September 12, 1996
By Linda Gorman
Amendment 11 would tax any real property owned by non-profit groups unless the group owns and uses the property for schools, community corrections facilities, orphanages, or housing for low-income elderly, disables, homeless or abused persons. No, taxpayers are not classified as abused persons. They are cash cows.
Taking sides is not easy for those who support limited government. Non-profit organizations do provide valuable services. Levying property taxes would undoubtedly put some of them out of business. Since the amendment will increase the costs faced by churches, temples, synagogues, mosques, hospitals, youth organizations, fraternal organizations, educational groups, animal shelters, zoos, and museums that own real property, it probably affects most people.
Some argue that non-profits should be taxed because some people benefit more than others and they don’t pay their fair share. This is like arguing that your neighbor deserves to have his roof taken off because a storm has demolished yours. But in an era of runaway rights, miser can demand company.
Others claim that “tax exemptions cost [the] state millions” as a recent headline in the Rocky Mountain News put it. They deserve to be dismissed out of hand. They have forgotten the essential fact that it isn’t the state’s money. Taxes are a cost to the people who create the wealth, not to those that spend it. The tax exemption simply means that enterprises meeting criteria are taxed at a lower rate. Casinos are taxed at a higher rate than most other businesses. Does this business tax “exemption” also cost the state millions?
Those claiming that taxing the non-profits will lower the property taxes paid by individuals have a charming naivet. When was the last time a government lowered taxes simply because it tapped into another revenue source? Nor is there any guarantee that citizens will receive services equal in value to the additional funds extracted from the private sector. Additional tax revenues are often wasted.
Still, sensible tax systems tax everyone, and every enterprise, at the same rate. Otherwise government officials have a nasty tendency to “buy” votes promising increased benefits to one group at the cost of increased taxes on another. Call this game divide and conquer. Politicians play it ceaselessly and tax rates ratchet upwards.
Tax exempt organizations also play with great enthusiasm. Many of them are charity case themselves, receiving huge fractions of their budgets from government. They lobby ceaselessly for more and support the expansion of government power. Making them bear the full cost of their actions has been undeniable appeal.
Another point in favor of the amendment is that economic theory shows that when capital (buildings and factories as well as money) can go elsewhere, the property tax is a tax on capital. High property taxes reduce the quantity of capital available (you get less of what you tax) and increase its cost. This means higher housing prices, lower wages, and lower land rents.
Since untaxed organizations pay less for capital, they probably use relatively more of it. The result is nice churches, fine Olympic training centers, nice gyms, church based child care centers, plush stadiums and eye-popping airports. If the untaxed sector is large enough, its unnatural absorption of capital can raise its price. To the extent that business manages to pass along its higher capital costs, an untaxed sector makes housing and consumer products cost more.
Theory also suggests that allowing untaxed non-profits to compete with tax-paying businesses wastes resources. Though the law requires that the businesslike sections of non-profits be taxed like businesses, enforcement is lenient. Blue Cross and Blue Shield were a classic example of this. When they were non-profits, they had a huge cost advantage over other insurers.
The ability of for-profit enterprises to compete as all is a remarkable testament to the power of market. Though cutting costs demands flexibility and unremitting attention to detail, business owners pay attention because they increase their income with every cost they cut. Non-profit cost cutting benefits no one in particular. Unsurprisingly, studies looking at businesses and non-profits in the same industry generally find non-profits less adept at cost control. In effect they waste their tax advantage.
Finally, one should set economics aside and consider whether letting the state tax non-profits might undermine religious liberty. Though the religious target changes form time to time, government hostility to religion has been historical constant. Religious organizations constitute a large fraction of the state’s non-profit sector. To date, the non-profit tax exemption has prevented government form using the tax system to attack out-of-favor religions. Lift the exemption and one is reduced to praying in the face of historical precedent that government will act responsibly.
Linda Gorman is a Senior Fellow with the Independence Institute, a free-market oriented think-tank in Golden, Colorado
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