NONPROFIT EXEMPTIONS AND HOMEOWNER PROPERTY TAX BURDEN

Public Finance and Management Volume 12, Number 1, pp. 21-50 2012
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Calabrese & Carroll
prove social welfare within local communities.1 Many of these organizations continue to exist by virtue of charitable contributions received from individuals and corporations who demand different services or services at a level beyond government provision. As social service providers, many of these organizations help to decrease demand for public services and therefore alleviate state and local governments from leveraging resources to finance provision. On the other hand, other types of nonprofits like hospitals and universities provide services that do not have concentrated local benefits because the client base either commutes to receive services or relocates only temporarily but does not represent the permanent residency of the jurisdiction or otherwise contribute to the local community. Like social service nonprofits, most of these organizations’ activities are exempt from federal, state, and/or local taxes. Importantly, many of these nonprofits have significant investments in facilities and other fixed assets and, therefore, greater amounts of property, plant, and equipment exempt from taxation, making them more costly for the local jurisdiction. While local governments bear the costs of these nonprofits’ exemptions, the benefits from services provided by these nonprofits may be dispersed beyond the locality. In addition, these nonprofits may actually increase demand for public resources. For example, hospitals may increase access to healthcare for citizens with publicly financed insurance like Medicare and Medicaid, and many localities and counties finance indigent care of local populations either by funding these nonprofit hospitals directly or by opening their own health centers specifically for the uninsured (Meyer et al. 1999); similarly, universities may increase demand for infrastructure and public safety. Exemptions that provide preferential tax treatment for individual taxpayers or for particular uses of property tend to be inefficient and neither horizontally nor vertically equitable. With tax bases that are restricted from such exemptions, local jurisdictions might shift tax burdens. Due to consumer mobility, local governments are restrained from using the tax system to redistribute wealth and therefore are not usually as concerned with vertical equity or progressivity. Instead, localities primarily focus on leveraging resources to finance services demanded by the resident majority. A broader tax base allows local governments to provide services demanded while imposing lower effective tax burdens on residents. However, localities with significant presence of nonprofit organizations with large amounts of tax-exempt fixed assets might
NONPROFIT EXEMPTIONS AND HOMEOWNER PROPERTY TAX BURDEN
Thad Calabrese School of Public Affairs Baruch College – CUNY, New York, NY, USA and Deborah A. Carroll, Department of Public Administration and Policy University of Georgia, Athens, GA, USA ABSTRACT
1. INTRODUCTION The United States has a culture that encourages charitable giving, which contrasts with that of many countries throughout the world. With a more limited tax and redistribution system as well as public service provision in the United States compared with much of the international community, a sizable nonprofit sector has emerged that is often considered supplementary to government. More than one and a half million nonprofit organizations exist throughout the U.S. with a substantial portion of these offering services to im-
This paper examines the question of whether there is any correlation between the prevalence of nonprofit organizations with property, plant, and equipment exempt from property taxation and the property tax burden for homeowners. Data from the Tax Foundation and Internal Revenue Service was used to analyze general-purpose local governments within larger counties (populations greater than 65,000) in the United States for years 2005 and 2006. Several econometric specifications were used to estimate homeowner property tax burden as a function of the value of nonprofit fixed assets, government tax structure characteristics, and a series of control variables. Our estimates suggest that county geographies with greater presence of nonprofits tend to have higher homeowner tax burdens on average. Specifically, the value of nonprofit tax-exempt fixed assets within a county geography that is 10% above the mean of $15.4 million is generally associated with a median property tax paid by homeowners as a % of household income that is between 0.0009% and 0.0154% above the mean or between $2 and $24 higher on average. The median property tax paid as a % of homeowner’s home value would be between 0.0006% and 0.0069% above the mean or between $3 and $12 higher on average. Overall, we find a strong, positive correlation between nonprofit fixed assets and property tax burden for homeowners at the local level.
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Throughout this article, the term “nonprofit” is synonymous with those entities organized under the Internal Revenue Code (IRC) subsection 501(c)3. These organizations operate exclusively for religious, charitable, scientific, or educational purposes. Although nonprofit organizations exist that are organized under other IRC subsections, these other nonprofits do not enjoy the tax exemptions afforded to those public charities organized under subsection 501(c)3.