In most US states, nonprofits will be tax-exempt for the most part. Federal law exempts charities from paying federal taxes subject to various qualifications. This is a generally accepted notion, as most charities do valuable work in our community. Also, many of these charities are on a tight budget and have more needs that they can fundraise for. However, the current state and city budget deficits that are being experienced today have pushed those in these administrations to think of innovative ways to raise funds. One of the ways is the imposition of taxes on non-profit organizations. While this may seem unfair and unethical, a closer look at what and how they are trying to tax may reveal something else.
Land taxes
One of the areas that has been suggested and that has caused some states and cities to tax charities is property taxes. Hospitals, universities, and other charities own large tracts of land and real estate in the United States. However, most of these organizations do not pay real estate taxes on these properties. However, cities like Philadelphia, Boston, and Providence are now proposing or taxing large nonprofits that own land in their cities. The reason is that it is unfair to subsidize taxes for some of these large, well-funded organizations with a large number of property at risk from taxpayers, some of whom cannot afford any property. In most cases, only large, well-funded nonprofits will own land and real estate and therefore can afford to pay real estate taxes without affecting their cause.
Unrelated business or business income
When a charity conducts for-profit side businesses to increase funding or to grow a revolving fund, those earnings may be taxable. Profits from side businesses conducted by charities are called unrelated business or business income (UTBI). However, the taxation of such funds is subject to various tax guidelines.
Taxation of large organizations
The other argument for supporting the taxation of nonprofits is that some of these organizations raise surplus funds that are even more than for-profit organizations make in revenue. Large universities, like the Ivy League universities, have large financial endowments by any standard. For example, Harvard University had donations worth $ 26 billion even after the recession, and many organizations withdrew funds for the institution. In 2008, Yale received donations worth $ 22 billion. In fact, these are huge funds even in the for-profit world. Although it may seem unfair that these organizations are taxed because they contribute so much to education, it is also worth noting that these organizations that raise billions in funds also consume public services (such as roads and utilities) and do not pay for them. In these difficult economic times, it may seem fair that these organizations contribute to the operation of the services they consume themselves, in the common attitude of shared responsibility.
Case at Point – City of Providence
The City of Providence is one of the cities that has recently taxed nonprofits. The tax rule announced by the city’s mayor, Mayor Angel Taveras, attracted a lot of media and public attention. Approximately 40% of the land in the City of Providence that is valued in billions of dollars is owned by non-profit organizations. For example, Brown University which is located in the city owns land valued at approximately $ 1 billion. Nine of the charities the city aims to pay property taxes to are expected to raise about $ 100 million if they pay the proposed property tax for charities that is set at 25% of normal property taxes.
Since these cities have imposed certain taxes on nonprofits, other city charities are eager to see if the trend will pick up as states and cities look to raise revenue to cover their deficits.
