Legal/Regulatory Overview: State Property Tax Exemption

Legal/Regulatory Overview:State Property Tax Exemption National Congress on the Un and Underinsured Washington, D.C. December 10, 2007 David F. Buysse Senior Assistant Attorney General Office of the Attorney General of Illinois

Hospitals and Property Tax Exemption • Most state property tax laws do not specifically define hospitals as exempt organizations. • Rather, as with federal tax exemption, hospitals generally have obtained state property tax exemption by qualifying as "charitable" organizations. • The charitable exemption in many states arises under state constitutional provisions.

Of what importance are property tax exemptions to non-profit hospitals? In 2006, a report prepared by the Congressional Budget Office concerning non-profit hospitals at the request of Chairman Bill Thomas of the House Committee on Ways and Means provided an estimate of the value of tax exemptions to that sector of the hospital industry in 2002.

The value of the property tax exemption was estimated to be approximately $3.1 billion.

The CBO also compared the provision of uncompensated care by nonprofit, for-profit and government hospitals.

The average difference between non-profit and for-profit hospitals were “slight,” albeit statistically significant. • “In the unadjusted results, nonprofit hospitals were found to devote a slightly larger share of their operating expenses to uncompensated care than did for-profits (a statistically significant difference of 4.7 percent versus 4.2 percent).” • “After adjustment, the difference between nonprofit and for-profit hospitals in their average uncompensated-care share was a statistically significant 0.6 percentage points.”

Government hospitals were found in both the unadjusted and adjusted results to have much higher uncompensated-care shares than either non-profit or for-profit hospitals – around 13% of operating expenses.

Such facts prompt the question…. To what extent should non-profithospitals qualify for a charitable exemption from property tax?

Charitable property tax exemptions for hospitalswere challenged in the mid - 1980’s . Utah County v. Intermountain Health Care, Inc., 709 P.2d 265 (Utah, 1985) • State property tax exemptions were revoked for several hospitals owned by Intermountain Health Care by the Utah County Board of Equalizations because the hospitals in question provided little free care for the poor - less than 1% of revenues. • The Utah Supreme Court upheld the exemption revocation, noting that "the defendants in this case confuse the element of a gift to the community, which an entity must demonstrate in order to qualify as a charity under our Constitution, with the concept of community benefit, which any of countless private enterprises might provide."

Charitable sales tax exemptions for hospitalswere challenged in the mid - 1980’s for similar reasons. Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa., 1985) • The Pennsylvania Supreme Court held that state law required an organization to "donate or render gratuitously" a substantial portion of its services to those unable to pay in order for the organization to be considered charitable for purposes of sales tax exemption. • Property tax consequences - after this decision, local tax assessors challenged property tax exemption for hundreds of organizations. By 1996, exemptions for most of the state's 220 private non-profit hospitals had been challenged.

The Texas legislature enacted a statute in 1993 setting financial guidelines for exempt hospitals. “(1) charity care and government-sponsored indigent health care must be provided at a level that is reasonable in relation to the community needs, as determined through the community needs assessment, the available resources of the hospital or hospital system, and the tax-exempt benefits received by the hospital or hospital system; (2) charity care and government-sponsored indigent health care must be provided in an amount equal to at least four percent of the hospital's or hospital system's net patient revenue;” Tex. Tax Code Ann. § 11.1801(a) (2006)

The Texas legislature enacted a statute in 1993 setting financial guidelines for exempt hospitals. “(3) charity care and government-sponsored indigent health care must be provided in an amount equal to at least 100 percent of the hospital's or hospital system's tax-exempt benefits, excluding federal income tax; or (4) charity care and community benefits must be provided in a combined amount equal to at least five percent of the hospital's or hospital system's net patient revenue, provided that charity care and government-sponsored indigent health care are provided in an amount equal to at least four percent of net patient revenue.” Tex. Tax Code Ann. § 11.1801(a) (2006)

Illinois has been at the forefront of recent debates concerning property tax exemption for non-profit hospitals. • Wall Street Journal published an article in October, 2003 highlighting collection practices by hospitals in Champaign County, Illinois • The Champaign County Board of Review sought revocation of tax exempt status for the non-profit hospitals in the county in 2004 and 2005. • Illinois Attorney General Lisa Madigan proposed legislation addressing billing, collection and charity care practices of tax-exempt hospitalsin 2006.

Guidelines for charitable property tax exemption in Illinois • Charitable exemption grounded in Article IX, Section 6 of the Illinois Constitution. • Section 15-65 of the Property Tax Code provides the statutory basis for the exemption. • In Methodist Old Peoples Home v. Korzen, 39 Ill.2d 149, 233 N.E.2d 537 (1968), the Illinois Supreme Court articulated six guidelines for determining whether property is in fact used for charitable purposes as required by the Constitution and the Property Tax Code.

Methodist Old Peoples Home criteria for charitable exemption • The benefits derived are for an indefinite number of persons for their general welfare or in some way reducing the burdens on government; • The organization has no capital, capital stock, or shareholders, and does not profit from the enterprise; • Funds are derived mainly from private and public charity, and the funds are held in trust for the objects and purposes expressed in the organization's charter;

Methodist Old Peoples Home criteria for charitable exemption • Charity is dispensed to all who need and apply for it; • No obstacles are placed in the way of those seeking the benefits; and • The exclusive, i.e., primary, use of the property is for charitable purposes.

Riverside Medical Ctr. v. Dept. of Revenue, 342 Ill. App.3d 603, 795 N.E.2d 361 (3rd Dist. 2003) • The court noted that 97% of Riverside’s net revenue of over $92,000,000 million came from patient billing and net revenue in the Riverside system was $10,000,000, although the specific facility in question had a net operating loss of $850,000. According to the court, “ ...in general this level of revenue is not consistent with the provision of charity.” • Further factors which weighed against Riverside’s exemption application were that it did not broadly advertise its charitable policies, established a 3% of revenue charity guideline, and received well less than 1% of its revenue in the form of charitable contributions.

Eden Retirement Center v. Department of Revenue, 213 Ill.2d 273, 821 N.E.2d 240 (2004), reaffirms Methodist Old Peoples Home “The appellate court's analysis is erroneous. The Methodist Old Peoples Home criteria are not mere non-statutory ‘hurdles’ intended to apply only to the pre-1984 version of the charitable-use property tax exemption statute. Rather, this court articulated the criteria in Methodist Old Peoples Home to resolve the constitutional issue of charitable use.” “The legislature could not declare that property, which satisfied a statutory requirement, was ipso facto property used exclusively for a tax-exempt purpose specified in section 6 of article IX of the Illinois Constitution. It is for the courts, and not for the legislature, to determine whether property in a particular case is used for a constitutionally specified purpose.” (emphasis added)

Community Health Care, Inc. v. IDOR369 Ill.App.3d 353, 859 N.E.2d 1196, (3d Dist., 2006) • Originally issued as an unpublished order. Upon Illinois Department of Revenue’s request, the decision was published on December 18, 2006, and now can be cited as precedent. • Decision affirmed IDOR revocation of a non-profit FQHC’s charitable property tax exemption. • Court held “…that a 27% use is insufficient to find the property is used primarily for a charitable purpose…” • Illinois Supreme Court denied PLA in Community Health Care, Inc. v. IDOR on March 28, 2007.

Illinois Department of Revenue v. Provena Covenant Medical Center The Director of the Illinois Department of Revenue issued a decision revoking Provena Covenant Medical Center’s property tax exemption for 2002 tax year in September, 2006. • Only .7% of 2002 revenues applied to charity care. • Noted Medicare/Medicaid shortfalls do not constitute charity care • 97.7% hospital revenue derived from patient services rather than charitable contributions.

Illinois Department of Revenue v. Provena Covenant Medical Center • On August 8, 2007, Circuit Court of Sangamon County entered an order reversing the decision of the Director. • Department of Revenue filed a notice of appeal September 7, 2007.

In 2006, Center for Tax and Budget Accountability estimates benefits of tax exemption for select non-profit hospitals in Cook County, Illinois.

In 2006, Center for Tax and Budget Accountability estimates benefits of tax exemption for select non-profit hospitals in Cook County, Illinois. • Illinois state and local tax exemptions accounted for 96 percent of the tax benefits received by the 21 hospitals and hospital networks analyzed in the study. • The annual benefit from property tax exemption was estimated to be $209.1 million (or 64% of all tax benefits received) for the hospitals and hospital networks in the study. • The cost of charity care provided by the hospitals and hospital networks in the study was estimated to be approximately $105.2 million.

In 2007, Cook County, Illinois estimates the benefits of property tax exemption for non-profit hospitals. • In 2006, the Cook County Board of Commissioners requested that the Cook County Assessor’s Office provide them with a report estimating the taxable property value for all Cook County hospitals that are currently exempt from taxation. • Pursuant to the Board’s request the Assessor’s Report was limited to the 54 licensed general hospitals in Cook County and did not address the valuation or tax exemption status of other medical facilities or other properties owned by charitable institutions. • The Assessor’s Report was issued November 6, 2007.

In 2007, Cook County, Illinois estimates the benefits of property tax exemption for non-profit hospitals. • The Assessor's Office report, estimated a range of aggregate property value of approximately $4,300,000,000 to $4,500,000,000 as of January 2006, under the assumption that real estate of the hospitals is entirely taxable and that no portion is exempt from property taxes. • The estimated taxes to be generated from utilizing an income approach would be $238,000,000, while the cost approach would generate $241,000,000 in estimated tax revenue. • On October 17, 2007 the President of the County Board of Commissioners announced the anticipated deficit for the County’s FY 2008 budget was $239,000,000.

Legal/Regulatory Overview: State Property Tax Exemption