New Jersey not-for-profit hospitals are anxiously waiting to see whether New Jersey Gov. Chris Christie signs a bill that would solidify their exemptions from state property taxes, amid increasing scrutiny of such perks.
But a state law likely won't end court battles on the issue in the Garden State or elsewhere, some say. An Illinois appeals court recently ruled unconstitutional that state's law defining what not-for-profit hospitals must do to get tax breaks, leaving some wondering whether the New Jersey bill could also face constitutional challenges.
The New Jersey bill would allow not-for-profit hospitals in the state to keep their property tax exemptions as long as they pay their municipalities $2.50 a day for each hospital bed and $250 a day for satellite emergency-care facilities. Those fees would increase 2% each year to account for inflation. The New Jersey Office of Legislative Services has estimated the law would raise $21 million for municipalities in its first year.
The bill was drafted after a state tax court in June decided to yank Morristown (N.J.) Medical Center's property tax exemption, saying it operated, in many ways, like a for-profit business. The hospital, owned by Atlantic Health System, ultimately settled with its municipality for $26 million, but the judge's decision made other New Jersey not-for-profit hospitals nervous.
Since that Morristown decision, at least 22 of the state's not-for-profit hospitals have heard from their municipalities about the issue, said Betsy Ryan, New Jersey Hospital Association CEO.
The bill now on Christie's desk tries to ensure that not-for-profit hospitals can keep their exemptions while still contributing financially to their municipalities.
"We think rather than have a piecemeal approach, where one town does one thing and another town does another, a statewide solution to bring certainty is the best course,” Ryan said.
The Illinois law that was recently ruled unconstitutional was also aimed at providing certainty for hospitals.
There are, however, some major differences between the Illinois law and the New Jersey bill. The Illinois law doesn't require not-for-profit hospitals to pay fees to municipalities. Rather, it 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 is to get property and sales tax exemptions.
Also, the Illinois appeals court that ruled on the law last week reasoned that it was unconstitutional because the Illinois Constitution allows lawmakers to exempt only property “used exclusively” for “charitable purposes.” It's likely the Illinois Supreme Court will ultimately decide the matter.
New Jersey hospitals, however, probably wouldn't have to worry about a ruling like the one in Illinois should the New Jersey bill become law, Ryan said.
That's because New Jersey's Constitution doesn't require that property only be exempted if it's used exclusively for charitable purposes, like Illinois' does.
Karen Ali, general counsel of the New Jersey Hospital Association, noted that the New Jersey Constitution already allows exemptions for buildings used for hospital purposes.
But Michael Darcy, executive director of the New Jersey State League of Municipalities, which opposes the bill, said the state Constitution prohibits lawmakers from passing “special” laws unfairly singling out certain entities for tax exemptions.
“If these businesses are being run, as the tax court said, in a manner that is indistinguishable from a for-profit business, why are they being selected to get this special treatment?” Darcy said. “The Constitution is designed so that, in laymen's terms, there's a fairness to the taxes. You cannot give tax advantages to one business over another.”
But an analysis provided to the New Jersey Hospital Association by outside legal counsel found that the bill would not violate that part of the state Constitution.
That analysis notes that the bill would not be considered “special” legislation because its exclusion of for-profit hospitals is reasonable. For-profit hospitals, the analysis says, “do not naturally” belong with not-for-profit ones.
Don Stuart, a partner at Nashville law firm Waller Lansden Dortch & Davis, said continued legal challenges to hospital exemptions in New Jersey are certainly possible, even if the bill passes.
“Particularly to a law that was perhaps quickly pulled together, and certainly in light of what happened in Illinois,” Stuart said.
Danny Chun, Illinois Health and Hospital Association spokesman, pointed out that states have many approaches on hospital tax exemptions.
"There's no one size fits all," Chun said.
Christie, a Republican candidate for president, has until Tuesday to sign the bill, if he doesn't sign it by then it will be considered vetoed. If that happens, the bill's proponents may try to re-craft or tweak it this legislative session to gain approval, Ryan said.
