A recent tax proposal by Gov. Paul LePage of Maine would overhaul the tax-exempt laws in the state, requiring nonprofits to pay property tax on valuations greater than $500,000. As might be expected, the plan is drawing sharp criticism from the state’s nonprofits.
The plan is designed to cut taxes for Maine families and businesses. It targets colleges, hospitals, and large nonprofits. This would effectively allow cities to tax nonprofit property above $500,000.
According to Lori Gramlich, director of public policy and communications as the Maine Association of Nonprofits (MANP), the change to property-tax rules would have significant impact on nonprofits in the state. While she said that it is currently not “well-defined” what constitutes a large nonprofit, a recent survey of MANP members showed 65 percent owned property valued at more than $500,000, putting them in line to pay property taxes.
“The addition of property tax expenses would force nonprofits to reduce their staff capacity, which would result in program cuts for nonprofit clients and the public, as well as lost income tax for the state,” said Gramlich.
The governor’s office argues that this change is necessary to take Maine homeowners off the hook for the cost nonprofits, such as municipal services. Gramlich countered that most of the income going through nonprofits is already taxed and that large nonprofits are already making payments in lieu of taxes (PILOTs) to the state.
Approximately 218 localities in 28 states have negotiated these types of payments from nonprofits, according to a report by the Lincoln Institute of Land Policy. Between 75 percent and 80 percent of such agreements are in the northeast, with the largest share in Massachusetts and Pennsylvania. More than 90 percent of PILOT revenue is from universities and hospitals – with college payments contributing about two-thirds of PILOT payments and hospitals another quarter. In Maine, six localities have received PILOTs from 12 nonprofits for more than $900,000 in revenue.
“It would be a pretty stunning development if this passed,” said Adam Langley, senior research analyst at the Lincoln Institute. “The fact that it was proposed, however, doesn’t completely surprise me because there have been many similar proposals in the past in Maine, but none of them have ever passed.”
According to Jeffrey Austin, vice president of government affairs at the Maine Hospital Association (MHA), hospitals in the state “simply have no ability to absorb” the tax increase, citing hospitals’ thin operating margins in recent years. Specifically, the aggregated operating margins of all Maine hospitals in State Fiscal Year 2014 was 0.5 percent; in SFY 2013 it was zero.
Explaining that hospitals provide a “vital service” to the state, Austin said that Maine’s hospitals provided more than $125 million in charity care.
“Hospitals subsidize the public health insurance program, Medicaid, by more than $140 million each year,” explained Austin. “In addition, hospitals pay a $100 million income tax to the state to help fund the Medicaid program.”
Austin added that many hospitals in the state not only make payments in lieu of taxes, but some also make the decision not to make their property tax-exempt. Noting that it is not consistent from hospital to hospital, Austin explained further:
“So, if a hospital acquires a previously private physician practice and the physician practice owns a building somewhere in town, the hospitals don’t always just flip the property to exempt. In many of Maine’s larger municipalities the hospital entity is one of the larger property taxpayers today.”
Whether LePage’s plan will pass is up for debate. While the provision affecting nonprofits is part of a proposal that contains popular tax cuts for individuals and businesses, it also represents a major restructuring of the tax code and will likely be subject to months of debate in the state legislature. MANP’s Gramlich has confirmed the organization already has made efforts to lobby against the bill.
“I have been working with our advocates in Augusta and have had meetings with members of leadership, including our Speaker of the House and Senate President,” said Gramlich. “I have also met with our House Chair of the Appropriations committee. These meetings we held in an effort to not only introduce myself to legislative leaders but to also articulate MANP’s positon regarding the nonprofit sector.”
The Maine Independent College Association (MICA) has confirmed similar plans according to published reports. Attempts to reach Dan Walker, the attorney leading MICA’s case against the bill, were not successful at this writing.
“If the budget were to pass, it would have a significant impact on nonprofits but it remains to be seen how nonprofits would react,” said Langley. “Would nonprofits have to cut back on services? Would university tuitions increase? There would have to be some sort of response to pay for the taxes.”