Is the N.J. hospital property tax “exemption” unconstitutional?

Four New Jersey municipalities, a deputy tax assessor and a handful of individual taxpayers have filed a lawsuit seeking to overturn a recently-enacted law. The law grants hospitals a tax exemption in exchange for a direct per-bed payment to the municipality. This exemption is in lieu of traditional property taxes.

The case was filed in Mercer County Superior Court. However, Mala Sundar, Presiding Judge of the Tax Court, was temporarily transferred to the Superior Court. Understandably, the court desires expertise in taxation in this case. Thus, it triggered the Tax Court’s limited jurisdiction. The parties have filed cross-motions for summary judgment, with a hearing scheduled for mid-November.

The Issue

The plaintiffs’ primary argument is that the New Jersey Constitution requires any exemptions to be granted by general laws. Essentially, this law singles out hospitals for preferential tax treatment. A Tax Court decision in 2015 is the rationale behind this new law. In this decision, the Court found that Morristown Medical Center was not entitled to a property tax exemption because the hospital conducted for-profit activities. As a result, this watershed case led to a flurry of litigation in the Tax Court. Accordingly, municipalities sought to recapture revenue from previously exempt hospitals. The new law brought an end to the appeals by providing hospitals with an exemption through “community service” to the municipality. A portion of the fees go to the county. However, the school district receives no fees, which typically commands the largest portion of the property tax levy.

Why does this case matter?

Quite simply, the revenue to municipalities under traditional tax structure would far exceed the “community service” payments under the law.

As New Jersey taxpayers are all too aware, one less dollar that someone else pays in property tax means that the rest of the property owners in town will be picking up the tab. The esoteric question animating the legal discussion is thus - should property owners bear a portion of the cost of a local hospital? Or, should the users, insurers, employees and others associated with the hospital bear the cost in the potential form of increased care costs, decreased salaries, or increased insurance premiums?

To be sure, there is certainly some benefit having a local emergency room available to a township, which is part of the “quid pro quo” analysis for granting an exemption in the first place. However, is the windfall to hospital stakeholders justified by the mere presence of a hospital in town? Hopefully, this litigation will answer some of these questions. Regardless, the stakes in this challenge are unquestionably high.

We will keep an eye on this case and report any developments. In the meantime, please call with any questions.