Not only did they donate 37 acres in a beautiful part of Loudoun County, but Ken Falke and his wife also gave $1 million to help start the Boulder Crest Retreat for Military and Veteran Wellness, a rural haven where wounded service members can relax and recover with their families.
Falke assumed that the retreat would be exempt from property tax, as is common with nonprofit groups across the country.
Instead came the first half of a roughly $20,000 tax bill. And a question many local governments nationwide are wrestling with as they try to make up money lost during the Great Recession: Should nonprofit organizations have to pay taxes or other fees?
This month, after a heated debate, the Loudoun County Board of Supervisors voted to once again consider tax breaks for new nonprofits, after years of denying them. “It’s going to be Christmas in Loudoun County,” Supervisor Matthew Letourneau (R-Dulles) said before voting against the measure, warning that the board could be inundated with requests.
For charities, a tax bill means another overhead expense taking away from their mission of helping those in need. But for cash-strapped local governments — especially those in places such as the Washington area, where much of the land is used by governments, churches, universities, hospitals and nonprofit organizations that don’t pay property taxes — it’s hard to keep cutting off revenue.
“The recession hit,” said David L. Thompson, vice president of public policy for the National Council of Nonprofits. “And all of a sudden, nonprofits that were the anchor of the community and greatly praised by policymakers — ‘Come to our city. Look at the great nonprofits we have!’ — started being treated as scofflaws not paying their fair share.”
Virginia has a law, unique in the country, he said, that gives local governments the authority to grant or deny property-tax exemptions to some types of nonprofits. (Other types of nonprofits, including churches and schools, are automatically exempt.) Most Northern Virginia counties no longer grant the exemptions, so nonprofits such as new soup kitchens and health clinics opening up have to pay taxes on the property they own.
Other places across the country have found other ways of getting more money from nonprofits, including fees for city services.
In Loudoun County, which debated the issue this month, some supervisors said the county needs every dollar. Taxing nonprofits, they said, was good fiscal management.
But others said some nonprofits fill gaps in government services — helping the homeless, the elderly, the mentally ill — and should, as a result, be exempt.
“We should, as a community, thank them for the good work they do and not have them worrying about paying property taxes when they’re out there trying to fundraise,” Chairman Scott K. York (R) said.
Most nearby counties stopped granting those types of exemptions. Fairfax County requires many new nonprofits to pay property taxes, as does the city of Alexandria. In Arlington, the county didn’t eliminate the ability to apply for an exemption but passed a resolution stating that it thinks that all who benefit from county services should pay taxes — and hasn’t granted any exemptions since 2002.
In Prince William, as in many counties, nonprofits request funding during the budget cycle rather than a permanent property tax break. The county granted $2.4 million in fiscal 2014 for 34 “community partners,” based on needs the government has identified as a priority.
“It gives the board a little more flexibility in bad times,” said Steven Solomon, chief financial officer for Prince William County, “rather than have it be automatically exempted forever.”
Nonprofits are one of the fastest-growing sectors of the economy, booming even during down times. Some are shoestring operations, but others have massive endowments, prime real estate, sleek headquarters and lobbyists. Many have ardent supporters who can pack public hearings to pressure local politicians. And with the recession forcing public officials to scramble for revenue, local governments around the country have been looking at ways to get money from nonprofits.
A couple of years ago, Boston officials began asking some nonprofits for “payments in lieu of taxes.” Other cities followed or began imposing fees for services such as water, trash removal and public safety.
It comes up in Baltimore fairly often, said Henry Bogdan, director of public policy for Maryland Nonprofits. “Whenever the economy goes bad for a while and government revenues drop off, you’ll find certain localities who, under fiscal duress, will look at large nonprofit institutions and say, ‘I wish we could get some money out of them.’ ”
In 2009, researchers estimated that property tax revenue forgone because of the charitable tax exemptions totaled between $17 billion and $32 billion in the United States.
Nearly two-thirds of nonprofit leaders said in a national survey that in the past two years, they have been hit by new payments to local governments, whether payments in lieu of taxes, user fees or special-use taxes, said Lester Salamon, director of the Center for Civil Society Studies at Johns Hopkins University.
The nonprofit industry “continued to grow right through the recession,” he said. “It generates $39 billion in revenue. . . . So what [Virginia] has to decide is if it wants to choke off that impact.”
The decisions on whether to grant exemptions are often controversial, said Terry Rephann, a regional economist with the University of Virginia’s Weldon Cooper Center for Public Service, with some convinced that the nonprofits merit the breaks by helping the community. “But the argument could be made [that some of these] act a lot like for-profit organizations. Some, like in the medical and social services, compete with for-profit firms.”
In Loudoun, where property taxes make up almost 90 percent of tax revenue, one supervisor often questions why part of the expansive Howard Hughes Medical Institute’s Janelia Farm Research Campus was granted an exemption. In 2013, that meant $2.8 million in forgone property-tax revenue for that organization alone.
Because local governments are so reliant on property tax revenue, exemptions can have a big impact.
“Property taxes are extraordinarily important to the county,” bringing in almost 78 percent of the revenue, said Kevin Greenlief, director of the Department of Tax Administration for Fairfax County. “It drives the entire budget.”
In the District, more than a third of the property is tax-
exempt. A tax commission is proposing a new tax per employee to the D.C. Council as part of a package of changes to eke out revenue from large nonprofits such as hospitals and colleges and balance out the tax burden.
In Norfolk, where officials are projecting a $20 million shortfall for fiscal 2015, the City Council recently decided to stop taking new requests for exemptions. It wasn’t a difficult decision, said Sharon McDonald, commissioner of revenue. “No, no, no, no. It was, ‘This is something we don’t have a choice in doing.’ ”
In Richmond, almost a quarter of the real estate is owned by nonprofits — about $6 billion worth — so the tax burden falls more on individuals and businesses than it does in some other places. Every time a university buys another $50 million office building or a state agency expands, said James D. Hester, the city assessor of real estate, the taxes are redistributed to others. “That’s an issue that’s discussed almost every year.”
In 2007, the City Council voted to stop allowing property-tax exemptions for nonprofits.
In 2012, that was lifted after a group restoring a landmark historic theater downtown pleaded that it couldn’t stay afloat with the property-tax bill. The City Council was flooded with requests for tax exemptions from other groups, many of which were granted, Hester said. In a public hearing, it was hard for politicians to vote no when people were pleading their case, he said.
“They opened the door — and everybody came through it,” Hester said.
This year, the council shut it again.
In Loudoun, that kind of rush of applicants is what worried some supervisors. “Where’s the money going to come from?” Letourneau asked. The board is bracing for a tight budget.
But other supervisors argued that they should help the organizations that help residents — and save the county money in the process. York, the board chairman, said that there are good organizations that deserve a tax exemption and that he doesn’t think the forgone revenue would be nearly as much as the potential cost to take on the services that the nonprofits provide.
After the vote, several nonprofit leaders were elated. Like them, Falke said his nonprofit, Boulder Crest, will apply for an exemption this spring. He’s hoping that it won’t have to pay the second half of that $20,000 bill.