In the Matter of Greater Jamaica Development Corporation, et al., Respondents,v.New York City Tax Commission, et al., Appellants.

Brief

N.Y.June 2, 2015

Queens County Clerk’s Index No. 21215/11 Appellate Division-Second Department Docket No. 2012-04300 Court of Appeals of the State of New York GREATER JAMAICA DEVELOPMENT CORPORATION and JAMAICA FIRST PARKING, LLC, Petitioners-Respondents, - against - NEW YORK CITY TAX COMMISSION and NEW YORK CITY DEPARTMENT OF FINANCE, Respondents-Appellants. BRIEF FOR AMICI CURIAE LAWYERS ALLIANCE FOR NEW YORK, QUEENS CHAMBER OF COMMERCE AND NONPROFIT COORDINATING COMMITTEE OF NEW YORK, INC. JAMES W. PERKINS EDWARD C. WALLACE LAUREN B. GRASSOTTI GREENBERG TRAURIG, LLP Attorneys for Amici Curiae Lawyers Alliance for New York, Queens Chamber of Commerce and Nonprofit Coordinating Committee of New York, Inc. 200 Park Avenue New York, New York 10166 Tel.: (212) 801-9200 Fax: (212) 801-6400 Dated: April 17, 2015 CORPORATE DISCLOSURE STATEMENTS Pursuant to Court of Appeals Rule 500.1(f), Lawyers Alliance for New York states that it has no parents, subsidiaries or affiliates. Pursuant to Court of Appeals Rule 500.1(f), Queens Chamber of Commerce states that it has one affiliate, the Queens Chamber of Commerce Foundation, Inc., a nonprofit organization operating under section 501(c)(3) of the Internal Revenue Code, and no parents or subsidiaries. Pursuant to Court of Appeals Rule 500.1(f), the Nonprofit Coordinating Committee of New York, Inc. states that it has no parents, subsidiaries or affiliates. i TABLE OF CONTENTS PRELIMINARY STATEMENT ............................................................................... 5 FACTUAL BACKGROUND .................................................................................... 9 The Role of the Charitable Exemption ........................................................... 9 The Role of Greater Jamaica and Its Parking Facilities in Essential Economic Development ..................................................................... 11 The Government’s Prior Recognition of the Charitable Purpose of the Parking Facilities ................................................................................ 17 The Revocation and Court Proceedings Below ............................................ 18 ARGUMENT ...........................................................................................................21 I. GREATER JAMAICA’S WORK ASSISTING ECONOMIC DEVELOPMENT OF JAMAICA THROUGH THE PROVISION OF SUBSIDIZED MUNICIPAL PARKING FACILITIES IS A CHARITABLE PURPOSE WITHIN THE MEANING OF SECTION 420-a ....................................................... 21 A. Providing Quasi-Government Services Is A Charitable Purpose ......................................................................................22 B. Greater Jamaica Meets This Standard ......................................27 II. THE APPELLATE DIVISION CORRECTLY REVERSED THE TRIAL COURT BECAUSE APPELLANTS FAILED TO SATISFY THEIR BURDEN TO SHOW THAT RESPONDENTS’ PARKING FACILITIES ARE SUBJECT TO TAXATION ................................................................................. 31 III. APPELLANTS ERRONOUSLY CONTEND THAT THE IRS DETERMINATION CONCERNING RESPONDENTS’ STATUS AS TAX EXEMPT ENTITIES UNDER 501(c)(3) OF THE INTERNAL REVENUE CODE PROVIDED THE BASIS FOR THE APPELLATE DIVISION’S DECISION ............. 35 ii IV. ASSUMING ARGUENDO THAT RESPONDENTS’ STATUS AS TAX EXEMPT ENTITIES UNDER 501(c)(3) OF THE INTERNAL REVENUE CODE AND A CHARITABLE CORPORATION UNDER THE NOT-FOR-PROFIT CORPORATION LAW IS PROPERLY BEFORE THIS COURT, RESPONDENTS SHOULD BE PRESUMPTIVELY ENTITLED TO THE CHARITABLE EXEMPTION UNDER NEW YORK STATE LAW ............................................................... 36 V. THE GOVERNMENT IS INCORRECT IN ITS ARGUMENT THAT CHARITABLE CORPORATIONS THAT GENERATE EXCESS REVENUE ARE COMMERCIAL ENTERPRISES PER SE ............................................................................................... 42 CONCLUSION ........................................................................................................47 iii TABLE OF AUTHORITIES State Cases Adult Home at Erie Station, Inc. v. Assessor of City of Middletown, 10 N.Y.3d 205 (2008) ......................................................................................... 43 Ass’n of the Bar of the City of New York v. Lewisohn, 34 N.Y.2d 143 (1974) ................................................................................... 41-42 Canton Human Servs. Initiatives, Inc. v. Town of Canton, 4 Misc. 3d 413 (Sup. Ct. Lawrence County 2004) ............................................. 22 Congregation Rabbinical Coll. of Tartikov, Inc. v. Town of Ramapo, 17 N.Y.3d 763 (2011) ......................................................................................... 43 People ex rel. Doctors Hosp. v. Sexton, 267 A.D. 736 (1st Dep’t 1944), aff’d 295 N.Y. 553 (1945) ............................... 25 Ecclesia Word Ministries Int’l, Inc. v. Brophy, 21 A.D.3d 372 (2d Dep’t 2005) .......................................................................... 31 Ellis Hosp. v. Assessor of Schenectady, 288 A.D.2d 581 (3d Dep’t 2001) ............................................................ 26-27, 28 Farm Sanctuary Inc. v. Patton, 221 A.D.2d 67 (3rd Dep’t 1996) .................................................................. 20, 22 Gospel Volunteers, Inc. v. Vill. of Speculator, 33 A.D.2d 407 (3d Dept. 1970) .......................................................................... 44 Greater Jamaica Dev. Corp. v. Tax Comm’n, 111 A.D.3d 937 (2d Dep’t 2013) .................................................................passim Lackawanna Cmty. Dev. Corp. v. Krakowski, 12 N.Y.3d 578 (2009) ................................................................................... 33-35 Merry-Go-Round Playhouse, Inc., v. Assessor of City of Auburn, 24 N.Y.3d 362 (2014) ......................................................................................... 44 Miriam Osborn Mem. Home Ass’n. v. Assessor of City of Rye, 80 A.D.3d 118 (2d Dep’t 2010) ......................................................................... 20 N.Y. Botanical Garden v. Assessors of Town of Washington, 55 N.Y.2d 328 (1982) ......................................................................................... 32 Otrada, Inc. v. Assessor of Town of Ramapo, 41 A.D.3d 678 (2d Dep’t 2007) .................................................................... 31-32 iv Peckham v. Calogero, 12 N.Y.3d 424 (2009) ......................................................................................... 31 Plattsburgh Airbase Redevelopment Corp. v. Rosenbaum, 1 A.D.3d 21 (3d Dep’t 2012) .............................................................................. 26 Salvation Army v. Town of Ellicott Bd. of Assessment Review, 100 A.D.2d 361 (4th Dep’t 1984) ....................................................................... 44 Spectapark Assocs. v. City of Albany Dep’t of Assessment & Taxation, 12 A.D.3d 800 (3d Dep’t 2004) .................................................................... 27, 28 Stephenson v. Hotel Empls. & Rest. Empls. Union Local 100 of AFL- CIO, 6 N.Y.3d 265 (2006) ........................................................................................... 41 Swedenborg Found., Inc. v. Lewisohn, 40 N.Y.2d 87 (1976) ..................................................................................... 41-42 Symphony Space v. Tishelman, 60 N.Y.2d 33 (1983) ................................................................................. 6, 21, 44 People ex rel. Watchtower Bible & Tract Soc., Inc. v. Haring, 8 N.Y.2d 350 (1960) ............................................................................... 31, 43-44 Yeshivath Shearith Hapletah v. Assessor of Town of Fallsburg, 79 N.Y.2d 244 (1992) ......................................................................................... 44 Federal Statutes I.R.C. § 501(c)(3) ..............................................................................................passim State Statutes N.Y. Not-for-Profit Corp. Law § 102(a)(3-b) .......................................................... 39 N.Y. Not-for-Profit Corp. Law § 112 ...................................................................... 40 N.Y. Not-for-Profit Corp. Law § 201(c) .................................................................. 28 N.Y. Not-for-Profit Corp. Law § 202(a)(12) ........................................................... 40 N.Y. Real Prop. Tax Law § 420-a ....................................................................passim N.Y. Real Prop. Tax Law § 420-b ..................................................................... 38, 39 v Other Authorities Bowman H. Woods, Reexamining the Property Tax Exemption, Land Lines, July 2003 .................................................................................................. 23 David Schultz, Evaluating Economic Development Takings: Legal Validity Versus Economic Viability, 4 Alb. Gov’t L. Rev. 186 (2011) .................................................................................................................. 24 Comm. on Taxation of the State of N.Y. Constitutional Convention of 1938, Doc. No. 2, Report of the Comm. on Taxation (1938) ...................... 23, 39 H.R. 1860 75th Cong. Sess., 19 (1938) ................................................................... 39 L. Richard Gabler & John F. Shannon, The Exemption of Religious, Educational, and Charitable Institutions from Property Taxation, in IV Taxes, Research Papers Sponsored By the Commission on Private Philanthropy and Public Needs (U.S. Dep’t. of the Treasury 1977) ............................................................................................................. 23-24 Working to Bring Jamaica Back to the Heights, Queens Courier (Apr. 14, 2012) ............................................................................................................. 25 Rev. Rul. 74-587, 1974-2 C.B. 162 ......................................................................... 25 Subcomm. on Taxation & Fin. of the N.Y. Constitutional Convention Comm. of 1938, Report on the Problems Relating to Taxation & Fin. (1938) ........................................................................................................... 23 Urban Inst. Nat’l Ctr. for Charitable Statistics, The Nonprofit Sector in Brief: Public Charities, Giving and Volunteering 2012 ................................. 42 The undersigned (collectively referred to as “Amici”) submit this brief amici curiae in support of Petitioners-Respondents Greater Jamaica Development Corporation and its wholly owned operating subsidiary Jamaica First Parking, LLC (“Jamaica First”) (collectively referred to as “Greater Jamaica” or “Respondents”), who request that the Court affirm the unanimous decision of the Second Department reinstating the tax exempt status of five integral parking facilities in downtown Jamaica, Queens. The parking facilities were developed to foster economic development and for over ten years have done so in that challenged community directly in furtherance of Respondents’ exempt purposes. Respondent- Appellant New York City Department of Finance (“DOF” or “City”) (together with Tax Commission of the City of New York “Appellants”) arbitrarily reversed its own determination that it had made repeatedly for years that the subsidized parking provided by Greater Jamaica was properly tax exempt. 1. Lawyers Alliance for New York (“Lawyers Alliance”) is the leading provider of business and transactional legal services for nonprofit organizations working to improve the quality of life in New York City neighborhoods. In addition to its in-house staff, it functions through a network of law firms and corporations providing pro bono services, who work together to help nonprofits develop affordable housing, stimulate economic development, promote community arts, and operate vital programs for disadvantaged children, young people, the 2 elderly, and low-income New Yorkers. Lawyers Alliance joins in this amici brief to further its long-standing goal of supporting nonprofit action for economic development in low-income neighborhoods, such as Jamaica, Queens. Lawyers Alliance works with numerous nonprofit clients throughout New York City who rely on their exemption from real property tax to enable them to fulfill their charitable purposes. Until now, the City has not given them any reason to doubt the reliability of this exemption. Reversal of the Appellate Division and reinstatement of the DOF’s arbitrary and capricious determination and lower court ruling will destroy certainty for hundreds of nonprofit groups, and will make it more difficult for Greater Jamaica and similar community development organizations to continue their charitable work. If there is to be a significant change in the real property tax treatment of charitable organizations, let it come from the state legislature, not from haphazard administrative decisions with arbitrary and capricious results. If the Appellate Division decision is reversed, and the DOF determination is reinstated, many charitable efforts in underserved communities, through social services, economic development and all other types of charitable organizations will suffer. 2. The Queens Chamber of Commerce (the “Queens Chamber”) represents more than 1,000 businesses and organizations doing business in and around Queens County. It seeks to foster economic growth and prosperity 3 throughout Queens by promoting the interests of business through advocacy, networking and education. In 1999, the Queens Chamber founded the Queens Chamber of Commerce Foundation (the “Foundation”). This 501(c)(3) organization helps students pursue higher education, helps displaced workers find new jobs, and cares for vulnerable communities in Queens. The Queens Chamber joins as an amicus here to further its mission of fostering economic growth and development, and to ensure the strength of all of Queens’ neighborhoods, including Jamaica. The Queens Chamber and its members recognize the vital positive impact that the parking facilities owned by Greater Jamaica (through Jamaica First) have had on the Jamaica business community and on the people of Jamaica more broadly, and it supports their continuation and further resulting economic development. For years, the borough of Queens has been struggling to gain economic resurgence, and overcoming many obstacles, the areas surrounding Jamaica in particular are poised for new hotel, housing, office and retail developments. To further this goal, it is critical that downtown Jamaica businesses be given appropriate support to develop and ultimately thrive. Without the property tax exemption of the parking facilities at issue, however, Greater Jamaica’s support for downtown Jamaica’s economic development will be 4 impaired, which, in turn, will create a significant risk of impairment to development of the business community in Jamaica and to Queens as a whole. 3. The Nonprofit Coordinating Committee of New York, Inc. ("NPCC") is the largest association of nonprofits in the New York City area and is the leading voice and information source for this community. NPCC serves as an umbrella membership and service organization with approximately 1,500 501(c)(3) nonprofit members in New York City, Long Island, and Westchester, including business improvement districts and community development corporations, as well as social service, arts, religious, housing, and many other types of nonprofit organizations. NPCC serves its members, and thereby the public, by building positive relations between government and the nonprofit sector, by providing nonprofit leaders with training and information on good governance and efficient management, and by saving nonprofits money through group buying programs for organizational necessities like office supplies, payroll services, and insurance. Finally, NPCC monitors legislative and agency issues and brings nonprofit leaders together around common concerns. Preservation of the charitable property tax exemption was at the heart of NPCC's creation. NPCC was founded in the early 1980s to contest an attempt by the City of New York to deny or revoke this exemption for many of New York's leading nonprofit institutions. NPCC was successful in helping preserve the 5 exemption at that time, and it remains an important contributing factor to the continued vibrancy of the nonprofit sector that the City enjoys today. NPCC is therefore in a unique position to appreciate the stakes in this case and to provide the Court with the perspective of the larger nonprofit community. Each of these organizations supports Respondents’ position that the Appellate Division properly reversed an arbitrary and capricious decision by the DOF that ran counter to DOF’s own policy when it revoked, without analysis, a long-standing exemption from real property tax of five parking facilities owned by Greater Jamaica. In this instance, and as discussed herein, Greater Jamaica had answered the local government’s call to assist the government by operating the subject parking facilities for economic development when the local government did not have the resources to do so. While the amici submit that the DOF decision was based on an incorrect reading of the Real Property Tax Law, they are also compelled to bring to the Court’s attention the serious real world consequences that reversing the Appellate Division’s ruling would have. PRELIMINARY STATEMENT The real property tax exemption under Section 420-a of the Real Property Tax Law for charitable organizations is a lifeline for nonprofit organizations in this state. Without the exemption, real property ownership is unaffordable for the vast majority of charitable nonprofit organizations. Property ownership allows 6 nonprofit organizations to use their premises for carrying out charitable purposes as they see fit, such as by running a soup kitchen, or serving children, or people with HIV, without regard to whether a landlord might find such uses objectionable. Property ownership also allows nonprofits to maintain public and social services in rapidly gentrifying communities despite increasing rents, plan for the future, and to obtain financing and other credit using the property as security. At stake in this case is the continued availability of this crucial, constitutionally protected exemption for a wide variety of charitable organizations. This Court’s landmark opinion in Symphony Space v. Tishelman rejected an effort by the 1970s-era New York City Department of Finance to narrow the exemption. The Court warned against giving “the terms ‘charitable, educational and moral or mental improvement’ an overly narrow interpretation,” or taking “a narrow and fragmentary view of the exemption,” and stated that “an interpretation so literal and narrow that it defeats the exemption's settled purpose is to be avoided.” 60 N.Y.2d 33, 36-37 (1983). The City’s attempt to revoke Greater Jamaica Development Corporation’s exemption is part of a new effort to narrow the exemption improperly. The City’s briefs on this appeal give short shrift to Symphony Space, and rely on precisely the sort of cramped interpretation of Section 420-a rejected in that case. As the City recognized when it granted Greater Jamaica the exemption, working to revive a 7 distressed urban area is charitable in nature, because it, among other things, creates economic opportunity and leads to the improvement of the quality of life for low- income residents. The City’s arguments are particularly ominous for the vast swath of the nonprofit community that has been forced to establish self-sufficient operations in order to supplement increasingly scarce government and philanthropic contributions. If, as the City urges, this Court wholesale bars charitable nonprofits generating excess revenue from eligibility for the charitable exemption, notwithstanding the clear charitable function of the operations, property ownership and indeed survival for many nonprofits may become impossible. This Court should also reject the City’s contention that a determination by both this state’s Department of State and the federal Internal Revenue Service that an organization is charitable is irrelevant to whether a property is eligible for the charitable exemption. On the contrary, such determinations, made by governmental entities with vast experience ascertaining whether an organization’s activities are charitable, are useful guidelines for tax assessors. Section 420-a itself provides no definition of the term “charitable,” and the state’s manual for assessors acknowledges that it can give no guidance either. That leaves each of this state’s more than 1,000 assessing jurisdictions to define the term for themselves. The all too foreseeable consequence is that they make arbitrary and capricious decisions of 8 the sort at issue in this case. Their decisions would be far more reliable if they were able to take note of the determinations that other experienced government entities have made. DOF’s determination to revoke the exemption here hinged on its unsupported conclusion that “the parking lots are not incidental to another recognized charitable purpose . . . .” As the Appellate Division recognized, this conclusory statement contradicts the facts and ignores the historical background of Greater Jamaica’s role in the development and operation of the parking facilities. The Appellate Division also recognized that its ruling was consistent with the position of the Internal Revenue Service, which in a detailed letter noted the historical charitable purpose and function of Greater Jamaica’s operation of the parking facilities. Appellants and now the NYS Conference of Mayors as amicus have seized on this observation to challenge the Appellate Division decision on a ground upon which the ruling does not depend: that an IRS determination controls. Rather, as the Appellate Division explained, the lower court ruling was infirm because it improperly shifted the burden on to Greater Jamaica to prove its tax exempt status was proper, rather than applying the burden to the government to show why it should now revoke a status that it had found properly existed for years. 9 In sum, because the Appellate Division decision was correct and well- grounded in New York law and the Appellants and their amicus only rely on supposed errors that do not underpin that decision, Amici urge the Court to affirm the decision below and sustain the tax exemptions for the parking facilities at issue. A different result is not justifiable under the law and will do great damage to the Jamaica area, and by extension, the incentive for economic development in challenged areas throughout the state of New York. FACTUAL BACKGROUND The Role of the Charitable Exemption The publicly available data shows that most nonprofits could not afford to own real property without an exemption. The average value of a charitable exemption to a nonprofit in New York City is $87,000; in 2014 there were 2,520 exemptions. See Office of Tax Policy, N.Y.C. Dep’t of Fin., Annual Report: The New York City Property Tax FY 2014, at 14, available at http://www1.nyc.gov/assets/finance/downloads/pdf/reports/reports-property- tax/nyc_property_fy14fmvandav.pdf. Of amicus NPCC’s 1,455 nonprofit members, 32 percent have revenue under $125,000 and 56 percent have revenue under $500,000, including fee- generated revenues. NPCC, 2013 Annual Report 10, 12 (2013), available at http://www.npccny.org/info/AnnualReportFY13.pdf. For instance, the Fanfare 10 Theater Ensemble, which had revenue of just under $60,000 in 2013, has a roughly $232,000 charitable exemption. See Fanfare Theater Ensemble, 2013 Form 990- EZ, available at www.guidestar.org; see also N.Y.C. Dep’t of Fin., Property Tax Benefit Information for BBL 1-00445-0016, http://nycprop.nyc.gov/nycproperty/nynav/jsp/selectbbl.jsp (enter “00445” and “0016” for Block and Lot, respectively; follow “View”; then follow “May 25, 2014 - Final Assessment Roll” hyperlink). Most nonprofit organizations, therefore, could not absorb this cost, even taking into account any fee-generated revenues. In comparison, in fiscal year 2014, the “cost” to the City of the total charitable tax exemptions is approximately $218 million, representing just approximately 1.53 percent of the total value of all property tax exemptions granted by the City that year. See Office of Tax Policy, N.Y.C. Dep’t of Fin., Annual Report: The New York City Property Tax FY 2014, at 14. In the first half of the 20th Century, downtown Jamaica was an important business and retail center, the largest in Queens and the third largest in the New York metropolitan area. Jamaica Plan EIS, New York City Department of City Planning, S-2, http://www.nyc.gov/html/dcp/html/env_review/jamaica.shtml (hereinafter “FEIS”). It boasted major department stores, government and corporate offices, hospitals, industrial sites, and houses of worship. See R 200. By the early 1970s, however, with the region increasingly reliant on automobile 11 transportation, Jamaica’s ample rail transit infrastructure no longer gave it a competitive advantage. FEIS at S-2. Major retail centers-notably shopping malls with free parking-sprang up just over the Nassau County line, only four miles away. Id. Jamaica lost retail and other businesses; it also suffered major declines in residential investment. Id. Following widespread urban decline in the 1960s and 1970s, Jamaica, significantly lagged behind much of the rest of New York City in economic growth and ran the risk of economic collapse, along with the likes of Newark and Detroit. See R 199-203. The Role of Greater Jamaica and Its Parking Facilities in Essential Economic Development In 1968, the influential Regional Plan Association (“RPA”), which monitors trends and recommends public policies and actions in the tri-State metropolitan area, released its Second Regional Plan which focused on the identification of regional sub centers as a viable solution to the then-serious and increasing problems of urban decay, public transportation declines, job and labor mismatches, racial unrest, and environmental degradation. The RPA’s Second Regional Plan included a report entitled “Jamaica Center,” prepared by Carlisle Towery, then an employee of RPA. In the Jamaica Center report, Mr. Towery offered proposals for the development of downtown Jamaica as a commercial, educational, cultural, and health center that would take advantage of the community’s excess transit capacity. These proposals were aimed at providing jobs and services to downtown Jamaica’s 12 low-income environs, retaining the community’s middle class residents, and generating municipal tax revenue from new jobs and development. See Press Release, Greater Jamaica Dev. Corp., F. Carlisle Towery, Greater Jamaica Development Corporation Leader For Four Decades, Announces His Retirement (Nov. 10, 2014) (hereinafter “Greater Jamaica Nov. 10 Press Release”). At about the same time, at the urging of Mayor John V. Lindsey and in partnership with his office and local civic leaders, Greater Jamaica Development Corporation was founded to prevent the kind of urban abandonment and decay being experienced by older downtowns throughout the northeast. The Jamaica Center report has served as Greater Jamaica’s road map throughout its successful 45 year history and the report’s author, Mr. Towery, who was initially loaned to manage Greater Jamaica after issuance of the report, continued to lead the organization as its President until his retirement at the end of last year. See Greater Jamaica Nov. 10 Press Release. Refusing to accept the fate of Jamaica as a failed commercial center, Greater Jamaica has worked since its founding in 1967 to spur public and private investments in the area. Over the last 45 years, Greater Jamaica has played a key advocacy, advisory or operational role in all the major development projects in the area, for example: 13 • Demolishing the Jamaica Avenue elevated train and replacing it with the Archer Avenue subway extension; • Building the AirTrain light rail service, which links the Long Island Railroad and New York City Subway to J.F.K. International Airport; • Developing the Jamaica Center Urban Renewal Area, which now includes a new federal office building and city courthouses; • Building a new campus for York College, now an anchor of the area; and • Creating the Jamaica Arts Center and improving existing local cultural institutions. FEIS at 2-2; Greater Jamaica Nov. 10 Press Release. Even with this progress, Jamaica has continued to lag behind more affluent areas of New York City, and the City has recognized that more is needed to be done. See generally FEIS. Since the 1970s, the government has asked Greater Jamaica to focus on the improvement in downtown Jamaica’s available parking. R 89. For decades, the City neglected the few municipal parking facilities there, allowing them to fall into disrepair at exactly the same time Jamaica was losing its major commercial anchors and employers. Id. Substandard management led to unsightly and unsafe conditions, dissuading people from parking there. Id. By the late 1990s, community groups and local businesses recognized that the economic development of downtown Jamaica would be stifled without convenient, safe, inexpensive 14 parking. Id. Since the City did not then have the means or initiative to act on its own, and at government urging, Greater Jamaica determined to substitute in and acquire and operate parking facilities directly to promote economic development in furtherance of its recognized charitable purposes. Id. In 1996, it purchased its first parking garage from the City via the New York City Economic Development Corporation (“EDC”). Id. Two years later, Greater Jamaica established its wholly-owned not-for-profit subsidiary, Jamaica First, “to address the need for safe, available, affordable public parking” in downtown Jamaica and to run Greater Jamaica’s parking facilities. R 82. In 2001, Greater Jamaica caused Jamaica First to acquire three more parking facilities from the City via EDC. R 21. When purchased, each of these facilities was in disrepair, unattended, poorly-lit, unsafe, and underutilized. Id. Greater Jamaica used its own funds to refurbish them and bring them back to full use. In September 2007, the New York City Council adopted a resolution proposed by the Department of City Planning, which established a Special Downtown Jamaica District and rezoned approximately 370 blocks to better address Jamaica’s housing and economic needs. See N.Y.C. Dep’t of City Planning, The Jamaica Plan Overview (2007), available at http://www.nyc.gov/html/dcp/html/jamaica/index.shtml. Accompanying the plan was a final environmental impact statement (FEIS), also approved by the City 15 Council. FEIS at S-56. This comprehensive FEIS analyzed all aspects of the new plan, including traffic and parking. Id. In it, the City went on record acknowledging the economic redevelopment plan would increase the demand for parking while lowering the supply. Id. The result was to be an overall shortfall of 2,165 off-street parking spaces. Id. The City considered this to be an “unavoidable adverse impact” but the plan offered no mitigation of the problem. Id. Once again, at government urging and directly in furtherance of its recognized charitable purposes, Greater Jamaica stepped in to help fill the gap of any viable plan for needed municipal parking. See e.g., N.Y.C. Dep’t of City Planning, Presentation: The Jamaica Plan 17 (2007), available at http://www.nyc.gov/html/dcp/pdf/jamaica/jamaica_presentation.pdf (identifying “Public Parking” as part of City’s “[l]ong-[t]erm [d]evelopment [v]ision”). Numerous city, state, and federal government buildings that serve the public use these parking facilities, as do other not-for-profits, such as community service and religious organizations. R 21. Several years ago, Greater Jamaica enabled the construction of 180-units of affordable housing in the community by allowing one of its parking facilities to effectively serve as adjunct parking for the development. Id. Pursuant to its purpose, but subject to reasonably prudent financial management considerations, Greater Jamaica makes its parking facilities available 16 to the public at below market rates and uses any net revenue generated to offset its operating expenses to support its various initiatives and projects, all in furtherance of its exempt purpose. R 202; see Greater Jamaica Dev. Corp., 2012 Form 990, at 1, available at http://www.charitiesnys.com/RegistrySearch/ show_details.jsp?id=%7b252A230B-1214-4843-8609-Fadu621AC8369632%7d (follow “IRS Annual Return” hyperlink at bottom) (reflecting negative net revenue for 2011 and 2012). Today, Greater Jamaica operates several parking facilities in Jamaica, which combined, provide approximately 2,000 below-market rate spaces, representing almost 40% of the area’s total off-street parking spaces. R 201; see FEIS at 16-10. Even with these facilities, Jamaica remains far short of the required amount of off- street parking, especially given its recent development plan. FEIS at S-56. Thus, if the Appellate Division’s decision is overturned, the revocation of the tax exemption for these facilities will make a precarious situation far worse. See, e.g., Greater Jamaica Dev. Corp., Chairman’s Report 2012, at 4, available at http://gjdc.org/docs/GJDCChairmansReport2012.pdf (acknowledging that Greater Jamaica’s increased tax liability “obviously, places a severe strain on Greater Jamaica’s ability to continue to assist this community in a host of ways- assistance that has helped to substantially increase private investment and property tax revenues to the City from new and improved development”). In fact, without a 17 tax exemption for these five facilities, Greater Jamaica’s continued operation of them appears infeasible. R 17; Greater Jamaica Dev. Corp., Chairman’s Report 2012 at 4. As a result, residents and consumers will face even greater parking shortages, more traffic, longer walks, and higher prices. R 202. Those with a choice will avoid the area, likely opting for adjacent Nassau County, and economic development in Jamaica will suffer. Id. This would leave Jamaica underserved and in the condition it faced when the government first asked Greater Jamaica to become involved in operation of the parking facilities. The Government’s Prior Recognition of the Charitable Purpose of the Parking Facilities Not only has DOF for years recognized the propriety of tax exemption for Greater Jamaica’s operation of the parking facilities, the IRS has also specifically recognized the charitable purpose served by Greater Jamaica and its parking facilities. In March 2001, the IRS wrote a letter acknowledging the ongoing loss of public parking spaces in Jamaica and pointing out the need for new parking infrastructure given ongoing development. R 67-72. The IRS recognized that Greater Jamaica organized Jamaica First in order to provide public parking and specifically granted the entire process tax exempt status as “substantially related to [Greater Jamaica’s] exempt purposes.” Id. Significantly, it went on to observe there is “strong evidence that the organization is actually ‘lessening’ the burdens of the government.” Id. 18 Further, the IRS recognized that, until recently, the City (i) acknowledged that providing parking in downtown Jamaica is “a means of combating community deterioration,” and (ii) considered the burden of doing so to be its own burden. R 70. The IRS observed that the City worked closely with Greater Jamaica, using EDC to encourage it to purchase or construct parking facilities to “serve the needs of several federal and city offices and cultural institutions as well as businesses.” Id. By purchasing, maintaining, and operating multiple convenient, safe parking facilities, the IRS recognized, Greater Jamaica has assumed a municipal function, one which the City has proved to be ill-equipped to handle. Id. In March 2013, after an extensive audit of information produced by Greater Jamaica in response to Information Document Requests related to the year ended December 31, 2009, the IRS reaffirmed Greater Jamaica’s qualification as a 501(c)(3) tax exempt charitable organization. See Greater Jamaica Development Corporation and Related Organizations Consolidated Financial Statements for the Years Ended December 31, 2012 and 2011, at 9; Greater Jamaica Dev. Corp., Chairman’s Report 2012, at 4. The Revocation and Court Proceedings Below Political considerations, however, have caused Appellants to take a different tack. In 2011, following publication of a newspaper article questioning the tax exemption for five Jamaica First parking facilities, DOF notified Respondents that 19 it was revoking the exemption from real property tax for each of the facilities as of the 2012 fiscal year. R 73-75. Inconsistent with the DOF grant of the exemption for the preceding four years, in its February 23, 2011 letter, DOF informed Respondents that it had determined the facilities were not entitled to exemption under section 420-a of the Real Property Tax Law (“RPTL”) because “[u]se of the property for parking facilities does not fall into one of the enumerated uses set forth in 420-a.” R 73. DOF further explained that it could not find any support in the caselaw interpreting section 420-a “to consider use of the properties for the purpose of operating parking lots-even for economic development of an undeveloped area-to be “charitable.” Id. DOF provided no reasoning or evidence supporting its “about face” and stated conclusions. Respondents filed an Article 78 challenge to the government’s application of section 420-a of the RPTL. Applying the rational basis test that applies to denials of requests for tax exempt status, the Supreme Court upheld DOF’s decision to revoke the exemption and dismissed the petition. R 10-11. The trial court incorrectly understood it to be constrained by an arbitrary and capricious review of the DOF ruling, noting that “[i]f the court were reviewing this case de novo, it might have been inclined to lean toward a finding that the organization is one of a charitable nature, however that is not the court’s role in this proceeding.” R 10. 20 On appeal, the Appellate Division, Second Department reversed, granted Respondents’ Article 78 Petition, and annulled DOF’s revocation of the exemption. The Second Department ruled that the trial court should have applied the standard applicable when a municipality takes away a tax exemption it had previously granted, and that is, that the municipality has the burden of proof to show the real property is properly subject to the taxation. The Appellate Division held that Appellants “failed to meet their burden of proof for revocation of the tax exemption on the grounds that [Respondents’] activity did not conform to a charitable purpose within the meaning of RPTL 420-a.” Greater Jamaica Dev. Corp. v. Tax Comm’n, 111 A.D.3d 937, 939 (2d Dep’t 2013) (citing Miriam Osborn Mem. Home Ass’n. v. Assessor of City of Rye, 80 A.D.3d 118, 133 (2d Dep’t 2010); Farm Sanctuary, Inc. v. Patton, 221 A.D.2d 67, 68-69 (3d Dep’t 1996)). Since the government made absolutely no showing that the property was properly subject to taxation, the Appellate Division determined that Appellants’ “revocation of the tax exemption did not have a rational basis and was, therefore, arbitrary and capricious.” 111 A.D.3d at 940. The Appellate Division also noted that the record included the March 2001 IRS letter ruling, and recognized that “a property owner seeking a real property tax exemption which demonstrates that it is a not-for-profit entity ‘whose tax-exempt status has been recognized by the Internal 21 Revenue Service and whose property is used solely for [charitable] purposes has made a presumptive showing of entitlement to exemption.’” Id. at 939. Appellants filed for leave to appeal to this Court and, following the grant of leave, now continue to challenge the tax exemption granted to Greater Jamaica’s parking facilities. As discussed below, revocation of the charitable exemption is inconsistent with the history summarized above, deep-rooted principles of public policy, legislative history, and decades of New York legal precedents, including by this Court. ARGUMENT I. GREATER JAMAICA’S WORK ASSISTING ECONOMIC DEVELOPMENT OF JAMAICA THROUGH THE PROVISION OF SUBSIDIZED MUNICIPAL PARKING FACILITIES IS A CHARITABLE PURPOSE WITHIN THE MEANING OF SECTION 420-a Section 420-a of the Real Property Tax Law provides that “[r]eal property owned by a corporation or association organized or conducted exclusively for . . . charitable” purposes “and used exclusively for carrying out . . . such purposes” is “exempt from taxation.” N.Y. Real Prop. Tax Law § 420-a (McKinney 2010). As this Court has warned, it is wrong to give “the terms ‘charitable, educational and moral or mental improvement’ an overly narrow interpretation” or to adopt “an interpretation so literal and narrow that it defeats the exemption's settled purpose.” Symphony Space v. Tishelman, 60 N.Y.2d 33, 36-37 (1983). 22 A. Providing Quasi-Government Services Is A Charitable Purpose Appellants argue that the Appellate Division’s finding that economic development and lessening the burdens of government are “charitable” purposes improperly expands the scope of the charitable exemption in violation of RPTL 420-a’s legislative intent and Court of Appeals precedent. Br. at 22-24; 26-36. Appellants’ argument, however, ignores the bedrock principles supporting the decision below that have been part of New York law and public policy for over 200 years. Lessening governmental burdens by performing public or municipal functions constitutes a “charitable” purpose. See Farm Sanctuary, Inc. v. Patton, 221 A.D.2d 67, 69 (3d Dep’t 1996) (charity includes such purposes as “governmental and municipal purposes,” so long as the “objectives . . . are beneficial to community or area.”); Canton Human Servs. Initiatives, Inc. v. Town of Canton, 4 Misc. 3d 413, 421 (Sup. Ct. Lawrence County 2004) (“Organizations can be considered charitable when their purpose is to lessen the burden on taxpayers by providing what is otherwise a governmental function.”). In its decision below, the Second Department recognized that “[a]bsent a precise statutory definition of ‘charitable purpose,’ courts have interpreted this category to include relief of poverty, advancement of governmental and municipal purposes, 23 and other objectives that are beneficial to the community.” Greater Jamaica, 111 A.D.3d at 939. Indeed, in 1938, when New York’s Constitution was amended to include the state’s long-standing real property tax exemption for property used for charitable purposes, the drafting committee explained that “[t]hese corporations are discharging social obligations which the State would otherwise have to assume and are reasonably entitled to constitutional protection in the exemptions granted to them with respect to that property essential to the operation and maintenance of their work.” Comm. on Taxation of the State of N.Y. Constitutional Convention of 1938, Doc. 2, Report of the Comm. on Taxation 2 (1938) (hereinafter “1938 Report”); see also Subcomm. on Taxation & Fin. of the N.Y. Constitutional Convention Comm. of 1938, Report on the Problems Relating to Taxation & Fin. 202 (1938). This rationale for New York’s charitable exemption is consistent with the historical basis for the exemption. See generally Bowman H. Woods, Reexamining the Property Tax Exemption, Land Lines, July 2003 (historically, charitable exemption implemented because locals could not always wait “for the Crown to repair their bridges, causeways, seawalls or highways”); see also L. Richard Gabler & John F. Shannon, The Exemption of Religious, Educational, and Charitable Institutions from Property Taxation, in IV Taxes, Research Papers Sponsored By the Commission on Private Philanthropy and Public Needs, 2535, 24 2542-43 (U.S. Dep’t. of the Treasury 1977) (“these organizations provide services that the private sector alone would not produce, either at all or in sufficient quantity,” governments encourage them, promoting a “pluralistic approach to the provision of various services that would otherwise drift into the governmental domain”). It is equally well established that fostering local economic development is an essential government function. See e.g., David Schultz, Evaluating Economic Development Takings: Legal Validity Versus Economic Viability, 4 Alb. Gov’t L. Rev. 186, 194-195 (2011). In this State specifically, Governor Andrew Cuomo has focused on economic development, including “community and economic revitalization,” as a centerpiece of his administration. See 2014 State of the State Report, at 20-21. Moreover, Governor Cuomo has observed that resolving transportation- related problems, including parking, are important facets of economic development. See e.g., Andrew M. Cuomo, Moving the New NY Forward 19-24, App. D (2014) (listing economic development accomplishments, including Albany Capital Center project, which includes “a parking garage for 250 cars”); Andrew M. Cuomo, The New NY Agenda: A Plan For Action 93-127 (2010); Andrew M. Cuomo, N.Y. Statewide Capital Plan Fiscal Years 2013-2014 Through 2022-2023, at 93 (May 2013) (recognizing that “[t]ransportation investments provide critical 25 connections to markets, businesses, jobs, and amenities, and can help shape a community” and reporting that “NYSDOT will consider investments in projects beyond preservation that leverage other public and private resources to support existing and emerging economic opportunities”). Consistent with the State’s constitutional history, including the fundamental principles articulated in 1938, it has long been the law in New York that the definition of “charitable purpose” under section 420-a is not limited to offering free services to the poor. See People ex rel. Doctors Hosp. v. Sexton, 267 A.D. 736 (1st Dep’t 1944), aff’d 295 N.Y. 553 (1945). When economic development occurs in a community including a significant segment of low-income residents, it can improve their economic opportunities and quality of life and is consequently a charitable endeavor. See, e.g. I.R.S, Private Letter Ruling 200331005 (citing Rev. Rul. 74-587, 1974-2 C.B. 162), http://www.irs.gov/pub/irs-wd/0331005.pdf. This is precisely what Greater Jamaica is doing. See e.g., Working to Bring Jamaica Back to the Heights, Queens Courier (Apr. 14, 2012), http://queenscourier.com/working-to-bring-jamaica-back-to-the-heights/ (acknowledging that the goal of Greater Jamaica’s economic development work is “to expand economic opportunity and improve quality of life for the ethnically and economically diverse residents of Jamaica and for the region”). 26 Courts have recognized the charitable intent of economic development work. The Third Department recently reaffirmed that vacant land owned by a charitable organization as part of a local economic redevelopment plan is entitled to a charitable tax exemption. See Plattsburgh Airbase Redevelopment Corp. v. Rosenbaum, 1 A.D.3d 21, 21 (3d Dep’t 2012). In Plattsburgh, the Appellate Division held that petitioner, a non-municipal nonprofit organization formed “for the purpose of owning, selling and transferring real property for the benefit of local municipalities by fostering job creation and economic development . . . ” was a charitable corporation entitled to exemption under section 420-a. Id. at 22 (emphasis added). The Third Department affirmed that promoting “governmental and municipal purposes” is a proper charitable purpose under the New York Real Property Tax Law and found that petitioner’s certificate of incorporation “demonstrate[d] that it exists for the exclusive benefit of the public interest and to reduce the burdens on municipal government.” Id. at 24. The charitable activity at issue in Plattsburg is strikingly similar to the activities of Greater Jamaica and Jamaica First. Courts have also determined that parking facilities can fulfill public purposes and, when owned and operated for charitable purposes, may be eligible for tax exemptions. For example, in Ellis Hospital v. Assessor of Schenectady, the Third Department upheld respondent assessor’s determination that the portion of 27 petitioner hospital’s parking garage “used for hospital visitors, staff and patients . . . [was] necessarily incidental to the purposes of the exempt institution.” 288 A.D.2d 581, 583 (3d Dep’t 2001). The Third Department later held that a parking garage on county land was held for a public purpose where the lease “specifically provide[d] that the garage was built to provide parking so that the public could access the [adjacent] Pepsi Arena.” Spectapark Assocs. v. City of Albany Dep’t of Assessment & Taxation, 12 A.D.3d 800, 802 (3d Dep’t 2004) (upholding lower court’s designation of garage as “tax-exempt municipal property” where taxpayer remained beneficial owner and garage was used for public purpose). B. Greater Jamaica Meets This Standard There can be no serious dispute that both Respondents are organized for charitable purposes within the meaning of RPTL § 420-a. Greater Jamaica was founded in 1967 as a membership corporation. Its Certificate of Incorporation makes clear it was “organized and . . . operated exclusively for charitable, scientific, and educational purposes within the meaning of section 501(c)(3) of the United States Internal Revenue Code.” R 43-50. Jamaica First’s Certificate of Formation likewise limits it to “any lawful purpose or activity not inconsistent with the tax exempt status, under section 501(c)(3)” of Greater Jamaica, the sole member of Jamaica First. R 58. Further, Greater Jamaica itself, in its Certificate 28 of Incorporation, specifically lays out goals such as “[t]o encourage and effect the development and expansion of commercial, industrial, and manufacturing facilities in Jamaica,” and “[t]o support and assist in the planning, development and expansion of educational, cultural, recreational, residential, governmental, transportation and other related facilities in Jamaica.” R 44-45. As the Appellate Division, Second Department held, Greater Jamaica’s purposes, “including ‘[t]o support and assist in the planning, development and expansion of educational, cultural, recreational, residential, governmental, transportation and other related facilities in Jamaica” are “charitable” within the meaning of RPTL 420-a. Greater Jamaica, 111 A.D.3d at 939. Indeed, the Not-for-Profit Corporation Law (“N- PCL”) officially deems Respondent Greater Jamaica a “charitable corporation,” since it was founded as a “Type C” corporation formed for public or quasi-public purposes. N.Y. Not-For-Profit Corp. L § 201(c) (McKinney 2014). In fact, Respondents’ operations are even more of a charitable function than those in Ellis Hospital and Spectapark, as the parking facilities at issue are essential (not merely incidental) to the public purpose for which the Respondents were formed. Supplying convenient, safe, affordable parking, including for a low income housing development, directly encourages development in the area, by bringing commuters, shoppers, students, and others. As Greater Jamaica and the government planned from inception, the introduction of all of these categories of 29 people to the Jamaica area serves as a catalyst to further revitalization of the community by encouraging new development in the form of retail stores, housing, transportation, and cultural and educational institutions. Further, because lessening government burdens and fostering economic development are charitable purposes under long-standing New York public policy and law, there is no risk that sustaining Respondents’ property tax exemption will lead to the parade of horribles that the City imagines, i.e., “novel, peripheral and ambiguous activities well beyond the specified exempt categories,” (Br. at 33), such as supermarkets and shopping malls (according to the City) will now qualify for the exemption. The charitable exemption is statutorily limited to “a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes.” RPTL 420-a. On the face of the statute, therefore, commercial actors such as those the City imagines are ineligible to be organized as charitable organizations under the New York Not-for-Profit Corporation Law. Obviously, commercial actors such as those the City imagines are not likely (if even permitted) to be organized as charitable organizations under the New York Not-for-Profit Corporation Law. Further, unlike Greater Jamaica, no supermarkets and shopping malls can successfully trace their operations to a request to step in 30 for a government that could not sustain its own function or to claim that their purpose is solely to foster economic development of downtown Jamaica, without establishing that they provide subsidies to customers in the form of below-market rates, engage in any other community-building activities, and use any excess revenues exclusively to further their economic development activities. If anything, Appellants’ interpretation of RPTL 420-a as providing exemptions “only to properties where there [is] a clear societal recognition of a charitable use (homes for the elderly, wildlife sanctuaries, theaters for the arts, rehabilitative programs for substance abuse assistance, etc.)” (Reply Br. at 2-3), gives undue license to DOF to make arbitrary decisions based on an individual assessor’s subjective belief as to what should be recognized by society as charitable at any given time. New York City’s deep involvement in the revitalization of downtown Jamaica - including its support of and reliance on Greater Jamaica generally and in connection with the parking lots in particular - demonstrates that Greater Jamaica’s work carries out an essential public function. From the stand-point of equity, it is also unfair that Greater Jamaica should be induced by the local government to fulfill one of its functions, but then later be told it does not qualify for a tax exemption to fulfill that function. 31 II. THE APPELLATE DIVISION CORRECTLY REVERSED THE TRIAL COURT BECAUSE APPELLANTS FAILED TO SATISFY THEIR BURDEN TO SHOW THAT RESPONDENTS’ PARKING FACILITIES ARE SUBJECT TO TAXATION The Appellate Division ruling can also be sustained on the separate ground that the City’s revocation of Respondents’ property tax exemption in July, 2011, made without any analysis whatsoever, was arbitrary and capricious and the trial court’s application of the rational basis test erroneously shifted the burden to Greater Jamaica to demonstrate why it should have qualified for an exemption DOF had granted it for years. Normally, in an Article 78 proceeding challenging an initial government determination that real property is not tax exempt, the burden of proof lies on the taxpayer seeking the exemption. See People ex rel. Watchtower Bible & Tract Soc., Inc. v. Haring, 8 N.Y.2d 350, 358 (1960). The petitioner there must overcome the arbitrary and capricious standard of review of the determination. See Peckham v. Calogero, 12 N.Y.3d 424, 431 (2009); Ecclesia Word Ministries Int’l, Inc. v. Brophy, 21 A.D.3d 372, 373 (2d Dep’t 2005) (finding rational basis for Board of Assessment Review decision denying exemption when petitioner could not demonstrate its property was used exclusively for § 420-a exempt purpose). In a case such as this one, however, and as Appellants now concede (Br. at 11), when a municipality affirmatively withdraws “an extant mandatory tax 32 exemption,” that municipality bears the burden of showing the real property is not exempt from taxation. See Otrada, Inc. v. Assessor of Town of Ramapo, 41 A.D.3d 678, 679-680 (2d Dep’t 2007) (ruling town had not met its burden of demonstrating the residential use of the relevant property “was other than ‘reasonably incidental’ to the main purpose” of exempt organization); see also N.Y. Botanical Garden v. Assessors of Town of Washington, 55 N.Y.2d 328, 334 (1982) (upholding tax exemption of arboretum because municipality had not met its burden of showing it was not owned by exempt organization used for exempt purpose); Dep’t of Taxation & Finance, Assessor’s Manual, Vol. 4, Exemption Administration, Instructions to Assessors, Renewal Application for Real Property Tax Exemption For Nonprofit Organizations 1 (“renewal forms are designed to provide information on changes in the organization and use of its property that the assessor needs to make a determination of taxable status”). In applying these rules, the Appellate Division correctly held that DOF’s revocation of Respondents’ property tax exemption was arbitrary and capricious, and that the trial court erred by failing to address the respective burdens of proof of the parties. The City did not make any showing whatsoever that the parking facilities were subject to taxation because Respondents were not exempt organizations and/or were not using the facilities in furtherance of an exempt purpose. Indeed, it could not. 33 As the Appellate Division found, and as described above, the record establishes that Respondents are charitable organizations within the meaning of RPTL § 420-a. Notwithstanding that Respondents’ purpose or use of the facilities had not changed between 2007 and 2011, as of July 1, 2011 DOF revoked the exemption. Br. at 3. Respondents’ fiscal year 2012 renewal application was virtually identical to the renewal applications for the prior four years during which the exemption was renewed. There had been no change in the law or legislative history warranting revocation of the exemption. It is evident that this shift resulted from political considerations and not fact. Appellants’ reliance on Lackawanna Community Development Corp. v. Krakowski, 12 N.Y.3d 578 (2009) as the source of a purported “change” is without basis and illustrates that the revocation was based on pretext. In fact, this Court issued its decision in Lackawanna two years before DOF’s revocation of the exemption, therefore undermining Appellants’ contention that it served as the catalyst for the revocation. Moreover, the reasoning behind that decision is in clear distinction from this case. First, Appellants continue to mischaracterize this Court’s decision in Lackawanna as holding “that the economic revitalization of a distressed community does not qualify as a charitable purpose under RPTL 420-a.” Reply Br. at 2; see also R 9 (finding that “[w]hile Respondents have characterized the 34 holding in Lackawanna Community Dev. Corp. as stating that an activity conducted in furtherance of ‘spurring economic development’ does not qualify as a charitable purpose, this is a mischaracterization of the holding.”). In fact, this Court in Lackawanna explicitly limited its review to whether the subject property was entitled to an exemption under 420-a after its non-profit owner “leas[ed] it to an entity that carries out for-profit manufacturing activities on the property.” 12 N.Y.3d at 581. The Court held that real property could not be tax exempt when leased to an unrelated, for-profit commercial manufacturing company, even though it was owned by a community development corporation formed for the “charitable or public purposes of reliving and reducing unemployment . . . bettering and maintaining job opportunities, instructing or training individuals to improve or develop their capabilities for such jobs.” Id. The reason for the revocation was obvious: the property was being used by and for a commercial actor with a for profit purpose. Id. Second, Appellants’ assertion that “[t]he controlling principle enunciated by Lackawanna [is] that a commercial activity use of the property does not satisfy the ‘use’ test for a mandatory property tax exemption under RPTL 420-a” (Reply Br. at 2) might be true, but it does not apply to the facts of this case. Crucially, in Lackawanna, the not-for profit entity was not itself making physical use of the property. 12 N.Y.3d at 580. 35 Third, unlike Respondents here, the not-for-profit changed its use of its property after acquiring it from the City in furtherance of its charitable purpose. Of significance, the Court “assume[d] without deciding that prior to it being leased, the [property] held by LCDC was exempt from taxation.” Id. In contrast, here, Respondents themselves own and operate each of the five facilities as the government has originally requested and do not lease them out. III. APPELLANTS ERRONOUSLY CONTEND THAT THE IRS DETERMINATION CONCERNING RESPONDENTS’ STATUS AS TAX EXEMPT ENTITIES UNDER 501(c)(3) OF THE INTERNAL REVENUE CODE PROVIDED THE BASIS FOR THE APPELLATE DIVISION’S DECISION Appellants contend that “the Appellate Division relied upon [Greater Jamaica’s] IRC § 501(c)(3) status and its qualification for a federal income tax exemption to establish presumptive eligibility in meeting the requirements of New York’s RPTL 420-a,” and that it “held that IRC § 501(c)(3) status satisfies in effect both the ‘charitable purpose’ and ‘charitable use’ prongs of the 420-a test.” Br. at 8. However, as set forth in more detail in Section II above, and in Respondents’ brief, this was not the basis of the ruling. On the contrary, the Second Department held that Appellants “failed to meet their burden of proof for revocation of the tax exemption on the grounds that [Greater Jamaica’s] activity did not conform to a charitable purpose within the meaning of RPTL 420-a.” Greater Jamaica, 111 A.D.3d at 939. It went on to hold that “the Supreme Court should have granted the 36 petition, as the respondents’ revocation of the tax exemption did not have a rational basis and was, therefore, arbitrary and capricious.” Id. at 940. The Appellate Division did state the proposition that “a property owner seeking a real property tax exemption which demonstrates that it is a not-for-profit entity ‘whose tax-exempt status has been recognized by the Internal Revenue Service and whose property is used solely for [charitable] purposes has made a presumptive showing of entitlement to exemption.’” Id. at 939 (brackets in court decision, underscore added). However, that is clearly an observation about how to establish a prima facie case that includes two elements, most notably, the property must be used for a charitable purpose. The Appellate Division did not apply the “presumption” that Appellants assert it did. IV. ASSUMING ARGUENDO THAT RESPONDENTS’ STATUS AS TAX EXEMPT ENTITIES UNDER 501(c)(3) OF THE INTERNAL REVENUE CODE AND A CHARITABLE CORPORATION UNDER THE NOT-FOR-PROFIT CORPORATION LAW IS PROPERLY BEFORE THIS COURT, RESPONDENTS SHOULD BE PRESUMPTIVELY ENTITLED TO THE CHARITABLE EXEMPTION UNDER NEW YORK STATE LAW As discussed above, there can be no serious dispute that both Respondents are charitable organizations within the meaning of RPTL § 420-a. As also discussed above (supra pp. 13-14), following an extensive review, the IRS specifically recognized the charitable purpose served by Greater Jamaica and its parking facilities. This comprehensive review and findings are in stark contrast to 37 the manner in which DOF proceeded in revoking the parking facility exemption, providing no reasoning for taking an inconsistent position from that taken in prior years. Even putting aside the true basis for the Appellate Division’s ruling, Amici respectfully submit that either charitable corporation status under the NY Not-for- Profit Law, or recognition of exemption under section 501(c)(3) of the Internal Revenue Code should give rise to a presumption of eligibility for a 420-a exemption. Respondents satisfy both statutes, and so the Appellate Division would have been correct had it applied such a presumption. Such a presumption is necessary in order to ensure fairness and uniformity throughout the state. A lack of clear standards for 420-a eligibility, combined with a multitude of assessing jurisdictions, leaves the New York nonprofit community vulnerable to arbitrary and unfair application of this important exemption. Because nonprofits must apply for renewal of the exemption annually, each year brings uncertainty as to continued tax exempt status and further opportunity for arbitrary decisions. Thus, adopting a rebuttable presumption will help to ensure that determinations as to organizations’ eligibility for property tax exempt status are fair and uniform across the State. RPTL 420-a lacks a clear standard for determining which organizations are entitled to property tax exemption, thereby increasing the risk of arbitrary and 38 capricious administration. This risk is not imagined. There are more than 1,000 different assessing jurisdictions throughout the State, each of which independently administers 420-a. See N.Y. Tax Reform & Fairness Comm’n, Final Report F-5 (May 2013), available at http://www.governor.ny.gov/assets/ documents/greenislandandreportandappendicies.pdf. The State Department of Taxation and Finance Assessor’s Manual provides limited guidance to local assessors, but specifically acknowledges that “whether an organization is, in fact, a ‘not for profit’ organization . . . can be a very complex determination.” N.Y. Dep’t of Taxation & Fin. Assessor’s Manual, Vol. 4, Exemption Admin., Instructions to Assessors, Application for Real Property Tax Exemption For Nonprofit Orgs. 4 (hereinafter “DOF Manual”), available at http://www.tax.ny.gov/research/property /assess/manuals/vol4/pt2/sec4_05/rptaxex.htm. The DOF Manual further provides that “[s]ections 420-a and 420-b of the Real Property Tax Law generally prescribe organizations purposes but do not specify which activities legitimately serve such purposes. Thus, it is not possible to provide the assessor with a list of activities supporting tax exempt purposes. If an assessor is unsure whether a particular organization fits within an exempt category, he or she should consult the County Director of Real Property Tax Services or the State Office of Real Property Tax Services.” Id. Section 501(c)(3) of the Internal Revenue Code, and the New York Not-for- 39 Profit Corporation Law are particularly well suited to serve as the basis for the presumption of tax exempt status under RPTL 420-a because of the significant overlap among the specific entities and types of activities eligible for exemption, reflecting a common legislative purpose. Compare H.R. 1860 75th Cong. Sess., 19 (1938) (government “is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare”), with 1938 Report at 2 (“[t]hese corporations are discharging social obligations which the State would otherwise have to assume and are reasonably entitled to constitutional protection in the exemptions granted to them with respect to that property essential to the operation and maintenance of their work.”). Specifically, educational, charitable, or religious purposes qualify an organization to receive tax exempt status under section 501(c)(3) or RPTL 420-a, and also to receive charitable corporation status under the N-PCL.1 I.R.C. 501(c)(3); N-PCL § 102(a)(3-b); RPTL § 420-a. Moreover, all three regimes apply only if the 1 The presumption could be rebutted if an organization’s activities fall within one of the categories that is eligible for section 501(c)(3) exemption or charitable corporation status under the N-PCL but is not eligible for section 420-a exemption because the organization was conducting activities on the premises that were inconsistent with its purposes or was formed for purposes which entitled the organization to a permissive rather than a mandatory exemption. That would be the case, for instance, with respect to an organization formed for the prevention of cruelty to animals, which would be eligible for section 501(c)(3) status but would fall within RPTL § 420-b, not 420-a. 40 organization is not organized or operated for the benefit for private interests. I.R.C. § 501(c)(3); N-PCL § 202(a)(12); RPTL 420-a(1)(b). The Internal Revenue Service exercises strict oversight over organizations exempt under section 501(c)(3), and the New York Attorney General’s Charities Bureau exercises strict oversight over New York charitable corporations, to ensure that organizations within these categories truly are operating for charitable purposes. See I.R.S. Exempt Organizations FY 2012 Annual Report & FY 2013 Workplan 5, available at http://www.irs.gov/pub/irs-tege/FY2012_EO_AnnualRpt_2013_Work_Plan.pdf; NPCL § 112; see also NY Attorney General, Charities Bureau, About the Charities Bureau, http://www.charitiesnys.com/home.jsp (follow “About the Charities Bureau” hyperlink). Because Greater Jamaica has persuaded both of these regulators that it operates for charitable purposes, and does not operate for anyone’s benefit, it deserves a presumption of entitlement to exemption under section 420-a.2 Appellants’ contention that the presumption is contrary to the legislative intent of section 420-a because the provision does not expressly reference I.R.C. § 501(c)(3) misses the mark. Br. at 21. It is precisely because section 420-a does 2 While Greater Jamaica satisfies both statutes, exempt status should be available under section 420-a if either criteria is possessed by a property owner. It is possible that a charitable entity might not have sought recognition of exempt status from the Internal Revenue Service although eligible to do so, and many charitable entities exist as charitable trusts or foreign corporations that have not been formed under the New York Not-for-Profit Corporation Law. 41 not articulate any standards for determining which organizations qualify for the exemption that the presumption is appropriate. Contrary to the arguments of Appellants and Amicus Conference of Mayors, it has never been the law of this State that courts may not look to federal legislation for guidance in interpreting complementary state statutes absent express incorporation of the federal statute. See, e.g., Stephenson v. Hotel Empls. & Rest. Empls. Union Local 100 of AFL- CIO, 6 N.Y. 3d 265, 270 (2006) (noting that “[t]he standards for recovery under section 296 of the Executive Law are similar to the federal standards under title VII of the Civil Rights Act of 1964,” and referring to federal standards in analysis of plaintiff’s state law claim). Moreover, Appellants’ reliance on Swedenborg Foundation, Inc. v. Lewisohn, 40 N.Y.2d 87 (1976) and Association of the Bar of the City of New York v. Lewisohn, 34 N.Y.2d 143 (1974) is misplaced. Br. at 15-16. Those cases do not stand for the sweeping proposition that “an organization’s federal tax status does not establish its qualifications for a real property tax exemption under RPTL 420- a.” Br. at 17. Rather, in Swedenborg, this Court held only that “the fact that the foundation has received favorable determinations from the United States Department of the Treasury as to its exempt status for other tax purposes,” (40 N.Y.2d at 95), did not affect the Court’s determination that a nonprofit corporation engaged primarily in spreading the works of Emanuel Swedenborg (id. at 91) did 42 not qualify for the exemption. Similarly in Association of the Bar, this Court merely held that “decisions acknowledging the charitable or educational character of Bar Associations in other contexts for other explicit and distinguishable purposes are unpersuasive” in the specific context of evaluating whether bar associations could qualify for the charitable or educational exemption in light of specific legislation declaring property owned by bar associations and used exclusively for bar association purposes “shall be taxable.” 34 N.Y.2d at 561-62. V. THE GOVERNMENT IS INCORRECT IN ITS ARGUMENT THAT CHARITABLE CORPORATIONS THAT GENERATE EXCESS REVENUE ARE COMMERCIAL ENTERPRISES PER SE Contrary to Appellants’ contention, the generation of excess revenue is not the sine qua non of a commercial entity. Br. at 40-41. If it were, the charitable exemption would be off limits to many charitable organizations. Charitable nonprofits routinely generate a substantial portion of their revenues via fees for goods and services. See Urban Inst. Nat’l Ctr. for Charitable Statistics, The Nonprofit Sector in Brief: Public Charities, Giving and Volunteering 2012, at 3, available at http://www.urban.org/UploadedPDF/412674-The-Nonprofit-Sector- in-Brief.pdf (finding that fees for services and goods from private sources accounted for up to 50% of nonprofit sector’s revenues). This is necessary to offset declining government grants and philanthropic contributions in the face of growing demand for services. Id. 43 To be sure, under RPTL 420-a, an exempt property may not be “a guise or pretense for directly or indirectly making any other pecuniary profit.” RPTL 420-a (1)(b). Further, an exempt property will not be entitled to the exemption if it is owned by an organization in which “any officer, member or employee of the owning corporation or association shall receive or may be lawfully entitled to receive any pecuniary profit from the operations thereof, except reasonable compensation for services in offering one or more of such purposes, or as proper beneficiaries of its strictly charitable purposes.” Id.3 However, “[a]n economic benefit to a charitable organization does not by itself extinguish a tax exemption. The question is how the property is used, not whether it is profitable.” Adult Home at Erie Station, Inc. v. Assessor of City of Middletown, 10 N.Y.3d 205, 216 (2008). Indeed, an organization that generates net revenue can maintain charitable status when that revenue is generated in a fashion that is commensurate in scope with the organization’s other activities and directly in furtherance of its exempt purposes. See id. (recognizing that “an economic benefit to a charitable organization does not by itself extinguish a tax exemption”); Congregation Rabbinical Coll. of Tartikov, Inc. v. Town of Ramapo, 17 N.Y.3d 763, 765 (2011); People ex rel. Watchtower Bible & Tract Soc., Inc. v. 3 The strict exclusion of entities organized for pecuniary profit means that there is no risk that sustaining Respondents’ property tax exemption will lead to the parade of horribles that the City imagines, in which for-profit supermarkets and shopping malls and other commercial actors will qualify for the exemption. Br. at 33. 44 Haring, 8 N.Y.2d 350 at 355 (opining that “[it] is a new and inadmissible idea that an organization not organized for profit . . . loses its status as such because out of the sale of books and pamphlets it makes a first profit which goes into its capital funds or because the distributors of the books make a tiny gain therefrom”); see also Merry-Go-Round Playhouse, Inc., v. Assessor of City of Auburn, 24 N.Y.3d 362, 367 (2014) (recognizing “bare fact” that nonprofit “summer stock theater charges admission cannot nullify petitioner’s tax exempt purpose” and affirming Court’s previous “observ[ation] that ‘a commercial patina’ alone is not enough to defeat tax-exempt status’”) (citing Symphony Space v. Tishelman, 60 N.Y.2d 33, 38-39 (1983)); Gospel Volunteers, Inc. v. Vill. of Speculator, 33 A.D.2d 407, 411 (3d Dept. 1970), aff’d 29 N.Y.2d 622 (1971) (“The fact that an organization makes a profit from its operations does not make it a commercial enterprise so long as all profits are devoted to the permitted corporate purposes.”). “The test for determination of whether the property is used exclusively for the statutory purposes depends upon whether its primary use is in furtherance of the permitted purposes.” Yeshivath Shearith Hapletah v. Assessor of Town of Fallsburg, 79 N.Y.2d 244, 250 (1992); see also Salvation Army v. Town of Ellicott Bd. of Assessment Review, 100 A.D.2d 361, 362 (4th Dep’t 1984) (finding Salvation Army thrift stores to be “operated as an integral part of the program of 45 rehabilitation and therapy . . . for which the Salvation Army was incorporated, and not solely as a profit-making enterprise”). Not only is Appellants’ position inconsistent with judicial precedent, it is at odds with the New York State Assessor’s Manual which instructs that “[a] nonprofit organization may accrue revenues in excess of its expenditures in the course of carrying out its exempt activities. However, any such excess revenues must be used to support the lawful continuing activities of the organization.” DOF Manual at 4. Here, Respondents are not commercial actors and do not operate the parking facilities as a commercial profit-making enterprise. If they did, they would have charged market rates rather than the below market rates they do charge, consistent with their purpose. Adopting the City’s misleading characterizations that Greater Jamaica is a commercial actor operating “for profit” “commercial” parking facilities solely because the facilities involve the “patina of commercial activity” and generate excess revenues has no factual basis and would have a devastating impact on members of the City’s nonprofit community who rely on the exemption when operating their properties. Moreover, the record in this case demonstrates specifically that Respondents will be unable to continue to operate the parking facilities absent the charitable exemption. If Respondents discontinue their operation of the facilities, it will have 46 far-reaching negative consequences on the downtown Jamaica community. See Press Release, N.Y.C. Econ. Dev. Corp. (Nov. 22, 2014) (touting then-forthcoming “Jamaica Action Plan” set to contain “series of initiatives developed during months of extensive outreach with the Jamaica community, designed to enhance services for residents and businesses, and facilitate holistic development and growth,” and identifying Greater Jamaica as key participant); Jamaica Ctr. Bus. Improvement District, Annual Report 2014 (highlighting key revitalization initiatives involving Greater Jamaica). The government’s over-reaching in the circumstances of this case should be rejected as inconsistent with New York law and because of the serious adverse consequences DOF’s position would pose for the New York not for profit community. ADDENDUM Addendum - Table of Contents: 1. Bowman H. Woods, Reexamining the Property Tax Exemption, Land Lines, July 2013 2. L. Richard Gabler & John F. Shannon, The Exemption of Religious, Educational, and Charitable Institutions from Property Taxation, in IV Taxes, Research Papers Sponsored By the Commission on Private Philanthropy and Public Needs (U.S. Dep’t. of the Treasury 1977) 3. Subcomm. on Taxation & Fin. of the N.Y. Constitutional Convention Comm. of 1938, Report on the Problems Relating to Taxation & Fin. (1938) 4. Comm. on Taxation of the State of N.Y. Constitutional Convention Comm. of 1938, Doc. No. 2, Report of the Comm. on Taxation (1938) DEC 1 4 1977 RC'P LIBRAF Research Papers Sponsored By The Commission on Private Philanthropy and Public Needs Volume IV Taxes Department of the Treasury 1977 LVII Page Part VI Property Tax The Exemption of Religious, Educational, and Charitable Institutions from Property Taxation L Richard Gabler and John F. Shannon (1975) 2535 Summary of Findings 2535 I Current Magnitudes and Trends 2536 Summary of Previous Studies 2536 Exempt Property in Selected States 2538 Types of Exemptions for Religious, Educational, and Charitable Organizations 2542 I1 The Property Tax Exemption Debate 2542 The Case for Exemptions . . . 2542 The Case Against Exemptions . . . . . ' 2544 III Property Tax Exemptions: Intergovernmental Issues 2546 Causes of Public Concern . . . . 2547 Unpopularity of Property Tax 2548 Height of the Property Tax 2551 Increased Information . . . 2554 IV Alternative State Options 2555 Fiscal Alternatives , . 2555 State Reimbursement Via In-Lieu Payments 2555 State Authorization of Service Charges or In-Lieu Payments 2558 Administrative Alternatives 2561 Periodic or Annual Renewal 2561 Local Option, With State Safeguards 2561 Systematic Assessment and Publication of Findings . . . . . . . 2562 Footnotes 2563 Bibliography 2564 VOLUME V REGULATION Parti Regulation Federal Oversight of Private Philanthropy David Ginsburg, Lee R. Marks and Ronald P. Wertheim (1975) . . 2575 Introduction . 2575 I Overview and Summary of Recommendations 2576 Part VI Property Tax THE EXEMPTION OF RELIGIOUS, EDUCATIONAL, AND CHARITABLE INSTITUTIONS FROM PROPERTY TAXATION L Richard Gabler and John F. Shannon^ Summary of Findings • Although data are scarce and not entirely reliable, several studies support the conclusion that the amount of tax-exempt property of all types-govern- ment and private-is large and growing. Assuming that one third of all property is exempt, as suggested by these studies, approximately $15 billion of local property tax revenues is shifted from tax-exempt to taxable property. Of this $15 billion, some $10 billion can be traced to the exemption of government property and $5 billion to the exemption of private holdings. • There is wide variation among states in the types of religious, educa- tional, and charitable activities that are accorded tax-exempt status. Only churches, nonprofit cemeteries, and charities are exempt in all 50 states and the District of Columbia. • Tax exemption is advocated as an appropriate government subsidy to foster the provision of services and activities that are largely "public" or social in character. The unique features of this approach are its permanence and the virtual assurance of freedom from governmental intervention. • Critics of the exemption technique score the fact that this approach by- passes the governmental budget procedure and lacks flexibility to meet changes in social priorities. Also condemned are the severe inroads that exempt property can make into the tax base of local governments and the very imprecise measuring of costs and benefits. • In large part, public concern over the tax-exempt property question can be traced to hostility to the property tax, the continued increases in this tax, and the greater availability of information on exempt property. Nonetheless, this hostility has not led, in general, to an organized, action-oriented program by public interest groups against the tax-exempt property practice. • Although few advocate wholesale repeal of existing property tax exemp- tions, support can be found for various fiscal alternatives. State reimbursement to localities for state-mandated exemptions would resolve the conflict that occurs when one governmental level pays for exemptions granted by another. This approach would not alter the value of the exemption to the recipient institution and could, at least potentially, be adapted to meeting equalization objectives among localities. • The imposition of local service charges or voluntary payments by tax-exempt institutions would erode the value of tax exemption. These alter- natives would recover only a part of the revenues foregone by tax exemption and would not constitute the equivalent of placing such institutions back on the property tax rolls. • In addition to fiscal alternatives, several adminstrative reforms would serve to tighten-up the exemption technique. Among the most important are (1) periodic or annual renewal of exemption by the state government to assure the tax-exempt institution is performing the services for which the exemption was granted; (2) regular assessment of tax-exempt property and publication of findings; and (3) local home rule in granting exemptions, accompanied by state safeguards. 'Advisory Commission on Intergovernmental Relations, Washington, D.C. 2535 2536 CURRENT MAGNITUDES AND TRENDS The exemption of religious, educational, and charitable institutions from property taxation has existed from "time out of mind." The question of tax- exempt property and its impact on the local tax base has not lacked attention. The Advisory Commission on Intergovernmental Relations investigated this issue in 1963; numerous states and localities have also conducted or commis- sioned studies relating in whole or in part to the amount of exempt property, its ownership, its use, and the trend of taxable to tax-exempt realty. Despite the continual interest in the topic, there is a paucity of current, comparable data on tax-exempt property for the nation as a whole, for states, and for localities within particular states. The reason for this is not hard to find: Tax-exempt property, by definition, produces no governmental revenue. Because much of the tax-exempt property is of a unique or special nature, the cost of assessing and updating valuations has proven difficult to justify. As one study noted: "It is no secret that most tax exempt property is assessed at unrealistically low figures. Knowing that the property will produce no revenue, assessors frequently just drive past it and make what the trade knows as a "windshield evaluation," rather than spend valuable time making an accurate assessment."1 While there is a general lack of statistical data, several studies, using various estimating techniques, have been made of the value of exempt property at the national, state, and local government levels, both over time and at a given point in time. This section of the study summarizes the findings of selected earlier analyses of the amount of tax-exempt property and trends in this area, presents more recent data for selected states on the value of tax-free property in both the aggregate and for religious, educational, and charitable institu- tions taken together, and presents a 50-state tabulation of the taxable or tax-exempt status of various religious, charitable, and educational organiza- tions and activities. Summary of Previous Studies Data presented by Harold B. Meyers indicate that the pace of property tax exemptions has far outstripped the growth in the real property tax base. Using four bench-mark years and estimates of market value, Meyers estimates that tax-exempt property has grown from $2.0 billion, or 4.6 percent of all real property, in 1880, to $20.5 billion, or 11.7 percent of all real property, in 1922, to $294.7 billion, or 23.4 percent, in 1961, and to $569.5 billion, or 32.6 percent, in 1968.2 Compared with a forty-fold increase in the value of real property between 1880 and 1968, the value of property tax exemptions has grown 285 times. Meyers' estimation that tax-exempt property accounts for one third of all real property is generally in line with the findings of other studies. For example, Leo A. Droste, using Census Bureau data, estimated a $600 billion price tag for tax-exempt property out of a total market valuation of $1.8 trillion.3 Similarly, Alfred Balk found an average ratio of exemptions to total real property values of 35 percent for the 1967-1969 period in selected major cities.4 Estimates by Joan E. O'Bannon, generally centering on the year 1964, show the ratio of exempt land, including government property, to total assessed value to range from 5.48 percent in Arizona to 168.81 percent in Oregon. The comparable ratio for exempt private property in 19 states ranged from .53 percent in Idaho to 74.58 percent in Louisiana (see Table 1). 2537 Table 1 Total Assessed Value of Taxable Property in Selected States in Relation to Value of All Tax-Exempt Property and of Tax-Exempt Private Property (in billions of dollars) State Alabama Arizona California Colorado Connecticut Florida Georgia Idaho Indiana Louisiana Maine Maryland Massachusetts Minnesota Mississippi Nevada New Jersey New York Ohio Oklahoma Oregon Pennsylvania Washington Year 1964 1964 1964 1964 1961 1964 1964 1964 1964 1964 1963 1964 1963 1962 1963 1964 1963 1963 1963 1964 1964 1957 1964 Total Assessed Value of Taxable Property $ 3.59 2.19 36.74 3.92 9.80 13.83 5.02 . 7 6 6.26 4.13 2.34 12.50 11.57 7.32 1.69 1.30 24.10 46.27 19.97 3.34 3.11 12.50 3.84 Total Exempt Land, Including Government Property Value $ n. a. . 1 2 26.65 . 7 6 2.30 n. a. n. a. n. a. n. a. n. a. 1.02 2.50 1.37 n. a. n. a. 4.00 18.10g 3.07 n. a. 5.25 2.80 1.00 Percent of Total Assessed Value ___ 5.48 19.39 23.47 - - - - - 43.59 20.00 - 18.72 - - 16.00 38.12 15.37 - 168.81 22.40 26.04 Value $ .79a n. a. 7.12 . 1 2 1.01 4.95b 1.18C .004( 1.03 3.08e . 2 1 n. a. 1.78 n. a. . 0 4 . 0 7 n. a. 3.30 1.03, .53h . 5 5 1.24 . 2 0 Exempt Private Property Percent of Total Assessed Value 22.01 - 19.38 3.06 10.31 35.79 , 23.51 d .53 16.45 74.58 8.97 - 15.38 - 2.37 5.38 - 7.20 5.16 15.87 17.68 9.92 5.21 n. a. - not available. a. Includes only homesteads and industrial factories and plants. b. Includes only homesteads. c. Includes only homesteads and personal property. d. Includes only the real property for veterans, the blind, and widows. e. Includes only homesteads and manufacturing plants. f. Includes only some private nonprofit, district, and county property. g. Includes Indian and foreign lands. h. Includes only homesteads and personal property. Source: Joan E. O'Bannon, "Payments from Tax Exempt Property" in Property Taxation, U.S.A., Richard W. Lindholm, ed. (The University of Wisconsin Press, 1967), p. 205. 2538 Additional evidence on the magnitude and trends in tax-exempt property valuations is available at the local level. For all Maryland counties, tax- exempt property was 28.9 percent of all taxable property in 1969-1970; in Baltimore City, the comparable figure was 33 percent; statewide, this averaged out to just under 30 percent.5 For Baltimore, it is also clear that exempt values have increased as a share of total taxable real estate in each year since 1966. Similar findings are shown for New York State: Exempt Valua- tions as a proportion of total real estate valuations have increased between se- lected bench-mark years from 1894 to 1965, with virtually no interruptions. Statewide, the ratio of exempt to total valuations increased from 13.2 percent in 1894, to 22.6 percent in 1950, to 25.6 percent in 1957, and to 29.8 percent in 1965.6 The comparable figures for New York City were 16.2 percent, 24.5 percent, 28.6 percent, and 33.0 percent. Outside New York City, the figures show the same pattern of increase: 10.9 percent in 1894, 19.0 percent in 1950, 20.6 percent in 1957, and 23.8 percent in 1965. Richmond, Virginia, data demonstrate the pattern once again. With only a few interruptions, and these of minor importance, the ratio of tax exempt to total real estate valuations has increased, from 15.0 percent in 1955 to 23.1 percent in 1973.7 Although available at only one point in time, data for Milwaukee, Wisconsin, indicate that over 35 percent of the personal property and real estate within the city is exempt from taxation.8 Thus, sketchy and incomplete as the data may be, there is a pattern that emerges from these several studies. They all support the conclusion that whether attention is focused at the national, state, or local government level, the value of tax-exempt property has been increasing more rapidly than the value of taxable property. Equally significant, reasonably current magnitudes for some states and for individual localities, in particular, are of substantial size. While O'Bannon's study shows a considerable variation in the ratio of exempt to total assessed valuations on a statewide basis, among the selected states examined, several other studies have settled on an approximate figure of one third as the ratio of exempt to total valuations. Exempt Property in Selected States As noted earlier, magnitudes relating to the value of exempt property are not only scarce, they are also suspect. Local assessors frequently feel that exempt property is not worth the time and effort to arrive at current valuation and hence the property is carried for another year or assessment period at its previous value, however determined. To give at least some feel for the magnitude, Table 2 presents U.S. Bureau of the Census data on exempt property. These data cover 17 states and the District of Columbia. The Census material was supplemented by data obtained from individual state reports for 15 additional states. To assure a greater degree of comparability among states, the value of tax-exempt religious, charitable, and educational institutions was aggregated rather than tabulated individually for each classification as was done in the Census and stat« reports. For these jurisdictions, the value of all exempt property-including that owned by federal, state, and local governments-is frequently in excess of 20 percent of the total state assessed value. For the aggregate of religious, educational, and charitable exemptions, the comparable ratio is frequently in the 5 to 10 percent range. Clearly, no great confidence can be placed in these figures since the data are not uniform in quantity or quality. Yet, these data, inadequate as they are, do lend credence to the estimates of previous studies and help to support the conclusion that the value of all tax-exempt property can make substantial inroads into the tax base traditionally relied upon by local governments. 2539 Table 2 Tax-Exempt Property and Comparative Data, Selected States, 1971 State Total Assessed Value (in millions of dollars) Assessed Value of: Exempt Religious, Property, Educational, All Types Charities Ratio of All Exempt Property to Total Assessed Value Ratio of Religious, Charitable, and Educational Property to Total Assessed Value Arizona California13 Connecticut0 Delaware0 District of Columbia Florida Georgia Hawaii Idaho0 Indiana^ Iowac , Kansas ' Louisiana Maine0 Maryland Massachusetts Minnesota6 Mississippi0 Nebraska0 Nevada^ New Hampshire0 New Jersey^ New Mexico0 New York North Dakota0 Ohio Oklahoma0 Oregon Pennsylvania Rhode Island South Dakota" Vermont0 Wyoming0 $ 3,693 53,931 14,881 1,838 8,419 55,377 10,329 8,764 923,314 14,756 7,042 5,394 9,628 4,169 22,206 28,510 3,960 1,926 4,181 2,693 4,546 49,618 2,148 88,716 627 35,919 3,488 27,563 21,087 6,537 3,274 1,414 1,156 5 759 3,822 3,533 21 4,480 18,043 1,569 3,443 5,531 5,348 123 402 6,815 50 3,942 6,762 965 606 73 863 40 8,383 224 28,241 2 4,960 522 9,664 1,429 1,004 23 5 F 86 1,480 1,925 370 2,710 358 851 1,984 2,105 437 66 1,703 7,575 2,711 1,240 2,181 417 296 20o6 7.1 23.7 1.1 53.2 32.6 15.2 39.3 0.5 36.2 1.7 7.5 70.7 1.2 17.8 23.7 24.4 31.5 1.7 32.0 0.8 16.9 10.4 31.8 0.3 13.8 15.0 35. 11. 21.9 30.7 1.6 0.4 2.3 2.7 12.9 4.4 4.9 4 . 1 8.9 7.4 11.0 2.5 3.4 8.5 7.5 4.5 10.3 6.4 9.0 a. b. c. d. e. f. Excludes charitable type of totally exempt property. Excludes governmental totally exempt property. Totally exempt property types not reported. Excludes religious, educational, charitable and governmental types of totally exempt property. Excludes partial exemptions. Excludes charitable types of totally exempt properties. Excludes educational types of totally exempt properties. h. Exempt property values are for the year 1969 while the taxable values are for 1971. In some instances data are not shown because the re were no totally exempt values or because the aggregates involved were not identified in reported data. Sources: Rountree and Associates, Real Property Tax Exemptions and Relief: A Study of Policies, Practices and Impact on the Commonwealth of Vir- ginia, Vol. 1, pp. 23-4; U.S. Bureau of the Census, 1972 Census of Governments, Taxable Property Values and Assessments - Sales Price Rates, P a r t i , Connecticut, Pennsylvania, and Maryland valuation data on exempt property from state tax reports. 2540 Table 3 Tax-Exemption Status of Religious, Educational, and Charitable Organization Categories by State Cemeteries Future Eleemos- Parson- Non- Expan- ynary Veteran Church age Profit profit sions Insts. Orgs. Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Dist. of Col. Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Missouri Mississippi Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - X P.T. X X X X X X X X X X X X - X X X - X X X X X X X X - X X X - - - - - X X X X - X X X X X X X - - _ X - X - - X - - X - - X - - - - - - - X - - - - X - - X X - - X - - - X - - - X - - - X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - X - X - X X - - X - - - - - - - - - - X - - - - - - - - X - X - - - X X - - - X - - - X - - X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X - - X X X X X X - - X - X X X - - X X X - - - X - X X X X X X X X - - - - - - X X X - X X X - - X Total 51 39 15 51 16 51 31 Source: Rountree and Associates, Real Property Tax Exemptions and Relief, Vol. 1, pp. 11-12. x = tax exempt. <• Table 3 (Continued) 2541 Educational Fraternities Inc. Hous. Prod. Bus. Labor & Prof.Frater- Off On nal Campus Campus Facs. Prop. Colls. Assns YMCA's Retire- & ment YWCA's Homes Total x X 24 x X X X 20 X X X X 24 X X X X X X X X X 39 11 X X X X X X 18 10 X X X X X X X X 34 X - - _ X X - X X _ _ _ - X X X X _ - - _ - - X X _ _ - - _ - _ - X X - _ _ - - - _ - - X X - X X 13 9 6 5 9 12 8 9 7 12 12 6 12 9 12 13 10 9 3 10 9 9 3 7 Q O 12 5 11 8 8 10 5 11 11 14 7 9 0 3 3 4 13 8 11 3 13 9 11 7 11 14 17 2542 Types of Exemptions for Religious, Educational, and Charitable Organizations The phrase "religious, educational, and charitable organizations" covers a multitude of potential activities. The types of organizations providing such services and their taxable status in the various states and the District of Columbia are presented in Table 3. While churches, nonprofit cemeteries, and charitable organizations, as categories, are exempt in all states, there is rather wide difference among states with respect to the taxable status of various organizations and activities related to religious, educational, and charitable services. A rather generous policy of granting exemptions for religious, educational, and charitable activities prevails in North Dakota and Wyoming-which exempt 14 of the 16 classifications presented -and in 10 other states, where at least 12 of the 16 categories enjoy tax-free status. At the other end of the spectrum, 11 states have a relatively stringent tax exemption policy: Louisiana, Michigan, Pennsylvania, Rhode Island and Utah exempt only three of the categories; South Carolina, four; Arkansas, Montana, and New Mexico, five; and Arizona and Hawaii, six. II THE PROPERTY TAX EXEMPTION DEBATE The Case For Exemptions The public finance standard for evaluating a tax instrument is a broad tax base capable of providing large amounts of revenue at relatively low rates. This standard, then, implies that the tax instrument contains few, if any, exceptions to the general rate of tax and, in this sense, possesses a high degree of tax neutrality. Such a tax standard, however, collides head-on with the legislator's desire to provide special tax treatment for favored groups, activities, and individuals. Certainly a good deal of today's property tax exemptions reflect the desire to make the property tax a more "humane" tax. It is this objective-to utilize this local revenue-producing mechanism to promote certain social purposes- that has led to the granting of exemptions for institutions and organizations such as churches, charities, schools, hospitals, all of which are viewed within our society as worthy of encouragement The tax exemption promotes a pluralistic approach to the provision of various services that would otherwise drift into the governmental domain. As such, the tax exemption may, though it need not, relieve governments of burdens greater than the value of the tax exemption itself. To tax religious, educational, and charitable institutions would go against the vague, but deeply ingrained, feeling that such institutions are "unsuitable" activities for the purpose of taxation. The recipients of tax-exempt status provide a benefit in return: the fostering of desirable activities and the en- hancement of moral and civic values. To the extent that such activities provide "public" benefits -benefits to society as a whole, over and above those that accrue to the individual recipient-then an even stronger case can be made for government subsidization. Governmental assistance can be justified on the basis that in the absence of such public sector support there would be under-consumption of the service in question, and, since such 2543 services are presumed to confer benefits to society as a whole, this would have a detrimental effect on social well-being. The prime justification for granting property tax exemptions, then, is that the recipient institutions provide public benefits and thus are worthy of public support. Underpinning this argument and with special reference to religious, educa- tional, and charitable exemptions is the belief that these organizations provide services that the private sector alone would not produce, either at all or in sufficient quantity. In the absence of private sector production, govern- ment would be forced to provide these services. Even if viewed as an appropriate public sector activity, government production of these services would, of course, necessitate the imposition of the government's taxing authority. Rather than taxing such organizations and then appropriating the funds for the support of the activities, the public sector provides a subsidy by granting a tax exemption. While the subsidy need not be equivalent to the costs of providing the services, government, by exempting from tax those organizations that are willing to provide the desired public services, is promoting charitable and educational aims-and, in this case, by not invoking its powers of taxation. Professor Kendrick states this argument: The exemption of the property of private schools, colleges, univer- sities, art galleries, museums, and other cultural institutions, and of churches, charitable organizations, and hospitals is commonly held to be justified by the public nature of their services. They are said to do what should be done, but what the government alone can do only imperfectly, or incompletely, if at all. . . . In a word, institutions of this character find their reason for being in the fact that the concept of public services is broader than that of the services provided by government and financed by taxation.9 Since the exemption is generally not subject to annual review, there is no need for recipients to appear before legislative committees, and, consequent- ly, there is little opportunity to exert political influence or pressure on the private organizations receiving the exemption. At a minimum, officers of such organizations will not be required to court legislative approval of their activities or to have these activities channelled in directions other than those of their choosing. As one study of property tax exemptions granted to universities concluded: The most important of these (advantages) is the freedom afforded private educational institutions from interference by state officials. Furthermore, whatever advantages or drawbacks there may be to the exemption, as a practical matter it is politically secure. 10 On the other hand, the property tax as a mechanism for providing a public subsidy to private universities has been justified as superior to direct payments because it frees the university from political interfer- ence via budgetary control, thereby encouraging diversity and experi- mentation in the public-supported sector. Furthermore, the exemption insures continuity of public support, thus facilitating long-range planning. These arguments are buttressed by general principles of academic freedom. Educational institutions should be free from direct governmental control to enable them to fulfill their role as independent critics of government action. 11 An added advantage of the property tax exemption is the low-visibility status of this mechanism which provides a greater degree of financial certainty to recipients than would an annually appropriated direct subsidy. (It should be noted that in some situations, direct appropriation may not be a viable alternative form of subsidy. In the area of religious activities, for example, the property tax exemption may be the only feasible instrument of governmental 2544 assistance since the direct-appropriation technique would presumably be challenged on the grounds that it violates the principles of church-state separation.) In sum, then, the property tax exemption is a governmental subsidy which, when appropriately applied, encourages institutions providing services or activities that are public or quasi-public in character-services and activities that in the absence of a private sector counterpart, the government would have to provide. The signal advantages of this type of subsidy are the high degree of protection against governmental interference afforded to recipients and the financial certainty. Like other techniques of governmental assistance that might be used for the same purpose, the property tax exemption pro- motes a pluralistic society by encouraging voluntarism, recognizing that the governmental sector does not do everything best and that greater government involvement in the regulation and financing of private sector programs leads to a dimunition of discretionary freedom of private sector organizations. The Case Against Exemptions The same characteristics of the tax-exemption technique that are praised by its defenders are seized upon by its critics. While admitting that greater financial certainty is provided by this approach, critics point out that it is purchased at an excessive cost. In their view, the property tax exemption, just because it is "hidden," violates the principles of good government by subvert- ing the full disclosure of what is, in effect, a public expenditure program. If recipients are to be granted preferential tax status, this decision, the critics argue, should be made openly and, equally important, periodically. Indeed, it is the permanence of the exemption that limits the options available to government policy makers since it reduces their flexibility in adjusting to current circumstances. An organization or activity deemed worthy of an exemption at any one point in time may not necessarily be so evaluated in 5 or 10 years. Yet, many exemptions last far longer than that since nothing is harder to retrieve than a preferred tax status. Arguments such as these imply a preference for a more "open" mechanism of government assistance, a mechanism that also allows more flexibility in accommodating changes in priorities among the competing demands placed upon governmental decision makers. While the property tax exemption may provide considerable protection against political interferences, it does not rule out the possibility of abuse by the recipient. The exemption is in fact a subsidy, and it can be argued that the recipient should not be immune from public scrutiny since it is using public funds to provide its services. On efficiency grounds, the property tax exemption is also vulnerable in that it is an inflexible method of support and one that bears no inherent relation- ship either to the recipient's ability to finance the service provided or to society's need for the service. It would be sheer coincidence if the value of the tax exemption were to match the value of an appropriation based on actual needs for the service in question. Under a direct grant, there is at least the potential for approximating these needs on a year-to-year basis. Measures of public needs are admittedly imprecise, but they would seem to be more accurate than a value that results from a determination of land and improve- ments valuation and the prevailing local property tax rate. Commenting on this point, one recent study concluded: Exempt property receives a subsidy, the value of which is the tax bill the property would otherwise have paid. An exemption is a very crude 2545 instrument of public policy since the amount is merely a function of the market value of the property and the effective tax rate. There is no con- sideration of the social worth of the service performed by the exempt organization. Consequently, the exemption subsidy may be more or less than this amount. 12 With respect to university property tax exemptions, it has been stated: One difficulty with distributing public moneys in this manner is that it is a crude means for ascertaining the proper size of the subsidy. The ex- emption fixes the subsidy at the level of a university's hypothetical tax bill, that is, the property tax bill that would be due if the university were not exempt from taxation. The appropriate level of subsidy, however, absent redistribution goals, equals the value of public benefits that the university bestows upon the state and city in which it is located. Since the hypothetical property tax is a function of factors largely unrelated to the level of educational activity, the property tax relief enjoyed by the uni- versity will only accidentally be of comparable magnitude to the benefits it bestows. 13 As a mechanism of providing preferred tax treatment, the property tax exemption is further criticized because it reduces the tax base, necessitating the imposition of higher rates on the remaining taxable property to secure equivalent revenues. Thus, the standard of a broad-based tax applied at a uniform rate is eroded, as is the standard of tax neutrality. Moreover, the higher rates applied to the property remaining on the tax roils means that it is the owners of the taxable property that in effect pay for the exemption. Increased rates can also serve to raise the level of tax consciousness and tax- payer resistance, which affects what local government can do, and they influence the decisions of individuals and businesses about where to locate. It should be emphasized that once embarked on an active exemptions policy, cumulative-and deleterious-effects can be set in motion. Granting an exemption from the property tax for one worthy cause invites similar claims from other groups stressing the worthiness of their particular interests. As such claims proliferate, it becomes increasingly difficult to draw the line against these interests. Demands for tax-exempt status are likely to increase not only because of the apparently "favorable" legislative attitude but also because the value of a property tax exemption increases as tax rates are raised to cover both the demands placed on the taxing authority and the revenues foregone by previously granted tax exemptions. The cumulative effect can be large and, to the extent such a snowballing process is set in motion, a substantial erosion of the tax base can result. The above \rguments against property tax exemption are applicable regardless of the particular recipient of the preferred tax treatment. That is, they are considerations that should enter the decision of those determining whether an exemption should be granted, regardless of the particular activity that is seeking the exemption. There is a wide variety of arguments offered against property tax exemptions that focus not on the mechanism but on the purpose for which the exemption is secured. For example, certain tax-exempt enterprises compete directly with taxpaying businesses. This occurs when the recipient of the exemption undertakes activities that have a private sector counterpart or offer goods or services that are a close substitute for the output of the private business sector. In these cases-such as municipal parking lots, cafeterias, and restaurants run by governmental or charitable organizations - the taxpaying private sector is put at a competitive disadvantage solely as the result of the tax-free status granted the competitor. While this problem is not 2546 insoluble, one real difficulty is that many exempt organizations provide a mixture of charitable and noncharitable services and measures for restricting the exemption to only those activities considered charitable simply do not exist. Ill PROPERTY TAX EXEMPTIONS: INTERGOVERNMENTAL ISSUES From the standpoint of intergovernmental fiscal relations, the knottiest problem associated with tax exemptions centers on state government mandating an exemption from the local property tax base without providing reimbursement to local government for the property removed from the local tax rolls. This is, in effect, the same problem that arises when state govern- ments mandate programs that local governments are required to finance from their own resources. Lacking a state reimbursement, state-mandated property tax exemptions are viewed by local officials as an infringement of local home rule and a considerable constraint on local decision-making authority. As a more practical matter of local government finance, tax exemptions can pose severe revenue drains when exempt organizations are clustered in particular local jurisdictions. The typically hardest hit jurisdictions are the large central cities, college towns, and, at least in some states, the state capitol. Of course, a good part of the exempt property in state capitols is state owned and therefore not of direct interest to the exemption of private property. At the opposite end of the spectrum is the college town in which private property accounts for the large part of exempt property, the best- known examples being Cambridge, Massachusetts, and New Haven, Connec- ticut. The central city, of course, contains large amounts of both public and private property exempt from the tax rolls. Providence has 33 percent of its property in the exempt classification; Milwaukee, 25 percent; Pittsburgh, 33 percent; St. Paul, 32 percent; St. Louis, 30 percent; and Boston, 45 percent.14 The claim that recipients of preferred tax treatment return an equivalent benefit cannot be accepted uncritically in all instances. Even assuming that the benefit is equivalent, however, is not sufficient to establish that costs and benefits balance out within the confines of a particular jurisdiction. This is a particularly sensitive issue in the larger central cities and is one part of the question of taxation of non-residents who benefit by the use of a cluster of tax-exempt institutions located in the central city. Commenting on this point, a recent study of tax-exempt property in Hartford, Connecticut, noted: Non-residents of Hartford do not pay for the cost of Hartford's property tax exemptions but are free to patronize most exempt institutions. This problem is very similar to the "commuter" situation. Commuters have free use of Hartford's road system, make parking more difficult for Hartford residents, and cause traffic congestion and pollution. On the other hand, commuters spend money while in Hartford and Hartford could not maintain its position as commercial, business and cultural center of the region without them.15 Services of hospitals, colleges or universities, museums, and so forth, are not restricted solely to the residents of the city granting the property tax exemption; and while fees may be charged by such institutions, it seems unlikely that the fees will be-or legally could be-differentiated according to place of residence. Yet, it is the city dweller, or, more generally, the resident 2547 of the jurisdiction that grants the property tax exemption, that bears the cost. The central-city viewpoint has been summarized as follows: If we stop to analyze the central cities' tax exemptions, I think you will find it universally true that the central city which furnishes the appropriation or subsidy gains a small percentage of benefit for its citizenry. Hospitals, universities, and various fraternal and social groups are presumed to be of public benefit by statute, but the public benefits, if any, are metropolitan and statewide in scope. The complete subsidiza- tion, however, is limited to and provided by the central city taxpayers. 16 While benefits spill-over mainly between the central city and metropolitan area, it cannot be ignored that such spill-overs can extend throughout the state and indeed, in the cases of a major university, federal installation, or national headquarters for an exempt institution, the nation as a whole. This concentration of tax-exempt property in the central cities is not due solely to chance or historical accident. It can be the result of deliberate zoning policies of an exclusionary nature adopted by suburban jurisdictions. As Schmit points out: Communities clustered outside of the city, by zoning and other devices, have effectively eliminated the poor and limited the fraternal, charitable, benevolent and other institutions from locating within their units of government. The shifting of the cost of furnishing the public benefits, whether limited or extensive, is therefore forced upon the central city taxpayer with the resultant benefits inuring to the metro- politan or statewide citizenry. Criticisms of the property tax exemption technique cover a gamut of issues. The hallmarks of the technique -financial certainty and freedom from governmental interference-are not universally accepted as desirable. Nor can it be said that the exemption device is anything more than a crude measure of the public benefits provided by recipient institutions. By its very nature, the exemption runs counter to the ideal tax of uniform rate and broad coverage and may bestow a competitive advantage if used by recipients to provide goods and services that have a private sector analogue. Further exacerbating these drawbacks is the fact that once invoked, the property tax exemption device can snowball in importance, making serious inroads into the ability of at least some local governments to raise revenue equitably and at the same time heightening intergovernmental tensions between states and localities and among localities themselves -particularly between the central city and suburb. Causes of Public Concern Although critics of the property tax exemption are numerous and of long standing, they have not been noticeably successful in reversing the practice of granting tax exemption for bona-fide religious, charitable, and educational institutions and these institutions' related activities. This is not in the least surprising since the exemption practice is deeply rooted in the American experience. Yet, opponents of property tax exemption may very well have served to slow down, at least from what it might have been in their absence, the tendency to grant exemptions for certain institutions and activities. Indeed, this goal -the much greater scrutiny of potential tax exemption candidates and the careful consideration of alternative forms of public and/or private assistance to such institutions-may be the only practical objective possible; it is certainly more feasible than a mass withdrawal of granted exemptions. 2548 It is also possible that more fundamental changes in the practice of tax exemption are obtainable, at least at certain times and in certain places. For example, the tax-exempt privilege was revoked on 159 parcels of realty in Milwaukee, Wisconsin. 17 Also indicative of this possibility are the results of a public opinion survey conducted by the Urban Observatory, 18 in which citizens in 10 selected cities (Albuquerque, Atlanta, Baltimore, Boston, Denver, Kansas City (Kansas), Kansas City (Missouri), Milwaukee, Nashville, and San Diego) were asked whether they favored or opposed removal of the tax-exempt status granted to private schools and church property. In 9 out of 10 cities, 50 percent or more of the citizens indicated they favored removing the tax exemption for private schools and in 7 of these cities, at least 50 percent favored removing the exemption for church property. As the Urban Observatory study pointed out: It is hard to know whether these expressions by people reflect changes in ideology over a period of time or simply a current desperation for new sources of income for cities; we do not even know whether these figures represent a change from the past. However, there seems to be little doubt that some change in the laws regarding taxation of school and church property is politically feasible in most of the cities of this country.19 The question of political feasibility, however, is complex. Certainly with regard to church property, constitutional questions are bound to emerge. Nor can it be said that the property tax exemption issue generally occupies a priority position in the action agenda of public interest organizations. Nonetheless, three developments suggest that public concern with the exemption issue will persist, rather than wither away. These factors are (1) the relative unpopularity of the property tax, (2) the increasing amount of property tax, (3) increased information on the types and extent of exemptions. Unpopularity of the Property Tax Although it is an often stated proposition that "the only good tax is the one somebody else pays," it is less well known that taxpayers differ markedly in their attitudes towards different tax instruments. Three public opinion surveys (1972, 1973, and 1974) conducted for the Advisory Commission on Inter- governmental Relations by the Opinion Research Corporation reveal that the local property tax is generally considered the "worst tax" and always one of the two least fair. When specifically asked, "Which do you think is the worst tax-that is, the least fair?" 45 percent of the respondents in the March 1972 survey singled out the local property tax, more than double the number selecting the nearest competitor among major tax instruments used by federal, state, and local governments (see Table 4). (Respondents were asked to choose between the federal income tax, state income tax, state sales tax, and local property tax.) The subsequent ACIR surveys-in May 1973 and April 1974 -have shown, however, a marked diminution in taxpayer hostility to the property tax. Compared with the 45 percent figure of 1972, a respective 31 percent and 28 percent of respondents in the last two surveys reacted unfavorably to the local property tax. Even though there was a noticeable decline in taxpayer hostility, in the 1973 survey the largest single number of respondents cited the property tax as the worst tax (one percentage point more than those selecting the federal income tax) and in the 1974 survey the property tax ranked only 2 percentage points behind the federal income tax. In contrast, there was in both of these surveys a noticeable gap between those selecting the property tax as the worst or least 2549 Table 4 Which do You Think is the Worst Tax-That Is, the Least Fair? 1. Federal Income Tax 2. State Income Tax 3. State Sales Tax 4. Local Property Tax 5. Don't Know April 1,974 May 1973 March 1972 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. 1. 2. 3. 4. 5. Total U. S. Public 30% 10% 20% 28% 14% 30% 10% 20% 31% 11% 19% 13% 13% 45% 11% Men Women 18-29 Years of Age 30-39 40-49 50-59 60 Less Than High School Completed High School Completed Some College Professional Managerial Clerical, Sales Craftsman, Foreman Other Manual, Service Farmer, Farm Laborer Non-Metro-Rural -Urban Metro - 50, 000-999,999 1,000,000 or Over Northeast North Central South West Under $5, 000 Family Income $5,000- $6,999 $7,000- $9,999 $10, 000-$14,999 $15,000 or Over White Non-white No Children in Household With Children Under 18 With Teenagers 12-17 Own Home Rent Home 29 30 31 30 35 31 24 26 34 32 33 37 33 34 26 27 26 41 30 27 29 32 29 29 22 22 30 33 38 31 23 29 31 30 31 27 9 10 8 11 10 13 8 8 12 9 14 10 8 12 10 4 8 7 10 10 11 12 9 4 7 8 8 10 14 10 7 9 10 10 10 8 23 17 21 18 21 17 21 22 16 22 21 16 16 19 19 27 26 19 17 21 21 20 19 19 24 26 18 17 17 20 21 20 19 21 18 24 31 26 29 29 28 30 26 25 30 31 27 29 32 26 31 11 18 25 30 31 29 27 23 38 26 29 30 20 27 29 24 28 29 28 29 27 10 19 13 13 7 14 23 22 11 7 10 12 11 9 15 31 23 8 15 14 17 9 19 11 22 15 16 10 8 12 29 17 12 12 13 17 30 30 31 33 29 36 21 27 34 28 29 37 32 34 32 27 32 31 28 31 29 27 30 35 23 26 35 30 34 30 26 28 32 31 28 33 9 11 12 9 11 12 7 7 12 13 11 11 15 12 10 9 6 10 13 9 12 9 11 8 5 9 12 13 10 11 7 9 11 11 12 7 19 20 21 19 19 16 22 21 19 18 20 16 15 14 24 14 17 20 22 19 23 20 20 13 22 26 19 18 16 19 26 20 19 20 18 24 34 28 28 31 32 29 34 30 29 34 35 31 30 32 27 27 30 31 28 33 28 36 25 36 28 28 29 33 35 31 26 32 29 28 35 23 9 12 9 8 11 8 17 15 8 7 5 5 8 9 10 23 15 9 10 10 9 10 14 8 21 12 8 7 6 10 18 12 10 10 9 14 19 18 22 22 19 17 13 17 21 19 13 25 23 21 20 16 26 25 18 15 13 16 26 18 16 18 21 22 19 20 12 18 19 19 19 19 11 14 13 16 12 14 9 11 14 13 16 12 13 15 13 13 9 7 15 13 16 11 12 12 9 11 15 15 13 12 16 11 14 15 12 14 15 12 15 15 12 14 10 13 12 17 17 16 13 15 11 5 6 15 14 14 20 9 13 11 13 14 13 14 14 13 16 12 15 13 12 15 44 45 41 40 46 45 51 43 46 45 48 41 42 41 43 51 41 41 47 45 38 56 34 54 48 44 41 41 46 45 39 46 43 45 47 40 11 12 9 10 11 11 17 16 8 8 9 6 9 9 14 16 19 12 7 13 13 10 16 5 15 13 12 8 8 11 18 13 10 10 11 12 2550 Table 5 Here are Some of the Reasons that People Give Us for Feeling that the Property Tax is Not a Good Tax. Which One of These do You Feel is the Most Important Reason for Dissatisfaction With the Property Tax? 1. It is hardest on low income families. 2. It is based on estimates of home value that are not always fair. 3. Reassessments may sometimes result in a shocking tax bill increase. 4. It discourages homeowning. 5. It taxes any increase in the value of a home over the original purchase price, even though that increase is only on paper and not in the homeowner's hands unless he sells the house. 6. Property taxes have been going up faster than other taxes. 7. No opinion. 8. Don't agree that property tax is not a good tax. 1. 2. 3. 4. 5. 6. 7. 8. Total U.S. Public 27 21 6 12 12 12 11 5 Men Women 18-29 Years of Age 30-39 40-49 50-59 60 Less Than High School Completed 32 High School Completed Some College Professional Managerial Clerical, Sales Craftsman, Foreman Other Manual, Service Farmer, Farm Laborer Non-Metro - Rural - Urban Metro - 50,000-999,999 1,000,000 or Over Northeast North Central South West Under $5, 000 Family Income $5,000-$6,999 $7,000-$9,999 $10,000-$14,999 $15,000 or Over White Non-white No Children in Household With Children Under 18 With Teenagers 12-17 Own Home Rent Home Percentages add to more than 100 because multiple responses were accepted when a respondent could not decide on one reason for dissatisfaction with the property tax. 26 27 24 20 25 29 33 25 20 21 24 22 21 29 27 25 25 24 29 24 28 27 26 32 34 30 22 19 25 37 28 24 24 25 30 21 21 20 23 25 23 16 14 23 29 23 29 25 23 18 10 18 22 22 21 21 26 17 20 16 14 19 25 28 22 12 20 22 26 24 16 6 6 5 8 8 8 5 5 7 7 6 7 8 9 6 1 4 5 7 7 6 7 6 6 4 3 7 8 7 7 2 5 7 6 8 3 14 10 16 11 11 10 9 10 15 10 13 12 13 16 12 6 13 16 11 11 14 12 9 13 11 13 11 14 11 12 12 10 13 11 10 16 14 11 13 19 14 10 6 7 13 19 21 20 14 10 10 8 8 12 11 14 10 12 12 15 8 8 11 13 18 12 12 11 13 13 13 10 12 12 10 12 11 14 12 12 13 10 9 10 11 12 13 5 6 12 12 13 16 8 11 13 11 11 12 11 13 12 8 13 10 10 13 9 8 14 11 9 8 10 14 17 7 6 6 5 8 7 15 32 23 8 10 9 11 8 16 5 17 14 9 8 6 9 24 12 10 11 8 16 5 4 4 4 4 1 9 6 4 4 4 2 5 5 2 11 9 5 6 3 3 3 6 4 7 6 4 3 4 5 3 5 4 4 5 4 2551 fair of tax alternatives and those citing the state sales tax and the state income tax (see Table 4). These survey results are supported by two other studies of taxpayer attitudes towards tax instruments. When asked in a Louis Harris survey in February 1973, "From your personal standpoint, which of these taxes do you feel are too high, which too low, and which about right?" more people-68 percent- thought that the property tax was too high than any other major tax source. This represented an increase from the 62 percent registered in a similar Harris survey conducted in 1969. The results of the previously mentioned survey conducted by the Urban Observatory revealed that respondents favored the local sales tax as the method of raising additional local tax money, if needed. The local income tax was the second choice, while the local property tax placed near to or at the bottom of the list (which also included a tax on utilities and a tax on car owners). These several studies of public attitudes towards taxes lead to the conclu- sion that the local property tax is a highly unpopular tax and that taxpayer consciousness is particularly acute. Among the major reasons for taxpayer discontent is the belief that the property tax hits hardest at low-income individuals and that the tax is based on estimates of home value that are not always fair (see Table 5). Other frequently cited beliefs are that property taxes have increased more rapidly than other taxes, that the property tax dis- courages homeowning, and that it taxes any increase in the value of a home over the original purchase price, even though that increase is only on paper and not in the homeowner's hands unless he sells the house. In this atmosphere of taxpayer hostility and sensitivity, proposals to move additional property from the tax rolls -an act that in effect requires local officials to raise the tax rates on property remaining on the tax rolls to assure an equivalent revenue yield -would, if well publicized, likely provoke further public opposition. Yet this consequence is probably not sufficient to brake the exemption movement, particularly since exemptions are incremental, possess a low-visibility status, are unrelated in time to tax rate setting, are championed by well-organized interests and at least partially supportable by the general public. Height of the Property Tax Hostility to the property tax rests in part on the frequently overlooked point that the property tax burden has in the recent past increased sharply and nearly continuously. At a time when virtually everyone's property tax is being hiked, proposals to remove property from the tax rolls-and further increase tax rates on non-exempt property-are bound to heighten public concern. Nor can it be ignored that higher rates, regardless of the tax instrument, tend to emphasize the inequities inherent in any particular tax source- inequities that at lower rates, may have remained within the limits of tolerance. For the nation as a whole, the average effective property tax rate (the percentage that tax liability is of market or true value of the house) on existing single-family homes with FHA insured mortgages has increased from 1.34 percent in 1958, to 1.53 percent in 1962, to 1.70 percent in 1966, and to 1.98 percent in 1971 (see Table 6). For the entire 1958-1971 period, this amounts to a 48 percent increase in average effective property tax rates. An increase in effective rates was registered for nearly all states in the 13-year period. The pervasiveness of the increase is readily demonstrated. For example, the number of states where the effective rate on FHA insured mortgages hit or exceeded the 2 percent figure doubled between 1958 and 1962 (from 4 to 8 states), and doubled again between 1962 and 1966; 7 states 2552 Table 6 Average Effective Property Tax Rates, Existing Single-Family Homes With FHA Insured Mortgages, By State and Region, Selected Years 1958-1971* State and Region United States New England Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut Mideast New York New Jersey Pennsylvania Delaware Maryland Dist. of CoL Great Lakes Michigan Ohio Indiana Illinois Wisconsin Plains Minnesota Iowa Missouri North Dakota South Dakota Nebraska Kansas 1971 1.98 2.43 3.14 2.53 3.13 2.21 2.38 2.72 3.01 2.16 1.26 2.24 1.80 2.02 1.47 1.96 2.15 3.01 2.05 2.63 1.79 2.08 2.71 3.15 2.17 1966 1.70 2,17 2.38 2.27 2.76 1.96 2.01 2.40 2.57 1.88 1.14 2.05 1.37 1.81 1.44 1.64 1.96 1.21 2.14 2.12 1.64 1.81 2.64 2.67 1.96 1962 1.53 1.81 2.03 2.10 2.47 1.93 1.75 2.23 2.22 1.75 . 9 1 1.74 1.18 1.76 1.24 . 9 6 1.79 2.24 1.79 1.66 1.36 1.70 2.31 1.84 1.92 1958 1.34 1.58 1.81 1.63 2.21 1.67 1.44 2.09 1.77 1.50 . 7 1 1.47 1.08 1.45 1.07 . 8 4 1.35 1.82 1.57 1.34 1.12 1.54 2.01 1.90 1.65 State and Region Southeast Virginia West Virginia Kentucky Tennessee North Carolina South Carolina Georgia Florida Alabama Mississippi Louisiana Arkansas Southwest Oklahoma Texas New Mexico Arizona Rocky Mountain Montana Idaho Wyoming Colorado Utah Far West Washington Oregon Nevada California Alaska Hawaii 1971 1.32 . 6 9 1.27 1.53 1.58 . 9 4 1.44 1.41 . 8 5 . 9 6 . 5 6 1.14 1.35 1.91 1,70 1.65 2.19 Io72 1.38 2.45 1.49 1.62 2.33 1.48 2.48 1.61 . 9 2 1966 1.13 . 7 1 1.03 1.37 1.31 . 6 0 1.30 1.09 . 6 6 . 9 3 o43 1.09 1.11 1.62 1.30 2.41 1.70 1.23 1.34 2.20 1.52 1.14 1.98 1.47 2.03 1.42 . 8 1 1962 1.03 . 7 9 o94 1.18 1.17 , 5 3 . 9 4 . 6 6 . 5 2 . 7 6 . 4 9 1.09 0 8 6 1.44 . 9 8 2.27 1.58 1.13 1.27 1.85 1.31 1.12 1.83 1.31 1.71 1.24 . 7 7 1958 . 9 0 . 5 6 . 9 3 . 9 7 . 9 0 . 4 8 . 8 4 . 7 6 . 5 6 . 6 6 . 5 2 . 8 4 . 8 6 1.36 . 9 3 2.14 1.32 1.14 1.17 1.72 1.05 . 9 2 1.55 1.06 1.50 1.12 . 62 •Effective tax rate is the percentage that tax liability is of the market or true value of the house. Source: Computed by ACIR staff from data contained in U. S. Department of Housing and Urban Development, Federal Housing Administration, Statistics Sec- tion, Data for States and Selected Areas on Characteristics of FHA Opera- tions Under Section 203; 1971 data from unpublished FHA tabulations. Table 7 Average Effective Property Tax Rates, Existing Single-Family Homes With FHA Insured Mortgages, 50 Largest SMSA's, By Region, Selected Years 1958-197la 2553 Standard Metropolitan Statistical Area and Region Median of 50 SMSA's New England Boston Hartford Providence TV/Ti r l p Q c f lYUUOClO l» Albany Baltimore Buffalo New York Newark Paterson Philadelphia Pittsburgh Rochester Washington Great Lakes Akron Chicago Cincinnati Cleveland Columbus Dayton Detroit Indianapolis Milwaukee Toledo Plains Kansas City Minneapolis St. Louis 1971 2.13 3o21 2.88 2.34 2.45 2o25 2.24 2.68 2.93 2.53 3.08 2.46 2.72 1.93 1.62 2.16 1.52 1.88 1.53 1.38 2.03 2.29 3.52 1.30 1.76 2.08 2.09 1966 1.95 2.70 2.22 2.04 2.44 2.37 2.70 2.49 2.63 2.30 2.47 1.83 2.13 1.63 1.58 2.02 1.60 1.62 1.33 1.51 1.86 2.10 2.71 1.37 1.58 2.16 1.82 1962 1.71 2.46 1.96 2.01 2.55 1.96 2.31 2.26 2.21 2.02 2.20 1.57 1.95 1.34 1.32 1.95 1.35 1.39 1.11 1.32 1.87 1.06 2.62 1.19 1.35 1.82 1.51 1958 1.42 2.24 1.55 1.72 2.13 1.59 1.82 2.10b c c 1.70 1.42 1.66 1.24 1.20 1.39 1.11 1.23 0.86 1.09 1,56 0.84 1.93 0,95 1.16 1.67 1.14 Standard Metropolitan Statistical Area and Region Southeast Atlanta Birmingham Louisville Memphis Miami New Orleans Norfolk Tampa Southwest Dallas Ft. Worth Houston Oklahoma City Phoenix San Antonio Rocky Mountain Denver Far West Anaheim Los Angeles Portland, Or. Sacramento San Bernardino San Francisco San Jose Seattle 1971 1.52 0.98 1.29 1.98 1.40 0.48 1.13 1.50 1.83 2.21 1.85 1.31 1.62 2.21 2.45 2.19 2.85 2.28 2.44 2.34 2.76 2.61 1.82 1966 1.50 0.84 1.09 1.80 1.25 0.38 0.95 1.04 1.43 1.97 1.67 1.11 2.58 1.84 2.17 1.94 2.17 2.01 2.19 2.00 1.96 2.12 1.17 1962 1.01 0.68 1.03 1.61 0.62 0.55 0.99 0.82 1.26 1.73 1.36 0.82 2.36 1.86 1.86 NA 1.71 1.77 1.84 1.75 1.64 1.85 1.14 1958 0.97 0.66 1.01 1.05 0.73 0.53 0.96 0.98 1.27 1.70 1.24 0.85 2.18 1.65 1.69 NA 1.44 1.58 1.65 1.58 1.53 1.62 0.91 NA - Data not available a. Effective tax rate is the percentage that tax liability is of market or true value of the house. b. New York - Northeastern New Jersey. c. Included in New York - Northeastern New Jersey. Source: Computed by ACIR staff from U. S. Department of Housing and Urban Development, Federal Housing Administration, Statistics Section, Data for States and Selected Areas on Characteristics of FHA Operations Under Section 203; 1971 data from unpublished FHA tabulations. 2554 were added to the list between 1966 and 1971. Thus, by 1971, some 23 states had average effective property tax rates of 2 percent or more, compared with 4 states in 1958. The same pattern -high and steadily rising property tax rates-is apparent at the SMSA level. In the 50 largest such areas, the median effective rate has shown an uninterrupted climb-1.42 percent in 1958, 1.71 percent in 1962, 1.95 percent in 1966, and 2.13 percent in 1971 (see Table 7). Twenty-seven of the 50 largest SMSA's had effective property tax rates in excess of 2 percent in 1971. This compares with 21 SMSA's in 1966, 10 in 1962, and only 4 in 1958. These high and rising property tax rates have served to sharpen the focus on the inequities of the property tax instrument. As is true with any tax source, the higher the rate the more difficult it becomes to grant anyone a free ride. This is not to say, however, that the case for curbing property tax exemptions rests on a fiscal-exhaustion thesis. It cannot be claimed with any degree of assurance that local governments have suffered irreparable fiscal damage solely because of property tax exemptions. What does seem clear, however, especially in view of the uneven distribution of tax-exempt property, is that alternatives to the property tax exemption approach appear more attractive in the light of the demonstrated unpopularity of the property tax and the steady and sharp increases registered for this levy. Again, however, other considerations previously noted may override the braking effect of this factor. Increased Information Another factor contributing to the public awareness and concern over property tax exemptions is the greater amount of information that is becoming available on this topic. Although various state legislative committees have periodically studied property tax exemptions, these reports were restricted to specific times and locations. As such, they appealed to a rather narrow audience. Although there has been no major breakthrough on the data front, publica- tion of Albert Balk's work, The Free List, has altered this situation. Balk may very well be one of the few to attempt to estimate the increase of property tax exemptions and to estimate, using whatever bits and fragments of data he was able to uncover, the overall magnitude of tax-exempt property. Balk's accomplishment, however, lies not so much in the scope of his study or in any pioneering estimation techniques as it does in the fact that The Free List is a readily comprehensible work that has served to extend the audience for this topic beyond the usual tax expert and legislative committee. Much like Phillip Stern's The Rape of the Taxpayer, and to a lesser extent the work of Pechman and Ockner on income tax loopholes, The Free List presents a popularized treatment of a topic on which the average taxpayer may previously have had only passing or minimal interest. The "quasi- muckracking" tone adopted by Balk in places-his description of the Pan American building as the world's tallest tax exemption and his discussion of the tax-exempt consumer going through life using the services and activities provided by tax-exempt organizations-serve to arouse and heighten the average taxpayer's resentment against a tax system he regards as increasingly onerous. This is not to say, however, that publication of The Free List has trans- formed a latent hostility into a crusade for reform. This is clearly not the case. Indeed, the overall magnitudes of tax-exempt property-however staggering they may appear-do not necessarily form the basis for a program of reform. Much of the exempt property, for example, represents holdings of the federal 2555 government, which are immune from state and local taxes; another sizable segment is the holdings of local governments themselves, which if made taxable would do nothing more than add to the tax rolls property that the taxpayer would have to pay for. In short, a thoughtful reading of The Free List might very well lead to the conclusion that property tax exemption is an area in which the room for invoking alternatives is relatively circumscribed -by law, by tradition, and by practice. Nonetheless, if The Free List is unsatisfactory as an agenda or a blueprint for reform, it seems undeniable that it has served to crystallize what may have been a vague and ill-formed conception of the property tax exemption issue and made it more readily comprehensible for the general reader. IV ALTERNATIVE STATE OPTIONS Fiscal Alternatives Conceptually, the state has three approaches available to it for dealing with religious, charitable, educational, and other organizations seeking tax exemption. It can, of course, pursue the status quo approach -that is, continue to grant tax exemptions without providing reimbursement to local governments. In view of the numerous drawbacks to this approach, however, states may pursue either of two alternative strategies in dealing with the fiscal considerations inherent in the tax-exemption subsidy. While this section deals with alternatives to the tax-exempt technique, it should be borne in mind that few advocate wholesale repeal of the tax-exempt privilege. Whatever the drawbacks of this subsidy approach, it has been vigorously defended. Profes- sor Kendrick, for example, states: In my opinion, the case for these conventional exemptions (religious, educational and charitable activities) of private property is strong. And indeed exemption from taxation is the only way that the government can help the institutions concerned without making them lost their independence of action. . . . On the other hand, the value of an exemp- tion is concealed. But for the purposes thereby served, the very merit of an exemption lies in its hidden nature. No money is paid out of the trea- sury, no loss of revenue is computed, and no competition between institutions is engendered in the State legislature or the city council. The government simply refrains from taxation. As a result, each institution is helped, is on the same footing as the others, and is under no pressure to change its operations. The exemption, however, should be limited to the property used for the purposes served, and none that earn a profit to the institution or an individual should be included.20 State Reimbursement Via In-Lieu Payments States can supplement their tax-exempt policy by reimbursing localities in whole or in part for the revenue loss due to tax exemption. This approach has several advantages, not the least of which is that it recognizes tax exemption as a political reality that is unlikely to be overthrown either quickly or generally. By means of partial or full reimbursement, the state could respond 2556 to the fiscal-deprivation argument legitimately advanced by at least those jurisdictions that are overburdened by the presence of tax-exempt institutions. Moreover, since state payments would go to the locality rather than to the institution, there would be no interference by the state in the activities of the tax-exempt recipients. This approach would thus avoid several of the serious pitfalls that have effectively stood in the way of proposals to do away with the tax-exempt device and to replace it with a program of direct state subsidies to the recipient institutions. If the state government were to undertake a program of direct payments to local governments, two options would present themselves. By far the more difficult method would be for the state to attempt to reimburse either dollar- for-dollar or some specified share of the revenue foregone by the locality. Under this procedure, the value of the tax exemption would have to be calculated, and while this is the least troublesome aspect, some arbitrary and difficult decisions regarding proper valuation would have to be made. The more basic stumbling block would be the division of benefits between state and locality. Presumably, the state would finance those benefits from the tax-exempt organization that go to residents beyond the local area while the locality would "pay" through tax exemption for those benefits consumed by local residents. The measurement of public benefits is not easily accomplished, however, and the difficulties involved would be significant for organizations performing many functions that qualify for exemption and because of the great variety and multiplicity of organizations and activities that presently receive tax-exempt status. All of this is not to say that such a state payment program is impossible, on a theoretical basis. The real question is whether as a practical matter such a program would be workable and, if so, whether the necessary compromises and arbitrary resolution of disputes would in fact yield a very precise rendering of state versus local sharing of the benefits that are associated with the tax- exempt property or operation. Recently, Rountree and Associates developed a methodology that illus- trates the type of calculations necessary for a state reimbursement program of this type.21 To determine the state payment, Rountree and Associates developed two concepts-a revenue capacity factor (RCF) and a payment in lieu of tax factor (PILT). To develop the RCF, the following data are needed for each taxing jurisdiction: (1) the acreage of each taxable parcel of real prop- erty, (2) the gross square footage of all improvements to taxable parcels, (3) the acreage of each tax-exempt parcel of real estate, (4) the gross square footage of all improvements to tax-exempt parcels, and (5) the portion of total property tax revenues accruing separately to land and improvements. To derive the RCF for each jurisdiction, the total revenue generated by taxable land is divided by the total square footage of taxable land, giving the revenue capacity factor for land. As a second step, a revenue capacity factor for improvements is calculated by dividing the total revenue generated by improvements by the total gross square footage of taxable improvements. This gives an average value on a communitywide basis for land and improvements for all taxable property. Since it is calculated on a square-footage basis, each of these average values-for land and improve- ments-can be applied to the square footage of tax-exempt property to yield a revenue raising potential for such properties. As Rountree and Associates state: The Revenue Capacity Factor represents a standard measurement, on a community-wide basis, of the revenue generating ability associated with any single square foot of land or improvement, taxable or tax-exempt, in each individual jurisdiction. On this basis, the revenue capacity factors 2557 may be applied to tax-exempt land and improvements to determine their potential revenue generating ability if not exempt. It should be noted that the revenue figure generated by the formula is essentially equivalent to the average full value of the property tax which would normally be levied on the parcel were it taxable.22 The second step in this overall procedure is to develop the payment due by the state. For this component, Rountree and Associates use six types of local expenditures as reflecting "the effective cost to each jurisdiction for providing certain vital functions whose benefits accrue to all real property in the locality, whether taxable or tax exempt. . .". These expenditures are general administration, assessment of taxes, administration of justice, crime preven- tion and detection, fire prevention and extinction, and maintenance of buildings and grounds. The sum of these six items is then divided by the total property tax revenue and the figure further refined by multiplying this ratio by the ratio of total property tax revenue to total local source revenue. This is termed the payment-in-lieu-of-taxes coefficient. If the exempt property is also valued, then the PILT coefficient can be applied to this value and establishes the limit of in-lieu payments to the particular locality. This approach to the state reimbursement issue can rest here and thus constitute a state payment solely for the presence of tax-exempt property. One troublesome aspect of this, however, is that there is no real assurance that all communities in the state are in need of such a program. Thus, a strict state reimbursement program-whether determined in the fashion suggested by Rountree and Associates or by some other methodology-is subject to the lingering question, "Is this the best way to spend the additional state money?" Because the revenues foregone by property tax exemption may not be a pressing problem for all localities in a state, or because of the variations in the degree to which particular jurisdictions are affected by the tax exemption issue, it may be desirable to attach a second objective to a state reimburse- ment program. The approach above can be carried further and made into a state reimbursement program for tax-exempt property that is unconditional and equalizing as well. Under this approach, localities would share in a program that allocated state funds not only on the basis of exempt property valuations -which would establish the reimbursement nature of the program -but other factors designed to compensate for local differences in program needs or financial ability. Admittedly, such an equalizing program would not yield a precise render- ing of state payments to statewide, as opposed to local, benefits of tax-exempt organizations. Yet, the latter would have the distinct advantage of providing the state legislature with a program design that offered the opportunity of at least assuring that state payments be distributed where they are most needed. Although some would argue that all types of tax-exempt property mandated by the state should be compensated for, this argument is of even greater force for those local jurisdictions where the presence of tax-exempt organizations presents an "overburden" situation or where the already meager local fiscal resources would be further eroded by a mandated state exemption. Thus, while tax-exempt property in the richest local jurisdiction would be compensated for by such a state program, the same type of property would bring even greater state compensation to the poorer local jurisdiction, if an equalizing measure of local ability were added to the formula. To be sure, it seems reasonable to expect that representatives from wealthier districts would be less receptive to this type of state compensation program than would officials of the poor jurisdictions. Yet, the opposition of the richer communities should be substantially blunted by two additional considerations. Most obvious is the fact that while richer jurisdictions receive 2558 less per parcel of tax-exempt property than their poorer counterparts, they still receive something over and above what they are presently getting from the state. A second sweetener would be the unconditional nature of the state assistance. The greater flexibility and local discretion permitted by this ap- proach may be sufficient to induce representatives of the more affluent localities to accept the imprecise nature of the state reimbursement. Regardless of whether the state were to take the more precise reimburse- ment program or the unconditional-equalization approach, the major benefit would be the increased responsibility of the state in granting exemptions. A highly desirable by-product would be the much greater availability of tax- exempt property valuation data-data that, due to the nature of the state program, would be more current and comparable than much that is presently available. State Authorization of Service Charges or In-Lieu Payments An alternative policy option available to state government is to permit local governments to impose service charges on or to negotiate voluntary payments in lieu of taxes from the recipients of the state-mandated property tax exemption. This approach differs fundamentally from the in lieu payment approach in that the value of the tax-exempt provision to the recipient-while fully maintained under the state payment program -is eroded by the extent to which local governments impose service charges or in-lieu payments. Both the imposition of local service charges and in-lieu payments accomplish the objective of reducing the revenue foregone by the local gov- ernment due to tax exemption. Thus, they are both fiscal instruments designed to recapture revenues. Yet, they differ in several important respects. Local service charges are most appropriate where the recipients of the service can be reasonably well identified and the prices for the service can be collected easily and where substantial waste would occur if the service were provided free. In essence, service charges are a mechanism geared to a precise rendering of costs and prices. In practice, however, there is a restricted scope for service-charge financing. To be sure, new types of service charges or social waste prevention taxes can be conceived of. The difficulty is that to impose new and different charges would require additional administrative costs which may very well reduce significantly the net additional revenues that accrue to local governments. This is particularly true since such new service charges, if restricted solely to tax-exempt organizations, would yield relatively little in additional revenues, even disregarding costs of administration. Administra- tive costs can be expected to be relatively high since the use of new charges would necessitate almost continual analysis and negotiations, sometimes on an institution-by-institution basis. If such charges were levied community wide, two disadvantages would have to be recognized: the loss of the tax- deductibility privilege for federal individual income tax purposes and the introduction of an element of regressivity into the sharing of costs for public programs. Use of the more standard type of user charge-water, trash removal, and so forth -would, of course, largely avoid the administrative complexities. £ven with some of the more traditional charges, however, the problem remains that it is difficult to determine on what basis a particular institution benefits and should pay. Police and fire protection, though not water and sewerage, would seemingly necessitate use of some arbitrary allocation factor-per capita costs, per acre, or per $1,000 assessed valuation. 2559 These more standard charges, while applicable to certain services, would not appear to be adequate if large amounts of tax-exempt property pose a severe fiscal drain for a particular jurisdiction. As the Report of the Property Taxation Committee of the National Tax Association-Tax Institute of America noted: At the very least these charges might be applied to sewer drainage, sewage treatment, garbage and trash collection and disposal in addition to water service. Some local governments have even proposed a charge for fire and police protection, and street maintenance. However, even if charges were required for all of these services the total would fall far short of a tax because they do not include contributions for schools, welfare and dozens, perhaps hundreds, of the local public services.23 This is not, of course, a particularly startling conclusion. Service charges are conceptually a pricing mechanism designed to produce a more efficient or rational allocation of scarce economic resources. They are applicable to specific services as opposed to being general tax instruments, though obviously, they do accomplish a revenue-raising objective. In actual practice, of course, the use of service charges may be mainly for their revenue poten- tial rather than for their resource-allocation effects. Moreover, the connec- tion between the charge and a particular cost may be tenuous, at best. Where these conditions hold, the service charge is in fact being used inappropriately - as a supplement to the general local tax base. Where appropriately applied -as a charge for a particular service and equal to the cost of that service-the use of charges is best considered as a partial replacement of revenues foregone by the tax exemption. Service charges have been utilized by various jurisdictions to recapture at least some of the revenues foregone due to tax exemption. A water and sewerage charge is imposed on such property in both Denver and Colorado Springs. In 1969 Milwaukee adopted a sewer service charge against tax- exempt properties other than elementary and secondary schools. Pittsburgh levies what opponents call a "sick tax," otherwise called an "institution tax" of $6 per $1,000 of assessed valuation affecting exempt properties such as hospitals, nursing homes, colleges, universities, veterans' posts, recreational centers, and other organizations that charge fees to the public.24 In short, authorization by the state of standard type user charges would indicate that the local fiscal problem is not really particularly severe, or if it is, that the authorized remedy is not really adequate. Authorization and imposition of service charges merely reduces the amount of the subsidy to the recipient institution. The state, which mandates the exemption, does not provide financial assistance to reduce the amount of the subsidy. Nor can it be claimed that the residual subsidy-after the imposition of service charge fees-is a more precise measure of the benefits provided by the tax-exempt institution to the locality. Rather, a part of the costs are simply shifted from the locality to the tax-exempt recipient. Very much the same types of considerations are as applicable to voluntary in-lieu payments as they are to service charges. Both devices are, of course, designed to reduce the costs to the locality where the tax-exempt property is located. Yet, where service charges are designed to recover the costs of providing a particular service consumed by the tax-exempt recipient, in-lieu payments have more of a "voluntary payment" character. Such payments are not specifically geared to a particular service or recapture of a specified portion of costs incurred by the locality but are rather a negotiated payment between the local jurisdiction and the tax-exempt organization. 2560 Perhaps the best known voluntary in-lieu payments are those between Harvard University, M.I.T., and the City of Cambridge, which has been receiving payments based on the assessed valuation of land (not buildings) since 1928. The initial agreement was such that the two universities made payments for 20 years on any property removed from the tax list after 1928-an agreement that was renewed in 1948, 1968, and annually thereafter. In the field of higher education, the voluntary in-lieu approach is fairly frequently used. A 1969 study by the American Council of Education indicated that 30 percent of 318 respondents made such payments to local govern- ments. A more limited study of 33 colleges conducted by Yale University and the City of New Haven revealed that half of these institutions made some payment in lieu of taxes. Obviously, the negotiated payment will not result in a full recapture of costs to the locality since this would be a voluntary surrender of the value of tax exemption by its recipient. The full costs are also unlikely to be recovered because the city or locality usually has relatively few trading cards with which to negotiate an in-lieu payment. To be sure, the tax-exempt institution may prize good relations with city hall and appreciate that local officials can become difficult over plans for institutional expansion. Nonetheless, the locality cannot challenge or overthrow the mandated exemption. Like service charges, the state is not involved in the financing arrangements of in-lieu payments, aside from their authorization, and the result of any such payments would simply be to reduce the revenues foregone by the locality, with little reflection of the distribution of benefits between local and non-local residents. State authorization of either local service charges or in-lieu payments offers, at best, a partial recovery of the revenues foregone by the locality due to tax exemption. Neither approach involves any state financing to distinguish between benefits accruing to residents versus non- residents. Rather, the decrease in the revenues foregone by tax exemption is accomplished by additional payments from the institution to the locality. As such, service charges and in-lieu payments amount to a partial reduction in the value of the tax-exempt privilege to the recipient organization. The use of either service charges or in-lieu payments by local governments is not likely to go unchallenged by the exempt institution. Regardless of their nomenclature, recipients of the tax-exemption privilege will rightly view such payments as a reduction in the value of their tax-exempt status. Moreover, such charges or payments may be considered to be the "foot-in-the-door" to full taxation since once the "right" of tax exemption is violated, there is no clearly defined point at which the level of charges or payments ought to terminate. In addition, those communities seeking the authority to impose such payments on tax-exempt institutions to improve their revenue-raising capacity, may also be those communities most in need of the types of services provided by philanthropic organizations. Since the increased payments by the institution would seemingly be paid for from their operating revenues, this would curtail their activities, particularly if the institution's finances are tight. Nor can it be ignored that the institution's board, supporters, and users of services are well placed, well organized, and possess political clout in opposing such revenue measures, while those advocating additional pay- ments by tax-exempt institutions may be fragmented. Legal impediments may also complicate the efforts of those seeking increased revenue contributions from tax-exempt institutions. Because of these several factors, then, recipients of the tax exemption can be expected to defend their status. 2561 Administrative Alternatives There are a number of possible measures that would alleviate the difficul- ties posed by the traditional tax-exemption. Among the most significant of these are (1) periodic or annual renewal of the exemption privilege, (2) regular assessment of tax-exempt property, (3) compilation of tax-exempt property by taxing jurisdiction and (4) publication of findings, and (5) local home rule for determining exemptions, with state safeguards. Each of these measures offers at least the potential for ameliorating one or more of the defects of the traditional property tax exemption technique. It should be emphasized, however, that while these measures are independent of the fiscal options that the states may consider, they are compatible with the previously discussed fiscal alternatives. Periodic or Annual Renewal One of the more long standing criticisms of the property tax exemption is that once granted, it is rarely, if ever, reviewed. As such, the property tax exemption carries with it a certainty and a permanence that is unparalleled in all other sources of governmental subsidies. This certainty, however, is achieved at a considerable loss of flexibility to state and to local policy makers. Because of the lack of periodic or annual review procedure, there is little opportunity to determine whether this form of subsidy is compatible with or in. conflict with the aims and objectives of current governmental policies. Stated alternatively, the merit of periodic or annual review of tax- exempt property would be its ability to reassess in light of current rather than past purposes the legitimacy of the property tax exemption. It would, in effect, put back the property tax exemption into the budget calculus and thus extend the scope of items that are "controllable." With a system of annual or periodic state government review, it can also be expected that there would be greater scrutiny of the activities of recipients of the tax-exempt status. Such scrutiny need not be subject to the charge of political interference. Rather, it can be restricted to providing the assurance that the exempt institution or organization is in fact providing the services and activities for which the original grant of exemption was provided. To the extent that review goes beyond this objective, the likelihood and validity of a charge of political interference becomes more germane. Local Option, With State Safeguards A second reform would go to the heart of the division of authority between state and local governments. At present, the state mandated non-reimburse- ment exemption has the state government as the "giver" while the local government in which the exempt property is located bears the cost and is therefore the "payer." With this proposal, the breach of state authority and local responsibility would be closed by the state's transferring its authority to grant tax exemptions to the local sector. By placing this authority and respon- sibility together at the local level, a more accurate determination of benefits and costs may be achieved. The local option proposal, however, would necessitate the imposition of certain state safeguards to assure that the statewide interest in property tax exemptions was maintained. For example, the state would have to enumerate either specific organizations or broad areas of activities where local govern- ments might apply the grant of tax exemption. Quite obviously, the state 2562 cannot sanction the exemption of one religious group while having a second such organization made taxable. More importantly, however, the state would have to protect against the possibility of competition among localities either to attract what might be considered the more "profitable" or prestigious types of religious, educational, and charitable organizations or to freeze-out "undesired" insti- tutions, such as homes for the aged and halfway houses. It is not impossible that some educational institutions may shop around among local communities for the best tax offer when they are considering the expansion of their physical plant and facilities. To have this decision influenced by tax considerations would, it would seem, be less than optimal from the state's viewpoint. This is not to say that a system of local option to grant property tax exemption is not feasible. It is merely to point out some of the potential diffi- culties. At a minimum, it seems clear that states must assure that all or- ganizations performing the same type of activity-whether it be religious, educational, or charitable in nature-be treated equally by a particular local government, though not necessarily by all local governments. Whether all such religious, educational, and charitable organizations would favor such a system is another question. The church-state issue would presumably preclude any meaningful option being passed to localities, though on church- related questions-such as the tax treatment of parsonages and other proper- ties owned by the church but not used exclusively for religious purposes-local authority and discretion would seemingly be enhanced. Even if these difficulties were surmounted, it must be recognized that this authority to tax religious, educational, and charitable institutions would be a mixed blessing for local officials. Such organizations and activities retain a place of esteem in the public's eye because of their benevolent nature; the authority to render taxable the previously exempt property of organizations may in practice turn out to be a lesser enhancement of local decision making powers than it is intended to be in theory. Systematic Assessment and Publication of Findings No study of the question of tax-exempt property can proceed very far without the data limitations becoming evident. To be sure, this is the constant lament of researchers and policy makers as it is rarely possible to come up with the precise statistical information needed for specific purposes. The question of property tax exemption must surely set some sort of record for the paucity of current, comparable data. Indicative of this is that the best and most recent data available are from the Census Bureau for 1971. Even here, the data are available for only 17 states plus the District of Columbia and are not strictly comparable among this limited number of states. If the taxpayer is to be kept informed, it is essential that tax-exempt property be regularly assessed, that it be classified by type of exemption and by taxing jurisdiction, and that such findings be published. This package of administrative reforms would seem to be the minimum necessary for intelligent discussion and evaluation of the issues by the taxpaying public and its elected officials. This is the recommendation made by the Advisory Com- mission on Intergovernmental Relations in 1963: In order that the taxpayer may be kept informed, each State should require the regular assessment of all such tax exempt property, compila- tion of the totals for each type of exemption by taxing districts, computa- tion of the percentages of the assessed valuation thus exempt in each 2563 taxing jurisdiction and publication of the findings. Such publication should also present summary information on the function, scope and nature of exempted activities.25 More than a decade later, this recommendation remains applicable to a problem that has grown in significance and continues to provoke public concern. Footnotes 1. "The Erosion of the Ad Valorem Real Estate Tax Base," Volume XI, No. 1, National Tax Association, 1973, p. 12. 2. Harold B. Meyers, "Tax Exempt Property: Another Crushing Burden for the Cities," Fortune (May 1, 1969), p. 79. 3. Alfred Balk, The Free List, Property Without Taxes (Russel Sage Foundation, 1971). 4. Ibid., pp. 18-19. 5. Rountree and Associates, Real Property Tax Exemptions and Relief, Vol. II, Table A3-1. 6. Ibid., Table A3-6. 7. Ibid., Table A3-11. 8. Vincent A. Schmit, "Limitation of Property Tax Exemptions," Proceedings of the 61st Annual Conference on Taxation, National Tax Association, San Francisco, 1968, p. 237. 9. M. Slade Kendrick, "Property Tax Exemptions and Exemption Policies," Proceedings of the National Tax Association, Philadelphia, 1958, p. 87. 10. "Alternatives to the University Property Tax Exemption," Yale Law )ournal, Vol. 83, No. 1 (November 1973), pp. 183-4. 11. Ibid., p. 189. 12. John L. Knapp, Virginia Issues: The Real Property Tax, Tayloe Murphy Institute, University of Virginia Graduate School of Business Administration, (April 1974), p. 23. 13. Yale Law Journal, op. cit., p. 183. 14. Meyers, op. cit., p. 77. 15. Gregory H. Wassail, Tax-Exempt Property: A Case Study of Hartford, Connecticut (John C. Lincoln Institute, 1974), p. 57. 16. Schmit, op. cit., pp. 237-8. 17. Ibid., p. 237. 18. Urban Observatory, "City Taxes and Services: Citizens Speak Out," Nation's Cities (August 1971), p. 9. 19. Ibid. 20. Kendrick, op. cit., p. 88. 21. Rountree and Associates, op. cit. 22. Ibid., p. 111. 2564 23. "The Erosion of the Ad Valorem Real Estate Tax Base," op. cit. 24. Balk, op. cit., p. 137. 25. Advisory Commission on Intergovernmental Relations, The Role of the States in Strengthen- ing the Property Tax, Vol. I, A-17 (Washington, D.C., 1963). p. 11. Bibliography General American Bar Association. Section of Taxation, Committee on Exempt Organizations. "Important Developments During Year." 24 Tax Lawyer (Summer 1971), pp. 775-784. "Important Developments During Year," 25 Tax Lawyer (Summer, 1972), pp. 748-757. Arthur, John. "Effective Administration of Property Exemption Applications," in Proceedings of 37th Annual International Conference on Assessment Administration, 1971, of the International Association of Assessing Officers. Vol. 4. Chicago, 1972. Pp. 316-324. Assembly Interim Committee on Revenue & Taxation. Taxation of Property in California. Sacramento: California State Legislature, 1964. "Reporting and Valuation of Exempt Property." Assessors News Letter, XXVI (April 1960), p. 49. Association of Municipal Assessors of New Jersey. "On Property Tax Exemptions," 8 New jersey Assessors Bulletin (July 1969), p. 1. Balk, Alfred. "Changing Attitude Toward Exemptions," International Property Assessment Ad- ministration Proceedings of 35th Annual International Conference on Assessment Administra- tion. Chicago, 1969, pp. 214-25. The Free List: Property Without Taxes. New York: Russell Sage Foundation, 1971. . "The Extent and Economic Effect of Property Tax Exemptions," Proceedings of the 65th Annual Conference on Taxation. Washington,D.C. October 8-12, 1972. Columbus: National Tax Association, 1973, pp. 263-267. Barr, R. Gerald. "Real Estate Exemptions in Michigan," Proceedings of Sixteenth Annual Short Course for Assessing Officers. Papers in Public Administration No. 43. Ann Arbor: University of Michigan, Institute of Public Administration, 1963, pp. 101-12. Beck, Morris. Property Taxation and Urban Land Use in Northeastern New jersey. Washington: Urban Land Institute, 1963. Becker, Arthur P. "Can the Property Tax Be Made Acceptable to its Critics?" The Assessors journal, II, No. 4, (January 1968), p. 11-17. "Property Tax Problems Confronting State and Local Governments in 1967." State and Local Tax Problems. Knoxville: The University of Tennessee Press, 1969, pp. 34-47. Becker, Daniel, Chairman, N.Y. State joint Legislative Committee to Study and Investigate Real Property Tax Exemptions. Interim Report. Albany, 1969. Bilgor, Irving J. Commission to Study Tax Exemptions Laws. Providence, R.I., 1968. Bird, Frederick L. The General Property Tax: Findings of the 1957 Census of Governments. Chicago: Public Administration Service, 1960. 2565 Carper, Raymond E. "Property Tax Exemptions in Colorado." 6 Assessors Journal, (October 1971), pp. 19-36. Citizens Budget Commission, Inc. Real Estate Tax Exemption in New York City: A Design for Reform. New York, 1967. Citizens Governmental Research Bureau Milwaukee. "Exemption of 25% of City of Milwaukee's Property Tax Base, and 30% of Area of 18 Suburbs." Bulletin, LVII, (Jan. 11, 1969), p. 1-10. Colorado. Legislative Council. Property Tax Exemptions in Colorado. Research Publication No. 124. Denver, 1966. Tax Exempt Property in Colorado. Research Publication No. 102. Denver, 1964. Connecticut State Revenue Task Force. A Report on Connecticut Property Tax Administration and Exemptions, by Theodore Reynolds Smith. Hartford, 1970. Tax Study Commission. William F. Connolly, Chairman. Report: Property Taxes in Connecticut. Hartford, 1969. David, Calvin. "Ad Valorem Tax Exemptions." XXI University of Miami Law Review (Summer, 1967), pp. 894-95. Dreyer, Avon M. "Tax Exempt Real Property in South Dakota." Proceedings of Third Annual Conference of South Dakota Assessing Officers. Special Project No. 13. Vermillion: State University of South Dakota, Governmental Research Bureau, 1962, pp. 23-28. Dvorin, Eugene P., and Judith Morvell Jamison. Tax Exemptions and Local Self-Covernment: Case Study of Santa Monica, California. Los Angeles: University of California Bureau of Govern- ment Research, 1958. Eichner, James. "Recent Developments in Tax Exemption." Proceedings of Seventh Annual Virginia Assessors' Institute. Charlottesville: University of Virginia, Bureau of Public Administra- tion, 1963, pp. 135-47. Ferguson, John H. "Tax Exemptions Raise Vital Issues." Horizons for Modern Pennsylvania Governments, VIII (March 1961), pp. 1-2. Fox, George E. "State's Interest in Real Property Tax Exemptions." Current Problems and Alternatives in Financing Pennsylvania Governments: 7960-7970. University Park: Pennsylvania State University, Institute of Public Administration, 1962, pp. 59-68. Geppert, W.V. "Discussion of Tax Exempt Property in State of Texas." XI Baylor Law Review (Spring 1959), pp. 133-48. Groves, Harold M., and John Riew. "Statistical History of Property Tax Base in Wisconsin, 1916-1958." XX American Journal of Economics and Sociology XX (January 1961), pp. 127-46. Hardy, Gerald N. "Tax-Exempt Real Property." Current Problems and Alternatives in Financing Pennsylvania Governments: 7960-7970. University Park: Pennsylvania State University, Institute of Public Administration, 1962, pp. 47-54. Holland, J. Roy. "Property Tax Exemptions." XXXIX Tax Digest (First Quarter, 1961), pp. 31-47. Hunter, James K., Jr. "Property Tax Exemptions-Appraisal of Recent Trends." Revenue Administration 7965. Chicago: Federation of Tax Administrators, 1966, pp. 80-87. International Association of Assessing Officers. "Reporting and Valuation of Exempt Property." XXVI Assessors' News Letter (April 1960), p. 49. "Property Tax Exemptions: Assessors' Albatross." XXXIII Assessors' News Letter (May 1967), pp. 83-86. 2566 . "City Requests In-Lieu Property Tax Payments." 36 IAAO Newsletter (June 1970), p. 96. Johnson, Ed. "Property Tax Exemptions." LXIM The Municipality (July 1968), p. 167. James E. Kaldy. "A Service Charge Model for Tax Exempt Property." The International Assessor, Vol. 41, No. 1, January 1975, pp. 2-6. Kendrick, M. Slade. "Property Tax Exemptions and Exemption Policies." Proceedings of the National Tax Association, 7958. Harrisburg, 1959, pp. 84-89. Klink, Walter J. Study of Real Estate Tax Exemptions in City of New York. New York, 1962. Kurlan, Phillip B., editor. Supreme Court Review. Chicago, Illinois: University of Chicago Press, 1970, pp. 93-107. Legislative Council of Iowa. Study of Property Tax Exemptions Under Provisions of the Code of Iowa. Iowa City, 1955. Lewis, Henry W. "Exemption from Property Taxation: Study Commission Takes New Look." 38 Popular Government (April 1972), pp. 14-17. .. Property Tax Exemptions and Classifications. Chapel Hill: University of North Carolina, Institute of Government, 1970. "Real Property Taxes in Maine and the Improverished: An Expose?" XXII Maine Law Review (1970). Massachusetts Federation of Taxpayers Association. "Our Massachusetts Property Tax - Foremost Obstacle to Progress." XXVI Taxtalk (No. 5, 1958), p. 1. Massachusetts. Legislative Research Council. State Assumption of Certain Real Property Tax Exemptions; Report Relative to Boston, 1972. Massachusetts Taxpayers Foundation, Inc. Institutional Property Tax Exemptions in Massachu- setts. Boston, 1971. Summarized in Taxpayer Report. Boston, 1971. Matter, J. Aubrey. "Exemption of Institutional Real Estate-Virginia." Assessment Administra- tion 1957. Chicago: National Association of Assessing Officers, 1958, pp. 145-53. Meyers, H.B. "Tax-Exempt Property: Another Crushing Burden for the Cities." Fortune, Vol. 79 (May 1, 1969). Myers, Will S., Jr. "General Appraisal of the Effect of Exemptions on Tax Base." The Property Tax: Problems and Potentials. Princeton: Tax Institute of America, 1967, pp. 267-82. "Increasing Pressure for New Types of Exemptions and Their Implication for Assessment Administration." Assessment Administration 1963. Chicago: International Associa- tion of Assessing Officers, 1964, pp. 41-45. National Tax Association - Tax Institute of America. "The Erosion of the Ad Valorem Real Estate Tax Base," 7ax Policy, Vol. XI, No. 1, 1973. Neeld, Aaron K. "Tax Exemptions." Proceedings of Seventh Annual Conference for Assessing Officers 1960. New Brunswick: Rutgers, The State University, Bureau of Government Research, 1961, pp. 40-42. Netzer, Dick. "Impact of the Property Tax." U.S. Congress, JEC, & National Commission on Urban Problems. Washington, D C , U.S. G.P.O. 1968, p. 144. "Property Tax Exemptions and their Effects: A Dissenting View." Proceedings of the 65th Annual Conference on Taxation. National Tax Assoc, 1973, pp. 268-274. 2567 Neufeld, Ernest. "Is Tax Exempt Property A Municipal Asset?" XVIII National Tax journal (December 1965), pp. 415-19. Nevins, Richard. "Taxation of Possessory Interest: Intergovernmental Problem." Assessment Administration 1964. Chicago: International Association of Assessing Officers, 1964, pp. 117-19. New York Legislature, joint Legislative Committee to Study and Investigate Real Property Tax Exemptions. 1970. Norbet, Walter J. Exemption of Property from Local Taxation in Delaware: Case Study of New Castle County, Delaware. Dover, 1960. O'Bannon, J. E. "Payments From Tax Exempt Property." in Richard W. Lindholm, Property Taxation: U.S.A.. 1967. Pelisek, Frank J. "New Concept in Property Tax Exemption Review," National Association of Tax Administrators. Revenue Administration, 1967. Proceedings of 35th Annual Conference Chicago: Federation of Tax Administrators. Pennsylvania League of Cities. Survey of Tax-Exempt Real Property in Pennsylvania Cities. Harrisburg, 1971. Price, Jack N. "Property Tax Exemptions." Proceeding of First Institute for Tax Assessors, 1959. Austin: University of Texas, Institute of Public Affairs, 1959, pp. 29-44. Purnell, Robert L. "In-Lieu Payments in Michigan." International Property Assessment Admin- istration, Vol. 3. Chicago: International Association of Assessing Officers, 1971. Rhode Island, Commission to Study Tax Exemption Laws. Final Report. Providence, 1968. Rountree and Associates. Real Property Tax Exemption and Relief (2 Vols.). Richmond, Virginia, 1973. Schmit, Vincent A. "Limitations of Property Tax Exemptions." Proceedings of National Tax Association, 1968, pp. 236-40. Seward, Doris K. "California's Fiscal Crisis vs. Property Tax Philanthropy." 6 Assessors Journal (January 1972), pp. 3-23. Stauffer, AlanC. Property Assessment and Exemptions-They Need Reform. Research Brief No. 3. Denver: Education Commission of the States, 1973. Steiger, Martin L. "Real Property Tax Exemptions in Pennsylvania-Exemptions in Orbit," Cur- rent Problems and Alternatives in Financing Pennsylvania Governments: 1960-1970. University Park: Pennsylvania State University, Institute of Public Administration, 1962. Tanner, James C. "Non-Taxpayers' Rise: Properties Exempted From State and Local Levies Increase Rapidly," The Wall Street journal (August 18, 1964), p. 1. Tarrant, John F. Exemptions-Erosion of the Property Tax Base. Paper Before Governmental Research Association, September 25, 1961. Hartford, 1961. U.S. News and World Report. "Cities' Target: Tax-Exempt Property," (Jan. 13, 1969), p. 86. Wagner, Richard H. "Pennsylvania's Realty Tax Exemptions." Pennsylvania Department of Internal Affairs Monthly Bulletin. (May 1962), pp. 18-21. Walker, Mabel. "Increasing Clamor for Property Tax Exemptions." XXXI Tax Policy (October 1964), pp. 3-16. "Tax Limits and Tax Leakages." XXVI Tax Policy (April-May 1959), pp. 3-16. 2568 Wassail, Gregory H. Tax-Exempt Property: A Case Study of Hartford, Connecticut. John C. Lincoln Institute, 1974. Washington State Department of Revenue, Research and Information Division. Property Tax Exemption for Certain Private Organizations and Institutions in Washington, A Report Prepared for the Legislative Council Committee on Revenue and Regulatory Agencies. Olympia, 1970. Tax Exemptions: A Study of Tax Exemptions, Exclusions, Deductions, Credits and Differential Rates in the State of Washington. Olympia, 1971. Washington State Legislative Council. Property Tax Exemptions, 7969. Olympia, 1969. Washington State Legislative Council, Committee on Revenue and Regulatory Agencies. Property Tax Exemptions, 1969. Olympia, 1969. Welch, Ronald B. "The State's Concern over Property Tax Exemptions." Proceedings of the 65th Annual Conference on Taxation. National Tax Association, 1973, pp. 275-282. Westmeyer, Troy R., and Wesley Westmeyer, eds. "Georgia Reexamines Tax-Exempt Properties." 61 National Civic Review (June 1972), pp. 309-310. Westmeyer, Troy R., ed. "Tax Exemptions Protested." LI National Civic Review (December 1962), p. 635. Williams, Robert F. "Property Tax Exemptions Under Article VII Section 3(a) of Florida Constitution of 1968." XXI University of Florida Law Review (Spring-Summer, 1969), pp. 641-55. Wilson, Russell T. "Exempt Property Study Commission Reports." 47 New Jersey Municipalities (May 1970), p. 13. Wilson, R. Zane. "Tax Exempt Property-Growing Problem in Lancaster." 8 Pennsylvania (November 1969), pp. 8-9; and (December 1969), pp. 8-9. Winckler, George. "South Dakota Equalization and Exempt Property Report for 1968." Department of Revenue, Property Tax Division and others. Proceedings of Tenth Annual Con- ference for South Dakota Assessing Officers, 1969. . "Exempt Property Study in South Dakota." IV Assessors Journal (January 1970), pp. 23-28. Religious, Educational and Charitable Exemptions "Alternatives to the University Property Tax Exemption," Yale Law Journal Vol. 83, No. 1 (November 1973). Advisory Commission on Intergovernmental Relations. "The Limits of Property Tax Philan- thropy," The Role of the States in Strengthening the Property Tax. Washington: Government Printing Office, 1963. Volume 1, pp. 76-87. Antonio, Frank J. "Religious and Charitable Property: Obligation to Community." in Proceedings of 36th Annual International Conference on Assessment Administration, 1970. International Association of Assessing Officers, Vol. 3. Chicago, 1971, pp. 250-259. Apy, Chester, Chairman, New Jersey Commission to Study Laws of N.J. Exempting Real Property By Religious, Educational, Charitable and Philanthropic Organizations and Cemeteries from Taxation. Public Hearings, Trenton, 1969, (Vols. l- l l l , Vol. V). Balk, Alfred. "Costs, Benefits, and Other Factors in Local Property Tax Exemption of Charitable, Educational, and Religious Organizations." Tax Institute of America. Tax Incentives. Symposium Volume. Lexington, Mass.: D.C. Heath and Co., 1971. Bennett, Robert T. "Real Property Tax Exemptions of Non-Profit Organizations." XVI Cleveland- Marshall Law Review (January 1967), pp. 150-66. 2569 Benson, Harry J. "Exemption of Charitable Institutions from Real Property Taxation in Illinois." Chicago-Kent Review (Fall-Winter, 1968-69), p. 207. Bittker, Boris I. "Churches, Taxes and the Constitution." 78 Yale Law Journal (July 1969), pp. 1285-1310. Blechman, Jon S. "Constitutionality of the Real Property Church Exemption." XXXVI Brooklyn Law Review (Spring, 1970). Brancato, John R. "Characterization in Religious Property Tax-Exemption: What is a Religion?" XXXXIV Notre Dame Lawyer (October 1968), pp. 60-80. Bromberg, Robert S. "Tax Problems of Non-Profit Hospitals." Taxes: The Tax Magazine (September 1969), pp. 524-36. Carnecchia, Baldo M., Jr., "Religious Tax Exemptions." XVI Villanova Law Review (December 1970). Chiesa, Robert L. "State Taxation -Determination of Charitable Exemption -Probable Effect in Related Areas." XL Boston University Law Review (Summer, 1960), pp. 463-67. "Church Property Tax Exemption in Kansas," 19 Kansas Law Review (Spring, 1971), pp. 612-22. Cohen, Lawrence P. "Constitutionality of Tax Exemptions Accorded American Church Property." XXX Albany Law Review (January 1966). "Constitutionality of State Property Tax Exemptions for Religious Property." 66 Northwestern University Law Review (March-April 1971), pp. 118-145. Curtiss, W. David. "Tax Exemption of Educational Property in New York." LI I Cornell Law Quarterly (Spring, 1967), pp. 551-68. Dlott, Edward. "Institutional Property Tax Exemptions in Massachusetts," Assessors journal, VII, No. 4 (January 1973), pp. 16-26. Dunham, Allison. "Property Tax Exemptions of Colleges and Universities." Report prepared for the Commission on Financing Higher Education, 1951. Education Commission of the States. Property Assessment and Exemptions: They Need Reform, by Alan C. Stauffer. Denver, 1973. Evans, George I., Jr. "Tax Exemption of Nongovernmental Real Property With Particular Emphasis on Charitable and Religious Institutions." Current Problems and Alternatives in Financ- ing Pennsylvania Governments: 1960-1970. University Park: Pennsylvania State University, Institute of Public Administration, 1962, pp. 69-72. Ferrazzano, Dennis and Margaret C. Stewart, and Roger L. Taylor. "Constitutionality of State Property Tax Exemptions for Religious Property." Northwestern University Law Review (March-April 1971). Field, Stephen R. "Tax Exempt Status of Universities: Impact of Political Activities by Students." 24 7ax Lawyer (Fall, 1970), pp. 157-180. Freeman, Joseph S., Jr. "State Action and Tax Benefits to Private Charitable Organizations." 50 North Carolina Law Review (August 1972), pp. 1132-48. Fremont-Smith, Marion R. "Impact of Tax Reform Act of 1969 on State Supervision of Charities." 8 Harvard Journal on Legislation (May 1971), pp. 537-569. Gannon, T. M. "Baptist Parking Lot Case: Diffenderfer v. Central Baptist Church of Miami." America, Vol. 125 (December 4, 1971), pp. 480-1. 2570 Cunderson, Barry K., and Sampson, William R. "The Church Property Tax Exemption in Kansas." XIX Kansas Law Review (Spring, 1971), p. 612. Helmick, Richard H. "Exemption from Taxation by a State of Church Property. . . ," XXXIX University of Cincinnati Law Review (Summer, 1970). Howard, Vincent K. "Constitutional Law: Tax Exemption and Religious Freedom." LIV Marquette Law Review (Summer, 1971). Illinois Supreme Court Review: Not-for-Profit Corporations and Property Tax Exemption," LXII Northwestern University Law Review. (November-December 1967), pp. 784-87. International Association of Assessing Officers. "Educational, Religious, and Charitable Exemptions." Assessors News Letter (October 1967), pp. 181-83. Kauper, Paul C. "Walz Decision: More on Religion Clauses of First Admendment." 69 Michigan Law Review (December 1970), pp. 179-210. Kelly, Dean M. "The Churches Look at Tax Exemption." Christianity and Crisis (July 21, 1969), pp. 203-5. Kucharsky, D. "Pivotal Parking Lot." Christianity Today (January 7, 1972), p. 42. L.A.L. "Real Property Tax-Non-Prof it Exemption." XV New York Law Forum (Winter, 1969). Larson, Martin A., and C. Stanley Lowell. Priase the Lord for Tax Exemption. Washington, D.C.: Robert B. Luce, Inc., 1969. Church Wealth and Business Income. New York: Philosophical Library, 1965. "You, the Church, and Tax Exemption Wealth." Assessors journal, I, No. 1 (April 1966), pp. 10-16. Lerner, Harry, and Associates. Regulations Governing Tax Exemptions for Nonpublic {Private, Parochial, Denominational) Schools in Forty-Eight States. San Francisco, n.d. Lundquist, John. "The Constitutionality of Church Property Tax Exemptions." XX DePaul Law Review (Autumn, 1970). Lurie, Michael. "Charitable Exemptions From Real Estate Taxes-What Is a Charity." XVII DePaul Law Review (Winter, 1968), pp. 433-38. May, James M. "First Amendment and Church Property Tax Exemptions-Conflict and Com- promise." XXXVII Tennessee Law Review (Summer, 1970). McCann, Thomas J. "Charitable Exemptions: Schools and Colleges." Proceedings of Seventh Annual Conference for Assessing Officers 1960. New Brunswick: Rutgers, The State University, Bureau of Government Research, 1961, pp. 46-47. New Jersey, Commission to Study the Laws of New Jersey Exemption Real Property Held by Religious, Educational, Charitable, and Philanthropic Organizations and Cemeteries from Taxa- tion. Public Hearings: January 22 - May 21, 7969. State House, Trenton, N.J., 1969. (5 Volumes). Report. Trenton, N.J., January 30, 1970. O'Brien, Margaret M. "Should Churches Pay Taxes?" V Nation's Cities (December 1967), pp. 8-10. Olender, Jack W. "Exemption from Taxation of Religious and Charitable Organizations in Pennsylvania." XXI University of Pittsburgh Law Review. (June 1960), pp. 656-76. Pennsylvania Economy League (Eastern Division) and Bureau of Municipal Research (Philadel- phia). "Tax Exemption for Revenue-Producing Property of Charitable Institutions." Citizens' Business, No. 2,346 (October 1967), pp. 1-2. 2571 The Problem of Tax-Exempt Property in Philadelphia: Report No. 2: Revenue- Producing Property of Educational Institutions and Other Charitable Institutions. Philadelphia, 1967. Ralston, Charlotte, "Tax Exempt Status of Church Property." West Virginia Law Review (December-February 1970-1971). Robertson, D. B. Should Churches be Taxed? Philadelphia: Westminster Press, 1968. Roe, William. "Tax Churches:" That Ain't What I Said!" XLV Colorado Municipalities (October 1965), p. 273. Ryan, Thomas. "Tax Exemption for Real Property Owned for Religious Purposes." IL journal of Urban Law (August 1971). Sax, Carl H. and Marcus H. Sloane, III. "Tax Exemption of Church Property. . . ." XXXIX George Washington Law Review (December 1970). Sederstrom, Charles V. "The Exemption of Educational, Charitable, and Religious Institutions in South Dakota." XI South Dakota Law Review (Winter, 1966). Shaffer, Helen R. "Church Tax Exemption." Editorial Research Reports (November 11, 1964), pp. 823-39. Sierk, Carroll H. "State Tax Exemptions of Non-Profit Organizations." 19 Cleveland State Law Review (May 1970), pp. 281-289. Smitherman-, William C. "State Tax Exempt Status of Church Owned Residences for Ministers." XII Baylor Law Review (Summer, 1960), pp. 306-11. Stephens, John Allan. "Taxation -Exemption of Charitable, Religious and Educational Institu- tions from Property Taxes." XII Drake Law Review (December 1962), pp. 87-91. "Supreme Court, 1969 Term -State Tax Exemption for Religious Property." 84 Harvard Law Review (November 1970), pp. 127-133. Taishoff, Howard. "Establishment Dilemma: Exemption of Religiously Used Property." IV Suffolk University Law Review (Winter, 1970). Tanner, Andrew D., The Question of Tax for Churches. New York: National Conference of Christians and Jews, 1963. "Tax Exemptions, Subsidies and Religious Freedom After Walz v. Tax Commission."45 New York University Law Review (October 1970), pp. 876-907. Tucker, R. B., Jr. "Exemption of Church Property From Taxation." IL North Carolina Law Review (February 1971). U.S. News and World Report. "Tax Exemption for Private Schools: What Officials Plan." (August 31, 1970), pp. 70-4. .. "Should Church Property Be Taxed?" (July 10, 1967), pp. 46-47. ,. "Tax Churches? What Supreme Court Says." (May 18, 1970), p. 105. Warren, Alvin C , Jr., and others. "Property Tax Exemptions for Charitable, Educational, Religious and Governmental Institutions in Connecticut." 4 Connecticut Law Review (Fall, 1971), pp. 181-309. Werling, Charles W. "The Granting of Tax Exemptions by States for Religious Properties. . . ." II Loyola University Law journal (Winter, 1971). 2572 Winter, William O. "Tax Exemption of Institutional Property," XXXII Municipal Finance, (February 1960), pp. 143-48. Wolder, Victor R. "Income and Real Estate Tax-Exemption Problems of Churches and Asso- ciations." XL Taxes-The Tax Magazine (September 1967), pp. 613-21. PROBLEMS RELATING T O T A X A T I O N A N D F I N A N C E N E W YORK STATE CONSTITUTIONAL CONVENTION COMMITTEE Digitized by the New York State Library from the Library's collections. Digitized by the New York State Library from the Library's collections. INTRODUCTORY NOTE T H I S volume presents a discussion of twenty major topics in the field of taxation and finance. Only subjects which involved considerations of a constitutional nature were selected. T h e various subjects have been divided into four divisioils: 1. State finances and indebtedness. 2. Local taxation and expenditures. 3. Local indebtedness. 4. Special problems. Wi th respect to each l~roblem, we have presented both its histo1,ical background and the evolution of the principal proposals offered for its solution. Effort was made to state as fairly as possible the arguments for and against all the proposals. Only such arguments as appeared to have a certain degree of validity, however, were stated. Advocacy of any particular proposal was avoided. No recommendations have been advanced. W h a t changes, if any, should be made in the State Consti- tution rest in the discretion of the delegates to the Convention. This report has been prepared by and under the direction of the Sub-committee on Taxation and Finance of the New York State Consti- tutional Convention Committee. T h e Chairman of the General Committee served as member ex officio of each Sub-committee. T h e procedure by which all the studies and reports were prepared and are here published is fully described in the General Introduction in Volume I. v 1- Digitized by the New York State Library from the Library's collections. T h e Committee was particularly fortunate in obtaining the able as- sistance and guidance of Professor Paul Studenski, Professor of Eco- nomics at New York University. Professor Studenski served as Research Director of the Sub-committee and his contribution to this volume has been most valuable. T h e Committee also wishas to express its appreciation to those who so ably assisted the Research Director in the preparation of some of the material: Dr. Edward T. Bullock, Henry Brodie, John A. Bryson, Alvena J. Ellsworth, Leo Fishman, Dr. Richard A. Girard, Samuel McCormick, James S. Satterthwaite and Morton A. Shapiro. CHARLES P O L E T T I , Chairman, N e w York State Constitutional Convention Co~nmittce Digitized by the New York State Library from the Library's collections. CHAPTER X T A X EXEMPTIONS UNDER T H E GENERAL PROPERTY TAX T h e following classes of real property are now exempt from the gen- eral property tax in this State: (1) Real property belonging to the local taxing jurisdiction itself, (2) real property (used for public pur- poses) belonging to other public authorities-the Federal government, the State, the county or other municipal jurisdictions-located in the given taxing jurisdiction, and ( 3 ) real property belonging to charitable, religious, educational and other private institutions deemed to serve a public purpose, and used by such institutions exclusively for the carving out, thereupon, of their specified charitable, religious, educational and other work. Certain features of the existing exemption policies have been criticized by some groups of citizens in this State. Proposals have been made for a modification of these policies either by means of constitutional amend- ments u r by means of statutory action. I t becomes necessary, therefore, to review briefly the history and operation of these policies. Exempt ion of Rea l Proper ty Belonging to die Local Taxing Jurisdiction Itself T h e exemption by taxing jurisdictions of their own properties from their own property tax is as old as the property tax itself. From the earliest of times, taxing authorities have recognized that it would serve no useful purpose for them to tax their own properties, since by so doing they would not be obtaining any revenue. I t is obvious that in taxing its own properties, an authority would merely be transferring its own money (obtained by taxing private citizens) from its general fund to its tax account and from its tax account back again to its general fund. T h e net result of the transaction would be nil. T h e burdens on pri- vate citizens would neither be increased nor decreased thereby. Yet the amount of bookkeeping involved in the transaction would be con- siderable and the accounts of the authority would only be confused, It has, therefore, been recognized from the very outset that, in the interest of administrative simplicity, the taxing jurisdiction should exempt its own property from its own tax. However, it must assess i t so that the value of the exemption will be known. Digitized by the New York State Library from the Library's collections. In accordance with this doctrine, the State of New York exempted its own property from its own property tax when it levied one and provided also for the exemption by the local governments of their own properties from their property taxes. I t stipulated, however, that to enjoy the benefits of such exemption the local properties must be devoted to a "public use." The total amount of property in this State belonging to the taxing jurisdictions themselves and exempted by them from their own property taxes aggregated $4,312,334,273 in 1936 or approximately 66 per cent of the total exempt realty and 17 per cent of the total exempt and non-exempt assessed realty in this State. T h e distribution of this class of exempt property, as between different types of authorities, was as follows : County property. . . . . . . . . . . . . . . . . . . . . . . . . $129,7 13,137 Property of City of New York. ............ 2,112,691,760 Property of cities-other than New York. . . . 1,827,056,754 Town property. . . . . . . . . . . . . . . . . . . . . . . . . . 44,398,293 Villageproperty ......................... 36,469,023 School district property. . . . . . . . . . . . . . . . . . . 162,005,306 Origins of the Policy of Exemption of Real Proper ty Belonging t o Othcr Publ ic Authorities Approximately $340,451,474 of Federal property and $350,000,000 of State property in 1936 was exempt from property taxes imposed by any local authority, and $2,199,642,513 of properties belonging to local authorities was exempt from property taxes levied in the same territory by other taxing jurisdictions. This figure did not include'$2,112,691,760 of property belonging to the City of New York inasmuch as the city llas only one taxing authority. T h e system of exemption from taxation by public authorities of properties belonging to other public authorities is of very old origin. It rests on several considerations. First of all, it has been held that public. property of any kind, whether owned by the Federal government, by the State or by another local agency of government generally serves or benefits the local co~nmunity and should, therefore, be exempted from local taxation. Secondly, a fear has been entertained that if one authority were to tax the property of another, conflicts between authorities would frequently ensue. A temptation would exist for an authority to overtax the property of another and thus to shift upon the shoulders of tlie Digitized by the New York State Library from the Library's collections. taxpayers of that other authority, the burdens properly belonging to its own taxpayers. Taxation by one authority of the property of another means, in the final analysis, taxation of taxpayers by an nuthority not responsible to them. I t is therefore open to grxve abuse. Ry overtaxing the property of another authority, the taxing jurisdiction inay seriously interfere with the capacity of that other authority to perform its duties. T h e possibility of such interference by State and local authorities with Federal activities through overtaxation of Federal properties was recognized very early in the history of our constitutional system. It was realized that such overtaxation of Federal property may readily result in the destruction of the independence of the Federal government. Hence the conlplete exemption of Federal property and instrumentalities from any State and local taxation followed. T h e necessity for a complete immuility of Federal instrumentalities from State and local taxation as a means of protection of our constitutional government, was unequivo- cally expressed in the famous decision of Chief Justice Marshall in the cask of McCulloch V. Maryland. Said the Justice: "That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on one government a power to control the constitutional measures of another, which other, with respect to these very measures, is declared to be supreme over that which exerts the control, are propositions not to be denied." Since that time Federal property has always been considered tax exempt so far as state and local governmental authorities have been concerned, because the ownership of it has been conceived to be part of "the constitutional means employed by the government of the Union to execute its constitutional powers." T h e State could not very well have permitted its local subdivisions to tax its property. I t would have endangered thereby its superior authority and would have created difficultj~ for itself. I t never permitted the local authorities to tax any of its properties until more recent times.= Properties belonging to counties have been exempted from taxation by towns, villages and, later, cities from the earliest of times on grounds very similar to those on which the properties belonging to the Colony and later, the properties belonging to the State were exempted. 1 "It is a general principle that the tax laws of a state refer to private and not to public property," wrote a legal authority in 1898. "The public is never subject to tax laws, and no 'portion of it can be without express statute. No exemption is needed for any public property held as such." Brief of Appellant. Pcoble e r rel. City of clmrterdam v. Hcss (1898) 157 N.Y. 42, 51 N.E. 410. Digitized by the New York State Library from the Library's collections. Change in the State's Policy of Exemptions, in Application t o I ts Own Lande I n 1886, however, the State made some exception from the traditional rule of exemption of State property fro111 local taxation. I t subjected the wild and forest lands comprising its forest preserve to taxation by the local communities in which these lands were situated. I t had begun in 1883 to acquire substantial tracts of such land at the Niagara, in the Adirondacks and in other parts of the State, and constituted them in 1885 (by ch. 283) into a forest preserve. Local communities must have complained that these acquisitions by the State of lands that hitherto had been privately owned, deprived them of tax revenues; that (the communities) were furnishing services to these lands and were entitled to a contribution from the State for the repayment of the costs of these services. Hence, in 1886, the State passed a special act (ch. 280) making these lands taxable, and in 1896 it confirmed this arrangement, in its codification of the T a x Laws. Thus, a new principle was written into the law with a limited application,-the principle that a community in which State property of a certain kind was located was entitled to some contribution from the State towards the defrayment of the costs of its services. This new principle made further headway during the succeeding decades when the State permitted local governments, other than the county, to tax its reforested lands; allowed under the Education Law (sec. 4) and under various special acts, certain school districts to tax its lands located therein (but not the improvements thereon) ; and per- mitted by a special act passed in 1924 (ch. 631) the towns in which the Allegany State Park was located to tax the lands embraced in the park but not the buildings therein. I t was estimated that the taxes aid by the State on its properties to the local governments, under these pro- visions, amounted to $733,470, in 1933. T o produce this sum these properties must have been assessed in the aggregate at $25,000,000 if not more. Change in the Policy of Exemption of Extraterritorial Municipal Proper ty I n 1896 a limited, but very fundamental, departure was made from the existing policy of exemption of municipal property from taxation. I t had reference to municipal properties located outside of municipal boundaries. Cases of such extraterritorial properties were infrequent before the middle of the nineteenth century. They arose at first, in Digitized by the New York State Library from the Library's collections. connection with the construction of waterworks. New York City was one of the first cities to construct waterworks outside its limits. Later similar instances of acquisition and construction by municipalities of properties outside their limits occurred in connection with the develop- ment of large sewerage works, municipal parks and airports. At first, these extraterritorial properties were given the same exemption from local taxation as the intraterritorial properties. Soon, however, objections against the grant of exemption to such properties were raised by the communities in which these extraterritorial properties were located. Their objections were based on the fact that various services which cost money had to be rendered by them to these properties. I t was held by these communities to be unfair that they should bear the costs of servicing properties which were benefiting other jurisdictions. Emphasis was laid on the fact that these properties were producing revenue for other jurisdictions and were in the nature of business undertakings. The fairness of this complaint was apparently admitted by the Legislature, for in 1896, in enacting the Revised Statutes, the Legislature inserted therein a clause subjecting all municipal property located outside the boundaries of municipalities to local taxation. This act constituted an even more significant departure from the State's traditional policy of exemption of all public property from taxation, than were the acts subjecting certain State lands to such taxation, as described above. The theory embodied in the new ~ o l i c y was thus expressed by the Court of Appeals of this State in 1898 (People ex rel. City of Amsterdam v. Wess (1898)) 157 N. Y. 42, 51 N. E. 410) : "The assessment sought to be reviewed was laid under the pro- visions of chapter 908 of the Laws of 1896, known as 'The T a x Law,' which took effect June 15 of that year. T h e property assessed is the water works system of the relator, the city of Amster- dam, located in t'he town of Perth, consisting of water pipe, conduit lines and about two acres of land used for dams. "It is conceded that prior to this statute the property assessed was not liable to taxation, as it was held by a municipal corpora- tion for public use. This exemption rested on no statutory pro- vision, but upon a principle of the common law supported by numerous cases in England and this country, "We are of opinion the Tax Law of 1896 has changed this ru!e and that property held by a municipal corporation for public use, but located beyond the boundaries of the municipality is subject to general taxation. Digitized by the New York State Library from the Library's collections. "The history of section four of the present law is instructive and discloses the policy of the Legislature. T h e revisers submitted to the Legislature the T a x Law with section four, subdivision three, reading as follows as to exemptions: 'Property of the mu- nicipal corporations of the state held for public use.' This was merely a codification of the rule of the common law and evi- dences the views of the revisers. They proposed to exempt all property held by municipal corporations for public use witbout regard to its location. T h e Legislature, after due consideration, added these words to those last quoted: 'except the portion of such property not within the corporation.' (Report of Commissioners of Statutory Revision, 1896, p. 16.) I t thus appears the Legisla- ture was of opinion that public policy required if a municipality saw fit to acquire valuable property within the boundaries of another municipality i t was only just to the latter that the former should pay its share of the local taxes. I t is only within recent years that municipal corporations have foulid i t necessary generally to acquire title to property beyond their boundaries. T h e rapid growth of the great cities of the State had made the question of an adequate supply of wholesome water of paramount import- ance, and all the larger cities have been forced to acquire extensive property rights in the natural water supply of adjacent territory. "In many instances cities have condemned or purchased a large amount of real estate within the limits of some neighboring munici- pality in order to secure a water supply, and unless liable to local taxation thereon the taxpayers owning the remaining real estate are subjected to greatly-increased tax burdens. "As between these taxpayers and the municipality receiving all the benefits under this transaction, natural justice suggests that the latter should be assesscd for the purposes of taxation on the property so acquired outside of its corporate limits. T h e letter of the statute and the policy upon which it is founded lead to this conclusion." Difficulties Produced by Taxation of ~xtraterritorial Properties But the new policy of taxability of extraterritorial municipal properties began soon to produce difficulties. Now conlplaints began to come from municipalities owning such properties that they were being overassessed ar!d overtaxed by the jurisdictions in which these properties happened to be located. Movements were instituted to secure an exemption of such properties from local taxation. Thus, in 1924, section 4 of the 1 Digitized by the New York State Library from the Library's collections. T a x Law was amended to exempt "real property of a municipal corpora- tion not within the corporation which under agreement with the cospora- tion is used for a public park, public aviation field or highway." I n 1935, article 14-C of the General Municipal Law was enacted, section 411 of which exempted from taxation the property of any revenue producing undertaking owned by a municipality outside its boundaries subject to certain stipulatio~is. T h e undertaking had to be completely self-support- ing to qualify for the exemption under the provisioris of this law.= T h e law declared: "It is hereby declared to be the policy of this State that any municipality acquiring, constructing, reconstructing, improving, bettering or expanding an undertaking pursuant to this article shall manage such undertaking in the most efficient manner consistent with sound economy and public advantage to the end that the services of the undertaking shall be furnished at the lowest possible cost. N o municipality shall operate sucli undertaking primarily as a source of revenue to the municipality but shall operate such under- taking for the promotion of the welfare and for the improvement of the health, safety, comfort, and convenience of the inhabitants of the muni~ipali ty."~ T h e status of extraterritorial municipal undertakings as regards tax - - exemption is rather in a confused state at present. How many of such properties will be able to secure exemption under these new amendments of the T a x Law, and of the General Municipal Law is not certain. Recently, the city of Albany attempted to obtain the benefit of the new provision of the General Municipal Law for its properties located in the town of Bethlehem. It was opposed in this attempt by the town. T h e court ruled against the city, basing its decision on the fact that the city was unable to prove, in tlie court's opinion, that the property in question met the stipulations of the law. 2General Municipal Law, Art. 14.C, scc. 401; (a) Ufidcrtahiltg includes causeways, tunnels, viaducts, bridges and other crossings; highways, parkways, airports, docks, picrs and wharves; systems, plants, worlcs, instrumentalities and properties used or useful in connection with the obtaining of a water supply and the collection, treatment and disposal of water for public and private use; in connection with the collection, treatment and disposal of sewage waste and storm watcr; together wit11 all parts of any such under- taking and all agr~urtennnccs thereto including lands, easements, rights of way, contract rights, franchises, approaches, connections, dams, reservoirs, sewage disposal plants, intercepting sewers, trunk connecting and other sewer and watcr mains, filtration works, pumping stations and equipment. (b) Mucticipality means county, town, city or villnge. See. 411. Undntokiczg and borrds eSefnpt f+o,jc taxatioct. So long as a municinality shall own any undertaking, the properly and revenue of such undertaking shall be exempt from taxation. Bonds issued under this article and the income therefrom shall be exempt froin taxation, except transfer and estatc taxes. 'General Municipal Law, Art. 14-C, sec. 402. Declaration of policy. Digitized by the New York State Library from the Library's collections. There exists, therefore, a t this moment, a conflict of opinion between municipalities owning property outside their boundaries, and the towns in which such properties are located, as to whether such properties should be exempt from taxation. This conflict could be readily resolved by the subjection of these properties to taxation with a proviso, however, that the assessment of such properties should be made, not by town assessors who may obviously be prejudiced, but by State assessors who would have no bias in the case. T h e establishment of such a State assess- ment, however, is impossible under the present provisions of the Consti- tution. T h e section of the Constitution which stands in the way of such a change is the one which preserves the right of the people to elect all officers elected by them prior to the adoption of the Constitution. T o w n assessors belong to this class. As explained in another chapter, an amendment to the Constitution would be required to permit a State assessment of any property heretofore assessed by town assessors. Agitation in Favor of Taxation of All State a n d Local Propert ies Except Those Owned by the Taxing Authorities Themselves T h e complaints by the n~unicipalities, and especially towns, against the exemption of properties bclonging to other public authorities, located within their boundaries, have been by no means limited to the exemption of State lands, or the exemption of extraterritorial municipal propertics referred to above. Complaints also have been made against the exemp- tion of State and county hospitals, and other State and county institu- tions. T h e New York State Commission for the Revision of the T a x Laws, recently said with regard to this principle that "those who receive the benefits should pay the tax, and that i t is thus unfair that property which serves the citizens of one govern- mental unit should receive a subsidy in the form of a tax exemption from a different group of citizens in a different unit. "It is obvious that if this principle were carried to its logical conclusion no governmental unit would excmpt any public property except its own from taxation, and that this is in fact the only way to secure an entirely accurate distribution of the tax burden. Further consideration will show, however, that in many cases the benefits of the presence of the property in question will morc than outweigh this indirect subsidy. An important factor in determining the extent of the subsidy is the amount and kind of local public services required by the p r~pe r ty . "~ 'Leg. Doc. (1935) No. 62, pp. 40-41. Digitized by the New York State Library from the Library's collections. Recent investigations have disclosed, according to the commission, that State and county institutions, in most instances, conferred substantial benefits on the local communities in which they were located. Nonethe- less it is possible that the fairest solution of the problem would consist in taxing all State and local properties, subject, however, to a State assessment of them, pursuant to such an amendment to the Constitution as mentioned above. Exemption of Certain Types of Private Property from Taxation: T h e Origin of tlie Policy T h e public policy of the State of New York, like that of all American states, favors the exemption from taxation of institutions which are operated in the interest of the public welfare and not for a profit, and which are supported wholly or in part, by public subscriptions, private gifts, or endowments. In the State of New York the exemption from taxation is extended to real estate of such institutions when used exclusively for their corporate purposes and in a few instances, also, where not so used. T h e exclusive use of such property for such purposes is usually the condition upon which exemption is predicated. The State also exempts such corporations from income taxes. I t exempts devises and bequests to them from estate taxes. I t permits individual donors to deduct gifts to such institutions from net income subjcct to taxation. T h e city has power to exempt these institutions from special assessments and water rates. T h e exemption from taxation of such institutions supported by dona- tions and not operated for a profit is an atlcient practice, and is deep rooted in the American poIitica1 and socia1 system. As legal authority puts it, "The principle has been accepted as axiomatic that private prop- erty necessary to the essential support of government ought not to be the subject of taxation. This principle has been inseparably interwoven with the structure of all State governments and the habits and convictions of our people. I t is based primarily on the theory of the general benefit resulting from an increase of religious, educational or charitable uses. Beyond that, it is not an act of grace on the part of the states; it stands squarely on State interest." T h e soundness of that principle is asserted in a long line of court decisions. In Matter of Huntington ( 1 6 8 N . Y. 399) the court said: "To exempt their property-usually the gifts of 8 S a x , John Godfrey, Charitable Ezetnjtion from Taxation in Now York State on Real omd Personal Property. New Yorlc: Lincoln Engraving and Printing Corporation, 1933, PP. 7, 8. Digitized by the New York State Library from the Library's collections. the benevolent-from the burdens of taxation is scarcely less the duty than the privilege of the enlightened legislator." ' William D. Guthrie, eminent constitutional authority, in a memo- randum filed with the Constiti~tional Convention of 1915, ~ o i n t e d out that the basis for the exemption froin taxation of the institutions under consideration, is that "they render an cssel~tial public service, and that they tend to advance the common welfare, peace and order of the community." "The churches have been erected and are maintained at great expense wholly by the voluntary contributions of those who attend or support them. T h e other charitable and educational institutions render a service which, in great measure, would otherwise have to be rendered by the State itself, and each institution lessens the burden which would have to be borne entirely by the comn~unity a t large and discharged by taxation." "It can readily be demonstrated,'' he con- tinues, "that the actual cost and value of the services rendered to the public by the privatc, charitable and religious institutions, and the saving thereby effected to the budget or taxpayers of states and cities, greatly exceed the aggregate of all exemptions granted or other allowances and payments made to them." President Butler of Columbia University in a recent statement expounded the philosophy of exemptio~ls of private institutions serving educational and benevolent purposes. Mr . Butler pointed out the grave handicaps under which these institutions are workiilg nowadays as a result of the imposition by the Federal and State governments of heavy taxes on those sources from which they derive their main support. Mr . Butler said:7 "There are various types of social, economic and political revolu- tion. Not all of them are achieved by force. T h e most subtle type of revolution which confronts American democracy today is that which is easily and silently possible through taxation. I t so happens that taxation is one of the functions which a free people have entrusted to their government, of course with the expectation that - it would be a function exercised in accordance with the fundamental principles on which the nation itself is organized. T h e most fundamental and far-reaching of these principles is the distinction "See, also: Cooley, Law of Tasatioa sec. 724; Tcinpk Grovo Setnktary v. Cmmer, 98 N . Y . 121, 126; PeoPlo c.v re!. Serrrinary v. Barber, 42 Hun 27, aff'd 106 N. Y. 669; Matter of Will of Vassar, 127 N . P. 1, 16; Aq~ikerst College v. Ritclr, 151 N . Y . 252, 334; Peoplc v. Cmii:issioircr, 6 Hun 109, 112, 3 ; PeopIe v. Reilly, 85 App. Div. 71, 79; St. Barbara's Roma* Catholic Chlrrck v. The City, 243 App. Div. 371, 373, 4. 7Columbia University: Report of thc President of Columbia University for the year 1936, pp. 18-21. Digitized by the New York State Library from the Library's collections. between the field of Govern~llent and the field of Liberty. The former is definitely described and delimited it1 formal and written terms, and the machinery for its exercise, as well as that for its supervision and enforcement, is provided in a written constitution. T h e field of Liberty, on the other hand, is unlimited save by the powers definitely entrusted to Govern~nent. In the field of Liberty it is, and always has been, characteristic of the American people to co-operate in a variety of ways to establish and to maintain insti- tutions for the public service in the field of philanthropy, of public health, of the arts and sciences and of education in the broadest possible sense of that word. Undertakings of this kind in the field of Liberty, although not official as would be the case were they maintained by Government, are nevertheless public in every possible meaning of that word. Such institutions and undertakings are maintained for the public by the benefactions of those individual citizens who are moved by generous impulse to give of their gains and their savings for the public welfare and the advancement of the public good. "All this great variety of public service in the field of Liberty has been undertaken, and can only continue to exist, because of personal benefactions. If, therefore, Government undertakes, in the exercise of its duly granted powers, to adopt and to enforce a scheme of taxation which makes these benefactions for the public service in the field of Liberty impossible, then Government is attacking the public interest and the public service at their very foundation. Neither Communism nor Fascism could do more. I t is shutting its eyes to the fact that what is public is infinitely larger and more important than what is official, and that the public interest itself is served through private benefaction in hundreds of ways which Government could not successfully imitate if it w o ~ ~ l d . I t is estimated that the monetary value of the various undertakings for public service in the United States that have been brought into existence in the field of Liberty is many hundreds of millions, and that the amount annually given, under normal economic conditions, for the support of these public service undertakings by individual benefaction reaches more than half a billion dollars. "As a general rule Government recognizes, as public opinion should always compel it to do, the public service character of these undertakings and institutioils by exempting from taxation the physical properties which they occupy in order to carry on their work. I t should also be required to exempt from taxation the properties which they hold for investment when the income from X 8 Digitized by the New York State Library from the Library's collections. such investments is applied to the public service. I t would be just as reasonable to tax a. courtl~ouse, a city hall or a public park as to tax the property of an institution established in the field of Liberty to serve the public in any one of the ways which are here described. ''Owing to the uninstructed state of public opinion on this funda- mental subject, it is of highest importance that it be everywhere emphasized at the present time. Should this not be the case, the American people may one day wake up to find that their most respected, most beloved and most successful institutio~is of public service in the field of Liberty have been either cripplec! 3r destroyed, and that they must look to the halting, imperfect and often incoxpe- tent hand of Government to undertake in wretched fastlion tlle tasks which were once being dealt with so well. When the people are being co~lstantly exhorted to open their eyes to the possibility of obvious political revolution with all its attendant disasters. they should not be permitted to overlook the possibility of a quiet but per- sistent, if unseen, revolution against their highest interests and their best service through a wholly inlproper use of the power of tax a t' lon. "All moileys given or bequeathed for public service in the field of Liberty lllust be exempted from taxation of any kind-whether Federal, state or local. Let moneys retained for personal, for family or for other private uses be taxed if need be, but not those to which the public n ~ u s t look for much that is best in its national life." Inequalities i n Tax Exemptions Which Resulted f r o m Special Legislation P r io r t o 1896 During the colonial period and the succeeding hundred or more years, until 1896, exemptioils were granted very largely by means of special laws naming the particular corporations intended to be benefited. General tax statutes such as revised statutes of 1801, 1823 and 1828 also contained exemptions of certain types of institutions. T h e list of the exemptions included in these statutes, however, was not all-inclusive, and the exemptions granted under them were often not as complete as were those granted by means of special T h e practice of granting exemptions by means of special laws resulted in great inequalities in the exemptions enjoyed by various corporations. In 1889, the Legislature appointed a Commission for the Revision of the Statutes of the State. There had been no revision of these statutes since 1828. One of the subjects to which the commission had 8 Saxe, bop. cit., pp. 14-15. Digitized by the New York State Library from the Library's collections. to give considerable attention was that of tax exemption. Speaking of the condition of the law on tax exemption at that time, the Court of Appeals said, some years later in a decision of an important tax exemption case: ' "The subject of taxation has been a great embarrass- ment to legislative bodies throughout the history of the world. Special interests clash with general interests and seek relief, wholly or in part, from the public burden which is essential to the protection of property and the preservation of order. Claims for exemption multiply, and when the Legislature yields to the pressure of special interests, the pre- cedent breeds a multitude of special statutes and brings confusion into the law. Such was the situation that confronted the Legislature of 1889, which set out to meet the difficulty by an act authorizing the appointment of commissioners to revise and consolidate the statutes relating to different subjects, and, among them, to 'the assessment and collection of taxes and exemption of property from taxation throughout the State.' " The Codification of 1896 Correcting Inequalities Existing a t the T ime T h e Commissioners of Statutory Revision codified and revised the esisting tax statutes and wrote a new tax law, which the Legislature enacted in 1596 (ch. 908) as a part of the General Laws (ch. 24). Section 4 of that tax law covered the subject of exemptions. I t em- braced in a few concise and fu~ldainental provisions all the exemptions existing a t the time, and i t laid down the important principle, referred to above, that to qualify for the exemption, the institution must be organized exclusively for one or the other of the enumerated purposrs and the property of the institutions must be "used exclusively for thc carrying out thereupon one or more such purposes." These purposes were defined in the law as follows: "Moral or mental improvement of men or women, or (for) religious, bible, tract, charitable, benevolent, missionary, hospital, infirmary, educational, scientific, literary, library, patriotic, historical or cemetery purposes, or (for) the enforcement of laws relating to children or animals." lo In addition to these general exemptions the section also contained several special exemptions apply- ing to properties belonging to associations of volunteer firemen, dwelling houses of clergymen, and properties of agricultural societies uskd for exhibition grounds. 0 Matter of II~cnthbgtoit, 168 N. Y . 399, 405; Pratt Igrstit~~te o f City of New York, 183 N. Y. 151, 155-6 cited from Saxe, ofi. cit. pp. 16-17, loch. 908 of the Laws of 1896, sec. 4. Digitized by the New York State Library from the Library's collections. T h e codificatioll of 1896 "was so thoroughgoing that the Court of Appeals held that its effect was to repeal all special exemption acts by inzplication, except where a transfer of property to corporations claiming exemptions was induced by promise of State exemption." l1 T h e codi- fication of 1896 effectively corrected the inequalities which had crept into the law during the preceding century or more, under the system of granting exemptio~ls by special legislation. Incorporation in t h e Constitution in 1901 of a Prohibit ion of Grants of Exemption by Means of Private o r Local Bills The law was not assured, however, against the appearance of new legal inequalities so long as it was still possible for the Legislature to grant exemptions by means of special laws. A move was therefore made a few years after the enactment of this above codification, to prevent an eventuality of this sort. A concurrent resolution was introduced in the Legislature by Assemblyman Merton S. Lewis in 1900, providing for an amendment to the Constitution to the effect that "the Legislature may not pass a private or local bill . . . granting to any person, association, firin or corporation an exemption from taxation on real or personal property." T h e concurrent resolution was passed and the proposed amendment was submitted to the people and was ratified by them at the election of 1901. I t became a part of article 111, section 18. Addition of New Classes of Property t o t h e List oE t h e Exempts T h e constitutional amendment of 1901 did not prohibit the Legisla- ture from granting new exemptions. I t merely restricted it to granting them by general laws. T h e Legislature continued casually to receive applications from various private groups for the inclusion of them in the list of institutions or organizations entitled to exemption. I n the forty pears that have elapsed since 1896, however, only two new classes of exemptioils (thosc for public playgrouilds and bar associations) have been incorporated in the general provisions of section 4, but ten or more new classes have been added to the special provisions of this section. These additions have been as follows: L. 1903, ch. 199, adding present subsection 12 exempting property of any county mcdical society within any city of the first class. 11 Saxe, op. cit., p. 17. Pctcvron V. Mort i? lo, 210 N. Y. 412, 416-7. Digitized by the New York State Library from the Library's collections. L. 1907, ch. 478, adding subsection 14 of the present law, permitting any city of the first class to exempt property belong- ing to all academy of music. L. 1920, ch. 949, adding section 5 to the present law, permitting "the legislative body of a county or the legislative body of a city . . . 01- the governing board of a town, village or school dis- ti-ict" to exempt until January 1, 1932, any new buildings therein planned for dwelling purposes esclusively except hotels con~pleted since April 1, 1930, or the construction of which is comlnenced before April 1, 1925. L. 1920, ch. 413, adding in subsection 5, the words "bonus or insurance granted by the United States" after the words "property purchased with the proceeds of a pension" (i.e., extending the exemption to property purchased with soldiersJ bonus and ad- justed certificate money). L. 1923, ch. 679, adding present subsectioll 15 exempting the real property of a corporation, association or post composed of Veterans of the Grand Army of the Republic, Veterans of Foreign Wars, the United Spanish W a r Veterans, the American Legion and any otlzer corfioration or associatioiz of veterans of the a/-my 07- navy o f tlze Un i t ed States in any war, actually alld exclusively used and occupied by such corporation, associatio~l or post. L. 1927, ch. 565, adding the words "bar association" after the word "literary" in the aforementioned clause of subsection 7 (present subsection 6 ) . L? 1929, ch. 382, adding the words "public playground" in the same subsection. L. 1933, ch. 396, adding present subsection 7-a exempting prop- erty of "a corporation which, pursuant to its charter, maintains a fire patrol and salvage corps for the public benefit" and used by such a corporation exclusively for thc purposes of such fire patrol and salvage corps. L. 1936, ch. 474, authorizing any city having a population of one million inhabitants or lllore until July 1, 1937 "to adopt and amend local laws PI-oviding that alterations and improve- ments to existent buildings except in so far as the gross cubic area of the building is increased thereby, shall be exempt from taxation for local purposes during construction and upon com- pletion for a period not to exceed five years after completion, pro- vided that construction was started after the execution date of this act and colnpleted before October 1, 1938, and further provided that in no case shall such alterations and improven~ents Digitized by the New York State Library from the Library's collections. be exempted to an extent greater in valuation than the valuation of the previously existing building appearing on the assessment rolls on the first day of October next preceding the commence- ment of said improvement." L. 1936 ch. 694, in adding, by specific description, in subsection 6, the Brooklyn Academy of Music. Several laws amending section 4 of the T a x L a w have been passed since 1896, for the benefit of hospitals and fraternal organizations, mak- ing exceptions for them from the rule that to enjoy exemption the property must be used exclusively for the corporate purposes of the institutions. Properties which produced income for these institutions and organizations but were not used by them directly for the accom- plishment of their corporate purposes were likewise given exemptions. These several additions to the law have not materially altered its fundamental principles. O n the whole the policy of 1896 has stood firm. T h e r e has been some complaint from time to time that the burdens of taxation were high in part because of exemptions from taxation granted to the semi-public institutions. T h e subject of tax exemption was considered at the Constitutional Coilvention of 1915, first, by a com- mittee, but no recommendation thereon was made by the committee. Later the subject was debated before the convention. T w o amendments of a remedial nature were proposed. T h e first, which was more extreme, provided that "no future tax exemptions shall be granted on any seal estate not owned by the Federal, State, county or municipal governments, except that places of religious worship with grounds on which they stand and the necessary approaches thereto shall be free from taxation." M r . Nixon, its introducer, had' originally intended to propose a measure prohibiting all private exemptions, but pressure from religious groups had forced him to abandon this idea. T h e second suggestion merely provided that "hereafter no exemption shall be granted except by general l aw and by the affirmative vote of two-thirds of the members of each house." T h e discussion of these two proposals was neither particularly ex- ' tensive nor informative. T h e Board of Trustees of the Sheltering Arms of New York City, a charitable institution, submitted a memorial declar- I i ing that private charity had always received State encouragement and , that to deny i t this encouragement would merely necessitate the com- I plete taking over by public authority of the function now performed by / private charity, and that the resultant increase in the costs to the Digitized by the New York State Library from the Library's collections. authority would greatly exceed the costs of exemption. M r . Nixon made a lengthy speech opposing any extension of exemptions but his. Mr . Nixon's proposal was not adopted by the convention. T h e other pro- posal was adopted but since the Constitution proposed by the convention was not ratified by the people, the proposal never took effect. Recent Studies a n d Proposals During the succeeding years several studies of the subject of tax exemption have been made by official agencies (see Appendix B for the recommendations of these agencies). T h e Committee on Taxation and Retrenchment, in a report made in 1927, referred to the "antiquityJJ and "vigorous survival" of "this important public policy" the general outlines of which "have stood unaltered from the earliest days of our organized State government."12 After reviewing the arguments for and against tax exemption, i t recommended to the Legislature that there should be "no further extension of real estate exemption," or "if this proves im- possible, . . . that any exemption granted be subject to local opinion and that i t be for a limited term of years." I n 1932, the Committee on the Revision of the T a x Laws, in a study of the same subject, went even further in the direction of a modification of the existing exemption policies of the State. I t recommended that "all land acquired hereafter by ally private or public body (except the United States) shall not be exempt but shall be subject to taxation" and moreover, that any future increase in the value of land now exempt should be taxed in the future.ls I n February, 1935, in a new study of the subject, the same commission confirmed these recommendations. I t concluded its report on the ques- tion with the following observation : I4 "Suggestions for solving the problem of tax exempt real property have been many and various. Since exemption is not so much a present as a future menace to the tax base, most of them are intended to stunt the growth of exempt property either by prohibiting futurc exemptions entirely or by making them subject to local option or to a time limitation . . . T h e variety of proposals at least shows a healthy public interest in the problem-an interest which must, however, grow even healthier if a statesmanlike solution is to be found before further difficulties develop and passion and prejudice arise to warp the decisions." ==Leg. Doc. (1927) No. 86. IaLeg. Doc. (1932) No. 77, p. 21. 1"eg.. Doc. (1935) No. 62, pp. 57-58. Digitized by the New York State Library from the Library's collections. I n November, 1935, in N e w York City a n Advisory Committee appointed by the Aldermanic President 13. S. Deutsch, submitted a com- prehcnsive report on T a x Exemption and T a x Inequalities calling for a sweeping readjustment and restudy of the entire exemption policy of the State as applicable to the city of N e w York. I ts major proposals were : (1) T h e city should have the power either to limit the amount of exemption or to have a voice in the choice of a site for any build- ing or activity for which exemption will be askcd. (2) N o tax exemption sliould be granted to any group unless that group be granted a certificate of convenience and necessity by the Board of Estimatc and Apportionment. ( 3 ) T h e city should be granted the power to review, revoke, rede- termine or limit all tax exemptions a t stated times and under conditions which will prevent abuse of such powers. T h e committee drafted bills embodying these proposals, but these bills were never introduced in the Legislature. T h e agitation of the past few years in favor of some restriction on future exemptions from taxation of private properties has so far produced no results. T h e list of private properties exempt from taxation is still growing. Since 1925, indced, the State has added to the list of exempt private real estate, propcrty owned by Catholic and Jewish war veterans associations, property purchased with soldiers' bonus money up to $5,000, property owned by volunteer fire patrol corps, and a few other types of real property. Dur ing the years 1930-37, more than forty exemption bills have been presented to the Legislature, nine of which. became law. Only four bills provided for a restriction of exen~ption and only one of these aras passed.15 T h e T a x L a w lists now inore than twenty- five classcs of private property in the exempt class, and this list may be expanded at any time.1° T h i s increased pressure for legislation extending the list of propcrties exempt from the Property T a x has caused considerable apprehension among some of the municipal authorities in this State. I n the opinion of some municipal oficials the only way to prevent such legislation from being passed is to write into the Constitution a prohibition on the Legislature against adding new classes of private property to the existing lists of the exempts. , l6 See Appendix C for the complete list of exempt properties in New York State. ja See Appendix D for the list of bills presented to the Legislature in this period. Digitized by the New York State Library from the Library's collections. I n view of the existing agitation for a limitation of the exeinption of private properties, i t becomes necessary briefly to re-examine the entire subject of private tax exemption. The Present Extent of Private Exerllpt Property in the State T h e total amount of private exempt property in this State aggregated $1,496,031,881 in 1934, or approximately 23 per cent of all exempt property and 5.8 pcr cent of all exempt and non-exempt assessed property in this State.17 I t is claimed by some authorities that these figures greatly exaggerate the importance of private exempt propertics in this State. I t is said that land embraced in these exempt properties is generally overassessed inas- much as the institutions, being exempt froln taxation, feel no need to protest against an overassessrnent of their land. T h e New York State T a x Commission is rather noncommittal on this subject. I t says: "We are unable to state whether the valuations put upon the exempt property are better or worse than the valuatio~l put upon the taxable A t the same time the commission observes:1° "When tax maps are set up it is frequently found that there have, been various taxable properties omitted. I n the case of exempt property the liability of omission may be much greater." T h i s statement refers to both private and public exempt property. T h e exempt private properties in this Statc were distributed according to type, in 1936 as Religious. ............................... ........... Moral and mental improvement. ...... Educational - cl~nritatrle - liospitals. Fraternal and benevolent.. ................ Cemetery.. .............................. ... I'roperty purchased with pcneion money. . Miscellaneous. ........................... Amount (In thousands) T h e volume of exempt privatc property, Iiowever, has not increased during the past twenty years any faster than the volunle of total 17 Annual Report of the N c w York State T a x Commission 1934, Tables 19 an11 31. Is Ibidem, p. 169. ID Ibidem. S o ~ ~ r c e : Annual Repnrt of the State Tax Comnlission 1936. Legislalivc D o c ~ ~ o i c ~ ~ t (1937) N o . 11, pp. 159-75. Percentage of private exempt property f exempt property Per cent of total exempt and non- exempt assessed property Digitized by the New York State Library from the Library's collections. assessed exempt and non-exempt realty in this State. I n 1915 private exempt property amounted to 5.8 per cent of the total assessed realty in the State. I n 1936, i t still amounted to approximately the same per centum. Certain fluctuations in this per centum rate had taken place during the intervening period. I n 1920 the ratio dropped to 4.6 per cent. Next, with the grant of an exemption in the city of N e w York on new residential buildings for a period of ten years, the ratio of private exempt property to total assessed valuation rose a t one time (1925) to 8.8 per cent, includiog such residential exemptions. W i t h the termination of this exemption, however, and the transfer of some $5800,000,000 or more of residential realty in N e w York City from the exempt to the non-exempt list, in 1931 the per cent ratio dropped that year from 8.3 to 5.1. T w o years later, in 1933, i t was back at the point a t which it stood in 1915, namely at 5.8 per cent. I t is seen, therefore, that the increase in the volume of private exempt property during the past twenty or more years has merely kept pace with the increase in the total volume of assessed realty. Exemption of Religious Property Real property belonging to a corporation or association organized exclusively for religious, bible, tract, or missionary purposes, or for the moral or mental improvement of men or women, as stated, and used exclusively in carrying out thereupon these purposes, is exempt from taxation. "The theory underlying all these exemptions," says the N e w York State Commission for the Revision of the T a x Laws, "is that of desirable public purpose." 21 I n early colonial days when the church and the state were closely bound together, the church was granted exemption as a matter of course. I t was the duty of the church in those days to relieve the state of rnuch of its charitable burden and to assure public order by its teachings of morality and personal conduct. Here then was an arm of government considered by many to be as important as some of the other administrative agencies more generally connected with the public authority, and, as such, i t was granted all of the privileges and immunities commonly granted these T h e adoption of the Federal and State Constitutions guaranteeing religious freedom and giving formal assurance of separation between the Church and the State in the United States and every state therein has "Leg. Doc. (1935) No. 62, p. 44. " Philip Adler, Historicnl Origin of the E.ce~lzptio~t frolia Ta.vation of Charitable Insti. tutiolrs. (Published hy Westcliesler Chamber of Colnmerce, Wliite Plains, N. Y. 1922), p. 77. Digitized by the New York State Library from the Library's collections. TAXATION AND FINANCE 213 been made the basis of argument that all historical ground for the exemption from taxation of religious institutions was swept away by these constitutional provisions. But the exemption appears to rest on broader grounds. There was no alteration in the practice following the adoption of these constitutions. T h e need for the moral teaching and charitable efforts of the church was still felt. T h e old practice of exemption was so entirely in accord with public sentiment that it uni- versally prevailed. T h e govcrnnlent thereafter continued to aid the work of the church by means of tax exemption, and the church, through its teachings of morality and personal conduct, has contributed and contributes to public order and the observance of the law. I t is not necessary to defend the exemption of its property upon its appeal to public sentiment. T h e chief concern of the State is public order.23 T o these basic reasons for the continuance of the policy of exempting religious properties from taxation are sometimes added the reasons that (1 ) churches and the surrounding open spaces belonging to them add beauty and dignity to a neighborhood, promote better utilization of the surrounding land and increase the value of the adjoining properties, thus reducing the tax rates of small property owners in the other parts of the locality; that (2 ) the church buildings cannot be used for any other purposes than those carried on in them by the church itself and have, therefore, little, if any commercial value; and that (3 ) the churches are generally poor and would be colnpelled to close their doors and discontinue their worthy services to their local communities, if they were subjected to taxation. T h e consequent losses to the communities ' would be immeasurable. T h e total volume of exempt religious property in the State, exclusive of that classified under the title of "moral and mental in 1936, was $564,078,000, or approximately 37.5 per cent of all private exempt realty. T h e distribution of this religious property as between different clhsses was as follows: Buildings and grounds used as places for religious worship $553,654,000 Property of religious corporations occupied by officiating clergymen ..................................... 8,060,380 Property owned by clergymen.. ..................... 2,363,930 ""The advancement of religion has ever been held to be one of the principal divisions of cliaritahle trusts." Mo&e v. Bishop of D+~rkagia, 10 Ves. Jr. 522, 531; Iftcotnc Tax Corn. v. Pegnsel (1891), A.C. 531, 583: Matter o f Dqtrbvow, 245 N. Y . 469, 474. The exempt property classified under the title "moral and mental improvement" amounted in 1936 to $69,976,960. Prior to that year this class of exempt property was included in the Tax Commission's report under the title of "Religious Property." Digitized by the New York State Library from the Library's collections. Exelliptioli of P i i v a t e Educa t iona l Proper t i es I n c l u d i a g Scientific a n d Library Proper t ies Properties of private educational institutions of a non-profit-making nature are exempt from taxation in this State, as already stated, if these properties are used exclusively for the carrying on upon them of educational purposes. These properties may be divided roughly into three classes: ( 1 ) Properties of privately endowed universities and other institutions of higher learning; ( 2 ) properties of privately supported elementary and secondary schools; and ( 3 ) properties of libraries, museums, and other scientific organizations. T h e first are largest in amount, aggregating approximately $200,000,000.25 T h e second, repre- senting properties of elementary and secondary schools aggregated in 1934, $121,000,000. T h e third representing libraries, museums and other scientific organizations aggregated $78,000,000. Educational institutions have always, since the earliest colonial times, becen recognized in this country as deserving exemption. T h e exemption of their properties ffom taxation was founded on the recognition of the great public importance of education. At first, exemption was granted only to institutions of higher learning. Elementary or secondary schools received the benefits of exemption only when they were maintained by religious or philanthropic institutions. Gradually, the policy of exemp- tion was extended to all educational institutions. T h e need for the continuance of the policy of exemption of proper- ties of privately endowed institutions of higher learning in modern times has thus been stated recently by M r . Henry L. S t i m s ~ n : ~ ~ "Such institutions occupy a peculiarly important position and perform a peculiarly important function in this country. Owing probably to the rapidity of American growth in wealth as a new and pioneer country and the consequent genel:osity of our men of wealth, we probably have had a larger percentage of privately endowed schools and colleges and other educational institutions in this country than anywhere else. From the beginning of our history they have occupied a dominant position in our education arid in the spread of American ideas of education, culture, and political thought. Public education was confined to elementary 26Report of N. Y. State Tax Commission for 1936 shows the aggregate value of exempt properties of universities, colleges, and professional schools other than State Normal Schools to be $220,179,731. This figure includes, however, properties of State colleges (other than normal schcols) and of municipal colleges. 20Brom a letter written to the Sub-committee on Taxation and Finance of the State Constitrttional Convention Committee, Janua-ry 17, 1938. Digitized by the New York State Library from the Library's collections. cducation. I t is only recently that the State has taken substantial part in higher education and that the State college ant1 university have become prominent. "Our private institutions have not only received their original endowments froin private sources, but, as the standard of education which they dispense has been constantly increased and has nearly always exceeded in cost the amount of tuition paid by the scholars who receive it in nearly all of the institutions, their current inainte- nance has also in large part been dependent upon the continued donations of private wealth. "The end of this period of private beneficence seems now to be definitely approaching. T h e expenses of modern government have become so great, graduated taxation of wealth has become so onerous, that i t is well known that the sources and methods of private endowment are gradually drying up. "From the beginning these institutions have received from the State the benefit of exemption from local and general taxation on the plant actually used in the process of education. If , in addition to the gradual loss of gifts which they are now experiencing, the State should also begin to visit them with taxation, the end or certainly the very great curtailment of these institutions would be very soon in sight. "The loss to the historic character of our education would be beyond the power of estimate. I n the great bulk of these institu- tions research, study, and education have been free from control from without. Very few donors have sought to impress upon them the restrictions of the donors' views. Work in the sciences, the liberal arts and history has been guided only by the desire for accuracy and truth, subject to no passing whim of outside social, . political or religious dogma. I n these respects I am of course speaking primarily of our secular institutions. And it may well be said that even in that minority of schools and colleges founded by or belonging to religious orders, the same standards of science are very commonly enjoyed. Certainly throughout the secular schools and colleges their trustees and faculty in the ovel.whelming majority of cases are chosen without any regard to how the students shall be taught except as such standards are guided by the search for truth. "Now in the struggle for existence which we see approaching as their funds become narrowed, educational institutions, unlike relig- ious institutions, are subject to the competition of the State. And in this competition their competitors, the State institutions, will not Digitized by the New York State Library from the Library's collections. enjoy the freedom from political control which the privately endowed schools and colleges do enjoy. If the private institutions go to the wall and disappear, they will be supplanted by institutions in which the search for knowledge cannot be counted on to be free. W e all trust that America will never see such a political distortion of education as is now taking place in Germany, for example, but even under democratic government we can be certain that political and social influences will somewhat color the control of education. T h e management of public institutions being in the hands directly or indirectly of their local govei-nments, the influence of passing phases of political beliefs, policies and creeds will be certain to have its effect upon the choice of the directors and teachers of the schools themselves and therefore upon the course of their instruc- tions and learning. "This is a danger which is peculiar to institutions of learning. I n America the State does not go into religion and does not become a competitor of our churches. But it does become a competitor of our colleges and schools and if they should be ultinlately forced out of existence, the consequent damage to American thought, scientific, social, historical, and political, would be incalculable. An immediate and great blow would be struck if the present exemp- tion of theii- property from taxation were taken away from them or limited." Recent investigations have shown that there is little merit in the complaints of local communities in wllich privately endowed institutions of higher learning are located that they are suffering a hardship from the exemption of these institutions from local taxation. "An examina- tion of any college town," says the New York State Commission for the Revision of the T a x Law," '%ill disclose that the economic benefits locally conferred (by such institutions) are considerable." I n some cases, the question as to which properties of institutions of higher learning are exempt under the law and which are not is not easily resolved. I t was held in a recent case that where the ground floor of a college building was occupied as a store, from which income was derived, the building was exempt only to the extent of the portion used exclusively for educational purposes.28 I t was held in the same case that a denlonstration farm, athletic fields, supply stores, and a chancellor's official residence constituted property reasonably necessary to the accom- plishment of the purposes of the institution and were entitled to ex- emption. ' 7 Leg. Doc. (1935) No. 62, p. 44. ZaIa re Syracuse U+tiuevsity, 212 N.Y.S. 253. Digitized by the New York State Library from the Library's collections. T h e origin of the policy of exempting property of private non-profit making elementary and secondary schools, like that of the exemption of properties of iilstitutions of higher learning, can be traced to the exemp- tion of properties of religious institutions during the colonial period. T h e church was attending to the elementary and secondary education during that time and the piaopertj7 on which it was carrying on this educational work enjoyed the privileges of exemption. Tlle worthy public purpose of this work was never questioned. W i t h the assumption by the public authority of the function of public education, the basis for the exemption of properties of such non-profit making private institutions which carried an elementary and secondary educational work changed. I t was recogilized now that these institutions were performing not merely a desirable public purpose but even a neces- sary one-a purpose which the government itself was serving. It was felt that these institutions were relieving the government of the responsi- bility and expense of caring for the education of the children whom they undertook to train. T h e least that the public authoi-ity could do as a reconlpense of the institutions for the services they were rendering and the money they were saving to the authority was to free these institu- tions from taxation. T h e justification for the exenlption of such private schools is not generally questioned so long as they are genuinely non- profit making and reasonably open to the public. T h e exemption of privately endowed libraries, historical, scientific and ai-t museums, and other such institutions is justified on the ground of the desirable public purposes they serve. T h e justification for their exemption is not challenged so long as these properties ai-e used exclusively for these objects, seek no profit, and are kept free to the public. Exemption of Chari table a n d Hospital Properties Real property owned by associations organized exclusively for chari- table hospital purposes arid used for carrying out such purposes there- upon is exempt. I n the case of hospitals, the exemption extends to all property owned by the hospital association, including properties which produce income for the institution but are not directly used for hospital purposes. T h e exemption harks back to the exemption of religious insti- tutions which carried on charitable work and maintained hospitals during the colonial and later periods. T h e exemption of charitable property has been justified on the ground that such property "serves both a neces- sary and a desirable purpose, while the local benefit generally more than pays for the loss in revenue."" T h e exemption of hospital property rests ZD Leg. Doc. (1935) No. 62, p. 26. Digitized by the New York State Library from the Library's collections. today on the theory that "the protection of the public health is one of the most important of the necessary public purposes of the State."so Exempt ion of Proper t i es of Benevolent a n d F r a t e r n a l Associations Property of corporations or associations organized exclusively for benevolent purposes is exempt. A s in the instance of hospital property, the exemption in this case extends to property not actually used for the carrying out thereon of the benevolent purposes of the associ a t' ion, pro- vided the income therefrom is so employed.31 "In so far as these groups volunteer by mutual aid to relieve the State of a part of its traditional burden of caring for the poor, aged and helpless," says the Commission for the Revision of the T a x Laws, "the exemption of their property may be justified under the doctrine of necessary public purpose." T h e justification for the extension of the exemption in the case of hospitals and fraternal and benevole~lt associations to properties not used for the fulfillment of their respective benevolent purposes is open to ques- tion. T h e courts have held in certain cases that property used by a benevolent association as a source of income in competition with private conln~ercial businesses is subject to taxation. Thus , for example, it was held in this State that "parts of a Y.M.C.A. or a Y.W.C.A. building used ior a kitchen and restaurant for serving meals to the public at a profit as well as to the occupants of the building are subject to tax- atioi~."~"The question of exemption of some of the properties of benevo- lent organizations is in a somewhat confused state. Exempt ion of Proper t i es of Certain Professional Associations T h e property of bar associations, county medical societies up to a certain amount, pharmaceutical societies up to a certain sum, and properties belonging to agricultural societies and used for exhibition purposes are likewise exempt under the law. . T h e theory back of these exemptions is that certain occupations, even though private, serve a public purpose. Bar Association buildings generally maintain libraries and assembly and conference rooms which are open not only to the mern- bers of the legal profession but also to members of the Legislature, ju- diciary and other public agencies. Libraries had been exempted from taxa- tion for many years. I t was claimed that the Bar Association properties even in the absence of a specific mention of them in the law were entitled to exemption under the title of libraries. Ibidetit. I6idsm. 52 17.1r.C.A. v. City of Arcru York, 216 N.Y.S. 248 quoted from Legnl Limitnliolzs of tlrr Rights nirrl Pomrrs of Scl~nol Rotrrds "11ifh Xr.rprct to T u ~ u l i o ~ t Ly Wayne W. Soper (2lurc;lu ol I'ublicnlions, Teacl~crs Callegc, Columbia University, N. Y., 1929), p. 65. Digitized by the New York State Library from the Library's collections. E x e m p t i o n of Cemetery Proper t ies Property of cemetery associations used exclusively for cemetery pur- poses and not of a frankly profit-making nature is exempt. T h e fact that the cemetery associatio~l receives revenue from the sale of lots o r f rom the rental of the unused portions of the grounds and obtains thereby incidental profit does not invalidate the exemption. T h e exemption of the cemeteries originated from the time when cemeteries were owned by churches. T h e exenlption is based on the theory that the cemeteries per- form a necessary public purpose inasmuch as place must be found to bury the dead. Additional considerations which were responsible for the exemption of the cemeteries, according to the Committee on Taxation and R e t r e n ~ h m e n t , ~ ~ included the fact that a t the time of the original exenlptions the land of cemeteries was worth very little. T h e cemeteries required very few services from the communities in which they were located. Furthermore, i t would be difficult to decide sometimes who should pay the taxes on the cemeteries and what to do if the taxes are not paid. Obviousljr, the taxing unit could not exhume the bodies and sell the lands. I t does not seem proper, however, that cemetery associations which pay handsome dividends to their stockholders should enjoy esemp- tion from taxatioii, especially where tlie land is held for future use and in the meanwhile is rented for non-cemetery purposes. T h i s abuse may be corrected by statutory enactment and proper execution of the law. E x e m p t i o n of Miscellaneous P r o p e r t y T l ie properties occupied by veterans' organizations are exempt, ap- parently in recognition of the services rendered by the veterans to the nation. T h i s exemption, however, is not as important as the exemption granted to property purchased with soldiers' bonus and pension money. T h i s exemption cannot exceed $5,000 and applies to all taxes except highway and school taxes. T h e total amount of property cxempted in 1934 under this clause was in excess of $20,000,000. S u m m a r y of t h e O p e r a t i o n of Tax Exempt ion Laws O n the whole, the policy of tax exemption has promoted the welfare of the people of the State. Certain abuses and injustices, however, have crept into the system. These abuses fall, in the main, into two cate- gories : ( 1 ) T h e granting of special exemptions by general law which in reality are special in effect, and (2) the failure to limit by administrative 38 New l'orlc Stale Comrtlission for llre Rcvisicn of the Tax Law, op. cit., p. 47. Digitized by the New York State Library from the Library's collections. action tlie exemptions to property actually devoted to the purpose which, under the law, is the only basis of exemption. I t should be possible to correct these abuses through the exercise by the Legislature of greater discretion in the enactment of tax exemption laws and tlirough greater watclifulness by the local tax administrators and the courts over the proper administration and interpretation of the tax exemption laws. Review of the Merits of Some Recent Proposals f o r a Constitutional Corrective Several proposals to correct the abuses of tax exemption by incorpo- rating certain restrictions in the Constitution have been made in recent years. Of these proposals, two deserve special examination: (1 ) T h e proposal adopted by the Constitutional Convention of 1915, that "here- after no exemption shall be granted except by general law and by the affirmative vote of two-thirds of tlie inembers of each house," and (2) the proposal that no new classes of property be added to the list of the exempt properties. I n favor of the first proposal, i t may be said that i t will require of the Legislature a more careful procedure in the enactment of new tax exemption laws. I t will not bar the way to any legitimate additions to the existing list of exempt private properties. As against this proposal, i t may be said that it would place institutions now included in the list in a privileged position while placing difficulties in the way of new types of private institutions, serving perhaps fully as worthy public purposes. T h e arguments in favor o/: the proposal to bar the Legislature from adding new classes of private property to the existing list of the exempted private properties may be stated as follows: (1 ) Tcw exemption is being carried beyond its legitimate limits. I t is being extended to classes of private property which are devoted to uses which are not strictly public in character. T h e proposed amendment will put an end to this dangerous trend. (2) T a x exemption begins seriously to infringe on the revenues re- quired for tlie maintenance of local governmental services. T h e proposal will safeguard these revenues against further infringe- ment. ( 3 ) If private institutions serving public purposes are to be en- couraged by the State, i t is preferable that they be encouraged by means of direct subsidy rather than by means of tax exemp- tion. A direct subsidy can be more easily adjusted to the require- Digitized by the New York State Library from the Library's collections. Illents of the situation. T h e proposed amendment will accelerate this shift to the more flexible and less costly public subsidy. (4) T h e proposed constitutional restriction will relieve the legislators of pressure from selfish and aggressive private groups seeking exemption, and often einploying questionable methods to attain their objectives. (5) T h e proposal provides an easy transition to a better policy. I t does not disturb the existing types of exemptions and does not require any difficult readjustments on the part of existing exempted institutions. AS against this pt-oposition, the following arguments may be advanced: (1) I t would be extremely dangerous to limit the power of the Legis- lature to extend the classes of exemptions by constitutional amend- ment, since situations may arise in the future in which it may become both necessary and desirable for the State to exercise this power. No one could have foreseen years ago that it might be desirable for the State to encourage low-rent housing develop- ment by means of tax exemption. Yet in the opinion of many citizens of this State, such a policy would be in the public interest at this time. Conditio~is may develop in large urban areas and elsewhere under which a temporary grant of exemption to certain types of property might further desirable social and economic changes. I t is impossible to foresee the situatioils which may require legislative action. (2) Alleged abuse of this sovereign power does not justify withhold- ing the power entirely. I t does not seem the part of wisdom to im- pair the powcr of the Legislature t o continue existing exemptions, to create new classifications of equal public importance, or to limit their application. ( 3 ) A direct subsidy may be preferable to tax exemptioil in certain cases and not as effective or practicable in others. T h e choice should be left to the Legislature. It is neither necessary nor advis- able to prohibit by collstitutional amendment legislation which has been used with considerable success in promoting the public welfare in America since earliest Colonial days. (4) Direct subsidy would cost the public authorities substantial sums of money annually, and increase their budgets. Such exemptions as are now provided by law do not increase the cost of govern- ment. They do not seriously affect the income of the localities; in fact, i t is claimed that they tend to decrease the tax rate. Digitized by the New York State Library from the Library's collections. (5) Direct subsidy would be in derogation of the codification of 1896, which has worked satisfactorily during the intervening years, and is criticized only as to a few exemptioils which are special in their nature. Direct subsidy would be worse than special bills, (now inhibited by the Constitution) because all semi-public institutions that need financial aid would be called on to stand in line before the Finance Committees of the Senate and Assembly, each seeking a special subsidy for itself. Digitized by the New York State Library from the Library's collections. APPENDICES TO CHAPTER X APPENDIX A Arguments For and Against Tax Exemption, ,as Stated by the New York State Special Joint Committee on Taxation and Retrenchment (Leg. Doc. 1927, No. 86, pp. 9-12.) T h e tax exemption of public property and securities, and of religious, educa- tional, and charitable associations is an inherited policy in New York State. I n the past decade, i t is true, there have been two new and important kinds of exemption. T h e first of these was the exemption of certain kinds of personal property with the enactment of the iiicome taxes. But this is to be regarded rather as a change in the method of measuring taxation than as an extension of exemptions. T h e second change is the temporary exemption of new housing f rom local taxes which w a s adopted as a post w a r emergency measure. With this exception, the general outlines of our exemption policy have stood unaltered from the earliest days of our organized State government. Chnngizg Conditions Does this antiquity imply that the policy is unimpeachable? Does its vigorous survival indicate that it is ideally suited to present day conditions? W e do not think so. T h e changes which have taken place since this important.public policy came into existence have been so great that we are inclined rather to the thought that the older the policy is, the greater is the need of its re-examina- tion and reconsideration. T o mention only a few of the more obvious changes which have taken place, the following may be cited: T h e status of the church has been revolutionized. I t has been separated from the government and is no longer supported from tax moneys. I ts membership is entirely a personal matter and large parts of the population have no religious affiliation where formerly membership w a s all but universal. Free public education has come into existence. Charities have been secularized, and in considerable measure brought into the field of government work. T h e provision of improvements such as street paving, sidewalks, sewers, water supplies, and the provision of services like street cleaning and lighting, the removal of wastes, and even police and fire protection, a re no longer in the field of individual and private responsibility. They have become almost exclusively governmental func- tions. I n the furnishing of light, water, and transportation government has gone into direct competition with private business in ways that are entirely new since tax exemption of public enterprises w a s first developed. W i t h the growth and increased density of population, and the development of government func- tions, especially of education, many small taxing units have been formed during tlie past fifty years, which serve immeasurably to complicate the problem of exemptions. Economic changes and the ease of travel have changed the situa- tion so that the institutions which serve a community may be located in other districts, and institutions located in a given community may be of no local service. T h e r e has been a revolution in the relative burden of local taxation with the years, and also a gradual development of the real estate tax as the Digitized by the New York State Library from the Library's collections. one chief source of local t ax moneys. During the early days of tax exemption in this State, local government' was inexpensive because local government furnished few services, and a larger part of the taxes came from indirect sources and from sources other than real estate. All of these changes have a distinct bearing upon the .nature and the amount of t ax exemption, and we feel that they make it necessary to consider the policy of exemption anew and in the light of present conditions, in spite of the fact that it is a practice which has come down to us through many generations. Argumtnis for i?xtmpiion Theoretical justifications of tax exemption appear to rest in whole or in par t on one of the following considerations: (1) Nothing is gained and much useless expenditure for administrative machinery is required if publicly owned property is made subject to taxa- tion. A tax is a compulsory contribution toward the support of the government. Any tax which a government levies upon itself must be passed on to other taxpayers. Exemption merely places i t there in the first place and eliminates the intermcdiate bookkeeping. (2) There a re many activities carried on by individuals which are virtually governmental functions, such as the provision of elementary education and the care of the sick, the old, the young, and the poor. These a r e governmental responsibilities, and wherever they a re undertaken by private groups, those groups should be assisted because they are relieving the government of a definite expenditure. Should such organizations be called upon to help support the government when their purpose and effect is to help thc government in its own work? ( 3 ) There a re other activities which seek to elevate mankind and make life more worth while. T h i s is the highest object of the State, and govern- ment cannot very wcll lay a tax upon any instrumentality which is honestly directed to this end. Higher education, a r t galleries, and religi- ous institutions fall in this class. (4) T a x exemption does not, as a matter of fact, cost the community any- thing. T h e exemption by the city of a city park obviously makes not a cent of difference to a single taxpayer. T h e exemption of a private hospital which is furnishing free beds for the poor does no taxpayer a n injury, because those free beds would have to be furnished by the city and this would require t a x levies for buildings and for maintenance. And it is recognized that every community must have churches, schools, hospi- tals, etc. T h e y are just as necessary as streets. They a r e par t of the mechanism of civilized life and a re reflected therefore in the common wealth, a share of which can be enjoyed only through the ownership o r use of a parcel of land in that community. Therefore, the private land of the community absorbs and reflects its share of the value of these common services, and the exemption of the real estate used for these community institutions does not, as a matter of fact, eliminate any actual values. T h e effort to include them would first result in double taxation, and ultimately in the gradual disappearance of the reflected values until an equilibrium was reached a t the former level. Digitized by the New York State Library from the Library's collections. Nor would the abolition of exemptions lighten the total tax burden in any way. It would shift the tax burden imperceptibly, in most cases, but the total amount would remain the same. Co7n7itent on Thcsc Thcorics In this report we have brought together statistical and other material bearing upon the theories stated in the last paragraphs. While we have dealt with the facts and practical results of exemption rather than with hypotheses, it may not be out of place to comment briefly on the theories outlined above. (1) While there is much to be said for the exemption of publicly owned property purely as a matter of administration, this policy overlooks the iact that a large amount of property may be owned by one taxing unit and located in another. Under these conditions there may be an injustice to the taxpayers of a district. (2) I t is of course legitimate for government to subsidize private agencies which are discharging governmental functions and thus helping the government to do its work. Such subsidies should be based upon the amount of service rendered and they should be reconsidered frequently in comparison with the service actually performed and with the other work and needs of the city. T a x exemption does give a subsidy, but the trouble is that it is a blind subsidy, controlled by accident. And it is, moreover, a compulsory subsidy which cannot be reviewed and fixed by those who pay it as sound finance demands. ( 3 ) The subsidizing of the institutions devoted to human uplift in fields for which government has assumed no general responsibility, present l~iuch the same situation. In addition there are more doubtful questions involved. Should a city subsidize agencies which are performing no governmental function? Agencies which many of the citizens ignore or oppose? I s it consistent with the separation of the church and the State to continue an indirect subsidy for religious institutions? In a democracy, should a community be forced to subsidize property which does not benefit the community in its own estimation? (4) The argument that tax exemption does not cost the community anything is ~indoubtedly true. I t does not, however, offer any very great help in meeting our practical situation. Railroad stations, grocery stores, and banks are just as necessary, surely, as churches and schools. They go to make up the community, too. Their ose is sold with a city lot and is reflected in the lot value. But we do not exempt them. The general character of the population of a section is also reflected in land value, ' but we do not on that account exelllpt from taxation blonde college graduates. The argument of reflected values goes too far to be of much practical help. And even if the principle is entirely sound, it is evident that there is, in any case, a difference in the distribution of the burden. There are of course many other considerations bearing on both sides of the question which could be mentioned. But as has been said above, we do not consider it our province in this report to deal with the theories. W e are interested rather in a presentation of the facts as they are to be found in the State of New York. In the following pages of this chapter we are, therefore, summarizing our findings and our recommendations. ' / ,/ Digitized by the New York State Library from the Library's collections. APPENDIX I3 Proposals and Recommendations of Various Committees Studying the Problem 1. Recommendations of New York State Committee on Taxation and Retrenchment, 1927 (Leg. Doc. No. 86). (1) There shall be no further extension of real estate exemptions. (2) Any exemption granted shall be subject to local option and shall be for a limited number of years. ( 3 ) There shall be no broadening of the classes of property now exempt. (4) No property shall be exempt from water or special assessment taxes. (5) There shall be a reappraisal of all exempt property. (6) T h e value of land and improvements shall be assessed in separate categories. 2. Report of the New York State Commission for the Revision of the T a x Laws (Leg. Doc., 1932, No. 77). (1) All land (exclusive of buildings and improvements and excepting public roads and streets) belonging to one governmental unit (not U. S.) lying within the territorial boundaries of a second unit shall be suL;ect to taxation by the second unit. (2) All land (exclusive of buildings and improvements) acquired here- after by any public or private body (except U. S.) shall not be exempt. (3) All increases in the value of land (excluding buildings and improve- ments) now exempt shall be taxed over and above the equalized true value of the land a t the time of the passage of the bill. 3. Proposals of the Advisory Committee on T a x Exemption and T a x Inequalities, appointed by the President of the New York City Board of Aldermen, November 1, 1935. ( l a ) T h e present law relating to tax exemptions be repealed and com- pletely rewritten to incorporate recommended changes at least for New York City. ( l b ) T h a t a special tax exemption unit be organized to work out this change. ( l c ) In no case shall the amount of exemption exceed the amount which would have been due the city for taxes if the property were not exempted. (2) Organizations which are to some degree in competition with tax- paying properties must extend their free services until they are worth more to the city than the tax paid would be. (3) State of New York will pay taxes on lands from which the city derives no benefit. (4) T h e city shall be granted a voice in the selection of properties chosen by groups asking exemption. (5) Exemptions, where granted, must apply only for real estate. ( 6 ) City should derive a share of the sale of formerly exempt property. (7) National organizations be granted exemption only on basis of local benefit. Digitized by the New York State Library from the Library's collections. Exemptions granted to clubs, professional societies be eliminated. Exemptions to fraternal or benevolent orders be restricted to amount needed to make up deficit f rom the actual operation of the home, etc. T h e principle of exemption in more limited amounts be used to greater degree. City be given the power to revoke, review, etc. all exemptions. Parsonages and residences of clergy should become taxpaying. Private schools enjoying exemption should offer some free scholarships. Exemption of hospitals shall be based on quality and quantity of free service offered. A tax shall be imposed on the sale of a cemetery plot. A P P E N D I X C Present Status of Real Properties Exempt from the General Property Tax in the State of New York T h e following real properties are exempt f rom the general properly tax under the New York State T a x L a w : (1) Property of the United States. (2) State properly other than forest land in the forest preserve. (3) Property of a municipal corporation of the State held for public purposes. (3a) Property held within a public district f o r purpose for which district w a s established. (4 ) Indian lands of a reservation owned by an Indian nation. (5) All property exempt by law from execution (other than an exempt homestead) purchased with the proceeds of a pension or bonus is exempt up to $5,000 if petition is presented to local assessors and is affirmed. ( 6 ) Real property of a corporation o r association organized exclusively for moral or mental improvement, religious, bible, tract, charitable, benevo- lent, missionary, hospital, infirmary, educational, public playground, scientific, literary, bar association, library, patriotic, historical or ceme- tery purposes, or for the enforcement of laws relating to children or animals. (7) Real property of an incorporated association of present or former volunteer firemen up to an amounf: of $20,000. (7a) Property, real or personal, of corporations maintaining a fire patrol or salvage corps for public benefit. (8 ) Dwell ing houses owned by religious corporation for use of officiating clergymen. (9 ) Real property of a n agricultural society used for exhibition purposes. (10) Real property of a resident clergyman or his widow up to $1,500. (11) Property of a medical society to $150,000 in Kings or Queens and $50,000 elsewhere. Digitized by the New York State Library from the Library's collections. (12) Property of a pharmaceutical group-$100,000 in Rings or New York county and $50,000 elsewhere. (13) Academy of Music at discretion of local financial board. (14) Property of posts of war veterans. (15) Property of municipality not within area and used for aviation, parlc or highway. (16) Property of ally of United States in World W a r at discretion of local tax board. APPENDIX D Tax Exemption Bills Introduced in the Legislature, 1930-37, and the Action Taken on Each 1930 S.53, A.65-Exempt ceinetery pioperty although used for other purposes, if income is used for upkeep. Passed Assembly. S. 1106, A. 1144--Property bought with bonus if held by dependent father. Passed. Ch. 340. 1931 S. 1408, A. 1725-Exempt property incorporated. Sec. 7, Benevolent O ~ d e r s Law. S. 520, A. 715-Exempt new buildings from local taxes, to run to Jan. 1, 1937. S. 37, A. 235-Same as S. 53 above. S. 1325, A. 337-Exempt Medical Society in Queens to $150,000. Vetoed. S. 1642, A. 2138-Exempt property bought with bonus. Passed. Ch. 339. A. 301-Exempt property Spanish-American war veterans to $2,500. 1932 S. 242-End exemptions for cemetery property. S. 417, A. 483-Prope~ty held for hospital purposes by corporations to be exempt to same degree as corporations organized solely for that purpose. Passed. Ch. 328. S. 1313-Exempt corporation maintaining fire corps for public. Vetoed. A. 1163-Same as A. 301-1931. S. 590, A. 717-Exempt property bought with loan for military service. Passed Senate. A. 3-Same purpose as above. 1933 S. 1932-End bar association exemption. S. 90-End cemetery exemption. A. 2302-Property held by charitable group in competition with private organizations loses exemption. S. 1254, A. 1620-Exempt improvements on residential houses. S. 1099-Personal property of corporation maintaining fire corps for public shall be exempt. Passed. 1934 S. 98-End cemetery exemption in New Yorlc City. A. 1655-Same as S. 90-1933. A. BOO-Exempt ocean commerce to Dec. 31, 1942. Passed. Ch. 472. Digitized by the New York State Library from the Library's collections. S. 177-Same purpose as above. S. 1926-Exempt improvements on multiple dwellings. S. 1925-Exempt two-family houses. A. 2179-Exempt property of ally of United States in World War. 1935 A. 1832-End cemetery exemptions. S. 142-End cemetery exemptions, in New York City. S. 141-Exempt two-family dwellings up to $5,000 for each family. S. 361-Owner cemetery property may waive exemption. Passed Senate. S. 1912-Same as S. 417-1932. S. 1913-Same, except exemption of fraternal groups stricken out. S. 1914-Same as S. 1912. S. 1974-Organization wit11 dues paying membership loses exemption. S. 143, 390-Same as S. 141 except up to $1,000 per room. A. 735-Exempt improvements to dwellings. S. 1530, A. 2028-No denial of facilities by exempt organization. Passed. Ch. 852. S. 2020, A. 2444-Jewish W a r veterans, property exempt. Passed. Ch. 740. 1936 S. 2103-Academy of Music uses revenue for maintenance. Passed. Ch. 694. S. 1861, A. Z216-Exempt improvements in buildings five years after comple- tion. Passed. Ch. 474. S. 1326, A. 1914-Exempt new buildings in counties adjoining New York City. S. 75-Waive cemetery exemptions. S. 117, A. 891-Catholic war veterans, property exempt. Passed. S. 927, A. 1123-Exempt property bought with bonus. Passed Assembly. A. 1244-Exempt property bought with World W a r bonus. 1937 S. 862, A. 238GProperty of agricultural society used otherwise loses exemption. A. 828-Exempt property of Society of the Purple Heart. S. 1131, A. 1565-Tax certain cemetery property. A. 39-Same as S. 1926-1934. A. 698-Cities may exempt tenements and improvemeilts for no more than 10 years. Vetoed. Bills presented ........................................ 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills to end exemptions.. 4 Bills to extend exemptions.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Bills enacted ................................. . . . . . 9 Bills vetoed ..................... . ...... . . . . . . . . . . . . 3 Bills passed one house.. ............................... 2 Digitized by the New York State Library from the Library's collections. Certain Tax Exemptions in Certain States (1) Industrial exemptions. Louisiana-Corporations operating navigation, irrigation, o r hydroelec- tric plants. Idaho-Electric power plants used for irrigation. Mississippi-Paper product and wood alcohol. South Carolina-Cotton industries. (2) Trave l facilities. Mississippi-Toll bridges. South Carolina-Ports and terminals. ( 3 ) Veterans. Connecticut, Idaho, Rhode Island, Oregon-Property of all veterans. North Carolina-Lands of patriotic and historical societies. Montana-Clubhouses of veterans' groups. Alabama-Licenses of veterans up to $25. (4) Education. Wisconsin-Property of women's clubs. Digitized by the New York State Library from the Library's collections. STATE OF NEW YORK CONSTITUTIONAL CONVENTION 1 9 3 8 DOCUMENT No.2 REPORT OF THE COMMITTEE ON TAXATION (To Accompany Introductory No. 657, Print No. 732) The Committee on Taxation to whom was referred various pro- posed amendments to the Constitution relative to taxation, gave careful consideration and deliberation to them, held a public hear- ing thereon and conferred with recognized authorities. As a result the committee by thirteen affirmative votes with two other members present but not voting, and no negative votes, duly reported a new article in relation to taxation for insertion in the Constitution: The following are the various sections thereof with explanation of the provisions : Section 1. The power of taxation shall never be surrendered, suspended or contracted away, except as to securities issued for public purposes pursuant to law. Any law which delegates the taxing power shall specify the nafttre and subject of each tax which may be imp{)sed thereunder, and provide for its review. Exemptions from taxation may be granted only by general laws. Exemptions may be altered or repealed except those exempting real Doc. No.2 2 or personal property used exclusively for religious, educational or charitable purposes and owned by any corporation or association organized or conducted exclusively for one or more of such purposes and not operating for profit. The Legislature may, however, pre- scribe, limitations upr;n the extension of stwh exemptions in the various counties in relation to the taxable property therein. The adoption by the Legislature of the recent policy of dele- gating the taxing power to subdivisions and the resulting experience of taxpayers in the City of New York under the local legislation enacted pursuant to the broad grant of taxing power to that municipality, has lead your committee to the conclusion that the Legislature should at least specify the nature and subject of each tax which may be imposed by the subdivi- sion and provide for its administrative and court review. In order that there may beup,iform~ty in the State's taxing system and the avoidance of competition in taxation between various cities such as actually occurred through the administration of the general property tax, certain elements of a taxing statute shall be prescribed by the Legislature. Today the taxpayer is so aroused by various Federal, state and local taxes that con- stitutional safeguards in connection with the delegation of the State's taxing power are absolutely imperative. Your committee believes that the legislative power with respect to exemptions from taxation should be circumscribed in order to avoid the resultant increased burden upon taxable property. Therefore jt deemed it wise to provide for the granting of exemptions by general laws which may be altered or repealed except as to property used exclusively for religious, educational or charitable purposes and owned by organizations C()~duc.ted e4:clusively ~o,:r; pne or more of such purposes and not operating for profit. Those corporations are discharging social obligationswhich the State would otherwise have to assume and are reasonably entitled to constitutional protection' in the exemptions grante~. to them with respect to that property essential to the operation and maintenance of their work. With respect to the extension of such exemptions in the various coun- ties, the Legislature may prescribe limitations in relation to the taxable property therein. Section 2. The Legislature shall provide for the supervision, review and equalizatt:on of assessments for purposes of taxation. Your committee has been impressed with. the well-founded complaint of real .~state. taxpayers with respect to the assess- ments of such property for taxation. It believes that the time has arrived when the Constitution should contain a mandate to the Legislature to pr0vide a practicable and effective system for "the supervision, r~view and equalization of a~sesssments ", in the interest of all the real estate taxpayers of the state. Doc. No.2 Section 3. Moneys, credits, securities and other intangible per- sonal property within the State not employed in carrying on any business therein by the owner shall be deemed to be located at the domicile of the owner for ptwpose.s of taxation. Intangible personal property shall not be taxed ad valorem nor shall the possession thereof be subject to any excise tax. This section is derived from Mr. Gillette's proposal (Int. No. 134, Print No. 135), and Mr. Bennet's proposal (Int. No. 128, Print No. 129). The latter provides that intangible personal property shall not be taxed ad valorem and the former pro- vides that such intangibles as credits and securities, not employed in carrying on business within the State shaH be deemed to have their actual situs for purposes of taxation at the domicile of the owner. The Gillette proposal is but the statement of the well settled maxim that movables follow the person. As stated by Cooley: ''The rule is that the situs of intangible property, for the purposes of taxation, is the domicile of the owner, unless the property has acquired a business situs in another state• * • ". In the case of the taxation of fpreign corporations in this State the tax law specifically provides that a foreign corpora- tion shall not be deemed to be doing business in this State, for the purpose;; of taxation, solely by reason of maintaining cash balances in banks, or owning shares of stock or securities kept in the State as pledged collateral or deposited with banks in safe-keeping or custody accounts. By embodying this principle in the Constitution a guaranty will be given to both non-resident individuals and foreign cor- porations that they can keep their money and securities i~ the State of New York without any fear that the established legis- lative policy will be changed. Thus enormous amounts of such intangible personalty from all over the United States will be attracted to this State, making for the conservation of the financial center of the country here. Undoubtedly a very great part of such intangibles owned by non-residents and foreign corporations will find its way into the business of the State and will be used in business transactions in the State where it will be productive of business taxes. The Legislature has wisely conclud.ed, as indicated by express statutory policy, that the ad valorem taxation of intangible personal property is impracticable. Out of the experience with the General Property Tax, the Secured Debts Tax, the Invest- ment Tax, the Monied Capital Tax, the Tax Law, by Section 3 thereof, now provides that intangible personal property ''shall not be liable to taxation locally for state or local purposes". In order to avert any possible experimental return to outmoded, useless taxing methods with respect to intangibles, the commit- Doc. No.2 tee believes that this principle should be embodied in the Con- stitution. Section 4. Where the State has power to tax corporations incor- porated under the laws of the United States there shall be no dis- crimination in the rates and method of taxation between such cm- porations and other corporations exerc·ising substantially similar functions and engaged in substantially simt'lar business within the State. The source of this section is Mr. Folger's proposal (Int. No. 123, Print No. 124) providing for the equal taxation of national banking associations and state banking institutions. The State taxation of national banks is controlled by Federal statute. While the legislative policy of New York has consistently been to treat both classes alike for tax purposes, it now appears that several states are imposing heavier taxes upon state banks than upon national banking associations, from which the latter are protected by Federal statute; thus weakening the develop- ment of state banking systems, as state banks can readily be converted into national banking associations under the provi- sions of the National Banking Act. For the preservation of the dual banking system in a state the same tax treatment of both classes of banks is essential. Further, for obvious reasons, the adoption by New York of the policy of delegating the taxing power to subdivisions of the State renders it imperative to write this principle into the Constitution. The Folger proposal was given a cross-reference to the Com- mittee on Banking and that committee approved it in principle and the Superintendent of Banks advised that he "firmly believed that appropriate action should be taken to guarantee against the possibility of discrimination against our State bank- ing institutions". The Committee on Taxation, in view of pending Federal legis- lation looking to Federal incorporation of industrial enterprises, concluded that the principle of equal tax treatment embodied in the Folger ·proposal should be extended so as to provide equal tax treatment uf taxable corporations incorporated under the laws of the United States and other corporations "exercising substantially similar functions and engaged in substantially similar business withill the State". Section 5. All salaries, wages and other compensation to officers and employees of the State and its subdivist:ons shall be subject to taxation. Whenever the Congress of the United States shall grant permis- sion to the states to tax income from obligations of the United States or the compensation of public officers and employees of the United 5 Doc. No. 2 States the Legislature may grant similar permission to the United States to tax income from obligations thereafter iss1ted by the State and its subdivisions or the compensation of public officers and em- ployees of the State and its subdivisions. By act of the Legislature of 1937 it was declared to be the policy of the State that personal income taxes for the support of government within the State, measured by ability to pay as evi- denced by the amount of income received, should be made appli- cable to "salaries and compensation of all public officials". Your committee believes that this declaration of policy should be made a constitutional principle. Since 1932 the Federal Revenue Acts require that Presidents and all Federal Judges taking office after June 6, 1932, include their salaries in gross income for purposes of the Federal Income Tax. In view of the movement for doing away with the reciprocal exemption of Federal and state obligations and compensation of Federal and state officers and employees your committee deemed it expedient for the Constitution to empower the Legislature to grant permission to the United States to tax the income from state and municipal obligations thereafter issued and the com- pensation of the public officers and employees of the State and its subdivisions whenever Congress shall grant similar permis- sion to the State of New York with respect to Federal obliga- tions and compensation of Federal. officers and employees. Section 6. The Legislature is empowered to enter into agreements with the United States and any state thereof for the coordination of Federal and state revenue systems and their administration, pro- m'ded that all laws embodying such agreements may be altered or repealed. In the opinion of your committee it is urgent that a real effort be made to coordinate the Federal and state revenue sys- tems and their administration. The Australian Federation has blazed the trail in this direc- tion and agreements have been entered into between the Aus- tralian Commonwealth and the states under which the tapping of the same taxable resources by two taxing jurisdictions have been agreebly solved. We have the same problem in the United States and the Legislature should be fully empowered to deal with it, with the safeguard that all laws embodying such agree- ments may be altered or repealed. ' MARTIN SAxE, Chairman July 7, 1938.