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. 

Will State Hear County’s Pleas?

This week the Governor and 31 state legislators have been invited to County Council’s chambers to discuss "PA Assessment Law and the 2012 Court Ordered Allegheny County Reassessment". The topic could more appropriately be titled "Please Act on Our Moratorium Request". Council, by a 13-2 vote, recently passed a resolution asking the General Assembly to pass a bill circumventing the decision of the state Supreme Court that ordered a reassessment based on the uniformity violations in the County’s base year plan.

As we have pointed out before, the serious consequences of a legislative action that would try to nullify a Supreme Court decision cannot be understated. The County Executive and Council members in support of the base year and now the moratorium say they want predictability and stability. However, the status quo is in clear violation of the state Constitution’s uniformity clause.

From the perspective of the Council the upside of the moratorium is that it will give the General Assembly "suitable time to study Pennsylvania’s current property tax system and to enact legislation of uniform, equitable, and statewide effect…" The problem is that one, the Legislative Budget and Finance Committee released such a study in July of 2010 and two, the state has known for a long time with or without studies that the property tax system is outmoded and has acted at the margins (lottery, slot machines, homestead exemptions, etc.) to "solve" the problem.

A sure sign of how seriously legislators from the County take the Council’s request will be reflected by how many show up to the meeting.

Newspaper Revisits Nordenberg Report

The Post-Gazette in an opinion piece this morning laments that politicians and local leaders have failed to get a referendum question on the ballot asking voters to approve a merger of the Pittsburgh and Allegheny County. In decrying the lack of progress they remind us of the infamous Nordenberg Report from 2008, which recommended the merger vote. According to the op-ed writer the Nordenberg study group did a very thorough job of making the case that with all the municipalities there is excessive duplication and called boldly for a City and County merger to address the issue.

Too bad the op-ed writer has never bothered to read any of the criticisms of the shortcomings of the Nordenberg Report. Analytical ineptitude hardly begins to describe the hastily written report. Misleading use of Louisville’s job growth following merger with Jefferson County and failure to point out the huge differences between the situations in Kentucky and in Allegheny County and Pittsburgh are just a sample of the fallacies contained in the study.

But what really sank the Report almost as soon it was released was the absurd plan for merger. Pittsburgh would merge with the County, but all other 129 municipalities would remain intact. Pittsburgh as a government would cease to exist and be replaced by an "urban services" district. The district would run city services and collect taxes to support the expenses. Unfortunately for the plan, the Pennsylvania Constitution does not allow different tax rates for people and businesses in the same government jurisdiction. With Pittsburgh no longer in existence as a municipality its residents would be citizens of the County and could not be taxed higher than County residents. Moreover, Pittsburgh’s debt and other obligations would be shared by all residents of the County.

What a pathetic effort for seventeen months of study. Little wonder the public, in the City and across the County, have no interest in pursuing the merger.

Perhaps if the writers of opinion pieces would actually read the report and look at some of the criticisms leveled against it, they might climb down off their lofty high horse and deign to consult with a few folks who know something about the issues and problems in the Nordenberg Report. But don’t count on it. Strongly held convictions based on pie in the sky notions are often impervious to facts and reasoned argument.

Legislative Oath of Office and Assessment Moratorium Bill

Article VI, Section 3 of the Pennsylvania Constitution requires that all Senators and Representatives take and subscribe to the following oath, "I do solemnly swear (affirm) that I will support, obey and defend the Constitution of the United States and the Constitution of this Commonwealth and that I will discharge the duties of my office with fidelity."

Straightforward and leaves little room for interpretation.

How is it then that the Legislature intends to pass a bill that sets aside Article VIII, Section 1 of the Constitution that requires; "All taxes shall be uniform, upon the same class of subjects, within the limits of the authority levying the tax, and shall be levied and collected under general laws."? The Supreme Court has upheld this provision on several occasions, most recently in the case of a suit brought against Allegheny County’s assessment system.

The legislative moratorium on court ordered re-assessments based on the Constitutional requirements set out in Article VIII, Section 1 essentially sets aside the Constitution as it applies to property taxation, an action that is clearly inconsistent with the oaths of office taken by legislators and the Governor if he signs the bill into law.

Legislative Moratorium on Assessments Overrides Constitution

The principal effect of the moratorium on re-assessments now working its way through the Senate after having passed in the House will be to set aside an important constitutional provision known as the Uniformity Clause. By ordering a stop to court ordered re-assessments until some future unknown date, the Legislature will overturn a Supreme Court ruling that the base year as used in Allegheny County is unconstitutional. Thus, the legislation as written effectively amends the constitution statutorily rather than through the prescribed amendment process contained in the constitution.

Another consequence of the legislation will be to deprive property owners from suing a county wherein a property is located and taxes are paid on the grounds that the assessment system violates the Uniformity Clause. That amounts to legislative denial of due process.

Of course, this should be enough to give the Legislature pause before it proceeds, but it apparently won’t.

The Legislature says it wants the moratorium so that it can reform the state’s assessment regulations. The problem is the Legislature has no credibility on this point. They have had decades to fix the problem and have done nothing until forced by a Supreme Court ruling, which they now want to overturn. Here’s the crux of the situation. Any legislative reform of assessments will have to call for a re-assessment in counties that are far out of line on measurements of accuracy of assessments in order to satisfy the Uniformity Clause requirement and move the state into the 20th century vis-à-vis assessment.

The irony is that the Legislature is asking for time to write a bill that mandates re-assessments. They will meet the same resistance from folks afraid of a re-assessment and who are now screaming at them to stop court ordered re-assessments. Of course, the wink-wink, nod-nod understanding is that no legislation requiring re-assessments will be forthcoming any time soon. Thus, the state will continue with a constitutional crisis and ever worsening assessment inequities that are effectively locked in place.

Can Property Owners Be Required to Pay Unconstitutional Taxes?

In May, the Pennsylvania Supreme court ruled that Allegheny County’s base year property tax assessment system was unconstitutional because it produces severely inequitable results, forcing some property owners to pay more than their true market value share of taxes while others are paying less than the amount they should because their assessments are well below actual market value.

Under the Pennsylvania Constitution’s Uniformity Clause, similarly situated taxpayers must be treated equally. That means if property taxes are based on "fair market" value then assessments must as accurately as possible reflect market values. That was determined not to be the case in Allegheny County and the Court has, in effect, ordered the County to carry out a revaluation of properties to reflect actual, true market values.

The House has passed a bill calling for a moratorium on court ordered re-assessments until the Legislature can write reform legislation governing property assessments in the state. The Senate is considering the bill. If it passes the Senate and the Governor signs it into law, we will have a Constitutional crisis with one branch of government saying "carry out a reassessment as soon as possible" and another branch saying "ignore the Court and wait for us to write an assessment reform bill"-which will happen about the same time pigs fly.

Thus, the question: in light of a Supreme Court decision that Allegheny County’s assessment system is unconstitutional, can property owners be required to pay property taxes until such changes are made in the system to bring it in line with the state’s Uniformity Clause? If a property owner in the County refuses to pay property taxes, on what grounds will the taxing bodies be able to argue that the person is in violation of a constitutionally permitted tax law?

And that is just the beginning of the state’s problems. Undoubtedly, the law will be challenged in court and will go directly to the Supreme Court where the ruling will be the law is unenforceable and the prior Supreme Court order must be obeyed. And then what?

One can only gasp at the willingness of the Legislature to issue such a challenge to the Court. A challenge that will not redound to the state’s credit and can only create further loss of respect for state government. The moratorium is not the way to deal with the assessment problem. Rather, the Legislature should get busy and write a reform bill that seriously addresses the state’s assessment shortcomings, which are legion.

Constitutional Crisis Threatened by Legislation on Assessments

Members of the state House of Representatives have voted nearly unanimously to order a moratorium on court ordered re-assessments, unless they are being done voluntarily.

Here’s the problem. How can the House, for all intents and purposes, vacate a
Supreme Court ruling based on a constitutional issue? The Court has ruled
Allegheny County’s system is unconstitutional and must be fixed in line with
Judge Wettick’s May 2008 order.

If the Legislature wants to change the Uniformity Clause provision of the PA
Constitution, it has an amendment process it can use. Until then it seems logical
that a Supreme Court ruling based on that clause must be carried out as
expeditiously as possible to stop the unconstitutional favoritism the system is
imposing on Allegheny County property owners with some folks suffering irreparable financial harm by having to pay more taxes than they should have to pay. They can never get that money back.

It appears a constitutional crisis is in the offing. If the House bill becomes law and there is a lawsuit-which is inevitable and probably before the ink is dry-it will go straight to the Supreme Court where it be will declared unconstitutional and therefore unenforceable. Then what?

One can hope the Senate will steer well clear of this legislation. It is simply unimaginable that Congress would pass a law telling states they do not have to enforce Miranda rights or that they can ignore Roe vs. Wade with impunity if they so choose. Or more recently the Supreme Court ruling that overturned the District of Columbia’s prohibition of the lawful ownership of firearms in the home as unconstitutional: what would state legislators say if Congress passed a law telling Pennsylvania it could ignore the Supreme Court decision on second amendment rights and Philadelphia and Pittsburgh proceeded to pass a DC type prohibition on personal gun ownership?

The legislative branch cannot be allowed to overturn Supreme Court decisions, especially those based on the Constitution. The precedent, if allowed to stand, would throw Pennsylvania into chaos as far as the separation of powers is concerned. Courts serve a clear and vital function as a check and balance on the other branches of government. If their power to issue enforceable rulings and judgments is taken away, the legislative and executive branches will have destroyed the balance of power and woe betide the Commonwealth when that happens.