How Nonprofits Can End Up Becoming a Drain on City Budgets

Nonprofits in America range from small community charities to large national and international organizations and universities, hospitals, art museums, religious institutions and more. One thing they all have in common, however, is that they do not pay property taxes on the real estate and the buildings they own. In some cities, they are even exempt from paying for water and other services. This is despite the fact that a nonprofit benefits from the same city services as the tax-paying organization down the street or across town, from police protection and roads to public education for the children of the organization's employees.

In other words, the buildings and offices which house the economic activity of nonprofits are for the most part 'off the tax rolls.' Because education and health services are organized under the 501-c-3 provisions of the IRS tax code, states grant them tax-exempt status. Why? Because they are contributing to the 'general welfare' and providing 'social goods.' In the case of nonprofit hospitals, for instance, it's expected that in return for being granted tax-exempt status on their property, hospitals will provide care to the indigent, thereby reducing costs to the public sector. A laudable and entirely defensible reason for being granted a privilege. But how much indigent care is enough to qualify?