Philadelphia Nonprofits Could Be Forced to Pay More City Tax

A recent State Supreme Court decision changes the rules.

Do Philadelphia nonprofits pay their fair share for city services? For those who say nonprofits should pay more, a recent court ruling could be (as the kids say) a game changer. The only question for the future might be, “What will be the name of the game?”

As in cities across the country, nonprofit organizations in Philadelphia are exempt from many taxes, including the real estate tax. That public largesse is in recognition of the public service that nonprofits perform in tending to the needs of the citizenry. However, as they operate, those nonprofits also generate costs for the city. Every hospital that tends to the needs of the sick also creates traffic on city streets. Every university that educates students also requires policing.

In some cities, officials have argued that some nonprofits (especially those with annual budgets that run into the hundreds of millions of dollars) should make a “payment in lieu of taxes” (PILOT) to help offset some of the costs borne by their host municipalities. In cities like Boston, large nonprofits make sizable contributions. PILOTs are expected to generate more than $20 million in cash and another $20 million in community services for Beantown this year. With budgets stretched to their limits, that kind of revenue can do a lot to help reduce tax burdens or expand service-delivery efforts.

Two decades ago, Philadelphia aggressively pursued similar payments—even threatening to challenge the nonprofit status of those institutions that refused to pay—and entered into agreements with many larger nonprofits to generate much-needed revenues. In 1995, Philadelphia generated more than $9 million from PILOTs.

But, state legislators reacted and defined nonprofit status to make it much more difficult to threaten an institution’s status, which severely weakened the city’s bargaining position. Thus, Philadelphia’s PILOT program wilted and the city generated less than $400,000 from PILOTs last year.

This status quo was upended recently by a court case that challenged nonprofit organizations’ tax-exempt status. The Pennsylvania Supreme Court ruled that nonprofits must pass a strict test to demonstrate that they operate free from a profit motive, which might help the city be more aggressive in seeking money from its nonprofits.

So if nonprofit institutions have lost protection from threats to their nonprofit status, the city could aggressively renew its PILOT program. But, if the game has changed, what will be the name of the game moving forward?

Will it be “Wheel of Fortune?” Without legislative protections, many nonprofits might find it hard to argue that all of their operations are purely charitable in nature. Will the city use its new leverage to convince Philadelphia’s notable institutions to pay millions each year to help pay for the municipal services they consume?

Will it be “The Price Is Right?” While most other cities generate the vast majority of their tax revenues from the real estate tax, Philadelphia gets most of its revenues from the wage tax. With nonprofits representing its largest employers, will the city decide it might be unwise to impose additional costs on the nonprofit goose that lays the golden tax-revenue eggs?

Will it be “Let’s Make A Deal?” Philadelphia has a grand but self-defeating tradition of playing favorites and allowing some to play fast and loose with the rules the rest of us must abide by. Will the city approach the question of renewing its PILOT efforts on a case-by-case basis where political ties and back-room deals determine who pays what?

Given recent reports of the city providing free utility service to some nonprofits, I sincerely hope that the Nutter administration stays far away from arbitrary decisions and sweetheart deals. If this recent lawsuit gives the city the ability to create a long-term PILOT program, it is critical that any future effort be reasonably and fairly administered across the board. We cannot afford to play games with tax policy.