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
The 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.
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.