TAX EXEMPTIONS: WHERE’S THE PUBLIC POLICY
(from Maine Townsman, February 1999)
By Michael L. Starn, Editor

Maine Municipal Association has put together a legislative proposal for this session that changes how municipalities deal with tax exemptions in two important ways: (1) it will establish some meaningful standards of eligibility for "benevolent and charitable" organizations to qualify for a property tax exemption; and (2) it will phase-in the partial taxation of certain types of now fully exempt properties in recognition of the municipal services provided to these entities. This proposal was discussed in greater detail in the December1998 issue of the MAINE TOWNSMAN under articles "Legislative Overview" and "MMA Legislative Agenda".

The MMA proposal identifies a "select" group of exemptions (excluding federal, municipal, quasi-municipal and church property) that would be subject to partial taxation. MMA’s Kate Dufour of the State & Federal Relations staff did an analysis of Maine Revenue Service data that shows the statewide value of this "select" exempt property at $2.8 billion (see Figure 1). Using the statewide average mill rate of 17, were this property taxable it would generate $47. 6 million of revenue to help support municipal services. Benevolent and charitable exemptions comprise about half of the "select" group when you take out state government property (see Figure 2). Benevolent and charitable tax exempt organizations, which are the focus of Part 1 of the MMA proposal, have an estimated value of $1 billion. If fully taxable, the owners of these properties would collectively pay about $17 million in property taxes.

A CHARITABLE PURPOSE

In early January, MMA’s State & Federal Relations department sent a letter to about 30 municipal assessors requesting information and specific examples of how the lack of standards for "benevolent and charitable" property tax exemptions affects their work and whether the concentration of tax exemptions has placed a financial burden on their community.

The financial burden is particularly troublesome when previously taxable property is taken over by an exempt organization. This practice of "conversion" directly removes taxable property from the rolls. For example, the City of Augusta in 1988 had two private nursing homes, with a combined taxable value of over $5 million. In that year, those two nursing homes were purchased by the local hospital. While the type of service being provided did not change, because of the tax exempt status of the new owner, these nursing home facilities stopped generating property taxes for the city.

SFR Director Geoff Herman reviewed the comments and information supplied by the municipal assessors and developed the following summary that illustrates the growing problem with the State’s lack of standards for "benevolent and charitable" exemptions. All of these examples make our municipal assessors wonder, "Where’s the public policy?"

• One of Maine larger cities has a nursing home valued at $8 million which is transferred to a newly formed ownership corporation, organized as a charitable organization. The management of the nursing home would be contracted out to a for-profit management group. The services provided by the nursing home would remain the same as before the conversion and the clients served would also remain the same, but $300,000 in property taxes would be available to the corporation’s management for other purposes.

• A religious-based group operates outreach health service clinics in this mid-Maine community. All services provided are either paid for directly or through private insurance or Medicaid.

• Two nursing homes, with property valued at $5 million, move from taxable to non-taxable when purchased by the area hospital. Their estimated annual income is $6 million with $2,000 deducted for charity care. Despite the objections of the local assessor, the new owners contend that "long-term medical care is a purpose long recognized in Maine as charitable in nature" and get the exemption.

• A doctor’s office building is purchased by a hospital and therefore obtains an immediate exemption.

• A hospital-based corporation wants to build a $5 million, 40,000 square foot office building in this southern Maine town and organize it into 12 condominium units in response to the Marcotte decision (a 1996 Maine Supreme Court case). The corporation seeks exemption for seven units. The medical services provided in the space are identical to the medical services provided by nearby non-exempt organizations.

• A low-income housing corporation, which is the second or third largest taxpayer in this Moosehead lake region town, is reviewing all laws in order to obtain tax exempt status. Maine Revenue Service is contacted and they advise that the corporation may be eligible for a 50% exemption.

• A small community that already plays host to a great deal of state property has received applications for seven new charitable exemptions over the last five years, including two boarding homes, a low-income housing complex, a group home for the mentally retarded, a housing facility for disabled adults, a child care service organization, and a medical care facility.

• One northern Maine assessor asks, "If the charitable services being provided by a tax exempt entity are being entirely paid for by the federal and state government, what is the source of charitable contribution from the exempt facility?"

• In one of Maine’s largest cities, the 1990’s was a decade of tax exempt expansion with a simultaneous decline in taxable valuation. In the past 20 years, 130 properties in that city were purchased by exempt entities and 70 were immediately converted to exempt status. The city expects the remaining properties to be converted over time.

• An artists’ cooperative owns a property which is used as an art gallery, gift shop and for juried shows. This mid-coast assessor questions the charitable nature of the organization.

• A family uses its residence to take in homeless people. The operation organizes as a corporation and obtains tax exempt status.

• A land-only parcel with 1,000 feet of ocean shorefront is going to be used as a nature preserve for certain scientific and aesthetic purposes. With the proper deed restrictions, the property could obtain a 95% reduction to its tax obligation under Maine’s open space tax law, but the owners go for a complete exemption.

• An exempt organization owns a large summer camp on high valued lakefront property. It purchases three residential properties which are used to provide vacation lodging for the organzation’s officers and family members.

• An organization is given exempt status by a 1940-era Private and Special Act. The Act exempts the organization’s value up to a total of $250,000 statewide. The current exempt value of the organization, statewide, is approximately $2 million.

• This exempt organization in southern Maine provides credit counseling services. Revenues are obtained through the clients’ creditors who provide the agency with a fee based on a percentage of the clients’ debt that is paid. The clients are also charged a fee directly by the agency.

• A fish and game club claims it deserves exemption because it allows the Boy Scouts to use its facilities in a small midcoast town; a hunting lodge upcountry seeks an exemption because it provides camp facilities for underprivileged children for a part of the season.

MORE ADVANTAGES OF TAX EXEMPT

Some "benevolent and charitable" organizations get benefits on top of their tax exempt status that generally go unnoticed. Waterville Fire Chief Darrel Fournier points out an interesting irony regarding tax exempts. "The more the city spends on its fire department, and the more professional and efficient that the fire department is, the better the community’s ISO (Insurance Services Office) rating." ISO ratings affect the cost of property insurance for both taxable and non-taxable organizations in a community. In other words, not only does the exempt entity get its local fire service for free, on top of that the greater the community’s investment in its fire service, the lower their insurance costs.

The previous example of hospitals buying up nursing homes offers another example of extended benefits, but with a different twist. Not only does the hospital get out of paying any property taxes, it acquires a competitive advantage over the taxable nursing homes in another way – where do you think nursing home referrals from the hospital go? Does this also hold true for doctor’s offices owned and leased by hospitals?

DEMAND ON MUNICIPAL SERVICES

Some will argue that tax exempts do not place a burden on municipal services. Their theory is that the municipal services are being provided anyway, for the taxpaying public. Municipal officials see it differently.

Waterville’s Fournier says that certain types of tax exempt properties place a noticeably higher demand on local fire and medical services. "Hospitals have a high usage of the fire department," Fournier says.

Statistics gathered by Deputy Fire Chief James Morin of Lewiston bear out the higher demand claim. The city has 11,651 taxable parcels and 300 tax exempt parcels. Of 2,154 fire department responses last year, 278 were to tax exempt properties. The percentages are revealing: 13% of all fire department responses went to tax exempt properties, buy only 2.6% of the assessed parcels in the city are tax exempt.

Certain types of tax exempts are more apt to have a high number of false alarms. In Lewiston, the city’s fire department responded to 618 false alarms last year. Of that number, 154 (25%) came from Bates College, a property tax exempt private college. In Lewiston, as elsewhere, false alarms are treated like the real thing. For all of these calls, the city sent three pumper trucks and a ladder truck with 12 firefighters being dispatched. The police department also responds.

According to Deputy Chief Morin, Bates College has a problem with its smoke detection system that is causing many of these false alarms. Single room smoke detectors and house smoke detectors are inadvertently getting set off and college’s central alarm system connected directly to the city’s fire department goes off or the incident is brought to campus security attention and then called into the fire department. While both the city and college are working at reducing the high number of fire alarms, without question, the college is placing a demand on municipal services without contributing toward those services.

VOLUNTARY PAYMENTS/SERVICE FEES

Payments in lieu of taxes (PILOTS) and service fees, authorized under 36 MRSA, section 652, are not effectively dealing with the tax exempt issue. PILOT letters, which request voluntary payments from exempt property owners, have been largely unsuccessful in Maine (see Townsman article in February, 1991). Service fees, which are limited to certain types of residential, rental property have also been unsuccessful, principally because they are hard to administer.

Few Exempts Voluntarily Contribute

The amount of revenue a municipality receives from a PILOT solicitation mostly depends on the generosity of the exempt organizations. In some instances, it depends on the recognition or understanding that exempt property owners have about the municipal services they receive.

This approach lacks fairness – some pay, some don’t – and it lacks a connection between the services received and the amount paid. Many Maine communities have sent letters requesting contributions to help defray the municipality’s cost of providing services to exempt properties, but on most accounts these solicitations go unheeded. When there is a response, it is often nominal when compared to the costs of the municipal services that the entity receives.

Some communities have negotiated "voluntary" contributions. In 1988, town officials in Gorham made a strong case to the University of Southern Maine that the town’s need to purchase an aerial ladder truck had a lot to do with the University’s high rise dorm buildings. Then Town Manager Don Gerrish convinced university officials to make an annual in lieu payment to the town of $12,500 for the term of the bond used to purchase the truck.

The town of Farmington also gets an in lieu payment from the University of Maine at Farmington. Several years ago, university officials agreed to contribute toward local fire, police and ambulance service. In 1998, the university’s contribution to the town was $10,000.

While Farmington town officials certainly appreciate the gesture, this contribution is a small percentage of what the university would pay if fully taxable. Farmington Assessor Mark Caldwell says he conservatively values university property at $40 million. With a 16 mill tax rate, a taxable university would pay $640,000 in property taxes.

A very unusual PILOT takes place in Dover-Foxcroft, and it is a contribution that is much appreciated by the municipality. The owners of the Charlotte White Center, a mental health facility, provide a payment to the town of several thousand dollars, which would be their full tax obligation were the center not tax exempt.

The Gorham, Farmington and Dover-Foxcroft situations are more the exception than the rule. For the most part, exempts contribute nothing "voluntarily" toward the municipal services they are provided. To create a greater sense of fairness and to enable communities to have a predictable stream of revenue, MMA is proposing a partial taxation of certain exemption types.

The Problem With Service Fees

The state statute that deals with service fees is very narrow in terms of the types of exempt property on which a service fee can be levied and is administratively cumbersome. Only residential properties currently totally exempt from property taxation that have rental income, excluding student housing and parsonages, are affected. A subsequent law regarding subsidized housing that has been taken over by an exempt organization after September 1, 1993 allows for partial taxation (50% of the value) and would therefore be excluded from this type of service fee.

A service fee is a user fee; it is not an alternative method of taxation. That means there should be some rational basis between the services provided and the fee charged. The law that enables communities to impose such a fee specifically excludes education and welfare services. It also imposes a maximum fee of 2 percent of the exempt organization’s gross revenues.

The law is administratively cumbersome. Service fees are difficult to calculate (i.e., how would a municipality know how much fire protection cost should be apportioned to a particular property?). Service fees under this statute require an ordinance to implement them, another adminstrative hurdle.

 

OPINION POLL ON PROPERTY TAX EXEMPTIONS (Sidebar)

Maine Municipal Association commissioned a polling of Maine citizens in January, 1999 to elicit their opinions on MMA's priority legislative issues. The poll was conducted by The Potholm Group, headed by Bowdoin professor and professional pollster, Chris Potholm. The poll consisted of 400 Maine adults and has the normal statistical margin of error of "plus or minus 5% at the 95th level of confidence".

The poll indicates that MMA's legislative proposal regarding property tax exemptions has public support.

On the issue of charitable purpose, 71% of those surveyed believe that there should be standards to make sure that charitable organizations are providing valuable charitable services if they are tax exempt.

Having tax exempts pay something for the municipal services they receive got a more mixed, nonetheless affirmative, response. There was a fairly high level of "don't know" responses to these questions, but of those respondents who had an opinion, 54% said the non-governmental tax exempts should make some financial contribution for municipal services and 72% said the state should be making some contribution.