In a city with numerous state and federal buildings and two public colleges, an estimated 50 percent to 60 percent of the property in Columbia goes untaxed. Consequently, the burden of funding city services falls to a relatively small portion of the population.
Income tax exemptions compound this problem.
The Internal Revenue Service uses what it calls the “community benefits” standard for granting nonprofit status that allows some entities to avoid paying income taxes. But the criteria are ill-defined and subjective, not tied to the portion of revenue that benefits the community. Many businesses that operate largely like for-profit enterprises are classified as nonprofits and thus exempt from income and property taxes.
Hospitals are a prime example. Most U.S. hospitals have a nonprofit status, often despite raking in hundreds of millions or even billions of dollars annually — defying many people’s expectations of what a nonprofit organization should be.
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This matters locally because Columbia, like most local governments, automatically excludes these entities from paying business license fees, which the majority of city businesses must pay. That should change.
Rather than exempting an organization from business-license fees simply because it meets the vague standards set by the IRS, we should develop a smarter policy. My “fair fee” proposal would establish a new set of criteria, with charities and churches retaining their exemptions while other entities — particularly profitable businesses that conduct themselves like for-profit companies — paying the fees.
There would be three main benefits:
▪ A broader revenue base would reduce the burden on average citizens, who now bear more than their fair share of the cost of city government.
▪ It would mean greater financial stability and potentially more revenue for needed city services.
▪ It would level the playing field for the city’s taxpaying businesses. Imagine the frustration of competing for customers and sales against a company that is not paying a license fee.
It’s reasonable to expect these businesses, which consume city services, to help pull their own weight.
This isn’t a radical idea. In recent years, policymakers nationwide have increasingly pushed to end exemptions for cash-rich hospitals, concluding that the costs far outweigh the benefits. Greenwood, Spartanburg and Greer have asked medical systems to pay up. Often, the outcome is a compromise in the form of a “payments in lieu of taxes” agreement.
Certainly, Columbia’s tax-exempt businesses — including our two tax-exempt hospitals — are an asset to the city. I’d never seek to diminish that. Still, it’s reasonable to expect these businesses, which consume city services, to help pull their own weight.
And remember, they’d retain their generous income and property tax exemptions.
I first began researching new revenue options after some argued that we would create a revenue shortfall if we stopped the city from raiding our water and sewer fund. When I first suggested eliminating these license exemptions for nonprofits, citizens I spoke with overwhelmingly supported the idea.
Of course, there were also those who expressed concerns or outright opposition, including some affected businesses. Smartly, my colleagues wanted more time to study the idea, rather than rushing a change of such magnitude.
It’s time for the City Council to move it to the front burner.
That was two years ago. It’s time for the City Council to move it to the front burner.
City Council is grappling with an $8 million to $12 million gap between expected revenue and a preliminary 2017-18 budget. One option on the table is a property tax increase. Another, proposed by Howard Duvall, would assess a “public safety fee” on residents, businesses and nonprofits while halving property taxes — an approach that embraces some of the “fair fee” concepts. This has its pros and cons, but it’s encouraging to see an effort to expand the pool of those contributing to the system.
This annual exercise — scrambling for dollars to close a funding gap — underscores the challenges of a narrow tax base. I believe these challenges are best met through longer-term, fundamental changes. Ending needless exemptions would benefit taxpayers and bolster the city’s overall fiscal health, and it’s a step we must start to seriously consider.
Mr. Baddourah is a suspended member of the Columbia City Council; contact him at email@example.com.