Nonprofit hospitals in New Jersey breathed a sigh of relief Friday, thanks to Gov. Chris Christie’s new proposal for a two-year freeze on local efforts to challenge the hospitals’ exemption from property taxes.
Most hospitals in New Jersey are nonprofits, meaning that revenue goes back into the facility rarther than to shareholders. In New Jersey, like most other places, it also means that they’re exempt from property taxes.
But in June, a judge ruled in favor of a municipality that challenged Morristown Medical Center’s tax-exempt status, even as a nonprofit. Amid the detailed decision, the judge ruled that some of the hospitals’ practices were similar to that of a for-profit entity. Included on that list, was its contracting with providers that are for-profit.
That precedent and clarification have most other nonprofit hospitals worried, according to John Jacobi, from Seton Hall Law School in Newark.
“If that is no longer regarded consistent with a nonprofit tax-exempt operation, then all the hospitals in New Jersey should be nervous,” said Jacobi. “And they are nervous.”
Heeding the Morristown case, several other New Jersey cities followed suit with their own challenges to hospitals’ property-tax exemption.
The developments come as, nationwide, nonprofit hospitals are under increasing scrutiny for the community services and “value” they provide, compared with that of for-profit hospitals, as well as in relation to the benefit they reap from not paying taxes.
“There has been a movement in states like Utah and Illinois to challenge that status,” said Jacobi. “The research is not clear exactly how much value communities get from nonprofit hospitals or whether they’re better, but the point is that communities are now saying ‘we are losing a lot of property tax as a result of not taxing large, sophisticated business … so we should think long and hard about whether these facilities are sufficiently different from other commercial entities in our community that it deserves to have a tax-exempt status.”
But Jacobi added that hospital systems are incredibly complicated in terms of their role in the community and the way they operate.
On Friday, Christie called for a measure to freeze any municipal efforts to reverse a hospital’s tax-exempt status for two years. He also called for a special committee to examine nonprofit and tax-exempt issues in the meantime.
“The commission will provide for a comprehensive review of the property tax-exemption statute, and develop proposals for consideration for the executive branch and the legislature that will address the tax exemption in a manner that is fair to the hospitals, fair to the municipalities, and most of all, fair to local tax payers,” Christie said.
Earlier this year, Christie vetoed a measure, backed by nonprofit hospitals, that would have essentially required them to pay smaller community service fees instead of taxes.
Christie’s current proposal would need legislative approval. It’s also backed by the New Jersey Hospital Association.
“This bill allows our state to take a deep breath and work carefully and collaboratively to address the uncertainty created by the tax court decision on nonprofit hospitals’ tax exemptions,” said NJHA President Betsy Ryan in a statement.
State Senate President Steve Sweeney, meanwhile, criticized Christie for putting any efforts on hold for two years.
“The problem should not be ignored because it will continue to leave municipalities and their taxpayers paying the price for inaction and the hospitals in a continued state of uncertainty,” Sweeney said. “If the governor and [Assembly] Speaker [Vincent] Prieto agree to support this plan, I will do the same in the Senate with the hope that it will lead to productive and workable solutions.”
In a statement, Prieto responded, “A moratorium is not a solution to this problem. Neither is a commission.”
While the current municipal challenges don’t appear to directly affect hospitals in South Jersey, Mark Nessel, chief operating officer of Lourdes Health System, said its tax-exempt status is a major part of its operations.
He welcomed Christie’s proposal and a statewide, predictable approach to an issue that could instead potentially involve a lot of local lawsuits, time and effort.
“We’re happy because we believe we provide a lot of community benefit, and I think this is a very complex issue,” he said. “As far as how to tax nonprofit hospitals, it’s different across the state.”