the equivalent of a Federal form (or copies of their Federal report) that contains information and explanations about for-profit activities to the state and local taxing authorities.  Does the City know how much it collects from property taxes or payroll taxes attributable to non-profit activity that does not meet the charitable test?  If not, that surely needs to be learned and quickly. 


Bottom line for the proposed PPT bill: Non-profits that qualify as charitable organizations and have been granted tax exempt status under Pennsylvania laws and by the IRS will not be taxable under Pennsylvania’s Constitution.  To levy any taxes on these organizations will require either an amendment regarding Article VIII, Section 2, paragraph v of the Pennsylvania Constitution or a General Assembly rewrite of laws spelling out the criteria required to be granted tax exempt status.  Neither will happen any time soon, if ever, given what is at stake for the parties involved. 


Something needs to be done to put a stop to the almost annual controversy over non-profits and whether they should somehow be taxed. 

Taxing Non-Profits

A state Senator has proposed levying Pittsburgh’s Payroll Preparation Tax (PPT) on non-profits with 250 or more employees. The PPT is a flat rate levy of 0.55 percent on the total payroll of businesses within the City. This tax was imposed back in 2004 and was part of package of tax reforms that lead to abolishing the mercantile tax and the business privilege tax-two very onerous revenue taxes that were not based on company earnings and were quite punitive for some businesses.

The proposed PPT for non-profits would apply to the charitable part of a non-profit’s activities since presumably they are paying the tax on any activities that have been deemed for-profit. Note there are no taxes on the non-profits that could be eliminated as part of a deal sweetener for them.

This issue was debated at the time the PPT was being drafted into law. The arguments then and the arguments are still about the legality and constitutionality of taxing purely charitable organizations. There is also the issue of whether the taxing power can be given to the City if it is not part of a law that would allow other taxing bodies in Pennsylvania to levy the tax on non-profits.

Beyond those technical considerations, there is the political angle. Without question, the foundations, universities, churches and other non-profits in the cultural, educational and economic development community will be up in arms about the tax. These groups have many loyal and powerful friends who will point out all the good they do for Pittsburgh to help maintain its high rankings in many desirable amenities and attention to community needs. These friends will also be calling Harrisburg to make sure this bill never gets out of committee.

There are legitimate questions about what constitutes a qualified charitable organization. It is high time the Legislature update any laws pertaining to the criteria that must be met to qualify as a charitable organization and to delineate clearly when the activities they engage in are for-profit and must pay taxes.

All this is complicated by the rise of the mega-hospital such as UPMC where revenues have on occasion exceeded expenditures by large amounts. The laws need to recognize and deal with those situations by forcing the non-profit to lower its prices, allocate their excess to free care or donate to other hospitals that need financial help. Universities will also need a lot of examination to determine whether they are stepping over the lines in some areas into for-profit activity. This is not easy but it will have to be dealt with if we are to put an end to the annual cries for non-profits to do more.

Will the Senator also ask that governmental entities including authorities to also pay the tax as the law currently exempts them?

New Report on Non-Profit Payments

Back in May of this year we wrote a blog entry on a report by the Lincoln Institute for Land Policy about the characteristics of PILOT agreements between tax exempt non-profit organizations and local governments across the country. The blog noted the value of the report but pointed out that a lot of the data was incomplete owing to the fact that many localities that may have PILOT programs may not identify them as such. Note that locally the agreements between Pittsburgh and its non-profits have just been ruled public record after a request to the state.

Lincoln has followed up with a newer, more comprehensive working paper on the topic. The data is still lacking in spots: Pennsylvania shows 24 municipalities, two counties, and three school districts having PILOT agreements. Some have a specific number of non-profits making payments, others do not. Some have a dollar amount of contributions, others do not. For 2011 the report shows Pittsburgh receiving $2.6 million from 46 non-profits, which is the consortium of non-profits under the Pittsburgh Public Service Fund. The Institute classifies the payments as either "long-term contracts", "routine annual", "voluntary property tax payments", "irregular one-time", or "unknown". The last category is which Pittsburgh’s arrangement falls into under the report’s typology.

Parks Philosophy: Dynamic or Static?

Four years ago the previous County Executive made a public pronouncement that the County park system-comprised of 20,000 acres-would undergo a shift in thinking that looked more at private and non-profit solutions but would not involve selling off the parks. This came on the heels of a 2007 study commissioned by the County which examined revenue generating opportunities in the parks.

The reason? Primarily because maintenance had fallen behind and were neglected. A foundation akin to the Pittsburgh Parks Conservancy called the Allegheny County Parks Foundation was established, but there was an emphasis on establishing "public-private partnerships to operate some of the parks’ major amenities and attractions (emphasis added)". The Parks’ Department website still lists requests for proposals for operating some of those amenities and the County Parks’ Foundation is soliciting a bid for redesign of the South Park fairgrounds, but private involvement in the parks is still minimal.

Meanwhile the City of Pittsburgh Council’s new chair of parks and recreation completed a tour of parks in the City and much of the same was encounter: deferred maintenance, unused space, and an ongoing planning effort to determine what is being used and what is not.

The parks at both the City and County level are intertwined in a rather complex arrangement: proceeds from the 1% RAD sales tax go to the parks, there are the non-profits acting as recipients for donations and coordinating projects, there are formal parks departments and the public works departments handle most of the maintenance. Where exactly do outside private and non-profit interests fit into that quite crowded chart?

Councilwoman Puts Economics Ignorance on Display

Pittsburgh and Allegheny County are planning to revisit the issue of whether some large non-profit organizations in the City should have their property tax exempt status repealed. It is an argument that has been around awhile and a thorough discussion of the pros and cons is worth having. But as is invariably the case some politician will sally forth with an irrelevant, disturbing and illogical argument.

Enter a City Councilwoman saying that UPMC pays virtually no property taxes and commenting in a news report, "Additionally, many service workers at UPMC are not making family-sustaining wages", and continuing, "Roughly half of the service workers at UPMC make less than $12 per hour…while the living wage to support a family of four in Pittsburgh is $25.40 per hour."

First of all, when did a living wage reach $53,000 per year? That’s well above the regional average wage rate. Second, even if $53,000 a year is the family of four sustaining income, where is it written that everyone working at UPMC is the sole provider for a family of four? Third, if the skill levels of "service workers" can command no more than $12 per hour in the market place why is it the government’s job to artificially boost their wage rates? If UPMC is forced to pay higher wages, how will they make those payments? Charge more for services, offer less free health care, hire fewer workers, reduce the benefit packages for all employees?

If UPMC loses its non-profit status and has to pay millions in property taxes, where does it take the money from? Wages, benefits, free health care?

Whether UPMC should have all or parts its organization lose non-profit status is something to be debated and will probably either end up in court or require more legislation before tax exempt status is taken away. But that decision should not take into account the fact some workers do not earn $53,000. There are many non-profits with employees who do not earn that much. It is an irrelevant argument.

PILOTs: Grounded or Ready for Flight?

"It’s in the university’s best interest to help the city thrive. And the city has to realize it can’t kill the goose". That’s the assessment of the lead author of a Lincoln Institute for Land Policy report on PILOT (payment in lieu of taxes) programs between cities and non-profits. Killing the goose might have been what would have happened if the "post-secondary education privilege tax" proposed by the Mayor of Pittsburgh would have gone into effect.

The report provides quite a comprehensive picture of where PILOT agreements exist, but it still is not perfect owing to the fact (acknowledged by the authors) that many municipalities might have individualized agreements with non-profits or might not identify them as PILOT programs. The data shows there are only 117 municipalities in 18 states that have a PILOT agreement. Many are concentrated in the northeast U.S.

Pittsburgh is one of those municipalities: it has reported a positive dollar figure under the heading of "non-profit payment for services" at least going back to 1999. The highest amount for any one year came in 2006 when the total was $9.038 million as the Pittsburgh Public Service Fund came together. Recent audited numbers are much lower.

The report says that with the scrutiny on non-profits as to what constitutes non-profit activity and the pressure on local budgets that the interest in PILOTs is quite high, but yet their use it not widespread. Municipalities in Massachusetts account for 70% of the agreements found in the report. As we wrote in a Blog two years ago, Boston-a city that is often looked to when studying non-profit/municipal agreements-had a total value of hospital and university property that was just slightly less than the value of Pittsburgh’s total (taxable and exempt) property.

Pittsburgh’s last few budgets have said this in regards to PILOT agreements with non-profits: "the City and the non-profit tax-exempt organizations are developing a long-term arrangement regarding this revenue source".

Is Non-Profit Payment Non-Attainable?

The idea was probably germinating for a long-time, but in September of 2009 the County Executive announced that he would be seeking $4 million from non-profit agencies in the County to help with the budget in 2011 (the Executive stated "it is not in my budget until 2011" and that requests would start with hospitals "because they’re the largest [nonprofits] in the region. It doesn’t mean we’ll stop there").

The line-item for the contribution did indeed make it into the 2011 County budget: in the section titled "Revenue by Object Code with Character Sub-Totals" under Local Unit Revenues there isa line item of $4 million from "non-profits", right below money from the Regional Asset District, the City of Pittsburgh, and the Airport Authority.

Last year as the 2011 budget was being assembled printed reports detailed the scant and secretive details. To the best of anyone’s knowledge that money is not available. In September it was reported that "No deal has been reached to provide those funds, but [the Executive] pledged that an agreement would be signed by year’s end and the money would be available for 2011. He declined to identify any of the nonprofits with whom his administration is talking". In November it was reported the Chief Executive "has been closed-mouth about the status of any negotiations with nonprofits, [but that Council’s finance chair] said he expected the money eventually would be there."

Now state-level changes (the state funds a healthy portion of law enforcement and health and welfare functions in all counties) mean a $15 million gap in the 2011 budget and the status of the $4 million from unidentified non-profits makes that shortfall even more pronounced.

Does County Have a Non-Profit Commitment?

It may be a small (perhaps miniscule is a better way to term it) piece but in the 2011 County budget there is $4 million in non-profit contributions that some on Council have labeled "phantom revenue".

That’s because there is no assurance the money is coming other than a prediction by administration officials that it will be there. That echoes what was said earlier this year. As of September it was reported in print media that "no deal has been reached to provide those funds, but [the County Executive] pledged that an agreement would be signed by year’s end and the money would be available for 2011. He declined to identify any of the non-profits with whom his administration is talking."

It is not clear if it is one non-profit or a group of non-profits, whether the contributor(s) carries out services in communities not including the City of Pittsburgh or if there is overlap between City and non-City locales, or if the $4 million is for a specific service(s) the County provides or if the money is restricted or targeted in its use.

If the County’s agreement does come through it will be quite a coup given the often contentious climate between non-profits and local government in the region. Recall that just a year ago the City attempted to impose a tuition tax after other fees aimed at non-profits fell through. The County Executive noted at the time that there were better ways than a legal fight to gain the support of non-profits. In addition, non-profit payments to the City have fallen from the 2007 audited amount of $5 million or so.

If the deal does not come through then there will be scrambling to locate another source of funds to make up for the shortfall.

Phantom Revenue, or a “Ghost of Bad Budget Decisions” Past?

Next year Allegheny County hopes to get $4 million in revenues-officially termed payments in lieu of taxes-from non-profit organizations. A likely bet is that the non-profits targeted by the County will be hospitals and universities, both inside and outside of the City of Pittsburgh as the County covers the City’s boundaries.

The County’s desire to get non-profit money for next year should not come as a surprise. It was mentioned at this time last year that the County would seek $4 million. The County Executive made a distinction at the time between the County’s request and what was shaping up to be a battle in the City over the proposed tuition tax. "These are two separate issues…the city budgeted [for the revenue through nonprofits]. I didn’t budget for it at all; it’s not in my budget until 2011." The County Council president added that "we don’t come at this with any level of leverage. The city tried their approach, but we have been focusing on a much different style,"

And what different style would that be? The 2011 budget is here, but there is no type of agreement with non-profits on paying the $4 million. "No deal has been reached to provide those funds, but Mr. Onorato pledged that an agreement would be signed by year’s end and the money would be available for 2011" was what one newspaper report noted. How long before we hear claims about how rich non-profits are not doing their civic duty to help the County out in difficult times?

Target a revenue source, place it in the budget, and work out the details later: that’s not in the spirit of good governance.