PA Auditor General Holds Meeting in Philly on Debate Over Nonprofit Tax-Exempt Status

Auditor General Eugene DePasquale at City Hall

Pennsylvania’s Senate passed a bill last month proposing to amend the state constitution to give the General Assembly full power to define a purely public charity, which gives nonprofits tax-exempt status. Currently, the courts have the power to determine if a nonprofit qualifies as a purely public charity under an established judicial test, assuming its status is challenged in the courts.

A coalition of mostly Republican lawmakers want shift this power into the hands of the General Assembly, making the ability to establish a specific criteria a constitutional right of the legislature. (For more information and background, read Generocity.org’s explainer on the topic.)

In response, Auditor General Eugene DePasquale is holding a series of meetings across the state to discuss the amendment, as well as the larger issue of how tax-exempt status is determined. A meeting was held yesterday, March 25, in Philadelphia.

City Controller Alan Butkovitz testified at the meeting that Senate Bill 4 would make it easier for organizations to gain tax-exempt status, “placing an even more outrageous Real Estate Tax burden on current taxpayers.”

Around 30 percent of Philadelphia’s properties are tax-exempt, according to data collected by Governing Magazine. This includes property owned by churches, nonprofit service organizations, colleges, hospitals, and government buildings.

Union representatives from the Philadelphia Federation of Teachers and Local 22, the local firefighter and paramedics union, also spoke out against the amendment. They both stressed that the amendment would make it harder for the city to pay for essential services, such as schools and public safety.

“While it is certainly great to have these institutions in the city, as they continually expand, there is less and less land available for tax paying businesses to grow or begin within the city,” said Joseph Schulle, president of Local 22, during his testimony. “Asking these nonprofits to contribute to the economic needs of this city seems only fair.”

How could Senate Bill 4 translate into less dollars for municipalities? It’s not that the city will lose revenue directly, but instead it could lose an opportunity to make more money through something called Payments in Lieu of Taxes (PILOTs) or Services in Lieu of Taxes (SILOTs).

In the 1990s, during Mayor Ed Rendell’s administration, a number of large institutions, including the University of Pennsylvania, entered into PILOT agreements with the city in which they paid a set amount of money to help substitute for not paying property taxes.

Opponents of Senate Bill 4 argue that giving the General Assembly the power to define a purely public charity would make PILOT agreements impossible. The possibility that nonprofits could lose their tax-exempt status in court gives municipalities leverage to encourage nonprofits to enter into PILOT agreements, rather than get stuck in legal battles over their status.

Rendell, in testimony read on his behalf, said that the city collected over $10 million a year through PILOT agreements during his time as mayor.

But not everyone believes nonprofits should be a target for more revenue, regardless of the city’s budget gaps.

Representatives of local hospitals and service organizations, including the Pennsylvania State Alliance of YMCAs and Greater Philadelphia Health Action, Inc., argued that their services to the community more than make up for their not paying taxes, though neither expressed direct support for the amendment. In addition, Lee Huang of the research firm Econsult Solutions made the case that subjecting nonprofits to PILOT agreements can make the relationship between city government and nonprofit institutions transactional and adversarial, rather than cooperative.

Currently, the city and nonprofits work “hand in hand to provide community-serving resources such public education, policing, streetscape enhancements, which support those neighborhoods and strengthen the city as a whole,” Huang said.

One more public meeting is scheduled in Harrisburg next week, after which the the Auditor General’s office will compile the testimony and produce a report.

Senate Bill 4 and an equivalent House bill passed in the last legislative session, but state law requires that all legislation that would potentially amend the constitution pass in two consecutive sessions. Voters will also have a say due to requirement that the amendment be put to a public referendum.

 Photo via the Office of the Auditor General