Should Nonprofits Pay Property Taxes?

Q. Do you think that secular nonprofit institutions—universities, hospitals, private schools, art museums, even state governments—should pay real estate taxes to the local government?

A. Yes, for this reason: All owners of land and buildings in a community—whether for-profit or nonprofit entities—use the basic services provided by their city or county.

Because most of these services, such as sewers, roads, police and fire protection, are funded by real estate taxes, it’s reasonable that every owner should pay something. (That includes, in my view, a state government that owns land and buildings in one of its constituent local jurisdictions.)

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But I am sympathetic to the desire of nonprofits, especially small charities struggling to raise money in these challenging times, to avoid bearing any new expense.

If the citizens of a city or county wish, they could vote to give local nonprofits some degree of discount from a normal tax bill. And they could phase in the new property taxes gradually. Many nonprofits, especially wealthy private colleges, already make substantial voluntary payments to local governments in lieu of property taxes.

Sometimes these negotiated amounts come close to the actual bill that would typically be levied on real estate of that value. But I think it would be cleaner if nonprofits were subject to formal assessments and taxation, at either a full or discounted level.

What about churches? I’d leave their present tax exemptions in place, because there is the potential danger of a government using its taxing power against an unpopular religion and violating First Amendment rights. But I would urge churches to make voluntary payments in lieu of property taxes.

As for income taxes, Congress gave all nonprofits a waiver in 1917, and state and local governments followed suit. That is fine with me. Charities are already subject to tax on their “unrelated business income”—profits from enterprises they run that are not directly related to their charitable operations.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.