NOW
BGR’s Spotlight on Local Government Issues

It’s Time for Common Sense
on Nonprofit Exemptions
March 1, 2016

With the Louisiana Legislature facing an extraordinary fiscal crisis, an important dialogue has opened
regarding state revenue sources, tax dedications and
priorities. But some measures proposed to close the
state’s fiscal gap could have a negative impact on
local government revenues. The Legislature will
therefore need to consider ways to offset the fiscal
impacts on local governments, which face their own
budgetary challenges.
In November 2015, BGR issued a report exploring
the array of tax dedications in New Orleans, with
revenues totaling more than $1 billion for various local purposes. The report found that only one-fourth
of local tax revenue is available for broad municipal purposes. The other three-fourths is dedicated
to specific municipal purposes or to other entities.
These sizeable dedications limit the City’s ability to
meet basic responsibilities and pressing needs. The
report concluded that it is time to identify taxes that
are ripe for redeployment to meet basic needs.
BGR’s report told an important part of the story on
the city’s finances. But it did not explore the hundreds of millions of dollars in tax revenues that are
never collected – dollars that for one reason or another have been exempt from taxation. Chief among
these exemptions are those granted to nonprofit organizations under the Louisiana Constitution.1
In 1996 and 2011, BGR published reports exploring the cost of these exemptions. In the 1996 report,
BGR found that a staggering two-thirds of New Orleans’ real property value was off the tax roll. This
is due primarily to government and nonprofit ad valorem property tax exemptions, with the homestead
exemption accounting for a significant portion as
well. In 2011, BGR estimated that 60% of property
value was off the tax roll, and local taxing bodies had
to forego more than $125 million in revenue due to
nonprofit exemptions alone. BGR also found that the
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 number of parcels owned by nonprofits had grown
rapidly, increasing by 60% between 1996 and 2011.2
New Orleans is a center for nonprofit activity – and
it pays a price for that distinction. In particular, nonexempt property owners pick up the tab for services
provided to the expanding base of nonprofit entities.
Nonprofits benefit from taxpayer-funded services
and infrastructure, such as local flood protection,
streets and police and fire protection.
Every major U.S. city must contend with the impact of nonprofit property tax exemptions to some
degree. Churches, cemeteries, and educational and
charitable institutions are exempt from property
taxes across the country. But the problem of excessive nonprofit exemptions is particularly acute in
New Orleans for several reasons.
The exemption provisions in the constitution
are too broad. The Louisiana Constitution takes
a kitchen-sink approach to exemptions. Like other
state constitutions, it offers exemptions for cemeteries, religious institutions, schools and charities.
But some of the exemptions granted in Louisiana
are highly unusual, including exemptions for property owned by: labor organizations; organizations
devoted to promoting trade, travel and commerce;
and trade, business, industry and professional societies.3 There are also specially crafted exemptions
that target housing nonprofits, Mardi Gras activities and Tulane University.4
The exemption provisions are not tied to specific
public benefits. The most basic threshold standard
for granting an exemption should be to identify public services or amenities provided by nonprofits that
are important to quality of life and deserving of an
indirect government subsidy. But Louisiana’s constitution grants tax breaks to virtually any nonprofit.
There is no use requirement. The Louisiana Constitution does not require that property owned by a
nonprofit actually be used for the purpose on which
its exemption is based. Rather, it states only that the
property cannot be used for an unrelated commercial purpose. As a result, property that is sitting idle,
held for future investment or even used for a related
commercial purpose is exempt from taxation.5 Like
other states, Louisiana used to require that the property actually be used for an exempt purpose, and
it specifically prohibited exemptions for property
leased for profit or income. Unfortunately, the 1974
constitution eliminated these requirements.6
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 Local governments bear the brunt of these poorly-crafted and idiosyncratic nonprofit exemption
provisions. BGR’s 2011 report offers numerous
recommendations to improve administration of the
exemption and revise the constitution, including
giving local governments the power to opt out of
certain exemptions. But, at a minimum, the Legislature should approve and submit to voters a constitutional amendment that tightens the eligibility
requirements for the exemption. The constitutional
amendment should:
•  Limit exemptions to property of nonprofits
formed exclusively for religious, educational, charitable, cultural7 or burial purposes, and engaged solely in those activities.8
•  Require the Legislature to establish the
parameters of exemptions in a targeted
manner that further defines, but in no case
expands, the universe of possible exemptions set forth in the constitution.
•  Prohibits the Legislature from defining exemptions that have the effect of exempting specific entities, rather than groups of
entities.
•  Eliminate exemptions for organizations
devoted primarily to the interests of a private membership.
•  Impose a strict use requirement limiting
the exemption to property owned by an
eligible nonprofit that is directly and (subject to the exception in the next sentence)
exclusively used for an exempt purpose.
When a small portion of a property otherwise dedicated to an exempt purpose
is used for a related and supporting nonexempt purpose, the exemption should be
pro-rated.
We note that local assessors can act independently
and immediately to improve administration of the
exemption. For instance, BGR has recommended
that assessors place the burden of demonstrating
eligibility on nonprofit property owners and require
owners to reapply for their exemption on a regular
basis, as set forth under state law.9 BGR recommended that assessors regularly inspect exempt properties
to ensure eligibility and terminate the exemption for
property owners who cannot prove eligibility.
The state fiscal crisis demands a look at the bigger picture. It gives the Legislature an opportunity
to look afresh at the constraints state law places
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 on local revenues. Among the items ripe for the
Legislature’s consideration are nonprofit tax exemptions, which affect the income of local governments statewide. Fixing the constitutional provisions governing these exemptions is long overdue.
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Endnotes
1 La. Const. Art. VII, Sec. 21(B)(1)(a)(i) states, “Property
owned by a nonprofit corporation or association organized and
operated exclusively for religious, dedicated places of burial,
charitable, health, welfare, fraternal, or educational purposes,
no part of the net earnings of which inure to the benefit of any
private shareholder or member thereof and which is declared
to be exempt from federal or state income tax.”
2 Bureau of Governmental Research, The Nonprofit Margin:
Addressing the Costs of the Nonprofit Exemption in New
Orleans, March 2011, pp. 2-3. See also, BGR, Property
Taxes in New Orleans: Who Pays? Who Doesn’t? And Why?,
October 1996.
3 When BGR last conducted a 50-state survey in 1999, it
was unable to find any exemptions in other states for labor
organizations or entities promoting trade. It found only
one state that exempted special interest groups, such as
professional associations. See BGR, Property Tax Exemption
and Assessment Administration in New Orleans, December
1999.
4 La. Const., Art. VII, Sec. 21(B) (1-3) and (C)(12), and Sec.
14. See also La. Legislature, Acts 1884, No. 43, Sec. 5.
5 See Hotel Dieu v. Williams, 410 So. 2d 1111 (La. 1982);
Willis Knighton Medical Center v. Edmiston, 979 So. 2d 656
(La. App. 2 Cir. 2008); Board of Administrators of the Tulane
Education Fund v. Louisiana Tax Commission, 701 So. 2d
702 (La. App. 4th Cir. 1997), writ denied, 709 So. 2d 705 (La.
1998); and Hotel Dieu v. Williams, 403 So.2d 1255 (La. App.
4th Cir. 1981).
6 BGR reviewed the transcripts of the 1974 constitutional
convention and found no evidence that the elimination of the
use requirement was intentional.
7 BGR cautions that these categories are vague and potentially subject to manipulation absent legislation clarifying
and limiting the scope of appropriate uses. In particular, it is
BGR’s position that the “cultural” category should be narrowly
construed. For instance, while the North Carolina constitution
allows the state assembly to grant property tax exemptions
to property held for “cultural” purposes (N.C. Const. Art. IV,
Sec. 2 (3)), state law explains that a cultural purpose “is one
that is conducive to the enlightenment and refinement of taste
acquired through intellectual and aesthetic training, education,
and discipline” (N.C. Gen. Stat. Sec. 105-278.7(f)(5)). Texas
allows its legislature to grant exemptions “for the preservation of cultural, historical, or natural history resources” (Texas
Const. Art. VIII, Sec. 1(f)); the tax code then specifies the uses:
historic landmarks, museums, zoos, libraries, theaters and
performance halls (Texas Tax Code, Sec. 11.18 (d)(4-5).
8 See BGR, The Nonprofit Margin, pp. 18-20, for approaches
used in other states.
9 La. R.S. 33:2828.

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