An Illinois appeals court has ruled that a law defining what not-for-profit hospitals have to do to get tax breaks is unconstitutional. The ruling is yet another setback for not-for-profit hospitals, which have come under increased scrutiny in recent years over their tax exemptions.
The 2012 Illinois law was meant to provide clarity around exemptions for hospitals.
The law says that the value of certain charitable and other services offered by a hospital must exceed the estimated value of its property tax liability if it's to get a property and sales tax exemptions. The law was passed after the Illinois Supreme Court, in 2010, upheld a decision to revoke Provena Covenant Medical Center's property-tax exemption, worrying other nonprofits across the state. (The Urbana, Ill., hospital is now part of Presence Health.)
The Illinois 4th District Appellate Court, however, ruled Tuesday that the 2012 law is unconstitutional in a case involving the city of Urbana and other local taxing districts brought by Carle Foundation Hospital, also in Urbana, which was seeking relief from taxes in 2004-2011.
A lower court sided with the hospital, but the appeals court reversed that decision, saying the Illinois Constitution allows lawmakers to exempt only property "used exclusively" for "charitable purposes."
Carle spokeswoman Jennifer Hendricks-Kaufmann said the hospital is considering options, including an appeal.
The Illinois Health and Hospital Association criticized the ruling. If the Illinois Supreme Court were to uphold this week's ruling, hospitals would again have to live by the old law that caused so much confusion, according to association spokesman Danny Chun.
“This law was intended to set a clear and we believe fair standard that hospitals must meet to earn their tax exemption,” Chun said.
He cautioned, however, that nothing will change for Illinois not-for-profit hospitals for the time being, saying the ruling this week is not final and the case will likely go to the state Supreme Court.
Urbana Mayor Laurel Prussing said the city has lost 11% of its assessed tax value since Carle was relieved of paying $6.5 million a year in property taxes—the vast majority of which went to Urbana and its school district.
"Part of the inequity in the tax system is we have these very wealthy entities that can afford all kinds of lobbying to wiggle their way out of responsibilities," Prussing said.
The decision represents the latest defeat for not-for-profit hospitals trying to hold on to their tax exempt statuses.
Hospitals in Ohio and Pennsylvania have also faced challenges. The former mayor of Pittsburgh sued healthcare giant UPMC in 2013 to revoke that system's tax-exempt status, though both sides dropped that legal battle after a new mayor took over
In November, New Jersey hospital Morristown Medical Center agreed to pay $26 million to the town where it's located to end a dispute over the hospital's property tax exemption. That settlement followed a New Jersey tax judge's decision that the hospital should not be tax exempt.
In that ruling, Judge Vito Bianco said all modern, not-for-profit hospitals are “essentially legal fictions” for purposes of property-tax exemption, if they operate the same way as the Morristown hospital.
New Jersey lawmakers are now working on legislation intended to bring clarity to the issue.
Hospitals in other states looking to their state lawmakers to bring clarity to tax exemptions should be careful about how those laws are written, said Michael Meissner, a tax partner at Squire Patton Boggs.
“It would have been very easy to write a law that complied with the constitution and had the same provisions in,” Meissner said.
In Illinois, it's possible lawmakers will take another stab at writing the law if this week's ruling is upheld, Meissner said.
Meissner also said he doesn't expect challenges against hospitals' property tax exempt statuses to stop any time soon. Cities and counties, he said, “simply aren't deriving near as much revenue in property tax as we historically have so they're going after the largest targets in the areas.”
And Jim Flynn, who heads the healthcare practice group at Bricker & Eckler, said the "litigiousness of the local governments over this issue continues to rise to an alarming level.”
In Illinois, five hospitals have applications for tax exemptions before the revenue department: Peoria-based Methodist Services Inc. (two applications), NorthShore University HealthSystem in Lake Forest, Mercy Hospital and Medical Center in Chicago and Swedish Covenant Hospital in Chicago.
The Associated Press contributed to this report