NJ lawmakers seek formula for taxing nonprofit hospitals’ for-profit ventures

After a dispute over one New Jersey hospital’s nonprofit status, lawmakers in the Garden State say they’re looking to set statewide rules to govern when — and how much — medical centers must pay in property taxes.

Atlantic Health System, owner of the Morristown Medical Center, will pay the town of Morristown about $15 million to settle a years-long legal challenge over property taxes there.

Sen. Robert Singer, the ranking Republican on New Jersey’s Senate Health Committee, wants a legislative fix that acknowledges hospitals need to pay their fair share. He said he also wants to block municipalities from financially devastating hospitals.

“They’re looking at this as a cash cow, this is new-found taxable money that was never there before,” said Singer of Ocean County. “Many towns are looking at it as a way to close their budget gap.”

Betsy Ryan, president of the New Jersey Hospital Association, said there are many ways that hospitals give back to host communities. Sometimes they provide in-kind services, while other medical centers establish a formal financial agreement called a payment in lieu of taxes. The Morristown hospital had one of those PILOT agreements, but Ryan said new town administrators were seeking new contract terms.

Ryan said her group was surprised by the Morristown decision. “Hospitals provide a lot of community benefit to the towns they serve, they provide a lot of charity or indigent care,” Ryan said.

Tax-law professor Christine Allie from Widener University Delaware Law School said, in recent years,  states and municipalities want to tighten up the rules for the organizations that are granted tax-exempt status to include groups “that are stepping in and providing services that government would otherwise need to provide.”

As medical centers grow and diversify their services, Allie said, towns should ask for taxes on money-making ventures.

“This is the right place for the government to go to raise more revenue,” she said.

“There are a lot of nonprofits throughout the country that used to focus more on charitable purposes. Now they’ve moved,” Allie said. “If you see an organization where a lot of people are making six figures and, at medical establishments, seven figures, it’s likely running more like a business than a pure charity.”

“Even if you are tax-exempt, and you are a large community hospital employing hundreds of people, managing the health of your community, you may have a leader that has a compensation that reflects that level of responsibility,” said Scott Bishop, senior vice president for legislative advocacy at The Hospital & Healthsystem Association of Pennsylvania.

The judge who oversaw the settlement in the New Jersey case had a lot of  “discretion,” according to Bisop who said that, across the state line, Pennsylvania law offers clearer guidelines about the requirements an organization must meet to qualify as a tax-exempt not-for-profit.

New Jersey lawmakers say they are working fast to find a tax formula that’s fair to municipalities and medical centers both.

The equation will likely be more complicated than simply counting up the number of beds at a medical center. As health care delivery shifts, many hospitals are shrinking their bed counts as they expand their offerings, Singer said.

He said he’s hoping to have a bill on the governor’s desk before New Jersey starts a new round of property tax assessments in January.