The rules of the fight must be fair: states should pass a uniform code for nonprofit hospital tax exemption of real property.

• Author: Mintz, Lowell R.

1. INTRODUCTION II. BASIS FOR HOSPITAL TAX EXEMPTION A. Real Property Tax Exemption is Derived from State Level Tax Exemption B. Hospitals Began as Charities C. Policy Underlying Tax Exemption for Charitable Institutions III. GENERAL DISCUSSION OF STATE METHODS TO DETERMINE TAX EXEMPTION A. What is Charity Care? B. Quantitative Test C. Multifactor Test D. Hybrid Test IV. THE MAJORITY OF STATES TREAT NONPROFIT HOSPITALS AS GARDEN VARIETY CHARITIES UNDER THE LAW FOR TAX EXEMPTION A. Utah B. Illinois C. Ohio V. PROBLEMS UNDER THE CURRENT LAW OF TAX EXEMPTION A. The World has Changed B. Evolution of the Nonprofit Hospital C. Hospital Consolidation D. The Growth Trend for Nonprofit Hospitals is Expected to Continue to be Fueled by Increasing Demand for Medical Care E. Municipal Budget Problems F. Nonprofit Hospitals Have Evolved into a Unique Form of Charitable Institution Much Different From the Model of Charity used by the Law G. Lumping Hospitals Together with Garden Variety Charities for Real Estate Tax Exemption is Problematic H. Utah I. Illinois J. Ohio K. Lack of a Uniform Standard VI. THE SOLUTION: A UNIFORM MODEL CODE FOR TAX EXEMPTION OF NONPROFIT HOSPITALS; ESTABLISHING A CLEAR STANDARD FOR "CHARITY CARE" A. Tax Exemption for Hospitals Should Be Established in a Statute that is Separate from the Law Establishing Tax Exemption for Other Charities B. A Uniform Standard is Needed C. Should a Quantitative Test be Applied? D. Proposed Uniform Code for Nonprofit Hospital Tax Exemption E. The Principals Proposed in This Model Code are Generally Accepted by the Great Majority of States F. This Model Code Should be Adopted Because Interstate Hospital Growth Will Continue Necessitating a Uniform Law for Real Property Tax Exemption VII. CONCLUSION I. INTRODUCTION

   Let's Get Ready to Rumble! (1) Iconic words said at the start of heavyweight bouts. The struggle between municipalities and nonprofit hospitals over real property tax exemption has been a recurring fight between these two heavyweights. (2) In most cases, hospitals have preserved their real estate tax exemption. (3) In two cases, however, one from 1985 in Utah and another from 2010 in Illinois, local governments have successfully stripped traditional nonprofit hospitals of their real property tax exemption. (4) These two cases are illustrative of the problems that exist under the current standards that a hospital must meet for real property tax exemption from state to state. (5)

   Governmental challenges to charitable hospitals' tax exempt status is not a new fight. (6) While the conflict is classic, the landscape and players have changed. Once flush with tax revenues, local governments are now seeking new revenue for cash strapped schools, a problem that was originally limited to the inner city but has since spread to suburbs. (7) Nonprofit hospitals have been expanding into the suburbs and to surrounding states. (8) Nonprofit hospitals are operating like for-profit hospitals, (9) starting subsidiary businesses, (10) and closing unprofitable emergency rooms in poor neighborhoods where charity care is most sought after. (11) As nonprofit hospitals have evolved, their business model is more and more like for-profit hospitals, getting away from providing charity care to those who cannot afford to pay for healthcare services. (12) As hospitals operate more and more like for-profit businesses, cities' need for tax revenue increases, local governments have renewed efforts to tax nonprofit hospitals' real estate by challenging their state level charitable tax exemption. (13) The taxing authority's recent success in the Illinois Supreme Court (14) is expected to spur a renewed effort to fight tax exemptions for nonprofit hospitals around the country. (15)

   The lines have been blurred between a charitable hospital and a profit-generating healthcare business. The definition of charitable care has been under pressure from government taxing authorities seeking to raise tax revenues by challenging the tax exemption for vast amounts of hospital real estate. (16) Charitable hospitals are pushing to expand the definition of charitable care, (17) while at the same time seeking tax exemption for a growing number of satellite properties. (18) This conflict between governments and hospitals is leading to confusion about what qualifies as charity care, warranting nonprofit status, and the privilege of tax exemption. (19) Local taxing authorities, state courts, and nonprofit hospitals all need a clear codified standard for charitable care to differentiate between medical facilities that ought to qualify for an exemption from real property tax and those that should not.

   This Note will propose a new uniform code to be adopted by each state, specific to nonprofit hospital real property, which requires hospitals to establish a clear and measurable standard for charitable care to qualify for tax exemption. This Note does not dispute that tax exemption is appropriate where charitable care is provided. Rather, nonprofit hospitals should be tax exempt at the locations at which they provide charitable care and should be required to pay taxes where they do not provide such charitable care.

   Section ii will begin by explaining the basis for nonprofit hospital tax exemption, define the differences between charitable tax exemption at the state and federal level. Also, this section will explore what constitutes a charitable hospital, and conclude by discussing the historical purpose and policy supporting the charitable tax exemption. section iii will discuss state laws governing hospital tax exemption and explain the three tests states apply to determine if hospitals should be exempt, profiling three states to illustrate each test. section iV will address how nonprofit hospitals are lumped in with traditional charities under the law for charitable tax exemption. section V will explain the problems concerning hospital tax exemption under the current law. Lastly, Section VI proposes and discusses a new uniform model code establishing a law for tax exemption specific to charitable hospitals, which will define charitable care and establish a measurable standard so both taxing authorities and hospitals will have clear guidance for the kind of charitable care necessary to justify having a tax exempt status.

2. BASIS FOR HOSPITAL TAX EXEMPTION

   1. Real Property Tax Exemption is Derived from State Level Tax Exemption

      Real property tax exemption is initially derived from the state level charitable tax exemption. (20) Every entity seeking charitable tax exemption in this country operates under two different systems, one at the state level, and the other at the federal level. (21) state and federal systems for charitable tax exemption are completely different. (22) Each system provides different benefits to exempt entities. Federal tax exempt status provides exemption from federal income taxes, makes gifts to a tax exempt entity deductible to the benefactor, and subsequently results in lower interest rates for a tax exempt entity seeking funds in the public bond market. (23) state tax exemption relieves an exempt entity from personal property taxes and real property taxes. (24)

      The standards used by the two systems to determine if an entity qualifies for tax exempt status are different. The federal system applies the community benefit standard, while most state systems rely on some form of a charitable care standard. (25) To further complicate matters, each state has its own laws governing state tax exemption and those laws vary. (26) This Note will examine state tax exemption, focusing on the resulting real property estate tax exemption.

   2. Hospitals Began as Charities

      The Webster's Dictionary definition for hospital is "[a] charitable institution for the needy, aged, infirm, or young ... an institution where the sick or injured are given medical or surgical care." (27) Caring for the sick is considered to be charity. (28) The plain meaning of the word hospital is understood to mean that hospitals are charities. (29) This definition has been ingrained into our society because of how hospitals have historically operated.

      Prior to the Declaration of independence, hospitals were established for the purpose of caring for those who could not pay. (30) From the founding of Penn Hospital in 1751 into the 1880's, hospitals solely provided care to those who could not afford to pay a private physician. (31) Medical care administered at hospitals was thought to be inferior because it was provided to the poor free of charge. (32) Those who could pay went to private physicians and paid for medical care believing that if care were paid for it was superior to the free care provided to indigents at hospitals. (33) Early hospitals were entirely funded by charitable gifts and donations, and doctors volunteered their services to care for the poor free of charge. (34) Thus, hospitals originated as purely charitable institutions. (35)

   3. Policy Underlying Tax Exemption for Charitable Institutions

      There are two lines of policy that form the foundation for nonprofit tax exemption in the United States. (36) First, nonprofit organizations allow private citizens and organizations to solve society's problems rather than relying on the government. (37) Nonprofit organizations are effectively reducing government burdens by providing charity. (38) Government grants tax exemption to a nonprofit for reducing its burden "quidpro quo'" (39) Second, exemption is granted to charitable organizations that engage in activities that further the values or goals of the community thereby conferring a benefit. (40) Conceptually, the offsetting effect of the community benefit justifies the loss of tax revue from the exemption. (41) This community benefit is considered a gift to the community justifying the tax exemption. (42)

      There are several ways in which a hospital may establish itself as a public charity qualifying for tax exempt...