Hospital Association of Pennsylvania > Advocacy > Tax-Exempt Status > Testimony on SB 4


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Statement of The Hospital & Healthsystem Association of Pennsylvania

Before Pennsylvania Auditor General

Presented by

Scott Bishop
Senior Vice President, Legislative Advocacy
The Hospital & Healthsystem Association of Pennsylvania (HAP)

Harrisburg, PA
March 31, 2015

Auditor General DePasquale, I am Scott Bishop, Senior Vice President, Legislative Advocacy for The Hospital & Healthsystem Association of Pennsylvania (HAP). HAP represents and advocates for nearly 240 acute and specialty care hospitals and health systems across the state and the patients they serve.

I appreciate the opportunity to present why hospitals and health systems across the commonwealth support Senate Bill 4––a Constitutional amendment that will restore the legislature’s authority to establish uniform standards and qualifications as the criteria to determine the tax-exempt status of nonprofit entities.

To be clear, Pennsylvania nonprofit hospitals recognize that tax exemption is a privilege, not a right. For a hospital to be tax exempt, they must fulfill specific obligations to their communities, and they consistently do so.

In fact, the reason that having clear and concise criteria set in law is so critically important is that statutory directives ensure that already limited resources remain targeted to the commonwealth’s most important health and community priorities instead of being wasted on unnecessary legal disputes.

It is equally important to clarify that Senate Bill 4 does not seek to strip the judiciary of its power to judge whether an entity is an institution of purely public charity. Rather, since the courts have never declared Act 55 of 1997 to be unconstitutional or in conflict with any other statute, they should apply the provisions of Act 55, not a judicially created rule, to determine tax status.

Some historical perspective will help illustrate why the need for Senate Bill 4 is so pressing.

In 1985, in Hospital Utilization Project v. Commonwealth, the Pennsylvania Supreme Court created a five-prong test (now referred to as “the HUP test”) to determine whether an institution should be deemed to be an “institution of purely public charity.”

Under this test, an institution qualified as an “institution of purely public charity” if it:

  • Advances a charitable purpose
  • Operates entirely free from private profit motive
  • Donates or renders gratuitously a substantial portion of its services
  • Benefits a substantial and indefinite class of persons who are legitimate objects of charity
  • Relieves the government of some its burden

For the decade that followed the Hospital Utilization Project decision, there was a surge of litigation by local governments and school districts against nonprofits. As a result, instead of clarifying the situation, inconsistent court rulings created confusion and costly legal battles.

Then, in 1997, the Pennsylvania General Assembly unanimously approved The Institutions of Purely Public Charity Act (Act 55 of 1997), which established clear, concise standards for determining the tax-exempt status of nonprofits.

Act 55 uses the same five criteria established by the Supreme Court in 1985 as the framework for defining an “institution of purely public charity,” but elaborates on how an entity must demonstrate satisfaction of each criterion. In addition, Act 55 included two unique provisions––promotion of voluntary agreements with local governments, and prohibition of competition with small businesses.

This legislation was the product of a multi-year, bipartisan compromise between local governments, school boards, nonprofit entities, and lawmakers. At the time of the enactment of Act 55, no other state had developed such comprehensive requirements for state tax exemption. In fact, the law still provides one of the strictest sets of standards in the entire country.

The sole purpose of Act 55 was to eliminate inconsistency created by the HUP test and to clarify what an organization needed to do to be tax exempt. And, for fifteen years, Act 55 served its purpose. Prior to Act 55 of 1997, there were at least 20 ongoing legal challenges between hospitals and political subdivisions. Following enactment of the law, there were very few legal challenges.

However, during 2012, in the court case Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, the Pennsylvania Supreme Court turned Act 55 on its head by ruling that the courts, not the legislature, have responsibility for determining the tax-exempt status of nonprofits.

The result of this decision is that the Court has chosen to ignore Act 55 as the appropriate means to determine the tax status of nonprofits in the commonwealth.

Further, they are summarily dismissing what current Chief Justice Thomas Saylor referred to in his dissenting opinion in Mesivtah as “an integrated legal test blending the Judiciary’s well-crafted HUP test with the wide-ranging policymaking experience of the Legislature.”

Justice Saylor went on to say that, so long as Act 55 is constitutional (no court has ever said otherwise), he would “defer to the General Assembly’s reasonable policy determination that an organization satisfying the criteria set forth in Act 55 is a purely public charity.”

History has proven that the Mesivtah decision will return us to a time of great inconsistency and great confusion for nonprofits.

Decisions can vary from county to county and court to court. Senate Bill 4 provides the opportunity to restore fairness and provide clarity on the criteria for tax-exempt status. Concise standards established in law will enable nonprofits to prove whether they deserve to be tax exempt.

While there have been questions raised about the validity of Senate Bill 4, the state’s Legislative Reference Bureau recently issued an important advisory opinion stating that Senate Bill 4 will effectively amend the State Constitution to give the General Assembly the authority to define an institution of purely public charity. Specifically:

  • “The term ‘institution of purely public charity’ is no longer a term that must be defined exclusively by the judiciary. As a result, it is appropriate that SB 4 authorizes the General Assembly to actually define an institution of purely public charity by establishing uniform standards and qualifications for this purpose.”
  • In the 2005 decision, Bergdoll v. Commonwealth, the court determined that a Constitutional amendment “granting the General Assembly authority to legislate in a particular area of law previously under the purview of the judicial branch is a proper exercise of the people’s power under the Constitution.”

While it is understandable that different lawyers may have different opinions on the language, there must be no confusion about what this proposal does and does not do.

There has been confusion about the purpose of Senate Bill 4, created in part by misinformation about the proposal. The one-and-one-half-page bill calls for only one action: returning to the legislature the authority to establish uniform standards and qualifications as the criteria to determine the tax-exempt status of nonprofit entities.

As a result, Senate Bill 4 does not increase the number of tax-exempt entities. Senate Bill 4 does not raise taxes. Senate Bill 4 does not ensure the loss of government services in communities. Senate Bill 4 does not create any barrier for local governments wanting to challenge the tax status of a nonprofit.

We would note that, as local governments and elected officials discuss the need for additional revenues, it is critical that they look beyond institutions of purely public charity to other tax-exempt properties.

For instance, a March 2009 Pennsylvania Legislative Budget and Finance Committee report revealed that, actually, local government entities account for the largest share of tax-exempt properties. In fact, when tax-exempt properties held by local public authorities were combined with those held by local government, they account for 50 percent or more of all tax-exempt properties.

A second point of misinformation that requires some discussion revolves around the timing of Senate Bill 4. Quite simply, it is not being rushed through the legislative process.

In fact, this legislation is undergoing thorough legislative deliberation, and the public will play a defining role going forward. The Pennsylvania Senate first took up the language of Senate Bill 4 in Spring 2012.

Then, in 2013, the state legislature debated and passed Senate Bill 4 for the first time. As the legislature is debating the issue for a second time, hearings are being held.

Further, after the House approves Senate Bill 4, voters will have an opportunity to vote “yes” or “no” on whether to give the General Assembly the authority to establish the standards. Should the voters return authority to the legislature, constituents will be able to share their opinions with their elected officials during the legislative process.

Finally, it is irresponsible for anyone to suggest that hospitals are not contributing their fair share to the economic vitality of communities in this commonwealth.

In addition to making direct monetary contributions to help governments provide key services, hospitals offer free dental and eye care, free immunizations, free nutrition programs and meals, free domestic violence counseling, free drug and alcohol education, free screenings for the poor, elderly, and disabled. The list goes on.

Further, what Pennsylvania hospitals aren’t paying in taxes to fund indiscriminate government operations, they invest in the technology, personnel, and infrastructure that patients and their families count on to ensure that they get the health care they need 24 hours a day, seven days a week.

All told, Pennsylvania hospitals contribute nearly $6 billion annually in free or subsidized health care, essential medical research and education, and major community improvement initiatives.

They contribute nearly $100 billion to the state’s economy (total annual direct and ripple effect), and hospitals support nearly 600,000 jobs (both direct employees and positions supported by hospitals). Those 600,000 employees all pay taxes.

This is much more than just paying a tax bill to help local governments keep the lights on. This is hospitals and health systems investing substantial resources to strengthen communities in ways that no government program could begin to accomplish.

Every dollar a hospital is asked to put towards an arbitrary tax bill to fund general government operations is a dollar they can’t invest in a program to provide thousands of free flu shots to kids or to bring additional surgeons to a region so families don’t have to travel for complicated care or to sponsor signature events that significantly bolster regional economic development.

For small hospitals and those with negative operating margins, property taxes could consume a substantial portion of net cash flow and require difficult choices about services and programs.

The bottom line is that if hospitals are forced to redirect resources without consideration of the investments and contributions that tax exemption allows them to do, someone will need to fill that void. It will certainly not be government.

Again, Pennsylvania hospitals are mindful that tax exemption is a privilege, not a right. The vital role hospitals and health systems play in their communities clearly demonstrates that they respect this privilege and they will continue to earn it.

In closing, we are pleased to be joined by a broad coalition of organizations and their members who support Senate Bill 4:

Association of Independent Colleges & Universities of Pennsylvania
LeadingAge PA
Lutheran Services in Pennsylvania
Pennsylvania Association of Community Health Centers
Pennsylvania Association of Independent Schools
Pennsylvania Association of Rehabilitation Facilities
Pennsylvania Bar Association
Pennsylvania Catholic Conference
Pennsylvania Catholic Health Association
Pennsylvania Chamber of Business and Industry
Pennsylvania Community Providers Association
Pennsylvania Institute of Certified Public Accountants
Pennsylvania Jewish Coalition
Pennsylvania Alliance of State YMCAs
United Way of Pennsylvania

Thank you again for the opportunity to participate in this discussion. I would be happy to answer any questions you may have.

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