An Illinois appellate court has ruled that part of a law that allows nonprofit hospitals to avoid paying millions of dollars in property taxes is unconstitutional, according to the Chicago Tribune.
The decision not only reopened a statewide dispute, but it is also a blow to nonprofit hospitals across the nation, which have faced scrutiny over their tax exemptions in recent years.
Although the court ruling has created uncertainty, the 2012 Illinois law at the center of the case was meant to provide clarity regarding nonprofit hospital exemptions.
In 2010, the Illinois Supreme Court weighed in on the issue and handed down a decision that suggested nonprofit hospitals in the state that behave like businesses should not qualify for tax exemptions. Subsequently, the Illinois Department of Revenue denied tax exemptions to three hospitals, according to the report.
Last year, NJ-based Atlantic Health System ended a 10-year battle with the City of Morristown over its property tax exemption by agreeing to a $15.5 million settlement for prior-year taxes. In addition, going forward, Atlantic Health System will pay property taxes on some but not all of its property. The settlement followed a New Jersey Tax Court decision upholding the City of Morristown’s decision to deny a municipal property tax exemption for certain operations that the town saw as for-profit. In addition, in December 2015, a couple of state legislators introduced a bill that would require all not-for-profit hospitals to pay “Community Service Contributions”, a fancy name for payments in lieu of taxes (PILOT).
The property tax exemption has long been defended as a fair trade for hospitals performing charity care for indigent populations. Whether or not the value of the property tax exemption is greater or less than the charity care provided depends on a number of factors; however, the position taken by an increasing number of municipalities reflects two realities:
1) Originally, hospitals received property tax exemptions when the facilities were used exclusively to provide charity care. Obviously, that has since changed.
2) Today, a not-for-profit hospital is not-for-profit in name only. They act like for-profit companies (some run for-profit divisions), pay executives similarly to their for-profit counterparts, and are forced to compete with for-profit companies. Not-for-profit hospitals may not be as income-statement-driven as their for-profit counterparts but operating margins and financial metrics are critically important, as the better the performance, the better the rating and the cheaper the access to capital.
This trend won’t go away, and there’s no reason that it should.