It’s time to seriously look at ending business license fee exemptions

By Moe Baddourah

In May 2015, I proposed a reform measure designed to lessen demands on Columbia taxpayers and help shore up city finances. Under the “fair fee plan,” many businesses which have attained a tax-exempt designation from the IRS – and therefore don’t currently pay a license fee to operate in the city — would pay fees like the majority of city businesses.

The goal was to partially remedy a major problem facing Columbia finances: In a city with numerous state and federal buildings and two public colleges, an estimated 50-60 percent of the property goes untaxed. Consequently, the burden of funding city services falls to a relatively small portion of the population.

Tax exemptions compound this problem.

The IRS uses what it calls the “community benefits” standard for granting nonprofit tax exemptions. But the criteria is ill-defined and subjective, not tied to a specific percentage of revenue. Many businesses that operate largely as for-profit commercial enterprises are classified as nonprofits and thus exempt from income and property taxes.

Hospitals are a prime example. Most U.S. hospitals have a nonprofit status, often despite raking in hundreds of millions or even billions annually – defying many people’s expectations of what a nonprofit organization should be.

In addition to tax exemptions, most local governments, including Columbia, automatically exclude these entities from paying business license fees. That should change.

Rather than exempting an organization from business license fees simply because it meets the vague standards set by the IRS, we should develop a smarter policy. The “fair fee” proposal would establish a new set of criteria, with charities and churches retaining their exemptions while other entities – particularly profitable businesses which conduct themselves as for-profit companies – would pay the fees.

There would be three main benefits:

• A broader revenue base would reduce the burden on average citizens, who now bear more than their fair share of the cost of city government.
• It would mean greater financial stability and potentially more revenue for needed services.
• It would level the playing field for the city’s taxpaying businesses. Imagine the frustration of competing for customers and sales against a larger company which has the added advantage of not paying a license fee.

This isn’t a radical idea. In recent years, policy-makers nationwide have increasingly pushed to end exemptions for cash-rich hospitals, concluding that the costs far outweigh the benefits. Several S.C. cities including Greenwood, Spartanburg and Greer have asked medical systems to pay up. Often, the outcome is a compromise in the form of a “payments in lieu of taxes” agreement.

Certainly, Columbia’s tax-exempt businesses – including our two tax-exempt hospitals — are an asset to the city. I’d never seek to diminish that. Still, it’s reasonable to expect these businesses, which consume city services, to help pull their own weight. And remember, they’d retain their generous income and property tax exemptions.

I first began researching new revenue options in an effort to stop the city’s raids on our water-sewer fund, which some argued would create a budget shortfall.  After I suggested eliminating exemptions, citizens I spoke with overwhelmingly supported the idea. Of course, there were also those — including some affected businesses – who expressed concerns or outright opposition. Smartly, my colleagues wanted more time to study the idea, rather than rushing a change of such magnitude.

Now, it’s time to move it to the front burner.

City Council is presently grappling with an $8-12 million gap between expected revenue and a preliminary 2017-18 budget. One option on the table is a tax increase. Another, proposed by Howard Duvall, would assess a “public safety fee” on residents, businesses and nonprofits while halving property taxes – an approach which embraces some of the “fair fee” concepts. This has its pros and cons but it’s encouraging to see an effort to expand the pool of those contributing to the system.

This annual exercise – scrambling for dollars to close a funding gap – underscores the challenges of a narrow tax base. I’d offer that these challenges are best met through longer-term, fundamental changes. Ending needless exemptions would benefit taxpayers and bolster the city’s overall fiscal health, and it’s a step we must start to seriously consider.