Why are universities and hospitals tax-exempt? It seems really screwy to me, and it's part of the reason the city has such money trouble. | You Had to Ask | Pittsburgh | Pittsburgh City Paper

Why are universities and hospitals tax-exempt? It seems really screwy to me, and it's part of the reason the city has such money trouble.

Question submitted by: Bill Crane, South Hills

UPMC gobbles up competitors like it was run by the Rockefeller family, and if colleges were businesses, somebody would have complained about them to the Better Business Bureau. First, they target impressionable youth with campuses that look like hybrids between shopping-mall food courts and Bally's gyms. Only when the hapless students start racking up student loans do they discover the bait-and-switch: If they don't like the school, it's almost impossible to transfer your credits elsewhere. Many end up working for the college in "work-study" programs, essentially paying the school in order to work there.


Yet such behavior isn't just permitted but encouraged by state law, which exempts colleges and other non-profits from taxes. Why?


You're not the first person to ask. Attorney Ira Weiss, who is the solicitor for the Pittsburgh Public Schools and a long-time critic of the state's approach to tax-exempts, took non-profits to court repeatedly in an attempt to wring tax dollars from them. "Our challenge was that CEOs were paid salaries and compensation more indicative of for-profit corporations, that these institutions did little or nothing free, that they competed directly with private businesses," he says. You could argue that none of that has changed, but as Weiss muses, "I guess we were too successful." In 1997, after lawsuits filed by Weiss and others rolled back some tax-exempts, the state legislature passed the "Institutions for Purely Public Charity Act," which changed the rules of the game.


On the surface, the bill seems fairly innocuous. For example, it says that to be tax-exempt, an institution must serve a "purpose which is recognized as important and beneficial to the public," and "donate... a substantial portion of its services." And it "must operate entirely free from private profit motive"; for example, the salary of its officers must not be "based primarily upon the financial performance of the institution." (US Airways practically qualifies as a charity in this sense, since whatever else they were -- lucrative, absurd -- the salaries of its officers weren't based on the performance of their employer.)


Jim Redmond, a spokesman for the state's hospital association, says "Pennsylvania's law is kind of unique in that it lays out criteria that all non-profits must meet," to enjoy tax-exempt status. "Other states tend to be far more broad." But even if the law is more specific, cities get less from non-profits than they used to. In the old days, a town or school district could shake down non-profits by threatening to challenge their tax-exempt status in court. In order to ward off the challenge, non-profits would enter into "payment in lieu of taxes" (PILOT) agreements. But since the Act has passed, Weiss says, "There's no reason for a large non-profit to make a PILOT agreement today. They get a 'get out of jail free' card." Nowadays, he contends, "a hospital can charge you $6,000 for an ear-cleaning, and if the insurance pays only $400 for the procedure, they write off the rest of it as 'free care.' It's all accounting tricks." Before the Act was passed, Pittsburgh took in a few million dollars from tax-exempts; now it gets only a few hundred thousand.


Redmond understands why someone still paying off school loans from the University of Pittsburgh, say, might look at the $400,000 salary of the school's chancellor and ask who the real charity case was. "Often it can be very confusing as to why should I as a person who makes ends meet pay taxes, whereas a large entity like UPMC or Carnegie Mellon somehow doesn't have to," he admits. But, "I think the fundamental philosophy is embedded in the American belief that government shouldn't run everything, and in order to promote that, tax-exempt status is granted."


Indeed, the preamble of the public-charity act asserts that charities "lessen the burden of government," and it sure seems to be working in Pittsburgh. The charities provide services that government might otherwise be expected to, and the fact that these institutions don't pay taxes reduces other government services as well. Like providing garbage collection, swimming pools, rec centers and fire protection.


Be sure to thank them.

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