Another Tax Plan for Pittsburgh’s Nonprofits

Member Group : Allegheny Institute

(January 25, 2013)–Noting that non-profits in the City of Pittsburgh
own a lot of property and employ a lot of people but are tax exempt
and not a lot of them participate in helping the City through
payments in lieu of taxes, a state Senator has supported extending
Pittsburgh’s Payroll Preparation Tax (PPT) to non-profits having 250
or more employees.

The PPT is a flat rate levy of 0.55 percent on the total payroll of
businesses within the City. This tax was imposed by Act 222 of 2004,
signed into law on December 1 of that year, and was part of a package
of tax reforms that led to abolishing the mercantile tax and the
business privilege tax–two very onerous taxes that were not based on
company earnings and were quite punitive for some businesses.

Act 222 of 2004 does mention charitable organizations. It says they
should calculate the PPT but would only be liable for activities that
do not meet the requirements of the IRS Code or the state’s law on
public charities. The law also notes that nothing in the Act would
prevent a non-profit from making agreements with the City to provide
services or make voluntary payments.

The Senator’s memorandum on the proposed legislation states that his
proposal would reduce the PPT on for-profits to 0.5 percent and levy
the PPT on large non-profits at a rate of 0.4 percent. The
memorandum notes that non-profit employers with more than 250
employers account for over 70 percent of all non-profit employment in
the City. Governmental entities including authorities were not
subject to the tax when the Act was written and will not be in the
future in light of the constitutional provision exempting government

The issue of extending the tax to non-profits was debated prior to
Act 222 becoming law. Indeed, the first Act 47 recovery plan for
Pittsburgh noted "there are constitutional impediments to levying
this tax on charitable organizations… [and would likely] lead to
litigation between the City and the institutions."

Pittsburgh is the only municipality in the Commonwealth to have a
payroll preparation tax (it was created only for Cities of the Second
Class and Pittsburgh is the only one in that class) but there are
large non-profits in other corners of Pennsylvania. A 2009 study by
the Legislative Budget and Finance Committee identified 183
municipalities that are home to either a non-profit general acute
care hospital, a private four year college or university, a state
related or a state owned college or university, or some combination
of the four.

Could a selected group of non-profits in one city be subject to a tax
that only exists in that Pennsylvania city? Can that city treat
non-profits differently based on their size? Why should a charitable
organization with 250 employees pay the tax but those with 249
employees not? Even more to the point, since the Pennsylvania
Constitution allows tax exempt status for charitable organizations as
defined in statutes adopted by the General Assembly, how would it be
constitutional to allow a municipality to levy a tax on charitable
organizations that have been granted exempt status under Pennsylvania
law? These are just some of the long list of technical and legal
questions raised by the proposal that will have to be addressed by
legislative committees if the bill ever reaches the committee hearing

Moreover, there can be little doubt that in the event the proposed
legislation moves forward, the foundations, universities, churches
and other non-profits in the cultural, educational and economic
development community will be up in arms about the tax, especially
the larger ones currently in the crosshairs of the proposed tax bill.
These groups have many loyal and powerful friends who will point out
all the good the non-profits do for Pittsburgh to help maintain its
high rankings in many desirable amenities and in their attention to
community needs. These friends will almost certainly importune
Harrisburg so as to make sure this bill never gets out of committee.

It is unknown and perhaps unpredictable at this point whether the
proposed PPT reduction on for-profit businesses will prompt that
sector to mobilize and urge the Legislature to adopt the lower tax
rate planned for them as part of the scheme to levy the PPT on

None of this means there are no legitimate questions about what
constitutes a qualified charitable organization. Take for instance
the rise of the mega-hospital such as UPMC where revenues have, on
occasion, exceeded expenditures by large amounts or when a university
steps over the line into areas of for-profit activity.

Now would be the perfect time for the Legislature to review and
update any laws pertaining to the criteria that must be met to
qualify as a charitable organization and to delineate clearly what
constitutes for-profit and non-profit activities. The Legislature
can and should work on assisting taxing bodies in determining what if
any for-profit activities exempt organizations are involved in. It
might be as simple as requiring charitable organizations to file with
state and local taxing bodies the equivalent of a Federal form (or
copies of their Federal report) that contains information and
explanations about for-profit activities to the state and local
taxing authorities. Does the City know how much it collects from
property taxes or payroll taxes attributable to non-profit activity
that does not meet the charitable test? If not, that surely needs to
be learned and quickly.

Bottom line for the proposed PPT bill: Non-profits that qualify as
charitable organizations and have been granted tax exempt status
under Pennsylvania laws and by the IRS will not be taxable under
Pennsylvania’s Constitution. To levy any taxes on these
organizations will require either an amendment regarding Article
VIII, Section 2, paragraph v of the Pennsylvania Constitution or a
General Assembly rewrite of laws spelling out the criteria required
to be granted tax exempt status. Neither will happen any time soon,
if ever, given what is at stake for the parties involved.

Something needs to be done to put a stop to the almost annual
controversy over non-profits and whether they should somehow be

Jake Haulk, Ph.D., President
Eric Montarti, Senior Policy Analyst

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to the Allegheny Institute.The Allegheny Institute is a 501(c)(3)
non-profit organization and all contributions are tax
deductible.Please mail your contribution to:

The Allegheny Institute
305 Mt. Lebanon Boulevard
Suite 208
Pittsburgh, PA15234

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