Josh Goodman is a former staff writer for GOVERNING..E-mail: firstname.lastname@example.org
Universities and hospitals are tax-exempt, and that costs cities money.
In cities from Boston to Baltimore to Birmingham, Ala., universities and hospitals have played key roles in revitalizing urban neighborhoods. But expansions of eds and meds come with a downside: Tax exemptions cost cities money.
That was the subtext when Pittsburgh Mayor Luke Ravenstahl proposed a 1 percent tax on college tuition in late 2009. Part of the reason for this proposal was Pittsburgh's poor financial shape: The city has a seriously underfunded employee pension system.
Still, Ravenstahl wasn't targeting colleges randomly. Universities and hospitals have thrived in Pittsburgh, with real costs to the city. Pittsburgh's primary source of revenue is property taxes. Nonprofits are exempt from property taxes, but require city services. "They're buying up taxable real estate properties and taking them off the tax rolls," says Sen. Wayne Fontana, who represents Pittsburgh. "The trickle-down effect is that everyone else pays more for the same services."
Of course, these institutions do contribute to cities in various ways. When faced with the tuition tax proposal, Pittsburgh colleges and universities weren't shy about pointing out those contributions. Students and employees pay a variety of taxes, such as sales and occupational taxes, and are considered engines of economic growth. Did Pittsburgh, the colleges wondered, really want to kill the goose that laid the golden egg?
While only a few other cities have contemplated a tuition tax, variations of this debate are playing out around the country. As hospitals and colleges are growing, thriving and, most importantly, gobbling up property, they're creating growing anxiety for city budgeters.
In Pittsburgh, Ravenstahl backed down amid criticisms that his proposal was unfair and potentially illegal. In exchange for dropping the tuition tax, colleges agreed to make unspecified financial contributions to the city and help lobby the Legislature to aid Pittsburgh's under-funded employee pension fund.
The issue isn't going away though. Fontana is proposing state legislation that would give cities the power to tax the newly acquired property of large nonprofits. He hopes the taxes won't be necessary - that colleges and universities will increase their voluntary contributions to city budgets instead.
That's what large nonprofits in many other places are starting to do through what's known as "payments in lieu of taxes." For example, in Boston, with its legion of universities and hospitals, these voluntary contributions total $10 million per year. Then again, "voluntary" might not be quite the right word for these payments. What officials in Pittsburgh and elsewhere increasingly are indicating is that with their budgets in jeopardy, they're open to a little bit of coercion.