Taxing nonprofits

Hard-pressed states and municipalities are targeting nonprofits for new sources of tax revenue at a time when charities struggle to meet the demands for their services.

Nonprofits, among them universities, church groups and private schools, are usually exempt from property taxes and other user fees. However, some states and localities are reconsidering the blanket exemption to generate desperately needed revenue to balance their budgets. It will leave many charities worse off and forced to reduce their services to pay the bills.

A bill in Hawaii would levy a 1 percent excise tax on charities to raise up to $750 million, the New York Times reports. Minneapolis hopes to raise $155,000 by collecting the same fees it charges businesses and residents for street lighting.

Cities and towns in Indiana are looking at user fees for police and fire services. Pittsburgh recently debated whether to levy a 1 percent tax on college tuition to defray the cost of city services.

Calvin K.Y. Say, a Hawaii state legislator, said that repealing the exemptions "spreads the pain more evenly than raising the rate paid by those already subject to excise taxes."

It also burdens nonprofits, which are feeling the loss of investment funds and, for many groups, dwindling contributions.

The tax-exempt status of charities recognizes the important contributions they make and services they provide, often as a supplement to public agencies. The exemptions relieve the nonprofit groups of an expense that siphons funds away from programs or would demand additional fundraising to support.

The policy could backfire on states. In order to pay new fees and taxes, nonprofits might cut their services, which could force people to rely more heavily on tax-subsidized services.