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June 23, 2013

State fight brews over charities

HARRISBURG — The Legislature is quietly poised to make the first step toward a constitutional amendment that proponents say is only intended to reaffirm the rights of the Legislature to define what is a public charity. But critics have dubbed the bill “Permanent Tax Exemptions for Major Nonprofits Act.”

On the face of it, the dispute is a squabble between the Legislature and the courts over who gets to say what a charity is.

For charities and local governments, who wins matters because charities and, in particular, nonprofit health systems, like the rules set by the Legislature and the local governments prefer the standard set by the courts.

The courts developed a five-part standard, the so-called “HUP test” to define what makes a charity tax-exempt. Then in the 1990s, the Legislature passed the Institutions of Purely Public Charities Act. This law used the limits set by the courts but built into them conditions intended to clarify some elements of the law and encourage nonprofits to make voluntary agreements to pay the communities that they would otherwise have to pay taxes in.

The problem, said Amy Sturges, director of government affairs for the Pennsylvania Municipal League, is that few nonprofits have bothered making these payments in lieu of taxes.

“It is not helping,” she said. “If we lose the HUP test, municipalities will have less opportunity to challenge” the tax status of property held by charities.

In some communities, nonprofits consume two-thirds of the land.

“Residents of that city or borough cannot foot the bill,” Sturges said.

“It’s a bad situation.”

The issue has come back to the forefront because of a recent Supreme Court decision found that the Institutions of Purely Public Charities Act had over-reached. The court ruled that the Legislature could pass laws to more clearly define what a charity is, but that it could not pass laws creating a broader definition than the one the court had used.

That decision rankled the Hospital and Health System Association of Pennsylvania. “Because the Court has decided that their subjective test must continue to be applied, charitable organizations now will need to prove their tax-exempt status in different courtrooms facing different interpretations by different judges based upon a very vague judicial test created in the mid-1980s,” the organization declared in a letter provided to hospitals for lobbying lawmakers.

With the proposed constitutional amendment, the Legislature is trying to reassert its right to define charities however it sees fit.

Within the Legislature, the dispute has put lawmakers in a tough spot: Forced to stand up for health systems that are among the largest employers in the community or the local governments and taxpayers who may be getting squeezed by higher property taxes.

Rep. Bryan Barbin, D-Johns-town, said that by rolling back the rules set by the court, the constitutional amendment would make it much more difficult to challenge the tax status of subsidiaries of large health systems.

Anything that makes it more challenging to collect taxes from charities that are gobbling up property is bad for the commonwealth’s small cities and boroughs, many of which are already financially distressed, he said.

Rep. Mark Longietti, D-Mercer, said that he doesn’t buy that argument. But the bottom line is, the Sharon Regional Health System is the largest employer in Mercer County. Longietti said he is most interested in doing everything possible to help protect those jobs and help the hospital system thrive.

In Meadville, city officials have estimated that if they could collect taxes from all of the nonprofits in town, including Meadville Medical Center and Allegheny College, it would mean an additional $2.5 million a year in local taxes, said Mayor Christopher Soff.

Over 43 percent of the city is held by tax-exempt organization, he said.

“Right now, the city does not collect enough in property taxes to fund our core mission of fire and police protection and public works,” Soff said.

Both the college and the hospital make voluntary contributions to the city and they pay taxes on some of their property, the mayor said.

“I do wish the commonwealth would revisit the criteria used in determining tax-exempt status, what truly qualifies as promoting the entity’s core mission and what doesn’t, and determining some sort of flat rate that every entity pays, regardless of tax status, for fire and police protection and public works,” Soff said.

Democrats who oppose the constitutional amendment attempted to make a series of amendments that would have added language to clarify what it means to be nonprofit.

Rep. Greg Lucas, R-Crawford, who said that the type of protections that the Democrats want baked into the law just don’t belong in the constitution.

Lucas, the former mayor of the Borough of Edinboro, home to Edinboro University, said he understands the challenges facing communities.

Lucas said he would be open to exploring what constitutes a charitable enterprise but said that the constitutional amendment is needed to clarify the Legislature’s authority.

The Senate approved the measure calling for the constitutional amendment earlier this year. But even if it passes the House, it must pass the General Assembly a second time and then go before the voters in a statewide referendum.

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