Analysis: Tax-exempt property is a $500 million dilemma for towns in CT

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It seems simple: Large, valuable properties are owned by nonprofits that generate significant revenue and, if municipalities could tax them, their problems are solved.

In fact, Connecticut House Speaker J. Brendan Sharkey, D-Hamden, has proposed legislation in the past that would change the rules governing tax-exempt property in order to help struggling municipalities. His latest proposal for this session would allow municipalities to tax property acquired by private, nonprofit colleges, universities and hospitals on or after July 1, 2016.

Using data from Blueprint for Impact’s analysis on the economic impact of Connecticut’s nonprofit Sector, we have the opportunity to dig into the gritty details of this issue.

So, how large is the statewide tax liability reported by nonprofits, based on the value of land, buildings and equipment?

According to our data, it is more than $500 million per year. Sixty-two percent of the tax-exempt property is owned by private entities, nonprofit hospitals and universities.

A few cities carry the burden

The bubble chart below shows the value of the property held by nonprofit hospitals and universities in Connecticut. Notice how a few cities and towns have a disproportionately high volume of private, nonprofit property. Included with each town is an estimated property tax liability based on the median tax rate across all Connecticut cities and towns.

To compensate for the large amount of tax-exempt property, many towns will increase their tax rate, placing the burden on homeowners and business owners.

Municipalities do get some help from the state

UntitledThe PILOT program (short for Payment in Lieu of Taxes) attempts to reduce some of the burden that municipalities and taxpayers experience. However, the state only provides $115 million per year and has never fully funded the program, which only reimburses about 25 percent of the total liability created by private, tax-exempt property. Both Speaker Sharkey and State Senate President Martin Looney (D-New Haven) have proposed changes to the way Connecticut administers the PILOT program.

(Here’s a video about how PILOT programs work in other areas to provide some additional perspective, via the Lincoln Institute of Land Policy.)

Connecticut is not alone in its struggle to close the municipal funding gap created by tax-exempt property. Massachusetts has also considered removing the exemption for nonprofit property owners in the past. The map above, which would look different with current data, shows how the share of property taxes paid would change. The fight in Massachusetts is still ongoing, but it is an example that something will need to change in New England as municipalities continue to face tighter budgets — and nonprofit institutions look to expand.

How much do nonprofits contribute to Connecticut cities and towns?

This is where the tax question becomes complex. It is important to consider the contributions that nonprofits make to the municipalities in which they are based. Collectively, the state’s nonprofit sector employs 12.2 percent of Connecticut workers and provides $12 billion in compensation and wages. Those people then spend their wages in Connecticut and pay the property taxes in local towns.

A detailed analysis of the private universities and hospitals, which own the majority of tax-exempt property, reveals that they provide $7.5 billion a year in compensation and wages to workers in Connecticut.

In some cities, like New Haven and Hamden, nonprofits make additional payments beyond the PILOT grants from the state. Recently, Quinnipiac University made a voluntary payment of $1.23 million to the town of Hamden.

So what’s next?

If nonprofits are required to pay additional taxes on their large property holdings, it would undoubtedly impact jobs and the ability of nonprofits to provide services. On the other hand, if municipalities are unable to make up for the difference, particularly in some cities like Hartford, taxpayers will face higher tax rates and a reduction in the ability of towns to provide services.

Chris is founder of Blueprint for Impact, an organization helping nonprofits design web-based systems that make it easier to understand social problems and communicate the results of effective programs. This is the first in a series of posts about the data behind nonprofit tax liability. In the next post, Chris will explore how this issue impacts individual towns in Connecticut. He will also be digging into the potential impact of Sharkey’s proposed legislation.

What do you think?

  • Peter Morgan

    What alternative ideas are there for taxing non-profits? Taxing new property, grandfathering zero taxes for existing property, would seem to create a relatively difficult playing field for new non-profits. One could imagine imposing charges for specific services, police, fire, etc.; or charging property taxes at 80%, say, of the full rate, but offset by 50%, say, of the property taxes paid by employees living in the city/town; many other schemes.

  • Dwightstreeter

    The Yale Corporation, with an endowment of $23 billion and a FMV of ???, is living off an exemption from the 17th century when non-profit meant an institution of modest means. Clearly that is not the situation with these behemoth and wealthy institutions today, such as Yale and the Yale New Haven Hospital.
    Taxing property acquired after 2016 is a waste of time.
    We need to eliminate these exemptions at the state level and tax all assets over a base amount, such as $100,000.
    This would immediate lead to a reduction in property taxes, nuisance taxes (.22 on gasoline) and taxes that live on from another era, such as the property conveyance tax that adds insult to injury for people selling devalued properties.
    And it’s not impossible to increase the tax on millionaires, although Malloy calls those people his “base”.
    The current tax scheme is broken and it is a burden on the middle class and working poor.

  • 00000000001

    May I suggest some modest equalizing of CT state/local tax burden among it’s citizens. With the big tax increases of 2011, the tax burden was increased more on the non-rich, than the rich, and that was done on purpose. With the reasoning of keeping the rich from moving to a lower tax state, Malloy, with Barnes and Sullivan, they are all fighting to keep the tax burden on the rich as low as possible, even if it means the non-rich must pay more, much more. There’s a tax incidence report which will be showing that the rich have a CT state/local tax burden of 5% to 7% of their income, while the lower middle/working poor/retirees have a CT state/local tax burden of 15% to 25% of their income. My own CT state/local tax burden is about 20%, among the highest in the nation. Connecticut state government does a better job of income redistribution from the non-rich, than from the rich, but that doesn’t stop the rich from feeling paranoid about the feeling of being over-taxed.

  • Aki Bola

    The whole concept of non profit is a scam. Yale, with $24B endowment and $59,800 tuition+board and average non medical professor salary $200K, really? This is a run-for-profit business like any other, plain and simple.