The release of a special report by former Auditor General Eugene DePasquale has stirred an ongoing debate over how tax-exempt status is determined in Pennsylvania. The report analyzed tax data from 10 counties around the state and found that the amount of lost revenue due to tax-exempt public charities ranged from $35 million in Monroe County to over $600 million in Allegheny County.
Since the report’s release, local papers across the state have plugged these numbers into startling headlines (“Allegheny County potentially loses $619M in revenue from tax-exempt property”) further fanning the flames of a debate that stretches back over three decades.
The issue, however, is not as clear-cut as municipalities missing out on an opportunity for more revenue. The debate is over which branch of government gets to determine whether a public charity should be tax-exempt.
The state constitution permits the General Assembly to exempt institutions of “purely public charity” from taxation, but until 1985, there was no criteria for what organizations made the cut.
“For years, neither the state constitution nor the applicable legislation in effect at the time properly codified how to define a ‘purely public charity,’ leading to decades of wrangling between the Pennsylvania courts and the General Assembly as to who has the authority to establish that definition,” the report stated.
This changed when a state Supreme Court decision in 1985 — Hospital Utilization Project v. Commonwealth of Pennsylvania — established a judicial test to determine tax-exempt status. It was called the HUP Test, after the name of the appellant in the case, and it laid out five criteria that an organization must meet to be considered a purely public charity and thus tax-exempt:
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- Advance a charitable purpose
- Donate or render gratuitously a substantial portion of its services
- Benefit a substantial and indefinite class of persons who are legitimate subjects of charity
- Relieve the government of some of its burden
- Operate entirely free from profit motive
Nonprofit advocates have argued that the test was not interpreted uniformly across the state, leading to uncertainty among public charities about whether they qualified or were in danger of losing their status.
“[The test] provided five criteria that were fairly broad and fairly vague, and so various courts around the state applied the criteria differentially,” said Anne Gingerich, executive director of the Pennsylvania Association of Nonprofit Organizations (PANO). “There were quite a few court cases that occurred as a result.”
The PA legislature passed Act 55 in 1997, which created its own criteria based on the HUP test, in an effort to make the rules clearer for nonprofits and municipalities. Challenges to nonprofits’ tax exempt status plummeted due to the bill, according to Gingerich.
But another Supreme Court decision in 2012 asserted that the courts still had the final say on what qualified as a purely public charity under the constitution. Once again, the door was open to differing judicial interpretations of the HUP test.
The current debate stems from 2012 decision and the questions it created: How much power does the legislature have to establish a specific criteria? To what extent should the courts follow this criteria?
The argument boils down to some pretty heavy legal theory about the separation of powers between the legislature and the courts, and lawmakers are not waiting around to hash it out.
A bill currently on the Senate floor aims to bypass the debate by calling for an amendment to the state constitution that would give the General Assembly explicit powers to determine the criteria for what makes a purely public charity.
Senate Bill 4 passed the finance committee last week and is set for a full vote. It has already passed in both the House and the Senate in the last legislative session, but proposals to amend the constitution must be passed twice. In addition, voters will need to approve the amendment in a public referendum.
Backing for the bill is divided along partisan lines, with Republicans in support and Democrats, for the most part, in opposition.
Rep. Michael Sturla, D-Lancaster, told Generocity.org that the amendment would be an inappropriate extension of the legislature’s power.
“The traditional role of the separate branches of the government is that the legislature makes the laws, the executive carries out those laws, and the courts determine how those laws are applied and whether they’re applied fairly and evenly, whether they are constitutional or whether there are flaws,” Sturla said.
“What this amendment basically says is ‘no, the courts really don’t really have any say in that; we determine that as the legislature.”
Sturla added that he thinks the amendment could lead to the legislature picking “winners and losers” by allowing them to tailor the criteria at their whim. This could even open up the door to ideological beliefs affecting which organizations get tax-exempt status, he said.
The bill’s prime sponsor Sen. Mike Brubaker, R-Lancaster, has countered opponents of the bill by stressing the importance of setting clear rules so municipalities and nonprofits know what to expect from one another.
“The goal of Senate Bill 4 is simple: To clarify both the authority and criteria regarding our public charities,” he said in a press release. “This then allows for a clear set of standards to be established for our non-profits and taxing authorities by which to base their charitable status decisions.”
PANO has not taken a stance on the bill, although it supports implementing clearer rules.
“If that happens through a constitutional amendment, then it happens through a constitutional amendment,” Gingerich said, although she noted there are potentially other ways to achieve the same goal.
Sturla said he understands the concerns of nonprofits up against cash-strapped municipalities looking for revenue.
“I’m not saying we can’t tweak those laws and provide different standards,” he said. For example, he said, the legislature could push the courts to apply the law in a uniform manner across the state.
“You can’t have one court on one end of the state ruling one way and one court on the other end of the state ruling another way,” he added.
In light of recent cases where nonprofits had their tax-exempt status challenged by a municipality, some nonprofits are concerned that if the rules are not clarified they will increasingly be targeted to fill budget gaps.
Tivoni Devor, a Philadelphia-based advocate for nonprofits (and occasional columnist for Generocity.org) said his concern is that taxing property held by nonprofits draws money away from the mission-based activities of nonprofit organizations. “These organizations should be able to clearly demonstrate the value of their charitable work outweighs the value of the land they do it on,” he said.
“It’s important for nonprofits of all sizes to better explain the value of their work, via their outcomes, with the public to counter this pressure,” he added.
Photo via Alex Vuocolo. Graphic via Mo Manklang-30-
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