Ground is shifting under local, state and federal tax exemption policy and practice prompted by excesses, abuses and, simply, in the case of property tax exemptions, by the inequitable impact on municipalities that provide costly services that are, essentially, free for the tax-exempt (but paid for by taxpayers).
The case of Morristown v. Morristown Medical Center, the town’s hospital and its 40-acre medical complex, provides an example that has been much in the news of late because the New Jersey Tax Court ruled that the property tax-exemption granted the medical complex could not be supported given certain for-profit activities undertaken there. Accordingly, Atlantic Health Systems, the hospital’s parent, is required to pay taxes for the several years in question.
The hospital system is on its way to a higher court of appeal. But the law is often a crude avenue for managing complex policy issues and the challenge here is not to determine whether the medial center is a legal charity or a for-profit business but to devise a fair formula to provide revenue from the hospital to the town, either as a payment “in lieu of taxes” or a fee or assessment intended to help cover the costs of town services—police, fire, road maintenance, and so forth. Engaging in negotiations make more sense.
At the same time, legislation is being prepared that would require not-for-profit hospitals throughout the state to pay a fair share of property taxes. State Senate President Stephen Sweeney (D-Gloucester) plans to introduce a bill and predicts its easy passage in the Senate. Since the tax court ruling, moreover, several hospital systems have indicated their support for making property tax payments, including Barnabas Health, the state’s largest system, and Cooper University Healthcare. And, Betsey Ryan, president of the New Jersey Hospital Association, indicates that her group is considering several policy approaches.
So, it’s clear, this landscape is shifting and municipalities are gaining ground. A one-size-fits-all approach, however, is not wise. What is needed is a fair-share formula to meet specific circumstances. Guidelines are preferable to rigid formulas. While flexibility is important, towns need commitments beyond occasional voluntary payments in order to provide predictability for their budgets.
This shift has wider significance. Indeed, the exemptions and expenses of other not-for-profits, are increasingly being questioned. Foundations, museums, theaters, social service providers, schools and universities, in some cases, make voluntary payments to their host communities, but, increasingly, that’s not enough. Princeton University, for example, has made voluntary payments in the past but its host community continues to challenge its tax-exempt status. It is a question of equity: Shouldn’t those who benefit from services be responsible for some portion of their cost whether they are obligated to pay taxes or they aren’t?
Salaries paid to the heads of not-for-profit entities are frequently scrutinized now, and often derided, notably at universities and hospital systems. The tax court judge in the Morristown case, for example, observed that the medical center CEO’s salary–$5million in 2005, one of the contested tax years–was competitive with the for-profit sector. And, with a total compensation package exceeding $7 million (in 2012), the president of Rensselaer Polytechnic Institute is a constant target. Management and performance fees paid on university endowments have been vigorously contested in some quarters, understandably. Yale University, for example, paid more than $450 million to private equity fund managers as compensation to manage its $8 billion endowment in 2014. (The fund is exempt from corporate income tax because it supports “the advancement and dissemination of knowledge.”) Contrast that amount with the $170 million it handed out that year for tuition assistance, fellowships and prizes. The proportion, reportedly, was similar at Princeton University. Beyond the questions one might raise about how tax-exempt funds are being spent, are there not tax implications as well?
Commentary, The Bernardsville News, October 30 (Guest column by Linda Stamato)