Connecticut has long spared most colleges and hospitals from local property taxes and reimbursed their home communities with state grants worth a fraction of the lost tax revenue.
House Speaker J. Brendan Sharkey, D-Hamden, says it’s time to effectively reverse that. The speaker’s proposal would subject the nonprofits to property taxes. And colleges and hospitals — not municipalities — could seek state grants to offset a portion of the cost.
Sharkey said the proposal is rooted in concerns about local taxes and the loss of taxable property as hospitals and colleges buy up real estate to use as outpatient facilities or faculty offices. Local taxpayers can’t afford to fund the police, fire and other services needed to support the nonprofit institutions without more help, he said.
“We already rely so heavily on the property tax,” Sharkey said Tuesday. “When they lose so much revenue from major institutions like this, the costs outweigh the benefits.”
But advocates for colleges and hospitals say Connecticut cities and towns already have it better than their counterparts in most other states, and say the institutions’ tax-exempt status is important to their bottom lines.
Any repeal of tax-exempt status likely would need to be phased in over several years to help all parties adjust, Sharkey said, adding that several details of the measure are still being developed. It was unclear whether it would impact institutions with religious affiliations. The plan would not apply to public colleges and universities.
But Sharkey said lawmakers must recognize “we have a broken tax system” that long has relied too heavily on property taxes and the state’s ability to lessen that burden is limited.
‘Breaking points’ in local taxes
Connecticut towns and cities this year will receive $115 million in state funding to offset the taxes not paid by nonprofit colleges and hospitals through a program called PILOT, or payment in lieu of taxes.
That represents about 32 cents for every dollar the municipalities would have received if the property were taxable. Gov. Dannel P. Malloy has proposed adding $8 million to that grant next fiscal year, bringing the recovery ratio to 34 cents per lost dollar.
(Municipalities that host tax-exempt colleges and hospitals will also receive nearly $13 million this year from the state’s casino revenue. That pool wouldn’t be affected by Sharkey’s proposal.)
The Connecticut Conference of Municipalities expressed interest in the proposal Tuesday. The group said the concept “could provide significant and needed increases for local revenues for the host communities as well as property tax relief for their local residents and businesses.”
CCM added., “It is no secret that our current taxing structure at the local level has reached new breaking points.”
Those “breaking points” are being tested, Sharkey said, as colleges and hospitals open new satellite offices and other facilities outside of their main campuses.
“All of this property is being taken off of the local tax rolls,” he said, adding that in the case of smaller regional health centers owned by hospitals, “many of these are pure profit centers.”
Making hospitals taxable
But eliminating hospitals’ property tax exemption would also mean removing one of the advantages to being nonprofit at a time when some lawmakers have expressed unease with the possibility of Connecticut hospitals becoming for-profit.
All but one of the state’s hospitals are currently nonprofit, but four — Bristol, Waterbury, Manchester Memorial and Rockville General hospitals — are in talks to be acquired by Tenet Healthcare, a national chain that would convert them to for-profit facilities. For-profit hospitals would pay local property taxes.
Sharkey has said that Democrats in the legislature want to expand the approval process for hospital ownership changes, something prompted in part by concerns about for-profit ownership.
He said that hospitals are under considerable financial stress and acknowledged that many lawmakers are wary of local hospitals being “gobbled up by out-of-state interests.”
Although most hospitals are tax-exempt nonprofits, the state has been taxing them since 2012 through a scheme initially intended to help the state qualify for more federal health care funding. At first, the state repaid the money it collected from the hospitals, but it has since reduced the amount hospitals get back. The state has also cut the funding hospitals received to help cover the cost of treating uninsured and underinsured patients.
In a statement, the Connecticut Hospital Association said it hoped the property tax exemption would not change.
“Connecticut, like the rest of the nation, enacted the property tax exemption for hospitals in recognition of their critically important role in the community,” the association said. “It is our hope that the state will keep the current tax exemption and PILOT funding structure in place. Connecticut enacted the PILOT program to support cities and towns. We understand municipalities are under financial strain, and we applaud the governor’s efforts to increase funding to the PILOT program, which will provide them with additional needed relief.”
College financial pressures
Judith B. Greiman, president of the Connecticut Conference of Independent Colleges, said Connecticut is a national model because it is one of just three states that provides any municipal aid to offset tax exemptions for colleges and hospitals.
“Tax exempt status given to colleges and hospitals is kind of a longstanding tradition in every state,” Greiman said. “It’s a recognition that these institutions serve the public good, they serve the health, education and welfare of the whole state … and have deep connections with Connecticut employers.”
Connecticut’s economy has recovered sluggishly since the last recession, and Greiman said private colleges continue to feel tremendous pressure to expand financial aid as state scholarship funds have declined.
“Every student who was on aid needed more, and many students who had never been on aid came knocking on the door,” she said.
Greiman added that many private colleges already have eliminated sports and other programs, increased insurance costs on employees and imposed other “significant belt-tightening” steps to maintain expanded student aid.
Were their tax-exempt status eliminated, colleges almost certainly would look to cut more and raise tuition, she said, adding that it’s not impossible that some would close their doors.
“It would seriously impact the bottom line,” she said.