If George Washington University were any other employer, it would owe $39 million in property taxes to Washington, D.C., each year. Georgetown University would have to fork over nearly $9 million, American University $11 million and Howard University about $26 million.
But as nonprofit organizations, the universities — which control more than $10 billion worth of city real estate among them — are exempt from property taxes, just like churches, hospitals and the federal government. Local leaders have routinely raised concerns about these tax breaks and have pressed nonprofits to provide some form of compensation to the city, but their efforts are consistently beaten back.
As families wrestle with the exorbitant costs of higher education, lawmakers are questioning why many of the nation’s wealthy universities have raised tuition far in excess of inflation while sitting on hefty endowments, sometimes worth tens of billions of dollars. And local officials wonder whether universities are paying their fair share to the cities in which they reside at a time when government spending is strained.
Congressional hearings are set for this fall, and lawmakers have asked 56 private universities, each with endowments exceeding $1 billion, for information about the use of that money, the size of their tax-exempt property holdings and whether they make any payments in lieu of taxes (PILOTs) to their host cities.
“As Congress works toward overhauling the nation’s tax code, it’s imperative we gather as much information as possible about how preferences in the tax code are applied,” said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah). “This initiative will provide the committee further insight into how university endowments use their tax preferences to fulfill their charitable purposes.”
GWU and Georgetown, the only District schools with endowments exceeding $1 billion, own extensive property beyond the reach of tax authorities, like many of the other universities at that threshold nationwide. Unlike some of those schools, neither university pays to offset the public cost of providing police, fire and other municipal services because the District makes no such demand.
“A great city deserves great universities, but at the same time, the city has bills to pay,” said Natwar M. Gandhi, a former chief financial officer for the District. “The city has profound needs and has been financially responsible, but that does not negate the need for imposing a PILOT. It is a question of fairness, a question of equity.”
City officials have contemplated the creation of a PILOT program since the 1970s, arguing that nonprofit real estate owners unfairly benefit from the services supported by tax-paying businesses and property owners. Those attempts never made headway as organizations opposed the effort and emphasized the significance of their philanthropic and educational missions. Universities are among the largest employers in the city.
“We generate talent for the city, research, scholars, scholarship and money,” said Stephen J. Trachtenberg, who retired as president of GWU in 2007 after 19 years in the position. “Students spend. Faculty earn and pay taxes. Parents visit. We buy goods and services. [The financial] impact is positive and profound.”
At least 218 municipalities in 28 states collect payments in lieu of taxes from nonprofit organizations, according to the Lincoln Institute of Land Policy. Colleges and universities contribute 68 percent of the payments cities collect through these PILOT programs. The programs are voluntary, but they yield millions of dollars in revenue for local governments, albeit a fraction of what cities would receive if nonprofits paid property taxes.
Boston received about $28 million in PILOT contributions last year from local hospitals, museums and colleges, including Harvard University and the Massachusetts Institute of Technology. The city negotiates payments from tax-exempt organizations that own property valued in excess of $15 million based on a formula loosely linked to 25 percent of property tax rates.
Boston, which relies heavily on property tax revenue, has requested payments in lieu of taxes since the early 1970s. The size of the contributions has varied widely over the years, leaving city leaders dissatisfied with the program and leading them to revamp the terms five years ago, said Adam Langley, senior research analyst at the Lincoln Institute.
“When you look at places like Boston, Providence [R.I.] and New Haven [Conn.] that have actually received substantial revenue from nonprofits, they’re taking a collaborative approach where they’re really trying to work with nonprofits,” Langley said.
John C. Cavanaugh, president of the Consortium of Universities of the Washington Metropolitan Area, argues that unlike Boston, the District has the power to levy business, sales and income taxes to generate revenue. What’s more, local universities pay a host of other taxes, including a franchise tax on business income and taxes on the amount of impervious surface on their properties, he said.
Universities also pay taxes on the commercial property they rent to businesses. George Washington, one of the largest tax-exempt property owners in the city, paid $224,000 in taxes on its commercial property last year. If all universities paid property taxes, the District could have collected $111 million last year, according to an analysis of data provided by the D.C. Office of the Chief Financial Officer. That number is barely a percent of the District’s $7 billion budget.
The federal government owns the largest group of tax-exempt properties in the District. In the past year alone, the city missed out on $891 million in property taxes on 2,855 buildings held by Uncle Sam.
“The city provides a lot of free services to the federal government, and what do we get in return?” Gandhi said. “The largest employers in the city, and that’s including universities, aren’t paying taxes to support our services.”
After railing against universities’ tax exemptions in a 2005 article in Washingtonian magazine, Gandhi recalls receiving a postcard from GWU’s then-President Trachtenberg that read: “Bastard!”
Trachtenberg, who called Gandhi a great friend, confirmed the account and reaffirmed his position that payments in lieu of taxes are “a bad idea” that would do “little for the city, but [would] be a great hardship for the university.”
The man who famously turned GWU into one of the most expensive universities in the country said: “Money matters, but it’s not everything.”
In defense of universities, Cavanaugh said some institutions collect the trash and plow the snow in their neighborhoods and provide police forces for their campuses, reducing the demand on city officers. District universities, he said, also provided more than 600,000 hours of volunteer service and $32 million in scholarships to residents.
If the city ever created a PILOT program, universities might stop providing these services, said Cavanaugh, speaking on behalf of area schools. “We’re not in a position to make payments and provide free services at the same time,” he said.
Mark Schneider, vice president and institute fellow at the American Institutes for Research, said that no amount of volunteer hours or scholarship money should afford any university special treatment.
“Does this mean that we all should be sending bills for voluntary work to the city? And are these scholarships going to low-income D.C. residents?” said Schneider, who co-wrote a commentary about university tax exemptions that appeared in The Washington Post. “These arguments don’t hold water.”
D.C. Council member Mary M. Cheh (D-Ward 3) has been one of the most vocal supporters of the city implementing a payments-in-lieu-of-taxes program. In 2010, she proposed charging every university a $100 fee per student per semester to help the city balance the budget. The idea was met with fierce objection from area universities and never materialized into legislation. Cheh said she couldn’t muster support from the council or the mayor.
She nevertheless encouraged the D.C. Tax Revision Commission, a panel of city leaders tasked with reviewing the District’s tax structure three years ago, to explore the issue. The commission considered 63 proposals and ultimately recommended charging employers a quarterly fee of $25 per worker, which never came to fruition.
In its final report, the commission wrote that it was “concerned about the opaque and arbitrary nature” of PILOT programs and “anticipated unnecessary administrative burdens for both nonprofit organizations and the D.C. Office of Tax and Revenue.”
Commission member Fitzroy Lee, deputy chief financial officer for the District, recalls that many members thought that the broader issue of property taxes, which encompassed the PILOT idea, required a separate commission.
“They didn’t want to get bogged down with one tax source when they figured they could make headway on much more tractable things that could get done within our time frame,” Lee said.
He added: “I’m sure this is not the end of the issue. There is so much valuable property outside of the ambit of our tax base, so I’m sure whenever there is any kind of fiscal stress, it will always come up as one way of raising revenue.”
Clarification: An earlier version of a caption accompanying a photo of a building at 4000 Brandywine Street NW inferred that it was an American University building currently not subject to property tax. American University sold the building in March 2016; the building was not subject to property tax in the most recent tax year and during the time American University owned it.