Introduction
On average, almost 40 percent of properties in Pennsylvania’s cities are exempt from local real estate taxes, representing an estimated loss of over $600 million in potential property tax revenue based on market value, according to new research by the Pennsylvania Economy League, Central PA, LLC.
In 2022, the market value of tax-exempt properties for all municipalities exceeded $141 billion, resulting in an estimated property tax liability surpassing $900 million, the research found.
Meanwhile, most cities and many other municipalities across Pennsylvania are grappling with flat revenues and rising costs. From public safety to essential services, municipalities are tasked with funding the totality of demands to ensure the health, safety, and well-being of their community. Property taxes are often the largest revenue source.
Tax-exempt organizations provide great value to our communities. Nonprofits like hospitals, universities, government buildings, land conservancies, and similar institutions address critical community needs in healthcare, education, housing, and open space while also contributing to local economies by creating jobs and stimulating regional economic growth.
However, these organizations also rely on municipal services—such as police, fire protection, and road maintenance—without directly contributing to the costs. This fiscal imbalance often shifts the tax burden to homeowners and businesses, raising questions of fairness and sustainability.
To overcome the economic strain caused by these necessary institutions, the state should review and implement new policies regarding payments in lieu of taxes, service fees, and land valuation taxation.
Distribution of Tax-Exempt Properties
The amount of tax-exempt properties in Pennsylvania’s 2,560 municipalities varies widely. Cities — first, second, or third class — have the highest average rates, while townships exhibit the lowest as shown in the table below.
Excluding the city of Philadelphia, second-class townships have the highest total market value of tax-exempt properties. However, due to the nature of Pennsylvania’s municipal tax system, second-class townships do not face the largest loss in tax revenue.
PEL’s research also found:
- Location – Rural municipalities are less likely to have a high amount of tax-exempt properties compared to more urban locations.
- Home rule – Municipalities that have adopted a home rule charter are more likely to have higher amounts of tax-exempt properties than local governments governed by state municipal codes.
Policy Recommendations
To address the economic strain caused by tax-exempt properties, Pennsylvania should consider several policy changes:
- Payments in Lieu of Taxes (PILOTs): Voluntary contributions from tax-exempt organizations could offset their use of municipal services. While PILOTs remain underutilized in Pennsylvania, expanding and standardizing these agreements could provide a more reliable revenue stream for municipal governments. Between 2008 and 2012, only 18 municipalities reported receiving PILOTs, generating revenue between $1 million and $82 million annually. Standardizing and expanding these agreements could provide a reliable revenue stream while preserving nonprofit-community relationships.
- Service Fees: Imposing service fees on tax-exempt organizations for essential municipal services, such as police and fire protection, could help alleviate revenue losses. In some municipalities, police budgets constitute up to 78% of total expenditures. A fee equivalent to 33-78% of property tax liability for tax-exempt organizations could reduce revenue losses by $4.5 to $10.7 million annually, alleviating strain on municipal budgets.
- Land Value Taxation: Taxing properties based solely on land value, excluding buildings, ensures all properties contribute to municipal revenue. Estimates suggest such a model could generate approximately $339 million statewide from currently exempt properties, providing a more equitable distribution of fiscal responsibility. However, to successfully implement a land value tax on tax-exempt properties, the assessed value of the land must first be disentangled from the assessed value of the structures residing on a property.
Conclusion
Tax-exempt properties are indispensable to Pennsylvania’s communities, delivering critical services and economic benefits. Hospitals, universities, and charitable organizations enhance local quality of life, provide essential services, and attract economic activity. However, the societal benefits they offer often extend beyond the boundaries of the municipalities hosting them, leaving local governments to shoulder disproportionate costs. This dynamic underscores the need for collaborative, statewide approaches to balance the equation.
Nevertheless, the financial implications of tax-exempt properties in Pennsylvania highlight a pressing need for innovative policy solutions. While these properties provide significant community benefits, their disproportionate impact on municipal budgets threatens the sustainability of essential services. By exploring options like PILOT programs, service fees, and land value taxation, Pennsylvania can work toward a more equitable system that supports both nonprofits and the municipalities they serve. Collaboration and proactive planning will be key to achieving a balanced approach that ensures financial stability and community well-being for generations to come.
