IL Supreme Court mulls legality of hospital property tax exemptions; could await better test case

By Jonathan Bilyk | Jan 13, 2017

Editor's note: This article has been revised to correct and clarify the role of the Illinois Department of Revenue in the case at issue. 

The Illinois Supreme Court could soon decide whether hospitals in Illinois should be allowed to avoid paying property taxes, or whether a state law used to grant them tax exemptions should be declared unconstitutional.

Or the court could simply sidestep the matter for now, and instead await the arrival of a different case better suited for addressing the sticky legal questions.

On Thursday, Jan. 12, justices for the state’s high court heard arguments in the long-running legal fight over whether a hospital in downstate Urbana should be required to pay property taxes, because local tax collectors don’t believe the hospital’s business is charitable enough.

While the hospital’s owners, the Carle Foundation, hold nonprofit status, the city of Urbana, Champaign County and other local governments have argued a state law appearing to grant the hospital and others like it across the state tax exemptions should be stricken because it violates the state constitution.

The questions surrounding the Carle hospital’s tax exempt status have swirled since 2004 when the local governments first moved to tax the hospital. The hospital appealed those decisions to local and state tax review bodies, and then to Champaign County Circuit Court.

While the Carle case was pending, Illinois lawmakers enacted a law in 2012, containing a provision known as Section 15-86, explicitly granting hospitals tax exempt status, provided they can demonstrate they provide enough benefits to the community, generally in the form of low-cost health care services for low-income patients, equaling or exceeding the tax revenue the hospitals would otherwise owe.

In 2014, Champaign County Judge Charles McRae Leonhard used that law to rule Carle Foundation Hospital and others like it should be considered exempt from property taxes.

The local governments appealed, arguing the law was unconstitutional.

The Illinois Fourth District Appellate Court sided with the tax collectors, saying they believed the law essentially would allow hospitals to “buy a charitable exemption,” which they said violated constitutional language empowering the General Assembly to grant tax exemptions.

Seeking clarity on the question, Carle Foundation – which is continuing to seek tax exemptions for tax years 2004-2011 – with the backing of the Illinois Hospital Association and others, appealed the matter to the Illinois Supreme Court.

Shortly before the high court took up that case, however, the Illinois First District Appellate Court also weighed in, as justices there rejected a lawsuit also challenging the 2012 law, and upheld the law as constitutional. That case could also land before the state Supreme Court.

 During arguments before the state Supreme Court on the Carle Foundation case, both sides restated their positions.

Carle Foundation attorney Steven Pflaum said, while no legal questions landing before the Supreme Court are simple, the question surrounding the “constitutionality of 15-86 is about as easy as they come.”

He said the Fourth District Appellate ruling was “literally unprecedented,” contending the tax collectors and the appellate justices had “no basis for changing a test that is settled and has been settled for years.”

Attorneys for the governmental agencies, however, contended that, even if the 2012 state law were upheld as constitutional, decisions on tax exemptions should still rest on the so-called “Korzen factors” – legal questions established under previous case law to determine whether a taxpayer should be granted property tax exemption.

Carl Elitz, a senior assistant Illinois attorney general, on behalf of the Illinois Department of Revenue, argued the question of hospital tax exemptions should center on whether the primary purpose of the property is to provide charity, or to “make gifts,” for the community.

And Assistant Champaign County State’s Attorney Joel Fletcher called justices attention to the larger community impact of granting exemptions to large business properties, like hospitals. He said Urbana, for instance, would need to increase tax rates in general to make up for lost revenue that would otherwise be paid by the hospital. This, he said, would make Urbana less competitive than neighboring Champaign, where tax rates would be lower.

“High tax rates are economically burdensome to taxing districts,” Fletcher said.

All sides urged the high court justices to step in and provide “guidance” to resolve the uncertainty that has hampered Carle Foundation and the Champaign County governments since 2004, and which has gripped the health care sector in Illinois since the Fourth District ruling.

Supreme Court justices – and particularly Justice Robert Thomas –  however, centered many of their inquiries on “procedural questions” surrounding the Carle hospital case. They indicated the case’s baggage could prevent them from ruling on the matter, as the case is a less inviting test for the 2012 law than the more streamlined case decided in the First District court.

It could be months, however, before the First District case can be heard by the state Supreme Court.

Should the high court take a pass on the Carle Foundation case, the Fourth District ruling would be vacated, and the case sent back to Champaign County court for further proceedings on the Carle Foundation’s tax exemption requests. 

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Organizations in this Story

Carle Foundation Hospital Champaign County City of Urbana Illinois Department of Revenue Illinois First District Appellate Court Illinois Fourth District Appellate Court Illinois Hospital Association Illinois Supreme Court

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