Zelinsky on Nonprofit Hospitals

From the Lown Institute

Zelinsky has commentary this morning about two state property tax cases that point to the "taxable future of nonprofit hospitals."  His commentary follows-up on his Virginia Tax Review article last year in which he concludes that there is no justification for exempting "nonprofit" hospitals from tax.  Here is the Introduction:

I. Introduction

In Brookdale Physicians’ Dialysis, the New York Court of Appeals upheld the taxability of real property that a nonprofit corporation leased to a for-profit corporation performing dialysis services. In Backus Hospital, Connecticut’s Supreme Court similarly upheld the taxability of personal property owned by a nonprofit hospital and used to operate a freestanding rehabilitation center.

These decisions are important statements by two states’ highest courts on their respective states’ statutes governing real estate tax exemptions. But these decisions have broader significance, as well: They point to a long-term future in which most hospitals are taxed. Hospitals today, including most nonprofit hospitals, are commercialized businesses, indistinguishable in their operations from for-profit medical providers, which are taxed. Businesses should pay tax to fund the public overhead that makes their activities possible. As these two cases illustrate, the line between exempt hospital property and taxable medical services property is artificial and arbitrary. The operations of nonprofit hospitals are heavily commercial in nature. There is no convincing basis for distinguishing today’s nonprofit hospitals from their for-profit competitors or from other for-profit medical services providers for tax purposes. As the latter are taxed, so should be the former.

This article first discusses the New York court’s opinion in Brookdale Physicians’ Dialysis. It then reviews the Connecticut court’s decision in Backus Hospital. The final section highlights the deeper significance of these decisions. In the long run, the tax-exempt status of nonprofit hospitals is not justifiable. The businesslike activities of contemporary nonprofit hospitals are indistinguishable from the commercial operations of for-profit hospitals and other for-profit medical providers. In today’s world, all these commercialized medical services providers should pay tax like other businesses do. Brookdale Physicians’ Dialysis and Backus Hospital signal a future in which most hospitals, for-profit and nonprofit alike, are recognized as the commercial businesses they are and thus are taxed.

darryll k. jones