A lawsuit filed Friday against a New Jersey hospital is the latest in more than a dozen legal challenges to not-for-profit hospitals' tax exemptions in that state following a court decision last year and a failed legislative fix.
“I think it is evidence of what we feared would occur if we did not get a statewide legislative solution enacted into law,” said Betsy Ryan, New Jersey Hospital Association CEO, of the legal actions.
Municipalities are increasingly scrutinizing hospital tax exemptions across the country, saying hospitals operating more like for-profits should pay their fair share for services. Others, however, say municipalities are simply cash-strapped and trying the tactic as a way to close budget gaps.
Some of the lawsuits, such as the one filed Friday by the municipality of North Bergen Township against the 206-bed Palisades Medical Center, are challenging hospitals' tax-exempt statuses in general. About a dozen of the legal challenges involve municipalities seeking tax money that hospitals didn't have to pay in the last year or two.
The challenges were filed after a New Jersey tax court ruled against Morristown (N.J.) Medical Center in June.
In that case, the judge said that because the hospital operated in many ways like a for-profit business, it should not be exempt from property taxes. The judge also concluded that if all hospitals operate like Morristown then “for purposes of property-tax exemption, modern nonprofit hospitals are essentially legal fictions”—opening the door to similar challenges across the state. The town and hospital in that case ultimately settled for $26 million.
In response to that ruling, the New Jersey Legislature passed a bill (PDF) in January that would have solidified hospitals' tax exemptions in exchange for them paying fees to their municipalities. Gov. Chris Christie, however, didn't sign the bill, resulting in a pocket veto.
The bill's proponents had hoped it would help keep municipalities and hospitals out of court. But the bill's critics said it would have singled out hospitals for special treatment in violation of the state's constitution, and they called the fees ($2.50 a day per bed and $250 a day for satellite emergency-care facilities) arbitrary.
Ryan said the hospital association is talking to legislative leaders and the governor's office about moving new legislation on the issue soon, but she said couldn't provide more details.
“We're still hopeful we can get a statewide solution that we hope will bring certainty to this issue,” Ryan said.
Philip Swibinski, a spokesman for North Bergen, which filed its lawsuit Friday, said the township would also like to see a bill passed.
“But in the event that doesn't happen, we want to make sure we're protected and have this other avenue as well,” he said of the lawsuit.
Swibinski said the township isn't looking for the full amount in taxes that the hospital—which sits on a pricey piece of property on the Hudson River waterfront with a view of Manhattan—would normally have to pay. But it is seeking “a fair and equitable arrangement from the hospital that protects taxpayers and protects the rights of the township to seek tax revenue.”
Palisades CEO and President Bruce Markowitz said Monday that if the hospital didn't have its tax exemption “it would have a dramatic effect on Palisades for sure,” though he didn't have an exact number.
“I think all of us in the state want to follow the legislative process, and it doesn't benefit anybody to have a long and protracted legal challenge,” Markowitz said. He said such challenges are time-consuming and costly for both hospitals and municipalities.
Markowitz said he hopes to see a legislative solution this session, and is confident that his local leaders aren't looking to bankrupt hospitals. He also noted that New Jersey hospitals already pay a tax to support some state services and provide large amounts of charity care.
Michael Meissner, a tax partner at Squire Patton Boggs, said he anticipates the state will likely pass legislation to address the issue. He noted that when Christie pocket-vetoed the bill, he didn't state his opinion on it. Rather, Christie's office criticized the process by which the bill was passed.
A Christie spokeswoman called the legislature's votes “hasty” at the time.
Even if another, similar bill were passed, it might not end the legal challenges.
Tax appeals from at least seven of the municipalities challenging hospitals' exemptions in 2014 and 2015 would still likely have been filed even if Christie hadn't vetoed the original bill, said Martin Allen, an attorney for the seven municipalities with DiFrancesco Bateman Kunzman, Davis, Lehrer & Flaum.
Those municipalities include Rahway, New Brunswick, Summit, Long Branch, Rariton Township, Belleville and Freehold.
The municipalities felt the bill was unconstitutional because it unfairly singled out certain hospitals for tax exemptions. The New Jersey Hospital Association disagreed and found in an independent analysis that the bill would not have been unconstitutional.
The New Jersey court filings come amid renewed scrutiny on hospitals' tax-exempt statuses across the country.
Some experts say it's just municipalities looking to boost their budgets. But Allen, who also represented Morristown in New Jersey in its court challenge, said that's not what these challenges are about.
“It's a concern when residents and taxpayers are paying these high taxes and then they find out a company is being run in their municipality, and they're subsidizing that company through their taxes and a company is profiting by that subsidy,” Allen said. “The money that a municipality taxes is not going into an individual's pocket. It's there to support the services that need to be provided.”
An Illinois appeals court ruled in January that Illinois' law defining what not-for-profit hospitals must do to get their exemptions violates that state's constitution. That ruling stemmed from a case involving the city of Urbana and other local taxing districts brought by Carle Foundation Hospital, also in Urbana.
The Illinois Department of Revenue has temporarily stopped reviewing hospitals' applications for property tax exemptions in light of that decision, which will be reviewed at the Illinois Supreme Court.
Hospitals in Ohio and Pennsylvania have also faced challenges.
