A Clarification on Property Taxes

To the Editor:

The Chronicle’s article, “Taxing Times for Charity,” (September 18) repeated a common misconception about the charitable property-tax exemption: “For decades, many states followed the lead of the federal government in bestowing tax exemptions on any organization recognized as a charity under Section 501(c)(3) of the Internal Revenue Code.”

Property-tax exemptions long antedate the federal income tax. In 1860, over 50 years before the federal income tax, nine state constitutions (33 then existed) mandated universal property tax, while exempting governmental, religious, educational, and charitable property.

In research I did on the property-tax laws in all 50 states under the auspices of the Lincoln Institute of Land Policy, I found 501(c) (3) status to be simply irrelevant in most states. It is a necessary condition in a few, but sufficient in none. Nor is this a new development.

Confusion on this point probably arises because churches, institutions of higher education, hospitals, and nursing homes own most charitable property. All of them are 501(c)(3). Coincidentally, every state exempts them from property taxes, but for reasons unrelated to their federal tax status.

The Bridgeport and Santa Fe cases cited in the article are representative of two hot spots in property-tax litigation involving charities: commercial activity and housing. As more charities try to boost income by undertaking commercial activity, like selling food, they are exposed to property-tax liability. This should be no surprise; they have had to live with unrelated-business income taxes for years.

However, they should be forewarned, in many states their entire property is subject to taxation if any part of it is used for noncharitable purposes. (UBIT taxes only the unrelated portion.) Some local assessors look the other way on small amounts, like museum cafes, while others enforce the letter of the law.

Housing is the other particularly contentious issue. Most local governments and school districts live or die on the revenue from privately owned residential housing, unless they are lucky enough to have a power plant or shopping center. Even assessors who are willing to cut charities some slack on a small amount of commercial activity are wary about granting a charitable exemption for housing because it could open loopholes that could be exploited by for-profits in disguise.

H. Woods Bowman
Associate Professor
Public-Services Graduate Program
DePaul University
Chicago