Ruling Throws Illinois Hospitals' Tax Exemptions into Question
CHICAGO (AP) — An Illinois appeals court decision has reopened a statewide dispute over whether hospitals should be exempt from paying millions of dollars in income taxes and property taxes to local governments.
The Illinois 4th District Appellate Court ruled Tuesday that part of a 2012 law that allows hospitals to avoid taxes is unconstitutional.
The issue, which brewed for years before a legislative compromise defined how hospitals could qualify for tax breaks, is likely headed to the Illinois Supreme Court, as well as lawmakers and Gov. Bruce Rauner, according to Laurence Msall of the Civic Federation, a nonpartisan government research group.
"The Legislature could wait (until the Supreme Court rules), but issues will continue to mount," Msall said. "The Illinois Department of Revenue needs some direction from both the Legislature and the (Rauner) administration on how to handle pending applications."
Five hospitals have applications for tax exemptions before the revenue department: Peoria-based Methodist Services Inc. (two applications), NorthShore University Health System in Lake Forest, Mercy Hospital and Medical Center in Chicago and Swedish Covenant Hospital in Chicago.
This week's ruling involves a case against the city of Urbana and other local taxing districts brought by Carle Foundation Hospital, which was seeking relief from taxes in 2004-2011.
A lower court sided with the hospital, but the appeals court reversed that decision, saying the Illinois Constitution allows lawmakers to exempt only property "used exclusively" for "charitable purposes."
"An unconstitutional statute is unenforceable from the moment of its enactment," the ruling states.
Urbana Mayor Laurel Prussing anticipates the hospital, which had been the largest taxpayer in the city of 41,000, will try to get the case in front of the Illinois Supreme Court.
"Part of the inequity in the tax system is we have these very wealthy entities that can afford all kinds of lobbying to wiggle their way out of responsibilities," Prussing said.
Since 2012, Prussing said, the city has lost 11 percent of its assessed tax value since Carle was relieved of paying $6.5 million a year in property taxes — the vast majority of which went to Urbana and its school district.
Carle spokeswoman Jennifer Hendricks-Kaufmann said the hospital is considering options, including an appeal.
The Illinois Health and Hospital Association also expressed dismay, with spokesman Danny Chun saying the law "had ended a decade of uncertainty regarding the test for hospital property tax exemption.
"The law is clear, fair and reasonable," he added.
The Illinois Supreme Court weighed in on the issue in 2010, when it suggested nonprofit hospitals that behave like businesses shouldn't qualify for tax exemptions. Citing that court decision, the state Department of Revenue denied tax exemptions to three hospitals in 2011 and signaled more denials for other hospitals could follow.
That led to lawmakers' actions in 2012, in which hospitals won a broad definition of charity care and were required to provide free care to some patients. Investor-owned hospitals, too, were included in the tax break in a little-noticed provision that cost the state $10 million a year in lost revenue, according to an AP analysis at the time.
"This could require, in the end, an amendment to the Constitution in order to affect the needed change," said Msall of the Civic Federation, which supported the 2012 legislation as "a reasonable compromise" that balanced the interests of hospitals and government.