American municipalities generally exempt non-profits from paying property taxes. Then because many non-profits, especially colleges and universities, are actually giant lucrative business enterprises, municipalities often partially claw this back through Payment In Lieu Of Taxes (PILOT) agreements with major local institutions. But now with budgets strapped, a lot of municipalities are putting the squeeze on nonprofits further down the food chain. Erwin DeLeon of the Urban Institute is skeptical of the merits of this approach:
Last month, the town manager of Palmer, Massachusetts, goaded by budget shortfalls and Boston’s lead, asked 25 nonprofits, including churches and a youth summer camp, to make annual payments.
What will happen to nonprofits like these that serve the unemployed, homeless, poor, and hungry and run on very tight margins themselves? Payments in exchange for their tax-exempt status will likely put some over the edge. In 2009, half of human service nonprofits froze or cut employee salaries while four out of five drew on scant reserves. Another 21 percent opted to reduce programs and services. So where’s the slack to tax?
That doesn’t quite strike me as the right mode of analysis. Unlike the federal government, municipalities facing an economic downturn have to operate under a fixed budget constraint. If Palmer, Massachusetts doesn’t get more money from its churches, then it needs to either cut back on its own programs and services or else it needs to levy higher taxes on something that’s not churches. So the question for Palmer isn’t “will higher taxes on churches be bad?” It’s “will it be worse than the other available options?” I have no real information on this, but that’s the right question.
My bigger picture worry about tax exemption in the urban context isn’t about the revenue, however; it’s about the distortion in resource allocation. Urban land is a scarce commodity, and structures are valuable fixed assets. If you tax land and structures that are operated as homes and business, but don’t tax land and structures that are operated as churches, you end up with more land being used for churches and less being used for homes and businesses than would otherwise be the case. Now if the level of God’s affection for a town is determined in part by the square footage per worshipper of devotional space, this is a very reasonable policy. By the same token, if God demands the ritual slaughter of goats, then obviously an implicit tax subsidy for animal sacrifice is a good idea. But the more common view in the contemporary United States is that the key factors are the depth of worshippers’ personal relationships with Jesus Christ or else their diligence in seeking out the sacraments. By contrast, it’s pretty clear that at the margin the quantity of business activity in a town is in part a function of the square footage available for business purposes. Generous tax subsidies for the ritual slaughter of goats wouldn’t just be a source of lost municipal revenue; it would be a waste of goats. By the same token, tax subsidies for church land and church structures seem to me to be a waste of land and structures.
My guess is that politically influential pastors, bishops, rabbis, etc. are going to be inclined to disagree.