After Years of Judicial and Legislative Uncertainty Hospitals Receive Their Own Property Tax Exemption Under New Law

by Franczek Radelet P.C.

[authors: Scott Metcalf and Ares Dalianis]

For the past eight years we have been reporting to you on the controversy surrounding the determination of property tax exemptions for Illinois not-for-profit hospitals. The issue reached the Illinois Supreme Court in April 2010. At that time we reported on the Court’s decision in Provena Covenant Medical Center v. Dept. of Revenue, which upheld the revocation of a charitable property tax exemption because the hospital in question did not prove a sufficient level of charitable medical care was being provided. Most recently, in March of this year we reported on the Governor lifting a moratorium on hospital property tax exemption decisions. The controversy revolved around how to measure the amount of charitable care provided by hospitals. Last month, the Governor signed P.A. 97-688 into law, resolving this issue and creating a new type of property tax exemption specifically designed for hospitals. The new law represents a compromise among the various interest groups involved in this issue for almost a decade.

P.A. 97-688 adds a new section to the Property Tax Code dealing specifically with property tax exemptions for hospitals. Prior to the addition of this section, hospitals were only eligible for exemptions if they could demonstrate that they were “institutions of public charity.” The new Section 15-86 of the Property Tax Code provides a bright line calculation to determine eligibility for the exemption. Essentially, if the total value of a hospital’s charitable services or activities meets or exceeds the hospital’s estimated property tax liability, the hospital may claim the exemption.

The statute identifies seven types of hospital services and activities that constitute charitable activities. These include:

  • Free and discounted hospital care for the indigent;
  • Financial or other support of health care programs or services for the indigent;
  • Subsidizing physicians treating low-income persons;
  • Disease management and prevention for low-income persons in the community;
  • Financial support of government programs providing health care for low-income persons, such as Medicaid;
  • Financial or in-kind subsidies to state or local government health care programs; or
  • Any other activity provided by the hospital that the Department of Revenue determines relieves the burden of government or addresses the health of low-income or underserved individuals.

The statute then specifies how to estimate a hospital’s property tax liability. A hospital will calculate its estimated property tax liability by multiplying the lesser of the actual assessed value placed upon the property by a local assessing official or the estimated assessed value of the exempt portion as determined by the hospital, by the state equalization rate and the applicable tax rate. In order to maintain a property tax exemption, the property owner must file an affidavit with the chief county assessment officer, on or before January 31 of each year, accompanied by an exhibit showing (1) the value of its qualifying charitable services or activities and (2) the value of its estimated property tax liability.

The Illinois Department of Revenue is working on how the new law will be implemented. For new exemption filings the Department will be creating a form and rules for applicants to follow in order that they submit the necessary information to the Department. The Department expects to have to have the forms available by Labor Day. For applications that are currently pending, which includes some of the largest hospital properties in the State, it is likely that the Department will be reviewing the existing filings to see if there is sufficient information in the application to evaluate the request under the new law. If the pending applications have sufficient data the Department will likely be deciding them with the information already provided rather than asking the hospitals to submit new information with the anticipated new form.

Informed sources believe that 90% of all not-for-profit hospitals will qualify for exempt status under the new law and that the remaining 10% will need a few years to arrange their finances to qualify. Should pending applications of hospitals currently paying property taxes be granted, refunds will issue for those properties where the taxes have been paid. Given the size and value of some of the new hospital construction throughout the State, the refund issuances may be significant. Going forward, however, the new law at a minimum provides certainty in this area of the law.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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