Nov 30, 2024 By Gary Stout 5 min read

Nonprofits are critical to the welfare of communities across America. They range from small organizations with a charitable purpose to religious institutions, hospitals, and universities. Most U.S. organizations granted nonprofit status by the IRS have one thing in common – they are generally exempt from paying taxes. Cities and towns lose billions in tax revenue, even though a nonprofit benefits from the same public-school systems and municipal services as the struggling individual or private business across the street.

It is astonishing that local residents complain about paying taxes and become furious at any tax increase but say nothing about nonprofits that have no tax obligation. After all, full-time police and fire protection, municipal pensions, liability and vehicle insurance, city management and employee salaries, infrastructure and road maintenance are becoming more expensive every year. One firetruck can easily cost over $1 million. Most nonprofits are contributing little or no financial support.

This commentary will examine how nonprofits in the City of Washington have placed an undue burden on finances. I recently met with Ken Westcott, the city’s finance director, and Susan Koehler, the deputy finance officer, and they graciously explained Washington’s budget, growing expenses and shrinking revenue. Every city taxpayer should pay attention.

Westcott remarked that “while the world has changed, the Pennsylvania tax code regarding nonprofits has not.” There has been little attempt to legislatively update the definition of “public charity.” There has been no meaningful debate in Harrisburg to determine which nonprofits are operating to truly serve a charitable mission or which organizations require tax exempt status to perform their mission. While religious institutions and small charitable entities likely deserve tax-exempt status, entities like hospitals, nursing homes, and colleges raise questions.

Adding to the problem, larger nonprofits have a history of expanding their physical footprint and removing additional private real estate from the revenue-producing tax rolls. Over the years, for example, Washington & Jefferson College has consistently purchased private property surrounding its campus and elsewhere within the city limits.

In another example, the City of Washington’s big brother, Washington County, recently struck a major blow to the city’s tax collection efforts. Not only did the county overpay to purchase the Crossroads Center building, the purchase denied the city $180,000 in tax revenue each year.

Westcott and Koehler described a grim picture of Washington’s tax base and efforts to provide all the services that city residents have come to expect. This year, the budget will be in the range of $16 million. Fifty-seven percent of the city’s taxpaying residents are classified as low- to-moderate income. Eleven percent are over age 65 and on fixed incomes.

On the revenue side of the equation, 47% of the city’s real estate is tax exempt. There are 42 exempt churches within the city limits. Washington Hospital and W&J are tax exempt. The City of Washington is the county seat and receives no revenue from government-related buildings. All local and state government offices, the courts, social service organizations that assist the entire county and public housing are off the tax rolls.

With little help coming from Harrisburg to address this municipal drain on revenue, “agreements to provide payment in lieu of taxes” have become an alternative. These voluntary agreements, known as PILOTs, typically commit a nonprofit to make some payment to the taxing authority. Ideally, the payment would be a reasonable percentage of the amount the nonprofit would pay if it were not tax exempt. Unfortunately, the city has little leverage to compel cooperation.

The city sends notices to nonprofits informing them what their liability would be for police and fire services if they were obligated to pay taxes. A robust response would bring in over $2 million. If a reasonable portion of the tax obligations of W&J ($513,000), Washington Hospital ($402,500), the Washington County Housing Authority ($108,000), and others were actually paid, balancing the city budget would depend less on those who can least afford it.

The experience with PILOTs in Washington has been discouraging. Last year, the city collected only $10,000 in small PILOT payments from several churches and charitable organizations. A formal PILOT agreement with Washington Hospital pays $64,000, and one with the housing authority provides $25,000 in revenue. While many American colleges have formal PILOTS with the city where they receive substantial city services, W&J pays nothing.

What can be done to address this imbalance that places an undue burden on regular taxpayers and the city budget?

First, nonprofits should step up and meet with city officials to establish fair agreements to produce revenue. Nonprofits could voluntarily contribute to city projects that benefit them the most. For example, stormwater management programs are typically calculated based on the road frontage on an owner’s property. This approach directly links fees to the stormwater impact of each nonprofit.

Second, Washington County must recognize that the city, as the county seat, is the heart of county government. The commissioners should avoid removing private property from the city tax rolls. The county should provide free demolition and other big-ticket services to the city.

Third, private citizens concerned about city taxes and services should contact their elected representatives and seek legislative reform. It is not enough to complain at the last minute when an increased tax bill shows up in the mail.

Gary Stout is a Washington attorney.