Hospital Property Tax Exemptions on the Radar

Tax-exempt hospitals are entitled to a multitude of federal and state tax benefits, with an estimated total annual value of $12 billion. With numbers this large, many jurisdictions are calling for a return benefit in order to qualify for the property tax exemption. At a minimum, jurisdictions are asking for some kind of compensation to pay for the benefits provided to the nonprofit. In the case of nonprofit hospitals, some states have enacted legislation that requires a certain amount of charity care or community benefit in order to justify property tax exemptions. Other jurisdictions, however, such as Boston, have entered into arrangements with nonprofits titled “payments in lieu of taxes,” or PILOTs, in which nonprofits compensate local governments for some of the foregone property tax revenue. These payments help subsidize police and fire protection, construction of public goods and other vital operations, and are provided by all types of nonprofit entities, ranging from hospitals to universities.

While common, however, PILOTs are not without controversy. A lack of transparency, the possible political nature of a favorable deal and the question of whether institutions are actually paying their “fair share” are common criticisms of the arrangement.

State Legislation

After the Illinois Department of Revenue denied exemptions to several prominent tax-exempt hospitals, arguing that they were not operating in a charitable manner, the state enacted a law in 2012 requiring tax-exempt hospitals to provide a certain level of charity care and community benefits commensurate with the value of their property tax exemption. Today, Illinois-based nonprofit hospitals can enjoy a property tax exemption only if they can prove that factors such as charity care, preventive care, medical research and professional training are equal to the value of the exemption.

In Texas, as well, nonprofit hospitals must provide community benefits as a condition of state tax exemption. Texas law gives a hospital four alternatives that cover combinations of charity care and government-sponsored indigent health care in amounts equal to varying sums of net patient revenue.

For jurisdictions that do not have laws in place, critics are starting to challenge such exemptions.

A hospital that loses its tax-exempt status or its property tax exemption could face financial disaster. Bond covenants could require that tax-exempt bonds be called in, turning longer term liabilities into current liabilities. The hospital’s financial difficulties could also ripple out toward the community it serves, as in many jurisdictions, nonprofit hospitals are major employers, and layoffs might be an unintended consequence. Thus, it is critical that communities and nonprofit hospitals come to an agreement on whether a return benefits arrangement is appropriate and useful.

Federal Legislation

The Affordable Care Act introduced section 501(r) into the Internal Revenue Code, which requires a 501(c)(3) hospital to prepare a community health needs assessment (CHNA) and have an implementation strategy to address the findings of the assessment. Though the new federal tax requirements for 501(c)(3) hospitals also include financial assistance, billing and collection, and charges policy requirements, there is no requirement to provide a dollar amount or percentage of revenue in charity care or community benefits.

With varying policies on the state and federal level, nonprofit hospitals must navigate complex waters in order to maintain their exemptions while carrying out their mission.

Do you think a tax-exempt hospital should be required to provide a pre-set level of charity care/community benefits to qualify for property tax exemptions or do you think a PILOT is the more appropriate route to take?

Hospital Property Tax Exemptions on the Radar,” originally appeared on The Nonprofit Standard, the blog of BDO’s Nonprofit & Education practice, that offers thought leadership on the accounting, tax, and management challenges faced by nonprofit organizations, along with commentary on sector trends and developments.