Tax Exemptions for Nonprofits: Income, Property or Both?
Exemptions from tax for non-profits: should an income exemption be enough?
Non-profit organizations that meet IRS guidelines are exempt from paying income tax. The tax policy behind the exemption is that these types of organizations benefit the community and therefore reduce the burden on government. A similar policy is behind giving individuals a charitable deduction on their income tax returns for making gifts to charity.
This sounds reasonable; but, as always, there are problems and issues when organizations are testing the limits and trying to find exceptions. The degree to which an organization relieves the government of its burdens is often open to dispute.
In addition to income tax exemption, most municipalities provide an exemption from property taxes. The higher the density of non-profits in a school district, the more the rest of the property owners must shoulder the load of education. Think of a map of an urban area, and think of property tax “holes” in the footprint of every property owned by a property tax-exempt organization. The more holes, the more the burden is shifted to the rest of the property owners.
Income tax exemption is a federal matter, while property tax is a state and local matter. Laws in some states have exempted all property owned by groups like the Boy Scouts, Girl Scouts, YMCA and YWCA, regardless of each property’s use. Those not in the exempted groups have to make their own case with the local municipality to persuade them that the property’s use is of such a benevolent nature that it should surely be exempt from property tax.
Take the case of the family park built by the Jewish Community Center (JCC) in Wisconsin. It contains an outdoor swimming pool, volleyball and basketball courts, a community room and snack bar. It was denied a property tax exemption.
Wisconsin starts with the presumption that all property is taxable and then proceeds to carve out exemptions, 45 to date. Some exemptions are to all property belonging to the Scouts and the Ys, while others are extremely specific, like a dormitory run by the Methodist Church near a Wisconsin college campus and a community theater in LaCrosse.
Alan Marcuvitz, an attorney for the JCC, argued “that what appears to be purely recreational activity ‘has religious and community-building purposes.’ At the park, members observe Shabbat, attend kosher barbecues and Jewish holiday events, and play Israeli games. All of the signs in the facility are in English and Hebrew.” He argued that the park qualifies under an aggregate analysis of all the JCC activities at all its locations, which advance the JCC’s mission of promoting its religious, cultural, education and social values. It was also argued that as a “benevolent association” this family park shouldn’t be taxed; and if the exact same facility were owned and operated in the same way by the YMCA, property tax exemption would be granted by state law regardless of use.
John DeStefanis, attorney for the city, argued property tax exemption not granted by state law is granted (or not) by local government depending on use and regardless of what organization owns it.
County Circuit Judge Thomas Wolfgram sided with the county and denied property tax-exempt status.
A federal question arises. Why should a YMCA fitness center be exempt and not the JCC water park? Is the JCC being denied the equal protection of the law? That is the second part of the lawsuit that will be heard later this year in the Dane County Circuit Court. In the meantime, $30,000 per year is being paid in tax pending resolution of the constitutional matter.
Jack Norman, an opponent of current Wisconsin tax law and member of the Institute for Wisconsin’s Future, is of the opinion that it is indeed unfair, but his solution would be to grant fewer exemptions from property tax, not more. Furthermore, he feels the income tax break ought to be enough to compensate for the benevolent work of a non-profit and that property tax exemptions are for the most part just not a sound public policy.
In particular, he points out, many private and for-profit corporations do good things for the community but still pay property tax or make a contribution in lieu of taxes. Mr. Norman’s hope is that all the attention the issue is attracting might cause the state legislature to think about revamping the property tax law and its host of exemptions.