Property Taxes and Non-Profit Hospitals
Property taxes fund our police, firefighters, roads, and schools.
These services benefit everyone, and most property owners – from seniors on fixed income to large corporations – pay their fair share of taxes to support them.
However, many large hospitals and healthcare providers do not pay property taxes because they claim to be tax-exempt “institutions of purely public charity.” Many of these hospitals have high revenues, have benefited from growth and consolidation in the healthcare industry, and own large amounts of valuable property in the counties, municipalities, and school districts where they operate.
Because property taxes are the main source of revenue for local governments, other property owners pay more in taxes due to the exempt status of these large hospitals. A 2014 report by the Auditor General of Pennsylvania found that ten counties in Pennsylvania lost a combined $177 million in potential taxes due to the exempt status of certain medical facilities, increasing the tax burden on other property owners.
Historically, many hospitals have been exempt from property and other taxes based on their origins as religious and charitable institutions. “Non-profit hospitals have changed significantly, however, from their early origins as charitable alms houses providing free basic medical treatment to the infirm poor. . . . Like their new for-profit competitors, today’s non-profit hospitals have evolved into labyrinthine corporate structures, intertwined with both non-profit and for-profit subsidiaries and unaffiliated corporate entities.”
AHS Hospital Corp. v. Town of Morristown, 28 N.J. Tax 456, 465 (2015). Unlike the charitable hospitals of the past, the uncompensated care provided by today’s nonprofit hospitals “may not be substantially distinguishable from that given by for-profit hospitals.” Nina J. Crimm, Why All is Not Quiet on the “Home Front” for Charitable Organizations, 29 N.M. L. REV. 1, 21-23 (1999). Furthermore, a 2001 study found that “while the typical chief executive received $169,000 at non-profit hospitals . . . in some cases those numbers climbed into the millions,” an extraordinary amount for institutions that allegedly have no private profit motive.
Rebecca L. Traylor, The “Charitable” Privilege: Evaluating the Status of Property Tax Exemptions for Institutions of Purely Public Charity in Pennsylvania, 55 Duq. L. Rev. 271, 299-300 (2017); Eric C. Twombly & Marie G. Gantz, Executive Compensation in the Nonprofit Sector: New Findings and Policy Implications, URBAN INST. 2 (Nov. 2001).
Under Article VIII, Section 2(a)(v) of the Pennsylvania Constitution, tax exempt status is limited to “institutions of purely public charity.” According to the Pennsylvania Supreme Court, an institution must meet five criteria to be considered a purely public charity.
It must (1) advance a charitable purpose; (2) donate or render gratuitously a substantial portion of its services; (3) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; (4) relieve the government of some of its burden; and (5) operate entirely free from profit motive. Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985). If an organization does not meet all five criteria, it does not qualify as a tax-exempt charity.
Local government entities including school districts, municipalities, and counties may challenge hospitals’ tax exempt status in order to collect taxes on properties owned by hospitals that may no longer qualify as “purely public charities.”
Given the strict requirements of the law and the fact that many of these hospitals now resemble for-profit businesses, the hospitals may face a heavy burden in defending their tax exemptions.