When I made the case that property tax codes shouldn’t exempt non-profits, the response I got was mainly from irate conservatives. I gather that the reason for this was that my example of unjustly untaxed landowners was churches. That was my example because I believe that in the vast majority of municipalities churches do, in fact, account for the bulk of untaxed nonprofit ownership of land and structures. But obviously churches are something that conservative valorize culturally, and conservatives also dislike taxes, so when they hear that some heathen liberal wants to start taxing churches they get upset.
So to take another cut at the issue, I see Reihan Salam touting a Vance Fried Cato paper (PDF) calling for reduced subsidization of college tuition that involves, among other things, trying to persuade us that even non-profit institutions have profits:
How can a nonprofit have profits? Simply put, it happens when the revenue the nonprofit derives from providing a service exceeds the cost of providing that service. This might seem obvious, but it is often assumed that putatively “nonprofit” schools, by virtue of their designation, never make a profit from providing a particular service. In addition, such schools never report that they have realized profits, even when the profits happen to be large. Why? Because profits are reported as expenses.
Without endorsing Fried’s particular policy conclusions about higher education (I haven’t even read the whole paper) that’s exactly right. And of course it applies in general to the concept of diversified nonprofits. The synagogues I’m familiar with treat High Holy Day services as profit centers, selling tickets and generating funds to subsidize other activities. Some of those activities are worthy social endeavors, but many constitute something like a private benefit for congregation leaders, rabbis, etc. Not that there’s anything wrong with that. It makes perfect sense for organizations to feature bundled services, cross-subsidization, etc. And it also makes perfect sense for the United States to offer a variety of forms of corporate organization, including a nonprofit designation.
But we should really think harder about the implications of writing a major preference into the tax code for ownership of land and structures by firms with a non-profit organizational form. Probably the least enlightening way of thinking about this is to focus on the short-term fact that absent the tax preference, non-profits would have higher expenses in the form of tax payments. That, in turn, would allow for lower levels of residential or commercial property tax or lower sales taxes or whatever. The larger issue, however, is the long term one. Failing to tax non-profit ownership of land and structures encourages non-profits to invest their revenue in ownership of land and structures. This ends up reducing the amount of space available for residences and commercial ventures, but also reduces the extent to which non-profits will actually recycle their revenues into programming. A school faces a choice at the margin between hiring more professors and building fancier buildings. A church faces a choice at the margin between serving more lunches to poor people and building a fancier church. Exempting schools and churches from property taxes encourages them to choose to invest in buildings. Why do that?
As I understand it, churches really are the main issue here since substantial universities can usually be coerced/cajoled into making PILOT payments by determined municipalities. But conservatives may be more comfortable with this idea if they think of it in Fried’s terms as a call for less valorization of nominal nonprofits in general.