The Facts About Senate Bill 4
In 1997, the state legislature unanimously approved Act 55, which established clear, concise standards for determining the tax- exempt status of nonprofits. This law was the product of a compromise between local governments, school boards, and nonprofits.
Prior to Act 55, the tax-exempt status of nonprofits was determined by vague criteria created by the Supreme Court in 1985. From 1985 to 1997, there was a surge of litigation by local governments and school districts against nonprofits. Instead of clarifying the situation, inconsistent court rulings created confusion and costly legal battles.
Act 55 was introduced to eliminate inconsistency and bring clarity to the criteria to determine a nonprofit entity’s tax-exemption status.
For fifteen years, Act 55 served its purpose. Prior to Act 55 of 1997, there were at least 20 ongoing legal challenges between hospitals and political subdivisions. Following enactment of the law, there were very few legal challenges.
In 2012, in the court case Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, the court turned Act 55 on its head. The Supreme Court ruled that the courts, once again, had responsibility for determining the tax-exempt status of nonprofits, not the legislature. Now, the same vague criteria from 1985 is being used. This is a return to inconsistency and great confusion for nonprofits. Now decisions can vary from county to county and court to court.
Senate Bill 4 provides the opportunity to restore fairness and provide clarity on the criteria for tax-exempt status. The bill calls for a constitutional amendment to return the authority to the legislature to establish a set of clear, consistent standards for determining the tax-exempt status of nonprofits.
The bill passed last legislative session, and must pass again this session. A constitutional amendment referendum then will go before voters who will have the final say on the issue.
1. Senate Bill 4 will achieve its purpose.
The Legislative Reference Bureau recently issued an important advisory opinion stating that Senate Bill 4 will effectively amend the State Constitution to give the General Assembly the authority to define an institution of purely public charity. Specifically:
- “The term “institution of purely public charity” is no longer a term that must be defined exclusively by the judiciary. As a result it is appropriate that SB 4 authorizes the General Assembly to actually define an institution of purely public charity by establishing uniform standards and qualifications for this purpose.”
In addition, current Chief Justice Saylor’s Dissenting Opinion, joined by then Chief Justice Castille, in Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, underscored the strength of the language in Senate Bill 4.
- So long as Act 55 is constitutional, the court should defer to the General Assembly’s reasonable policy determination that an organization satisfying the criteria set forth in Act 55 is a purely public charity.
2. Senate Bill 4 simply will clarify that the legislature has the sole authority to determine the qualifications for nonprofit tax-exempt status.
The one-and-one-half page bill calls for only one action: returning to the legislature the authority to establish uniform standards and qualifications as the criteria to determine the tax-exempt status of nonprofit entities.
Senate Bill 4 does not increase the number of tax-exempt entities. Senate Bill 4 does not raise taxes. Senate Bill 4 does not ensure the loss of government services in communities. Senate Bill 4 does not create any barrier for local governments wanting to challenge the tax status of a nonprofit.
3. Many of the nonprofits that Senate Bill 4 would help are small nonprofits with limited financial resources, that provide much-needed community services.
The majority of nonprofits that are impacted by the purely public charity tax status issue are YMCAs, nursing homes, critical access hospitals, food banks, churches, homeless shelters, community health centers, health and human service providers, museums and other cultural venues, and other organizations that are integral to a community’s well-being.
4. Deliberation on Senate Bill 4 has been thorough and thoughtful.
Senate Bill 4 was originally debated in 2012, and was first passed by the legislature in 2013. It is again being voted on by the legislature this year. There already have been hearings and will be more. Voters will get to make the ultimate decision when a referendum appears on the ballot.
5. Most of the tax-exempt properties in communities are not nonprofits.
A Pennsylvania Legislative Budget and Finance Committee report shows that local government entities account for the largest share of tax-exempt properties. In fact, when tax-exempt properties held by local public authorities was combined with that held by local government, it accounted for 50 percent or more of all tax-exempt properties.
6. The auditor general has said he would not be comfortable delegating tax policy to the courts.
When testifying before the Senate Budget and Finance Committee, Auditor General Eugene DePasquale said he would prefer not to have the courts making the tax policy decisions.
7. Giving the legislature the authority to set the standards for the tax-exempt status of nonprofits can work. Act 55 was the product of a multiyear, bipartisan, collaborative effort.
When Act 55 was created by the legislature, it passed the General Assembly unanimously. This happened after there were ongoing discussions with local governments, school districts, nonprofits, and others who had a stake in the outcome of the issue. All parties agreed that the legislation was acceptable. After Act 55 was created, there were few legal disputes.
8. Pennsylvania voters will have a final say on this issue.
If Senate Bill 4 passes the House of Representatives for a second time, Pennsylvania voters will make the decision on the tax-exempt issue. This is not something that will be decided by the legislature. People will get to vote “yes” or “no” on a ballot referendum on election day. If the voters approve the question to give the legislature authority to set standards, voters will have another opportunity to weigh in during the legislative process.
9. An Institution of Purely Public Charity is required to operate “entirely free of private profit motive.” This is different from operating “entirely free of a profit motive.”
If a charity is enriching private individuals or for-profit entities, which is “private profit motive,” they would not meet this test for tax- exemption.
However, all charities must try to generate more in revenues than they pay out in expenses to ensure they remain viable (stay in business) and are able to deliver services. This is “profit motive.”
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