Hospitals in Illinois have secured a key win in a longrunning court fight over whether they should be required to pay property taxes, as the Illinois Supreme Court has upheld as constitutional a state law allowing hospitals to remain tax exempt.
On Sept. 20, a unanimous state high court rejected the challenge submitted in a case originally filed in Cook County court, asking the justices to declare unconstitutional a state law exempting nonprofit hospitals from the obligation to pay property taxes.
Justices said the issue centered on the “construction” of the law in relation to language in the Illinois state constitution, which says tax exemption “shall” be limited only to certain classes of property in the state. While hospitals are not expressly included on that list, lawyers arguing in favor of the state law asserted hospitals should be considered to be among those whose property is used for “charitable purposes,” even if hospitals may bring in large sums of revenue by charging for services.
Ill. Supreme Court Justice P. Scott Neville | Illinoiscourts.gov
Under the state law at issue – and specifically a provision referred to in court documents as section 15-86 – the state explicitly granted hospitals tax exempt status should they provide enough benefits to the community, generally in the form of low-cost health care services for low-income community residents, to offset the tax revenue the hospitals would otherwise owe.
This measure was enacted in 2012, in response to moves by some government officials in Illinois, and particularly in downstate Champaign County, to assess taxes on hospitals. Proponents of taxing hospitals believe doing so would bring in large new revenue for local governments, ostensibly helping to offset the property tax burden on homeowners and other businesses in those communities served by the hospitals.
In separate legal challenges, one originating in Champaign County and the other in Cook County, the plaintiffs essentially asserted the same reasoning: The state law giving hospitals the ability to use their charitable practices to secure a tax exemption violated the state constitution’s language mandating exemptions solely for property used “exclusively for charitable purposes.”
The Champaign case, centered on county officials’ move to tax the hospital run by the Carle Foundation in Urbana, reached the appellate court and the state Supreme Court first. In 2016, the Illinois Fourth District Appellate Court in Springfield ruled Section 15-86 unconstitutional, saying it essentially allows hospitals to “buy a charitable exemption.”
The state Supreme Court then overturned that ruling, but shied from using the case to declare the state law constitutional, instead focusing on “procedural questions” in that case, while appearing to await the Cook County case.
In that lawsuit, plaintiff Clarence Oswald didn't challenge a particular hospital's tax status, but still sought to have Section 15-86 declared unconstitutional, saying the law “on its face” violates the charitable purposes tax exemption requirements in the state constitution.
But the Illinois First District Appellate Court in Chicago sided with the Illinois Hospital Association and the state, finding the law could be considered constitutional because Section 15-86 merely provides direction to the Illinois Department of Revenue when evaluating a hospital’s property tax status. The justices in that decision noted the General Assembly and earlier state Supreme Court rulings dictate such exemption request are to be handled on a case-by-case basis.
In the opinion authored by Justice P. Scott Neville in the Oswald Cook County case, the Illinois Supreme Court unanimously backed the approach endorsed by the First District court, similarly finding the law doesn’t conflict with the state constitution.
While conceding the law’s language says the state “shall” issue tax exemptions to nonprofit hospitals, the high court justices said they did not believe this meant state lawmakers intended for hospitals to automatically receive tax exemptions. Rather, they said, they believed the language means the General Assembly intended to allow hospitals to qualify for charitable use tax exemptions.
“In the case at bar, the legislature was certainly aware of … the constitution and its requirement of exclusive charitable use, and it intended to enact a constitutional hospital charitable property tax exemption,” Justice Neville wrote. “To construe subsection (c) as plaintiff argues would cast doubt on the constitutionality of section 15-86, which, as we have concluded, is a result the legislature could not have intended.
“… Therefore, a hospital applicant seeking a section 15-86 charitable property tax exemption must document the services or activities meeting the statutory criteria. Additionally, the hospital must show that the subject property meets the constitutional test of exclusive charitable use,” Neville wrote.
The justices stressed their ruling does not preclude the possibility future squabbles over hospital tax exemptions. But this case, they said, dealt with the validity of “the statute on its face,” which passes constitutional muster.
“While it is possible that specific future applications of section 15-86 may produce actual constitutional problems, it will be time enough to consider any such problems when they arise,” Neville wrote.
Oswald was represented in the action by attorneys with the firm of Edward T. Joyce & Associates, of Chicago.
The Illinois Hospital Association was represented in the matter by attorneys Steven Pflaum, Tonya Newman and Collette Brown, of the firm of Neal Gerber & Eisenberg LLP, of Chicago.
In a statement following the decision, the IHA said it was “pleased” with the Supreme Court’s ruling, as the law at the heart of the case “has provided both hospitals and taxing bodies with clarity that was lacking for many years regarding the legal requirements for hospitals to receive property tax exemptions;” “has ensured that communities receive the ‘benefit of the bargain’ for hospital tax exemptions by requiring that the value of the free healthcare and other charitable activities provided by hospitals exceeds the amount of property tax they would otherwise pay;” and “has helped ensure that hospitals have the resources to serve their communities.”
“Hospitals across Illinois are at the forefront of an unprecedented transformation in healthcare. For non-profit hospitals, property tax exemption fosters that transformation by permitting them to focus their time, energy, and financial resources on new strategies to better serve all of the residents of our state,” the IHA said in its release.
“Taxing non-profit hospitals would hurt the communities they serve by diverting dollars that are better used to care for patients and to upgrade equipment, modernize facilities and hire needed staff.”