The idea of taxing nonprofits, which Gov. Paul LePage has resurrected through his proposed budget, is not new or unique to Maine. In fact, it has been rejected more than a half dozen times in Maine over the last four decades, as well as in numerous states in recent years.
The governor’s budget plan, which includes large, long-term state income tax reductions, would eliminate municipal revenue sharing in fiscal year 2017. Towns and cities currently receive about $62 million through revenue sharing.
To make up for that revenue loss, municipalities could tax large nonprofits at 50 percent of their assessed property value above $500,000. There is disagreement over whether the budget language as written would require towns to collect the tax or if they would have discretion. Government property and churches would be exempt.
Every state in the country exempts nonprofits from paying property taxes. However, when states or towns face budget crunches, there are attempts to remove or change the exemptions. Numerous states have looked at taxing nonprofits in recent years, the website Tax Analysts wrote last year. Such efforts, however, are generally unsuccessful.
A study committee in Vermont, for example, recommended reinforcing, not revising, the tax-exempt status of the state’s colleges and universities, but that these entities should enter into municipal service agreements with their hometowns. In South Dakota, lawmakers rejected a proposal to allow towns to assess levies on nonprofits to cover safety and emergency services. A 2013 study committee in Maine concluded that taxing nonprofits so the state could collect $100 million in revenue was “neither feasible nor desirable.”
The idea sounds enticing — many nonprofits such as hospitals and private colleges pay large salaries to their executives, so they aren’t cash-strapped, the thinking goes. So, why shouldn’t they help out their host communities by contributing to the tax base?
Many already do, through payments in lieu of taxes, either formally or informally. The Bangor Area Homeless Shelter pays the city $1,000 a year to recognize its reliance on some city services. Last year, Bowdoin College made a $126,000 “gift” in lieu of taxes to Brunswick, according to Town Manager John Eldridge.
It isn’t just about money, however. Bates Colleges in Lewiston provides 38,000 meals annually to food banks, offers reduced-cost meals for children and contributes more than 70,000 volunteer hours in labor to the community, at an estimated value of $1.5 million, college President Clayton Spencer said in a statement last month. The private college also provides about $4.7 million annually in financial aid to Maine students.
Many nonprofits provide needed community services that the government does not. Shelters for those seeking to escape domestic violence provide a safe place to go. Programs at the local YMCA might keep kids in school and away from crime and seniors active and out of the hospital. Land trusts preserve and maintain open space for recreation, wildlife and aesthetics.
Many nonprofits, especially museums, theaters and musical groups, are touted to visitors and potential residents as cultural draws to communities.
There is a “social compact” that trades the value of the services that nonprofits provide for their tax-exempt status, says David Thompson, vice president of public policy for the National Council of Nonprofits.
“Local budget holes are smaller because of the work nonprofits do,” he said Monday. Private schools reduce the costs of public education. Homeless shelters keep those with no place to go from standing in storefronts. Youth groups keep kids out of gangs.
In addition to breaking the social compact, assessing property taxes on nonprofits would require more bureaucracy and, hence, more government spending.
“Changing state and local property taxes would be a huge and difficult undertaking,” Robert Katz, professor of law at Indiana University, told Tax Analysts. “It would disrupt arrangements that have been in place for centuries and result in unintended negative consequences that are hard to predict.”
That’s why no other state has done what LePage is proposing. Maine shouldn’t be the first.