Hawaii, Indiana, and Pennsylvania are a few of the states thinking about getting rid of the tax exemptions for non-profits. Steep declines in revenues have prompted states and counties to reconsider breaks for charities. States argue non-profits partake of government services but get a free ride on taxes, while charities claim that they are helping governments by providing services for the needy. Hawaii State Representative Calvin Say believes revoking exemptions for non-profits (as well as other tax-favored groups) could result in $500 to $750 million to help close the state’s $1.2 billion shortfall.
Revoking tax breaks is never popular. As the New York Times reports, the Payment-in-lieu-of-Taxes (PILOT) program used by many local governments evolved as a compromise. In 2005, Harvard and MIT brokered a deal with the city of Cambridge to pay $60 million over 20 years for city services in lieu of making property tax payments. (For more on PILOT programs see this 2006 Mercatus Center study by Frederic Sautet and John Shoaf).
Through tax policy, governments influence charitable activities and giving. The way exemptions are awarded or taken away can cause great controversy. For example, as states go on the hunt for revenues, some organizations, like churches, will remain exempt.