Monday, May 6, 2013

The "Carle Problem" (the property tax burden of tax-exempt hospitals)

I have posted before about Illinois' new law governing property-tax exemption for nonprofit hospitals, and some of the havoc this has caused for local school districts now having to repay property taxes to hospitals in their districts who are eligible for exemption under this new law (see posts here and here).  But what I haven't commented on much is the relative fairness or unfairness of a particular taxing jurisdiction losing property tax revenues for a charity that benefits regional (or even national) interests.

The issue was brought home to me (almost literally, since I live in this area) by the situation involving Carle Hospital and the city and schools of Urbana, IL.  As a result of the Illinois law, Urbana schools will lose approximately $3 million in property tax revenues; the city nearly a million more, and some other local government units will suffer as well, to the tune of about $6 million in lost revenue overall.  One story in our local paper estimated that 90% of the property Carle owns, all of which is now tax-exempt under the new Illinois law (much of it may have ended up being exempt under prior law, too - I'm not necessarily blaming the situation on the new Illinois exemption statute) is located in Urbana.  But Carle is a huge hospital complex, complete with the only regional Level 3 trauma center.  While I don't know specifically how far patients come for Carle's services, the hospital certainly serves patients from next-door Champaign, Savoy, Rantoul, St. Joseph, Mahomet, Monticello, and other surrounding communities, many of which do not have their own hospital.  Yet these communities do not absorb any of the lost property tax revenue from Carle's presence - it happens to be located in Urbana, not Champaign or Rantoul or Mahomet.

This issue, of course, isn't limited to nonprofit hospitals.  Universities are another example of exempt organizations that spread their benefits regionally or nationally, yet take huge amounts of potential property taxes out of the system.  Why, exactly, should Cambridge, Massachusetts, bear the tax-exemption burden for Harvard?  Harvard has an international student body and employees that come from the entire Boston metro area.  Yes, it is certainly the case that Harvard's presence in Cambridge helps that city to attract taxpaying residents and other businesses; but it also helps all the surrounding communities, and if we base exemption on an organization's charitable outputs, well, then Harvard's exemption is the result of its supplying the world with Harvard graduates.  It seems to me that ideally the world ought to contribute in some way to Cambridge's property tax loss.

I'm not going to tackle the world just yet, but I have been discussing the issue with one of my colleagues, Laurie Reynolds, who is an expert in state and local government law.  We think that at least when it comes to Carle Hospital, there ought to be some sort of mechanism that requires surrounding communities, which benefit from Carle's patient care services (including services for the uninsured poor, which is now the basis for property-tax exemption in Illinois), to "reimburse" their "fair share" to Urbana.  The mechanism actually wouldn't be that hard to construct; Carle knows where it's patients come from and one could use this information to get some kind of rough estimate of which communities surrounding Urbana benefit from Carle.  But the "fair share" concept is bugging me.

What is the "fair share"?  Since Illinois law now bases property tax exemption on free and discounted services (very broadly defined) to the poor, should "fair share" be based on how many poor patients are served from surrounding communities?  Or should one consider all patients, since Carle provides care to paying patients, too?  After all, the classic "community benefit" argument that supports income tax exemption at the federal level encompasses a baseline that hospitals provide care to all paying patients.

Or should we go down this road at all?  It is always possible to argue that there are charities in surrounding communities that Urbana residents benefit from, but Urbana doesn't lose the tax revenue.  The problem is that these charities tend to be small social service organizations: the Salvation Army, for example, or Goodwill.  These charities don't cause anything even approaching the magnitude of property tax loss that a large nonprofit hospital complex does (or Harvard University).

I'd appreciate any thoughts . . . 


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But John, if there are spillovers for other jurisdictions, wouldn't we expect each municipality to under-invest in goods that benefit their neighbors? So one could argue that the state rule is forcing each locality to restore its spending to the level a central planner would choose. It's hard for me to see an ethical claim to reimbursement when one is being punished for acting selfishly.

Also, from a design perspective, there may well be good arguments for penalizing those who fail to create positive externalities (which is more or less what's happening for the Illinois towns that host a hospital), rather than rewarding those who do. Maybe those arguments aren't persuasive in the municipal context, but worth thinking about.

Posted by: BDG | May 6, 2013 6:43:00 PM

Urbana has no tax base because they have successfully made themselves a very uncompetitive and unpleasant place to do business. They brought this upon themselves. Let them raise taxes on their residents. They choose to live there in that environment, let them pay the price.

Posted by: Scott | Aug 18, 2013 7:38:37 AM

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