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Pennsylvania Lawmaker Has Plan to Help Cities Recoup Revenue

Posted on May 1, 2020

An impending recession may delay one Pennsylvania legislator’s unique approach to reimbursing some municipalities for lost property taxes, but he’s persistent and has time.

H.B. 1677, introduced by Rep. Bob Freeman (D), would create the Tax-Exempt Property Municipal Assistance Fund. The fund would annually distribute revenue to municipalities where the total market value of all tax-exempt properties equals or exceeds 15 percent of the municipality’s total assessed value.

The bill has been voted favorably out of committee twice, including in January when the Democrats and all but one Republican on the House Local Government Committee approved it on a 22–1 vote. However, it was tabled April 27, indicating that it may not see a floor vote this session.

Freeman has been proposing the fund for decades. “I’ve been lobbying every governor since I’ve been in office, many years ago [1983], and the biggest sticking point is the health of the state budget,” Freeman told Tax Notes, adding that a recession caused by the COVID-19 pandemic would likely complicate the bill’s passage. 

Freeman remains optimistic, though. “We have to stabilize the state economy, and the idea has been gaining greater recognition and support,” he said.

The bill's second sponsor is Rep. Dan Moul (R), whose district is Gettysburg. According to Freeman, Gettysburg is the “poster child” for the bill.

Approximately 80 percent of the borough’s value is tax-exempt, from battlefields and cemeteries to the college, hospital, and county government center. Freeman said he held a hearing on H.B. 1677 in Gettysburg, during which “the mayor of Gettysburg testified, relating to us [that] he pays more in real estate taxes on his modest middle-class home than the Walmart located outside of the township.”

The legislation aims to correct a persistent inequity known to capital cities, college towns, and medical centers around the country: Housing critical regional infrastructure narrows the tax base and further squeezes residents through higher tax rates.

Harrisburg, Pennsylvania’s capital city, is familiar with the revenue trap. Approximately 49 percent of the city’s value is owned by the state, according to Freeman. The city was poised to file for bankruptcy in 2011 but avoided that fate by becoming a designated Act 47 distressed municipality, defined as a municipality in severe financial difficulty and starting to fail. The biggest financial weakness identified in Harrisburg's Act 47 report was the significant amount of tax-exempt property. The city began calling nonprofits to ask them for payments in lieu of taxes (PILOTs), though according to the Patriot-News, the payments wouldn't cover the revenue loss.

Almost all the Pennsylvania cities in Act 47 status have 25 to 50 percent of their total property as tax-exempt, Freeman said. For example, approximately 49 percent of the property in Johnstown is exempt from taxes.

“My theory is that it’s one of the underlying reasons those cities start to fail,” Freeman told Tax Notes. “They used to be centers of commercial commerce and industry and a lot of that went to the suburbs in the ’70s and ’80s. They are left with nonprofits and major employers, whether government or universities. We shouldn’t penalize the communities with these facilities, which are regional assets in nature,” he said.

Assessing the amount of tax-exempt property in a community is difficult. Some jurisdictions don’t require tax-exempt organizations to assess their property values. However, a good indicator would be an area’s reliance on PILOTs. The Northeast accounts for 75 to 80 percent of PILOTs, according to the Lincoln Institute of Land Policy. Of those states, Massachusetts and Pennsylvania have the largest share.

In 2011 Pittsburgh received 1.84 percent of its property taxes in PILOTs, according to Lincoln Institute data. However, about 40 percent of the city’s assessed value is tax-exempt, according to reporting by WESA.

Freeman isn’t the only state politician attempting to solve this issue. Connecticut, for example, has a statewide PILOT that provides funds to municipalities with state-mandated property tax exemptions.

“That’s the only other one, as far as I know,” according to Joan Youngman, senior fellow in the Lincoln Institute's department of valuation and taxation. “It’s never fully funded, only partially funded, though.”

Freeman described his approach as one of the more painless ways of trying to reimburse these communities for housing regionally critical infrastructure.

Other states have taken a direct approach. In 2016 and 2018, Maine's then-Gov. Paul LePage made a strong push for adding tax-exempt properties to the tax rolls, even distributing pamphlets to legislators during his State of the State address targeting the potential $18.2 billion in tax-exempt land. And Princeton University in New Jersey and Brown University in Rhode Island both agreed to make PILOTs following negotiations or litigation.

In 2015 the Pennsylvania Senate passed a constitutional amendment that would have given the General Assembly authority to determine which institutions were purely public charity for tax exemptions, but the bill died in the House. A similar bill passed both chambers in 2013.

“If we can’t find another revenue stream to compensate communities with a high level of tax-exempt properties, you may find a renewed interest by municipalities to gain compensation,” Freeman said. “It becomes a difficult situation. Not all nonprofits are created equal. We’ve seen many nonprofits that are only nonprofit in name.”

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