What is charity?

Portland and other Maine cities are trying to find out —
and get some extra property taxes along the way

By Noah Bruce

NON-PROFIT: but is it a charity?

If Portland’s tax structure were a basketball team, it would look a lot like the mid-’80s Chicago Bulls, a team that, whenever things started looking ugly, passed the ball to its one star, Michael Jordan. There were two minutes left on the clock, and Dominique Wilkins had just hit his third straight jumper to put the Atlanta Hawks up by six, everyone knew the ball was going to Jordan. The show-time Lakers came to Chicago and Magic Johnson was feeding no-look passes to Kareem Abdul-Jabbar, the only way the Bulls could even compete was if Jordan had a huge night.

When the city’s finances start looking a little ugly, it turns to its one big star, too: raising property taxes.

Thing is, when Jordan would fly through the air, tongue hanging out his mouth, dunking over three defenders, the crowd went wild; if Portland City Council raises taxes again — which it is looking suspiciously close to doing — the crowd will be less than thrilled.

A big reason Portland is in a squeeze is its school budget. According to Portland City Councilman and chairman of the finance committee James Cloutier, this year Portland will receive $15 million in state education aid. But the city has a school budget of $65 million, and property taxes are expected to generate only $42 to $43 million. This $7 million or $8 million deficit may have to be made up by bringing out the big gun, the property-tax hike.

But Portland and other municipalities in Maine may be on the verge of signing their Scottie Pippen if the Maine Legislature approves a new bill that would augment the power of the property tax. And while the analogy may be wearing thin, the upshot is this: there may soon be an alternative to the almighty property tax — or at least who gets nailed by it.

But what the bill seeks to do is tax some non-profits who are currently exempt, and that’s not sitting well with everybody.

“We’re not naïve to the tremendous pressure put on property tax money,” says John Walker, director of the Maine Association of Non-Profits. “We believe this is the fault of the poorly thought-out tax structure in Maine. It is not the fault of the non-profits.”

Though the drafter of the bill, Geoff Herman, director of state and federal relations for the Maine Municipal Association, insists, “The bill is not designed to be revenue producing,” it only attempts to clarify the definition of what a nonprofit is, clearly there are more than just definitions at stake. Between 20 and 25 percent of the property in Portland is owned by non-profit organizations. This translates to nearly $1.1 billion worth of property owned by a range of non-profits — from the YMCA, to the Spurwink School, to the Portland Museum of Art — and nearly $26 million in taxes not collected by the city.

But whether the proposed bill is just about definitions or about generating revenue, the big question is which non-profits would be affected?

The bill would add a provision to Maine law taken from a Pennsylvania statute. It would effect only “charitable institutions,” so governmental agencies, museums, and fraternal, religious, and educational organizations would remain untouched. Beyond that, though, Herman is not specific but hints that some large, corporate non-profits might be in trouble.

“There is a non-profit spectrum,” he says. “At one end you have a food bank that is staffed by volunteers and receives free food donations . . . At the other end is a multi-million dollar corporation where the CEO makes $450,000 a year and the entire staff is extremely well paid. This company may have a charitable mission, but they are extremely different from the food bank . . .”

As he continues, it becomes clear Herman is talking about hospitals.

“ . . . They do provide medical care to people who can’t afford it. However, in some respects the costs for people who can’t afford care are subsidized by people who have insurance. Why does it cost so much for medical care? Because you are paying for those who can’t pay. In this structure one would ask, ‘Where is the charity?’ This particular bill answers that question.”

In Greater Portland, the bill could affect non-profits like Maine Medical Center, Mercy Hospital, and Consumer Credit Counseling Services that provide assistance to the community but, according to Herman, might not be “charitable.”

Vincent S. Conti, CEO of Maine Medical Center, concedes that the hospital practices what he calls “cost shifting” — charging people who can afford care for those who can’t. To Herman, that means the hospital is not a charity, and should therefore pay taxes like any other business. Conti, on the other hand, argues it is a necessity of fulfilling Maine Medical’s mission “to provide services to people in need, irrespective of their ability to pay.”

According to Conti, the largest revenue source for the hospital is payments for medical care made by consumers, third-party insurers, or Medicare and Medicaid. But Medicare and Medicaid reimburses the hospital for less than care actually costs; payments from these federal institutions are smaller to medical-care givers in Maine than to care givers in almost any other state.

Lack of reimbursement from these institutions combined with the cost of providing free or reduced care for the needy creates a shortage of funds that must be made up somewhere. Conti says that charging those who can pay extra is the only way to keep the hospital running.

Conti also brings up an argument members of the non-profit community frequently cite: the money lost in tax dollars by keeping a non-profit tax-exempt is less than the tax burden that would be created if the non-profit didn’t exist at all.

“When thinking about tax-exemptions,” he says, “ I think the value that we’re bringing to the community needs to be considered . . . If Maine Medical didn’t exist or didn’t accept charity patients, the city would have to build their own hospital and would end up incurring a major expense. There are no municipal hospitals in Maine and this burden is taken up by not-for-profit hospitals . . . In other states, taxpayers pay a city tax, a water tax, and a hospital tax.”

Another non-profit that may lose its tax-exempt status if the bill passes is the South Portland non-profit Consumer Credit Counseling Services of Maine (CCCS). Currently, CCCS is suing the city of South Portland and its tax assessor, Elizabeth Sawyer, to overturn her decision to tax the non-profit (see “No Free Rides,” Portland Phoenix, February 11, 2000).

Sawyer’s argument is that, though CCCS helps people in debt, it was set up to benefit credit-card companies and banks and is not a charitable institution.

According to Sawyer, out of $2 million in CCCS’s revenue last year, $1.2 million came from credit-card companies and banks and $600,000 came from consumers who pay a fee for CCCS’s services. She says the company does not use volunteer labor and does not provide debt-management services for free.

ANTE UP: Some non-profits like Maine Med will be forced to pay property taxes if a new bill is passed by the Maine legislature.

“Should the rest of the taxpayers subsidize CCCS? . . . Are they charitable? I think no,” says Sawyer.

David Lourie, CCCS’s attorney, says that CCCS “is beneficial to the public and does provide services without regard to a person’s ability to pay.”

His last point is important because if CCCS can prove this, they would be considered charitable and therefore tax-exempt under the bill. But the service he is referring to is only an initial counseling service provided for a nominal fee. The debt-management service, where CCCS actually works with the client to alleviate debt, is provided only to clients who can afford to pay a fee. Lourie claims some poor clients receive debt management for reduced fees.

It seems that CCCS would fit partially into some of the proposed statute’s charitable categories, but Lourie worries that “partially” would not be enough to keep the organization tax-exempt.

“What worries me about this kind of law is that if you don’t fit into it 100 percent you are excluded,” he says. “These laws are read very narrowly, and they end up putting charitable and benevolent institutions into a straight jacket, limiting the types of activities they can do. One size doesn’t necessarily fit all. We will be cutting off some beneficial institutions with this law.”

Lourie may be right. But the issue is not black and white. It is not just a case of hungry cities looking to get a meal wherever they can. The question is more complex and ties into other concerns like state funding and sprawl.

Service-center communities (areas that typically have large amounts of non-profits), like Portland, Bangor, Gorham, Lewiston, and Augusta, are penalized when it comes time for the state to calculate how much money to give its municipalities in revenue sharing. The state gives less money to municipalities with high property valuations because it assumes they make more money in property taxes. But service-center communities are unable to tax the non-profits whose property helped raise their valuations.

Portland City Councilman Peter O’Donnell feels this is unfair.

“Many of the council members feel that we are penalized for all the tax-exempt properties that we have in Portland,” says O’ Donnell. “When it comes time for revenue sharing, we get less money from the state, but then we are not able to tax on all this property.”

The issue also affects sprawl. Service-center communities have high property taxes in part because taxpayers are paying not only their bill for city services but the bill for non-profits, too. Herman says areas near service-center communities have lower tax rates and are consequentially attractive to businesses and people looking to buy a home (who also get to take advantage of the service-center without paying its taxes). This contributes to urban sprawl.

Walker, of the Maine Association of Non-Profits, stresses that there are other ways to let the municipalities raise revenue besides taxing non-profits. He says his group is working with cities on revenue-sharing plans.

In fact, a revenue-sharing bill, called Revenue Sharing II, was approved by the Maine Legislature last year, but was substantially weakened by the time it passed. The bill was supposed to raise the percentage of money that municipalities receive from state income and sales taxes from 5.1 to 5.3 percent. This would have increased the pool of money that is divided among Maine cities by almost $5 million per year. However, the Legislature cut this increase from the bill.

The only part of Revenue Sharing II that survived was a stipulation that any additional and unexpected money that the state receives will be diverted to the municipalities. Last year this turned into a one-time appropriation of $3.6 million to Maine cities, but guarantees nothing for the future.

Other states deal with the problem of taxing non-profits in a variety of ways. Municipalities in states like Florida and Iowa don’t rely so heavily on property taxes in the first place, so the taxing of non-profits is not such a hot issue. State law allows cities in these states to levy a local option sales tax. This means that city and county governments can elect to add a local sales tax onto existing state sales taxes. The revenue from these taxes benefits the municipality.

According to Councilor Cloutier, who is also on the Maine Municipal Association’s legislative policy committee, there will be a bill presented to the legislature this year that would allow a local option sales tax in Maine.

In Wisconsin and Tennessee, municipalities are able to require some non-profits to make a payment in lieu of taxes (PILOT). The non-profit keeps its tax-exempt status, but pays a portion of the taxes it would have paid if it were a taxable entity. In Maine, some non-profits pay voluntary PILOTs, but the state is not allowed to force such a payment.

Pennsylvania was the first state to strictly define which charities were tax-exempt. The bill that will be presented to the Maine Legislature by the Maine Municipal Association is based in part on Pennsylvania law. According to Joe Geiger, director of the Pennsylvania Association of Non-Profits, the law in that state does not exclude many non-profits from tax-exempt status. Hospitals, he says, participated in the crafting of the bill and went largely unaffected when it became law.

“The main effect of the law was to reduce the amount of court cases between non-profits and local governments,” says Geiger.

According to Mark Ryan, executive director of the Pennsylvania House of Representatives Committee on Finance, the Pennsylvania law was enacted to create uniformity in how non-profits were treated by tax-assessors in different parts of the state. It benefits non-profits by creating a “safe harbor” where they cannot be taxed as long as they stay within the parameters of the law. It helps cities by creating an incentive-based voluntary PILOT program that generates money for local governments.

In Maine, the legislature has steadfastly voted down any bill that tries to implement changes like those made in other states.

“[These bills] aren’t considered favorably in good [economic] times,” says Herman. “They aren’t considered favorably in bad times. They aren’t considered favorably when big changes are proposed. They aren’t considered favorably when little changes are proposed.”

And he is not tremendously optimistic about the future of this bill. “It is impossible to predict how it will do in the legislature,” he says.

Councilor Cloutier seems more hopeful.

“This bill is different from bills proposed in earlier years because it will have the support of a coalition of cities and service-center communities,” he says.

It’s clear that if a change is not made to Maine’s tax structure, cities will continue to struggle to make ends meet and will be forced to periodically raise property taxes.

To some, though, taxing non-profits could have unintended consequences that would impact Portland in the long term.

“Portland is a vibrant city in part because of the non-profits that are here,” Walker says. “People are willing to pay more to live here and consequentially pay higher property taxes because they want to be here. Part of the reason they want to be here are the non-profits. So in some respects the city is going to stand itself on its head if it taxes these organizations.”

Noah Bruce can be reached at nbruce@phx.com.