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Feb 24

Hospital Property Tax Subsidy Bill Now Law

Posted on February 24, 2021 at 10:05 AM by Legislative Staff

On February 22, Governor Murphy signed A-1135 (now, P.L.2021, c.17) into law. The League opposed this bill throughout the protracted legislative process, and is disappointed with the Governor’s decision to sign the bill. 

P.L.2021, c.17 attempts to resolve a conflict between the traditional notion of tax exemption for nonprofit hospitals and the modern business practices of these nonprofits. This issue came to the forefront after court decision that sided with a municipality that had challenged the tax-exempt status of a hospital system within their community. Siding with the municipality, the court found that because of the way the nonprofit hospital ran its business operations that the entire property could not be considered nonprofit, and therefore a large portion of the facility should be subject to taxation.

After this court decision many other municipalities examined the business operations of the nonprofit hospitals in their own communities and began to challenge the tax-exempt status. 

P.L. 2021, c.17, seeks to overturn this well-reasoned court decision which helped shed light on the modern practices of New Jersey’s nonprofit hospitals, and exposed how their for-profit activities disqualify them from property tax exemption. The new law however, only reinforces the “legal fiction” of today’s nonprofit hospital, which was identified in that ruling. 

From the onset, the League has been supportive of a legislative solution to this issue. Over the past years, we have worked with legislators and stakeholders in an attempt to craft a consensus solution. Unfortunately, we were unable to achieve this goal, and the bill signed into law reflects primarily hospital interest at the expense of local taxpayers.

We believe that this new law violates both the spirit and the letter of the NJ Constitutional requirement of uniform taxation and exemption by creating a special exemption class consisting of entities owned by non-profit organizations, providing for-profit medical services in a hospital setting. Entities owned and organized as nonprofits but providing the same for-profit medical services would not be entitled to tax exemption. This disparity clearly runs afoul of the State’s Constitution and leaves this new law vulnerable to a legal challenge.    

 Provisions of the new law include:

  1. The owner of property used as a hospital or a satellite emergency care facility that is exempt from taxation is to be annually assessed a community service contribution fee.
  2. For hospitals, the annual community service contribution is calculated using a licensed bed as a metric. Starting in 2021, the annual contribution equals $3 a day for each licensed bed at the hospital in the prior tax year. The number of beds shall never be less than the number of beds in this initial year.
  3. For satellite emergency care facilities, the contribution is $300 for each day in the prior tax year.
  4. The contribution for hospitals and emergency care facilities will increase by 2% each tax year.
  5. The annual community service contribution is reduced by any amount a hospital or satellite emergency care facility provides to a host municipality under any voluntary agreement that is in place in the prior tax year.  
  6. The annual community service contribution is payable in equal quarterly installments, payable February 1, May 1, August 1, and November 1. It is unclear at this time what the status of the February 1, 2021 installment is, given that the bill was signed and became effective after this date.
  7. Municipalities must provide 5% of contributions to the county.
  8. Agreements already entered into between municipalities and hospitals are still valid. For hospitals and host-municipalities that have already entered into a voluntary agreement prior to the enactment of the law, the hospital will be required to pay the greater of the amount agreed upon in the agreement or the community service contribution, for the duration of the agreement.
  9. Hospitals and host-municipalities are not prohibited from entering into a voluntary agreement requiring payments in addition to the community service contribution. There is, however, little if not zero incentive for a hospital to enter into such an agreement.

P.L.2021, c.17 also establishes the Nonprofit Hospital Community Service Contribution Study Commission within the Department of Health. The 10-member commission consists of the Commissioner of Health, the Director of Local Government Service in the Department of Community Affairs, two members of the Senate appointed by the Senate President, two members of the Assembly appointed by the Assembly Speaker, two members who are CEOs of hospitals subject to the contribution to be appointed by the Governor, and two mayors of municipalities eligible to receive the contribution also appointed by the Governor.

The Commission is tasked with studying the implementation of P.L.2021, c.17 and the community service contribution, and shall issue a report to the Governor and Legislature, initially within one year and then every three years. The report shall address the adequacy of the amount of the contribution, the administration and equity of the contributions, and any recommendations for improvement.

The League is continuing to evaluate the impact P.L.2021, c.17 will have on host-municipalities. We also understand there is the potential for the law to be challenged.  We will keep all members updated on this matter as it progresses. Meanwhile, you should be sure your municipal attorney, administrator, and tax collector and assessor are aware of this new law.

Contact: Frank Marshall, Esq., Associate General Counsel, or 609-695-3481 x137.