Tennessee's Charitable Property Tax Exemption: A Legally and Economically Unwieldy Tool for Achieving Charitable Policy Objectives

By Daniel, Paula P. | The University of Memphis Law Review, Fall 2006 | Go to article overview

Tennessee's Charitable Property Tax Exemption: A Legally and Economically Unwieldy Tool for Achieving Charitable Policy Objectives


Daniel, Paula P., The University of Memphis Law Review


I. INTRODUCTION ....................151

II. TENNESSEE LAW: How THE STATUTE, AS APPLIED, REFLECTS No POLICY....................154

A. The Constitutional Provision, the Statute, and the Rule of Liberal Construction ....................154

B. Ambiguity and Internal Inconsistency ....................159

1. What is Charitable Use of Property? ............ 160

2. Non-Spatial Apportionment Yields Internal Inconsistency....................180

C. How the Property Tax Exemption Statute Reflects No Policy....................184

III. WHY TAXPAYERS SHOULD CARE: THE ECONOMIC CASE FOR A MORE TARGETED TAX EXEMPTION .................... 188

A. State Law, Local Impact....................188

B. The Unknown Worth of the Property Tax Exemption and Its Guaranteed Inefficiencies ....................190

C. Why More Accuracy and Oversight Are Needed ....192

IV. CONCLUSION....................194

In a small northeastern town, a hardware store owner is dusting the counter when the tax collector enters the store. The collector approaches the store owner and hands him an envelope.

Collector: "Here's your property tax bill for the year. Even though the valuation of the store hasn't changed since last year, the bill has gone up."

Owner: "What in the world is this, Fred??? I certainly haven't seen any improvements around here to warrant this kind of bill - heck, my son's school hasn't changed since I went there."

The collector places his briefcase on the counter, opens it, and retrieves a map of the township. He begins to point out many of the well-known exempt properties and highlights new construction, also exempt from property taxes.

Collector: "See here in the northeast quadrant? There's a new hospital and a new public library. Don't forget about the other schools in addition to your son's, as well as all the churches here. Oh, and that big shopping center in the southwest quadrant was just converted to a church-we granted their application for an exemption this past year."

Owner (indignantly): "GET YOUR BRIEFCASE OFFMYALTAR."1

I. INTRODUCTION

Even the most civic-minded citizens dislike property taxes. The property tax exemption for charities increases the tax burden on owners of non-exempt property and has only become more controversial in the wake of three developments: highly publicized scandals involving charitable and religious leaders,3 higher property tax rates resulting from tax base erosion (while needs of municipalities grow), and the exponential growth of the nonprofit sector and the commercial activities that serve it.5

Commercialization of the non-profit sector has confounded the public and courts alike. Even though fiscally necessary,6 the burgeoning commercial activity of non-profits seems somehow improper. Non-profit hospitals offer state of the art health club facilities to the public and enter headlong into competition with for-profit fitness centers; non-profit art museums generate most of their revenue in upscale retail shops; and non-profit organizations in many industries establish for-profit subsidiaries and pay salaries commensurate with those that the "Fortune 500" pay their executives.7 On the one hand, we applaud entrepreneurial spirit and business efficiency, even in non-profits. On the other, something chafes when non-profits reveal such commercial motives.

Irrespective of these developments, many charities, for example, St. Jude Children's Research Hospital, offer much needed services to the public. But for the favorable treatment and indirect subsidies from the government, these entities might not accomplish their noble missions to the degree they do. No one can deny that such organizations need support. The increasing need for charities to enter the commercial marketplace, however, materially complicates Grafting a statewide tax policy for non-profit organizations.

Compare the efficiency and policy considerations underlying the federal income tax to those at the state level. …

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