National Tax Association

COMMENTS: THE CHARITY PROPERTY-TAX EXEMPTIONAuthor(s): Jeffrey ChapmanSource: Proceedings. Annual Conference on Taxation and Minutes of the Annual Meeting ofthe National Tax Association, Vol. 93 (2000), pp. 185-186Published by: National Tax AssociationStable URL: http://www.jstor.org/stable/41950605 .

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COMMENTS

THE CHARITY PROPERTY-TAX EXEMPTION

Jeffrey Chapman , Arizona State University*

The convoluted. cussions

world

of

of

the

taxes This

property-tax is is exemplified becoming

exemption

increasingly in the dis-

for convoluted. This is exemplified in the dis- cussions of the property-tax exemption for

charitable organizations. In the past, this exemp- tion generated only a small amount of controversy, principally in the area of non-charitable activities undertaken by these organizations. Today, this is a complex arena that shows every indication of be- coming more contentious. These three excellent papers, which are chapters in a forthcoming book, illustrate only a few of the areas of contention. While at first blush they seem to be quite different in subject matter, methodology, and scope, there are significant interconnections that possibly af- fect the conclusions that are reached by each of the authors.

The underlying theme of Joan Youngman's pa- per is that the courts can be important in this arena. She argues that nonprofits are probably on stron- ger legal grounds in claiming exemption from prop- erty taxes than in attempting to avoid in-lieu fee payments. However, Bowman, by essentially ac- cepting an argument that assumes capitalization of the property tax, comes very close to treating the tax as a fee, which is the opposite of what Youngman recommends. In another overlap, Youngman argues that it is very difficult to mea- sure the market value of exempt buildings; yet, the Cordes, Pollak and Gantz paper heroically, and I think at least partially successfully, attempts to do just that. In a third interaction, Youngman notes that property tax abatement for profit making firms is sometimes justified on the basis of job creation. To the extent that it is also justified for nonprofits using the same job creation reasoning, it might be argued that this is generating a potentially signifi- cant positive externality. Bowman argues that this is really a second- order effect and discounts its importance in his argument. I believe that Youngman's argument is correct, and if not used now will certainly be used in the future, and, thus, Bowman should attempt to incorporate it more

■"Jeffrey Chapman is Professor and Director of the School of Public Affairs.

formally in his analysis. Finally, I particularly en- joyed Youngman's short discussion of the contro- versy over the role of exemptions for charities that also have a political dimension. This controversy is likely to become increasingly important as the country moves to an increased use of nonprofits to deliver services. It would not be surprising to find that political values would play a part in the selec- tion of which nonprofit should be awarded the contract.

The Cordes et al. paper reflects an intense effort to calculate the value of the property-tax exemp- tion in the United States. Their work uses a so- phisticated methodology, although the paper is ultimately forced to analyze only $500 billion in real estate that charities hold and cannot investi- gate closely the estimated $900 billion in real es- tate owned by nonprofits (including charities). The overall conclusion is that the tax exemption is only a small part of nonprofit revenues-perhaps between 1 percent and 6 percent (although they do attach numerous caveats to these results). Perhaps one question to be asked is whether the nonprofits' ex- penditures on rent seeking exceed the benefits they obtain from the tax-exemption. As in most semi- nal empirical work, reading the paper raises more questions than answers. I would suggest at least four that the authors should consider in future work (the first two are raised by the authors). First, does the exemption encourage an over-investment in real property? Second, what is the extent of the market advantage that the exemption creates for the nonprofits over the for-profits? Third, what would happen if the authors moved away from a com- parative static perspective and adopted a more dy- namic analysis. For example, if the nonprofits were on the tax roll, the tax rate would be less and the comparative static benefits would be an overesti- mate. Finally, the study discovers that about 60 percent of the nonprofits with a reported taxable asset value of less than $100,000 do not own land (and thus must rent). The authors also assume that the property tax is fully shifted forward. Maybe, but the tax could also have been capital- ized into the price of the land and thus not shifted,

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depending on market conditions. Perhaps a few case studies in this area would be appropriate.

The final paper, by Bowman, is conceptually very exciting. The idea of an exit tax in lieu of a tax exemption makes a lot of sense. Of course, the implication that this becomes identical to a fee would probably upset Youngman, who has concerns about fees. I think, however, that the paper needs some expansion in its analysis of property tax capi- talization. For example, Bowman argues that if a person is buying into a community after the prop- erty tax has been raised, that person will be paying a lower price (compared to before the tax increase) because of the capitalization. This price differen- tial forms the basis for the exit tax. It also should be noted, however, that the new buyer is paying more in taxes-it is not exactly a free lunch for the newcomer. In addition, Bowman's community im- pact equation implicitly assumes 100 percent capi- talization. Given that Bowman also cites literature

that argues the capitalization rate is between 40 and 90 percent, his exit tax setting equation needs to be adjusted. This should be relatively straightforward in theory, although the adjustment coefficient would probably lead to a great many tax appeals (as well as the proverbial Youngman lawsuit). In addition, Bowman's argument could be expanded for states that have both fixed rates as well as fixed changes (or limits) on increases in the base. This situation implies a fixed change in the levy. This probably happens more often than Bowman believes. Finally, note that Bowman's example generates a value of the exemption to be about 2-3 percent of capital costs. This may be in the same order of magnitude that the Cordes et al. paper calculates.

As noted above, expanded versions of these pa- pers will appear in an edited volume. I would highly recommend this work to anyone interested in the financial aspects of the non-profit sector.

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