Institutional Exemptions: The burden of property tax exemptions on property taxpayers is significant in this state as studies over the past 20 years have shown
(from Maine Townsman, February 1996)
by Geoffrey F. Herman

Institutional property tax exemptions are a complex animal.

This article is about institutional property tax exemptions, what institutions are exempt, where they are concentrated, trends of exemption growth, and the evolving response to exemptions in the form of "payments in lieu of taxes" (PILOTS) and service charges. An institutional exemption can be distinguished from other property tax exemptions in terms of the direct beneficiaries. Veterans who gave certain military service, widows of veterans, and blind people are provided limited property tax exemptions. There are a number of personal property exemptions enjoyed by homeowners, farmers, stores, and industry. By-and-large, these types of exemptions provide a tax break to individual people. The institutional exemptions that are described in this article provide a tax break to organizations, institutions, and corporations.

It should be noted at the outset that governmental property can be rationally distinguished from all other types of exempt institutional property. It is, at one level of government or another, owned and controlled directly by the taxpayers. The sheer amount and growth in value of governmental property, particularly federal property, can skew all statistical trend analysis. For these reasons, the focus of this article is non-governmental exemption. This is not to say that communities that play host to large amounts of governmental property do not have a legitimate public policy concern with respect to the partnership relations between the municipality and the larger units of government. It is only that the issues and statistics surrounding governmental exemptions deserve a separate article.

Property taxes, as everyone knows, are assessed for the purpose of obtaining revenues to provide municipal services. The goal--indeed, the constitutional requirement--is to assess this burden equitably according to the value of all real estate and personal property subject to taxation. Against this fair-minded backdrop, certain institutional entities are given exempt status. In almost every case where the Legislature has bequeathed exempt status to an institutional entity, the financial burden on the remaining base of non-exempt taxpayers is concentrated. This phenomenon of concentration is pushed even further to the extent institutional exemptions are not borne evenly among all municipalities but tend instead to impact the few disproportionately to the relief of the many. The effect of these concentrations of burden is a matter of legitimate concern to the municipal officials who have to deal with the real-life impacts.

It would be easier to accept institutional exemptions as a whole if they all were granted for just one simple and obvious reason, but that is not the case. State and federal property is exempt presumably under the rationale that to tax this property simply reaches into one taxpayer's pocket to fill another--a robbing of Peter to pay Paul. If that is so, to tax municipal or school property would be robbing Peter to pay Peter. For the rest of the exempt institutions--the hospitals and charitable organizations, the colleges and centers of higher learning, the subsidized housing complexes and land trusts, the lodges and the Legion Posts, the churches and the Mason hall --the rationale for the exemption is something other than the Peter-robbing premise. The rationale in these instances must instead be grounded in the good works of the institutions and the benefits they bestow to the larger society in the fields of medical care, social services, education, and environmental protection. The immediate observation is that neither the government of generosity that creates the exemption nor the larger society that benefits from the good works is the direct funding source that underwrites the forgiven taxes.

A straightforward rationale for institutional exemptions is further confounded by the fact that the exempt institutions are all demanding of the municipal services toward which they don't have to contribute, and to varying degrees. The public works truck drivers don't lift their plows when they come to the roads around the university. Firefighters and police personnel don't screen their calls according to tax records. Children deservedly receive a public education whether they live in high-value mansions or rental complexes owned by exempt housing corporations managing deep federal subsidies. In fact, the only municipal service that is not fully provided to exempt institutions, ironically, is the assessing service. Municipal assessors are reluctant for good reason to spend a lot of time determining the precise value of property that is categorically exempt from taxation.

 CATEGORIES OF INSTITUTIONAL EXEMPTIONS

The institutional property tax exemptions are established in three sections of Maine tax law (Title 36, M.R.S.A.). Section 651 establishes the governmental exemptions, and the bulk of the remaining institutional exemptions are established in section 652. Section 656 holds a couple of odd-ball institutional-type exemptions governing private airports, private water supplies, and pollution control equipment. The following list describes each exemption category along with its relative value according to 1994 data.

Governmental. The exemption of governmental property is the largest exemption by far. As the focus of this article is on non-governmental exemption, the value of governmental property is mentioned here only to provide a sense of proportion. The value of all exempt institutional property in 1994 was nearly $10 billion. 67% of that value was government property, which includes all federal, state, and municipal property, quasi-municipal facilities such as the property of public water, sewer, and electric districts, municipal telecommunication and parking facilities, and municipal airports.

 Charitable and Benevolent Organizations. In 1994, charitable organizations enjoyed a $945 million property tax exemption, representing 29% of all exempt (non-governmental) institutional value, and nearly $15 million in lost municipal revenue annually. This category of exempt institution is now largely made up of the so-called 501 (c) (3) entities, which are organizations that have obtained a tax-exempt status with respect to that section of the federal income tax code by virtue of their status as a non-profit, charitable organization. With 501 (c) (3) credentials, this category includes hospitals, nursing homes, boarding care facilities, community mental health service facilities, child care centers, health institutes, and scores of other medical and social service agencies. Land trust organizations and the property they own, and certain summer camps for children that charge less-than market rate tuition, have also been deemed "charitable and benevolent" organizations.

Although exempt status is not typically transferable to property leased and used by an exempt entity, Maine tax law expressly exempts even the property leased by those hospitals, health maintenance organizations, and blood banks organized under section 501 of the IRS code.

This category also includes 501 (c) (3) subsidized housing complexes, although in 1994 that exemption was limited to 50% of the assessed value for subsidized housing complexes converting to 501 (c) (3) status after that point in time.

As demonstrated below, it is the charitable organization category of exemption that has shown the fastest growth in recent years of all non-governmental institutions. In 1989, the property tax exemption for charitable entities was $664 million in value. In 1994 it was $945 million, a growth of 42% over a five-year period. In comparison, the value of taxable property increased at a rate of 38% over the same period of time, jumping from $46 billion to $63 billion.

Literary and Scientific Organizations. This category provides tax-exempt status to most of the universities, colleges, and preparatory schools in Maine. This category exempts over $885 million in value (27% of all non-governmental institutional exemption), and represents an annual loss in municipal revenues of just under $14 million.

 Churches. The church property exemption is the third most valuable non-governmental exemption. Houses of religious worship are exempt, and the parsonages of church clergy enjoy an exemption of the first $20,000 in assessed value. $540 million in value was exempted in 1994 under this category, or 16% of all non-governmental institutional exemption.

Pollution Control Equipment. The pollution control equipment exemption governs equipment designed to reduce water or air pollution. This exemption is institutional in the sense that the beneficiaries are typically corporately-owned manufacturing facilities rather than individuals. The exemption is available provided the Commissioner of the Department of Environmental Protection certifies that the equipment meets the definition. Over $290 million of property is exempt under this section of law, representing .9% of all non-governmental institutional exemption and over $4.5 million in lost municipal revenue.

Fraternal Organizations. This exemption is available to fraternal organizations operating under the lodge system, such as the Masons and Eastern Star, or the Elks, Lions or Kiwanis Clubs, as examples. This exemption is not available to college fraternities. The exemption is also limited to exclude from exemption the prorated value of the property used for purposes not related to meetings of the lodge, ceremonials, and instructional use. In 1994, the exempt value of fraternal organizations was $65 million, or 2% of all non-governmental institutional exemption.

Veteran Service Clubs. Veteran organizations enjoy a property tax exemption similar to fraternal organizations, with the same limitation. The exempt value of veteran organizations is $26 million.

Chambers of Commerce/Boards of Trade. With an aggregate, state-wide value of about $6 million, the property of chambers of commerce and boards of trade are exempt from property taxation if used solely for those purposes.

Landing Fields of Private Airports. The property of municipal airports, of course, is entirely exempt from taxation. The landing fields of private airports are also exempt if those airports allow the public use of the landing fields at no charge. The value of this exemption in 1994 was $2 million.

WHERE LOCATED

Although large federal complexes, military or civilian, can by themselves place even small communities at the top of the exempt value list, exempt institutional property is generally concentrated in the larger Maine municipalities. After excluding all governmental property, as Table 1 illustrates, the dollar value of exemption is located in the communities with the hospitals, colleges, and concentration of social service agencies. Table 3 lays out the proportionate burden according to municipalities by population group, and shows that 55% of non-governmental exempt value is located in the urban areas of the state where just 31% of Maine's population is located.

Table 1 Top 10 Municipalities with Exempt Property

(excluding government property)

Portland

$419,749,928

Lewiston

$327,838,350

Brunswick

$181,589,111

Orono

$174,881,500

Bangor

$156,932,100

Waterville

$101,440,400

Rumford

$86,674,784

Auburn

$85,016, 700

Augusta

$80,456,400

Biddeford

$67,855,100

It is not necessarily the case, however, that the smaller communities go unscathed.

Table 2 represents an exercise to adjust for impact. The first list in Table 2 is the top ten communities in order of the dollar value of exempt charitable property. With three exceptions, it is a listing of the largest communities in the state. The second list in Table 2 is the top ten communities in order of the impact value of exempt charitable property; that is, the value of the exemption as a function of the municipality's total tax able value. That list looks very different, and includes communities with high nursing home or subsidizer housing concentrations that would rarely be thought of as host to much exempt property.

Table 2 Charitable Exemptions

Top 10 Municipalities

Top 10 Municipalities

Municipality and Charitable Value

Municipality and % of Total Property Value

Portland

$81,806,166

Frenchboro

$405,000

9.67%

Bangor

$81,078,900

Waterville

$38,299,200

7.03%

Waterville

$38,299,200

Bangor

$81,078,900

6.21%

Lewiston

$22,059,750

Rockland

$14,321,500

4.79%

Augusta

$15,135,800

Harrington

$1,000,000

3.93%

Camden

$14,781,500

Waldo

$407,525

3.48%

Rockland

$14,321,500

Eagle Lake

$1,358,700

3.41%

Biddeford

$12,013,900

Clifton

$919,600

3.14%

Old Orchard Beach

$10,198,200

Machiasport

$985,500

3.11%

Auburn

$9,874,700

Beals

$356,300

2.97%

Another trend supporting the observation that the smaller towns are not themselves exempt from the impact of institutional exemptions is demonstrated in Table 3, which tracks the concentration of non-governmental exempt value over the last 20 years according to all municipalities grouped by population size. The high concentration level of exempt property in Maine's cities has held fast over time, but there has been shift over time among the mid-size and smaller towns in Maine. Communities with populations between five and ten thousand people have experienced a more modest increase in exempt value over the last two decades than their smaller counterparts. Whereas 23% of all exempt value was located in municipalities with populations under 5,000 in 1975, 28% of exempt value is located there now.

Table 3 Non-Government Exempt Value by Population Grouping

Population

10,000+

5,000-9,000

2,000-4,900

0-1,999

Total

1975 Reported Exempt Real Value in Thousands

$449,701

$192,545

$103,598

$86,680

$832,524

1975 % of Total Value Reported Exempt

54.02

23.13

12.44

10.41

1994 Reported Exempt Real Value in Thousands

1,969,372

620,967

580,400

428,399

3,599,138

1994% of Total Value Reported Exempt

54.67

17.24

16.11

11.89

% of 1994 Statewide Population

30.58

22.91

25.21

20.43

% Change from 1974-1994

338

223

460

394

 

TRENDS IN GROWTH OF INSTITUTIONAL EXEMPTIONS

A few cautions have to be raised before reviewing the numbers that describe the growth of tax-exempt property.

Even mindful of these cautions, certain conspicuous exemption trends jump off the page. Table 4 tracks the growth in exempt value of the four most significant non-governmental institutional categories over the last 20 years, all in the context of the growth of taxable property.

Table 4 Trends in Growth of Exemptions

Property Category

1975 Value

1984 Value

Growth

1989 Value

Growth

1994 Value

Growth

(millions)

(millions)

1975-1984

(millions)

1984-1989

(millions)

1989-1994

All Taxable

$7,500

$24,500

226%

$45,700

87%

$62,900

38%

Exempt:
Charitable

99

223

125%

370

66%

462

25%

Hospitals

45

150

235%

294

97%

482

64%

Litera/Scientific

281

540

92%

737

36%

885

20%

Church

133

277

108%

473

71%

541

14%

Pollution Control

55

167

203%

204

22%

290

42%

Top 4 Exemptions

$613

$1,357

121%

2,078

53%

$2,600

28%

The first observation is the remarkable growth in value of taxable property over the 1975-1984 decade. Taxable property value grew at an average rate of over 20% per year during that decade, while institutional exemptions, generally, grew at just half that rate. There were two exceptions. Hospital exemptions expanded at a rate even higher than the brisk growth of taxable property. Pollution control equipment, although not quite as aggressive, was a contender.

During the next five-year period (1984 through 1989) the annual increase in taxable property began to moderate. Increases in taxable value that had been climbing at 22% per year dropped down to an average of 17% per year. The pollution control equipment category saw sharp drops in growth rate. Hospitals continued to lead the field in growth among the exempt categories, and again out-paced even the growth rate of the taxable base. Charitable organizations (excluding hospitals) and church property continued to maintain higher than average growth in exempt value.

The most recent half-decade of record (1989-1994) carries forward the trends started in the late 1980's. The growth in taxable value dropped to its lowest per-year growth rate average (7.5%) in the last two decades. Hospital exemption maintained its trend, gaining at a rate of increase of 13% per year, or nearly twice the rate of growth of the taxable base. The early 1990's saw the value of hospital exemptions overtake the value of the non-hospital charitable exemptions for the first time, propelling the over-all charitable category to the status of the most expensive non-governmental tax exempt institutional category, pushing past the educational institutions that formerly held the top spot.

The last five years also saw higher-than-tax-base growth in the exempt value of pollution control equipment. Growing at a slower rate in recent years have been the charitable institutions (excluding hospitals), the educational institutions, and church property.

RESPONSES TO EXEMPTIONS

Constitutional Amendment/Legislative Changes

At the end of this article is a list of the legislative amendments to the institutional exemption statutes of the last 30 years. At the fulcrum of this time line is the constitutional amendment approved by the voters in 1978 that required the state to reimburse municipalities for at least 50% of the local revenues lost to exemptions created by the Legislature during or after that year. As might be predicted, the legislative amendments leading up to the constitutional amendment typically had a negative effect on municipal revenues, but since the constitutional amendment became law the Legislature has refrained from instituting any new class of exempt institutional property.

In fact, since 1978 the Legislature has fiddled around with institutional exemption law in a manner generally favorable to municipalities. Housing owned by the educational institutions for the use of their employees has been clarified as non-exempt. The veteran organization exemption was reworked to remove the prorated share of the property used for purposes unrelated to the purpose of the organization. Since 1993, newly established "Section 652" institutions (charitable organizations, literary and scientific institutions, etc.) must apply for exempt status prior to April 1 in order to be found eligible for that initial year and thereafter; that is, eligibility must be determined up front rather than at an abatement appeal. The most significant post-1978 amendment to institutional exemption law was the 1994 enactment limiting housing corporations newly converted to 501 (c) (3) status to a 50% exemption.

Not all the post-1978 changes would appear to be entirely positive from a revenue point of view. The subsection governing charitable institutions has been amended three times in the last five years to "clarify" that certain nursing and boarding homes, community mental health facilities, and day care centers are charitable organizations by definition. While a skeptic might conclude that these clarifications are disguised expansions of the exemption category, the extensive case law on the issue suggests that these various agencies, with their 501 (c) (3) status in place, would be deemed benevolent and charitable institutions by Maine courts even without the clarifying language. This points to the reason why municipal efforts to derive some revenues from existing exempt institutions did not stop in 1978. The constitutional amendment closed the door quite effectively to new exemptions, but the exemptions that were enacted before the door shut are growing all the time, particularly the charitable exemption which is accommodating enough to embrace a wide and assorted new membership every year.

PILOTS

One of these efforts to exact some revenue out of the exempt institutions is to simply request from them a voluntary payment in lieu of taxes. There is no law on this method. It is simple request for contributions based on a fairness argument. The literature on this method advises formulating a rational PILOT-rate, which is a mill rate that covers the fundamental municipal services enjoyed by all citizens. Fire and police protection, road maintenance, and solid waste services if borne by the tax base are common components. After the rate is established, each exempt institution is formally asked to participate by means of a written request that lays out the fairness issue. The tangible contributions provided in response to PILOT requests during the 20-year history of PILOT programs in Maine can be characterized as not forthcoming at worst and uneven at best.

1975: In his 1975 Institutional Property Tax Exemptions in Maine, the University of Maine's David Wihry reported that the municipal requests for voluntary payments in lieu of taxes went generally unanswered. Focusing on the PILOT contributions by the university system, he noted that "present payments to communities tend to be arbitrary; that is, not based on a formula, and temporary rather than on an agreed annual basis." Wihry documented some modest contributions from the Farmington, Fort Kent, and Machias university campuses, and a substantial contribution from the Orono campus. He also noted that three private colleges, Bowdoin, Colby and Nasson, provide some PILOT funding, but that "for the most part (exempt institutions) do not provide compensatory payments."

1981: The MAINE TOWNSMAN reported in 1981, in an article by Ken Roberts, that the PILOT effort of three communities, Portland, Auburn, and Lewiston, was not meeting with any substantial financial success. The Portland City Council, at that time, created a PILOT rate to cover only the exempt institutions' share of police, fire and snow removal, and if all exempt institutions contributed at that much reduced level, the City would net $1.1 million. The city had received at that time just $10,000, mostly from churches. The programs in Auburn and Lewiston were being received in the same way, although some exempt entities were offering non-cash contributions-in-lieu, such as free day care services or sidewalk repair around Bates College.

1991: MMA's Jo Josephson reported in a 1991 Maine Townsman article that Portland's PILOT program was on the upswing with 10% of the exempt entities participating to some degree, and two major contributions from Regional Waste Systems and Blue Cross/Blue Shield. In all, the City had received 25% of what it should have received if all exempt entities contributed at their reduced PILOT-rate. Rockland's program at the time "had no takers". Bangor, according to the Josephson article, had developed a steering committee to see if there was any legal mechanism to exact contributions more effectively than the voluntary payment system.

1996: The phone survey MMA conducted on this issue was directed to the ten communities with significant amounts of exempt value attributed to Literary and Scientific institutions. Of the group, only three municipalities actively manage a PILOT program with mixed results. The City of Portland employees receive a 50% tuition cut from the University of Maine as its contribution. The Hyde School in Bath provides a small annual contribution of $2,000. As it did in 1975, the University of Maine at Orono provides substantial PILOT support. UMO pays Orono for 50% of the Fire Department and Code Enforcement budgets, 25% of dispatching services, and 25% of the solid waste operation, for a total annual contribution of over $500,000. It should be noted that although the seven remaining municipalities do not manage active PILOT programs, it is not necessarily the case that the exempt institutions within those communities contribute nothing to the tax base. In Brunswick, for example, Town Manager Don Gerrish reports that Bowdoin College has been electing not to place newly purchased property under its exemption, although it could under the law. For that reason, Bowdoin is now the fourth largest taxpayer in that town.

Service Charges

If the PILOT process is too uneven, service charges represent another approach. By the same statute that creates the exempt institutions, municipalities are authorized to adopt an ordinance that would require certain exempt entities to pay service charges. [Note: 36 M.R.S.A. § 652(1)(L) was repealed in 2007 and replaced by a slightly different provision at 36 M.R.S.A. § 508]. In concept, service charges are non-voluntary PILOTs. The service charge law, as helpful as it sounds, is deceptive. Although on its face the law allows the municipal legislative body to elect to tax exempt institutions, it imposes two caps on the service charges themselves, and then exempts all but one of the institutional properties that it purports to cover. The only class of exempt property to which services charges can be applied is rental property that is entirely tax exempt. The first cap on the level of service charge is a mill rate cap designed to cover the core, property-protection municipal services. [Note: Current law, at 36 M.R.S.A. § 508, does not impose a mil rate cap. Instead current law requires service charges to be calculated based on their actual cost.] Those services are defined as fire and police protection, road maintenance and construction, water, sewer, and sanitation services, and any other municipal services that are actually provided to exempt institutions and the people who use them, except for education and general assistance. [Note: The current version of the law does not list specific services, but instead allows service charges on “municipal services," defined as “all services provided by a municipality other than education and welfare.”] The second cap is that no service charge, no matter how calculated, may exceed 2% of the institution's gross annual revenues. Taken together, the various limitations placed on the service charge mechanism render it a less-than satisfactory solution to the municipal concern with institutional exemptions.

In 1995, the Legislature created a 21-member commission to study the rationale for each exemption, review trends in exemption growth, critique the PILOT and service charge options, and offer recommendations. Along with six appointed legislators, the study group was well represented on the municipal side from both the large communities (Portland, Bangor, Lewiston) and small (Hope, Milo). The hospitals, charitable institutions, educational institutions, and environmental groups were also represented, as well as three members of the taxpaying public. The commission's final report is due to be released any day.

The commission's draft report proposes a series of amendments to the current service charge statute. If enacted as drafted, the service charge option could be used as follows:

Beyond the mill-rate cap, two more caps are established. The service charge can be no more than 25% of the taxes that could be assessed if the property were not exempt or 1.5% of the exempt entity's annual receipts, whichever service charge obligation would be smaller. The term "annual receipts" is defined as any streams of income provided for receipt of goods and services, but does not include any governmental or corporate grants, private donations, or trust or endowment earnings.

The exempt institution may pay for its service charge by providing "in kind" service rather than cash.

A few exempt public properties would be subject to service charges under the proposed legislation, including public airports, public water, power, and sewage disposal facilities (unless the municipality or its residents are provided some services), and state property that generates streams of income from recipients of goods and services provided at the property. The service charge proposal with respect to this limited state property is apparently directed at the Maine Turnpike upon which there are franchise facilities providing services in direct competition with private, non-exempt enterprise.

The commission's draft report and draft legislation contains a minority report by Bethel selectman and Gould Academy administrator Harry Dresser, Jr., which expresses strong dissent with both the recommended legislation and the process by which it was developed. According to Mr. Dresser, the commission glossed over relevant information about the actual growth of exempt value as a function of taxable value in recent years, and failed to engage in meaningful dialogue about the various tangible and intangible values of charity and benevolence.

In his minority report, Mr. Dresser writes: "Were this commission's bill to be enacted, it would say to a public already reeling under a vanishing sense of community that the Legislature of the State of Maine has abandoned the notion of common good which underlies tax-exempt status in favor of a growing municipal appetite for revenue."

Institutional property tax exemptions are, indeed, a complicated piece of business.

ACKNOWLEDGEMENT: AR statistical information provided in this article was obtained from the Municipal Valuation Returns as compiled by the Maine Bureau of Taxation, Property Tax Division. Special thanks to MMA's Resource Center Specialist Kate Dufour for organizing the compiled data into usable formats.