Nonprofits II: Issues, Costs and Benefits

Demolishing Hull House

Property Tax-Exempt Status:  Case Study

The town of Morristown, New Jersey has a lawsuit against Morristown Medical Center attempting to take away part of the hospital’s property-tax exemption.  Started as a small building providing free medical services to the poor, Morristown Medical Center is now part of a health conglomerate with revenue of $1.7 billion a year.  Much of its revenue comes from providing facilities for private doctors and managing ambulatory and testing services.

The town won an earlier suit classifying part of the hospital’s operations as taxable.  If Morristown wins, the hospital will be liable to up to $3 million per year in property taxes.  Since the case is almost certain to go to the state supreme court, the nonprofit status of all hospitals in New Jersey with similar operations and relationships with doctors could be at risk.  The court’s ruling could potentially affect all nonprofits in New Jersey and then be used as a precedent in other states.  (Newark Star-Ledger, “For towns, nonprofits, tax case looms large,” February 22, 2015, A1)

Morristown Medical Center is the largest employer in Morristown.  The hospital is growing and will probably increase employment in the future.  But its parent company, Atlantic Health Systems, could decide to expand its services at another hospital or a new location.

The hospital attracts doctors and other healthcare professionals and services to the area.  For example, there are three nursing homes and two assisted-living facilities within two miles of the hospital.  Two of the nursing homes, privately-owned, are across the street from the hospital.

New Jersey has high property taxes.  The existence of large nonprofits in a town increases the local tax burden on privately-owned property.

The town and the hospital might negotiate a “in lieu of” voluntary contribution agreement.  Either way, this conflict might affect other nonprofits in Morristown.  Two large tracts of land, with specialized buildings, are owned by Seeing Eye and three private colleges. The smallest of the colleges owns land with an estimated market value of over $50 million.

Issues, Costs and Benefits

Nonprofits exist in a very different economic environment than when they were originally created and given tax exemptions.

Again, fewer than 5% of all nonprofits receive 87% of total revenue.  These are large operations with substantial assets.  The image of small, local nonprofits providing services to the poor and underprivileged, financed by local private donations, is somewhat out-of-date. Nonprofit managers often make corporate level salaries. Many nonprofits conduct large donation and marketing campaigns well beyond their area of operations.

Many of services provided by nonprofits are also provided by for-profits that pay taxes.  My local suburban YMCA primarily provides a fully equipped health club, physical rehab services, exercise classes, a pool, summer camps and programs, and baby-sitting services. It raises money by selling Christmas trees, in competition with two private nurseries within seven blocks. In the past, the “Y” may have offered “community services” that were not provided by private companies but this is no longer true.

Other “Y’s” and churches in the area sponsor government-subsidized and/or property tax exempt senior citizen housing. Many of the apartments are empty during the winter.

Some nonprofits provide goods and services that are only tangential to their original mission, such as the social, cultural and recreational services provided by some churches.  There is a “Y” in New York City that runs a kindergarten with tuition of $50,000 a year.  It is more difficult to get your kid into this school than Harvard.

It will be political dynamite if nonprofits lose their property tax exemptions and the rulings are applied to churches.

Nonprofits use municipal services, the same as payers of property taxes.  Some nonprofits pay property taxes indirectly when they rent office or other space.  Some pay “in lieu of” donations for municipal services.  I would guess that overall these payments are a small fraction of foregone property taxes.

I have not seen what the total tax savings of nonprofits are.  On the other hand, nonprofits, primarily hospitals and colleges, receive about $500 billion a year in tax money.  I have seen a few studies that indicate eliminating the itemized deduction to nonprofits would have little effect on total private giving.  This is not surprising since much of this goes to churches and related religious organizations.

If some communities charged property taxes and others didn’t, it might affect where nonprofits locate in the future.  Also, some existing nonprofits might relocate.

Social services to the poor are a small percentage of the total expenditures of all nonprofits.

A lawyer has told me that judges and the IRS have become somewhat more critical of the “community services” provided by some nonprofits.  More nonprofits are basically tax shelters or scams.  A long, recent article in the New York Times discussed how rich families have set up private art museums, sometimes on their residential properties, and “donated” part of their private art collections to avoid future estate taxes.  Public access to these museums is often limited.

Full Disclosure:  I once taught at one of the colleges mentioned in this post.  I am currently on the board of a nonprofit in Morristown that owns tax-exempt property.  (Not the hospital)

Sources:

Linda Stamato and Sanford Jaffe, The Newark Star-Ledger, “Finding common ground for tax-exempt charities and municipal services,” March 15, 2015, D5.

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For background and description of nonprofits, see Nonprofits I:  Nonprofits in the American Economic System.