Assessing the Nonprofit Property Tax Exemption

There has been a prolonged debate on whether local governments should grant nonprofit organizations tax exemptions for owning real property. At the core of this debate is an issue related to value capture. On one hand, like all property owners in a city, nonprofits enjoy the public goods provided by the municipality; thus they should pay for these services. On the other hand, some nonprofits perform functions that have community benefits and in turn lower the fiscal costs of public goods provisions.

In this case, property tax exemptions are justified. Joseph J. Cordes argues that there is insufficient evidence to show that many recipients of property tax exemptions provide community benefits that diminish the fiscal burdens of cities. Hence, he suggests that nonprofits should receive direct-cost subsidies instead of property tax exemptions. Alternatively, nonprofits may be asked to make annual payments in lieu of taxes (PILOTs), which are determined based on an agreement between the nonprofits and the city.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2011 and is Chapter 14 of the book Value Capture and Land Policies.