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Nonprofit Hospitals Would Pay Fees in Lieu of Taxes to Help Cover Municipal Costs

Legislation offered as compromise solution in wake of court ruling on Morristown Medical Center’s tax-exempt status

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Dozens of hospitals in New Jersey get a pass when it comes to paying local property taxes, thanks to their nonprofit status. According to state law going back more than a hundred years, they deserve that exemption because they provide an overall benefit to the communities in which they’re located.

But a bill that’s been making its way through the state Legislature in the final weeks of the current legislative session could force some of those hospitals to begin paying a new fee to local governments to help cover the costs of police and fire services or to reduce overall municipal property taxes.

The legislation was introduced last month in the wake of a landmark state tax-court ruling issued last year after the tax-exempt status of Morristown Medical Center in Morris County was successfully challenged on the grounds that for-profit services – including some services offered by self-employed doctors operating on a for-profit basis -- had become too entangled with the nonprofit hospital’s overall operations.

The bill seeks to resolve that uncertainty with a blanket statewide solution that would preserve the property tax exemption for nonprofit hospitals that also house some for-profit activities. In exchange, such hospitals would begin paying a $2.50 per-bed daily fee to local governments. In addition, a $250 per-day fee would be levied for satellite emergency care facilities.

The bill would also create a special study commission to look at the issue more closely in the coming years. The legislation would not impact for-profit hospitals or tax abatements already being provided to hospitals without nonprofit status.

Its bipartisan supporters say the measure -- which cleared a key Senate committee just before Christmas -- will prevent costly litigation in several other communities where a hospital’s nonprofit status is ripe for a challenge. It would also provide a new source of revenue for local officials struggling to keep their budgets balanced in a tight economy, the supporters say.

But opponents are questioning whether the bill in its current form is too generous to hospitals at the expense of already overburdened New Jersey property owners. They want to see a deeper analysis of the tax-exemption issue before any legislation is adopted.

More than 60 nonprofit hospitals enjoy property tax-exempt status in New Jersey under tax law that dates all the way back to 1913. But last year’s ruling by a tax-court judge upended that tradition. The June ruling prompted hospital officials to reach a settlement with Morristown. The agreement resulted in nearly a quarter of Morristown Medical Center’s property now being subject to local property taxes, among other components.

The court decision also shook up the hospital industry across the state, as municipalities throughout New Jersey started to look into whether they could generate new revenue from hospitals within their own borders.

The successful challenge to the property tax exemption also presented a new dilemma for nonprofit hospitals already struggling to survive in an ever-evolving industry.

Sen. Robert Singer (R-Ocean), a primary sponsor of the legislation, called the issue one of the most critical presently before lawmakers, given the strain many nonprofit hospitals are already under in New Jersey.

“No one ever wants to see a hospital close in their district,” he said during a recent legislative hearing. “This bill allows hospitals to survive.”

Betsy Ryan, president and chief executive of the New Jersey Hospital Association, said her influential organization also supports the bill. A report released last month by the hospital association found nonprofit hospitals provided the state with more than $2 billion in “community benefits” in 2013, including the employment of nearly 140,000 tax-paying workers.

“New Jersey hospitals have long supported their communities beyond traditional healthcare services,” Ryan said.

But several witnesses spoke out against the current version of the bill during the Senate Budget and Appropriation Committee’s Dec. 21 legislative hearing, raising concerns about the broader issue of “tax equity.”

Michael Cerra, assistant executive director of the New Jersey League of Municipalities, told lawmakers that whenever tax breaks such as those offered to hospitals are accounted for at budget time, it means more of the tax burden is shifted to other property owners, including homeowners. And New Jersey homeowners already pay the highest property tax bills in the country, averaging $8,161 in 2014.

“This is not a money grab by the municipalities,” Cerra said.

Dena Mottola Jaborska of New Jersey Citizen Action also urged the lawmakers to maintain clear distinctions between nonprofit hospitals with a true public-service mission and those that have decided to “blur the lines” by allowing some for-profit activities on their premises. The bona fide nonprofits are the ones that should be rewarded with the full property tax exemption, she said.

“We want to maintain that incentive,” she said.

Despite those concerns, the senators approved the measure with amendments in a 10-1 vote with two abstentions. A similar version of the bill has been introduced in the Assembly, but it’s unclear whether it will come up for a committee vote before the current legislative session ends next week.

Cerra said taking more time could result in a solution that all sides could live with in the wake of the court ruling.

“Hopefully this is the beginning of a process, and not the end,” Cerra said.

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