Monday, February 26, 2007

Pittsburgh is trying to change the contract

The city of Pittsburgh has a serious budget crunch, and about one-third of its land area is exempt from property taxes of which half is owned by non-profit organizations. That's the proverbial irresistable force smacking into an unmovable object.

The Pittsburgh Post-Gazette (at which I was a summer intern a looong time ago) is doing an pretty impressive job of covering the raging local debate, not just writing up what he said and she said but also looking around for relevant context and background. Indeed recently the paper brought some local specifics to light by uncovering the actual amounts that various local organizations had been contributing to a voluntary "payment in lieu of taxes" type fund. (As the paper notes, those amounts follow no logic as far as the size or wealth of various organizations -- not surprising for a voluntary system having no force of law.)

Broadly I stand on the side of the non-profits in this issue: the benefits to Pittsburgh of having the Carnegie Museum and Carnegie Mellon University clearly outweigh the lost property taxes, and for-profit versions of those enterprises would be far less rooted in the city (hence far more likely to move away when they felt like it). Were I a Pittsburgh alderman I'd be arguing that trying to balance the city budget by taxing non-profits is a crappy idea on several grounds. BUT...I do get impatient when non-profit folks turn this into some sort of church-state issue, as if non-profits have some sort of inalienable right to tax-exempt status.

That's nonsense. Private not-for-profit organizations in this country operate under a social contract which is an invention (and now a cultural export) of this country: exemption of most taxes plus limited tax benefits for contributions, in exchange for pursuing certain socially-beneficial purposes and spending any surpluses only on that purpose and staying out of partisan politics. A contract is a two-way street, and a social contract retains moral standing only so long as both parties are content with it. That's what Joel Fleischman is going around saying about charitable foundations, and he's right.

A reasonable argument is that cities are the level of government least able to absorb the tax-exemption end of this particular contract. That's because it can be such a big honkin' fraction of the tax revenues which are available to them (property taxes, mostly), and because the services provided by municipal government are a level from which non-profits get exactly the same benefit as businesses. (The city fire truck doesn't respond to the museum's fire alarm any slower than to anyone else's.)

One of the articles linked above describes a number of local attempts to deal with that conundrum, and some places where states have decided to compensate municipalities on the grounds that an entire region or state shares the benefits of having a major university or whatever. Frankly I can see the logic of some of that, and I notice also that the Pittsburgh situation includes an example of the separate issue of whether non-profit hospitals are really charitable enough. (The huge University of Pittsburgh Medical Center in 2005 ran a $500 million operating surplus (!) and contributed only $1.5 million to the city in lieu of a far greater amount in forgone property taxes.)

So I guess all that puts me kind of a similar place on property tax exemptions as Fleishman is in regarding foundations: that the non-profit sector needs to figure out and offer a reasonable adjustment to this part of the social contract, or the other party is going to eventually enforce one that we might like a lot less.


Harold said...

Here in Chicago, SEIU has raised the issue of Advocate Health being inadequately charitable -- and some of what traction they've got is because local governments are looking for more money in the couch cushions and everywhere else. The exact social contract here is pretty vague, allowing SEIU to imply that nonprofits need to provide benefits equal to their tax exemptions, and allowing Advocate to get by with generalized statements about all the good they do. So far the debate is at a primitive level in these parts; maybe Pittsburgh can show us the way in nonprofitude as well as in football.

Stephen Drone said...

Wow. 1/3 of the city's land area is exempt from property taxes. This seems like an awful lot. Can I assume this is pretty when compare to other major cities?

Paul Botts said...

The fraction varies a lot, apparently; one of those linked newspaper articles cites a few other examples such as New Haven Connecticut in which nearly half the land area is tax-exempt. That's a physically small city which of course is dominated by the huge Yale campus. I'm not aware of any comprehensive figures from around the country.

Pittsburgh is relatively compact among big cities; I imagine that as you move west to more spread-out cities the fractions of land not on the tax rolls generally declines. Of course cities with lots of government property have the same problem, state capitals and Washington DC and so forth. Boston comes to mind, with all those college campuses _and_ being the state's capital.

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