Published March 30. 2014 4:00AM
Often the simplest solution is not the best solution. Such is the case with House Speaker J. Brendan Sharkey's proposal to address fiscal problems in struggling cities such as New London by slapping a property tax bill on nonprofit hospitals and universities, which have always had tax-exempt status in Connecticut and throughout the country.
This is not to say the idea is without merit. As noted in a recent editorial, Rep. Sharkey deserves credit for reviving the discussion about the need for property tax reform in this state. The way hospitals and universities are treated when it comes to taxation could well be a part of such reforms.
However, as now presented, this is a loaf half-baked. It is too important a policy change not to do right, or to do in isolation without considering other tax policies. This short legislative session, ending in early May, does not afford that opportunity.
To recap, because cities cannot tax hospitals and universities, they receive state funding to help cover the loss in tax revenue. However that PILOT funding - payments in lieu of taxes - covers only about one-third of the losses. Rep. Sharkey's bill would allow municipalities to assess and tax the nonprofit hospitals and colleges. The state aid - a "reverse PILOT" Sharkey calls it - would go to the hospitals and universities.
In New London, home to Lawrence + Memorial Hospital, Connecticut College and Mitchell College, this change would generate significant revenues, an estimated $5.8 million from Conn College and $5.4 million from L+M, for example.
Yet it would not come without a price. The fees charged by L+M and all hospitals are largely set by private insurers and the government through Medicare and Medicaid. There is no pass through for taxes. Savings to pay taxes would come from layoffs, program cuts or reductions in charitable services. Recall that L+M recently eliminated about 70 positions in response to state cuts in Medicaid reimbursements. L+M offers eastern Connecticut's only Neonatal Intensive Care Unit, but at a loss of around $1 million annually. Would that remain affordable?
Conn College may be able to handle paying a property tax, but Mitchell College would face serious financial difficulty.
Rep. Sharkey argues his bill contains safeguards. They are dubious. There are those PILOT payments to reduce the sting to the hospitals and colleges. But would anyone be surprised if the legislature cut or eliminated the payments to find money for pet programs? The legislature does not have a good record of meeting its financial commitments - examples include a grossly underfunded state pension system and the failure to follow local education spending mandates .
The House speaker also says hospitals and universities could negotiate with a city to pay lower taxes, pointing to the in-kind services they provide and the fiscal problems full taxation would create. The cities, however, would have all the leverage, the institutions left begging for a break.
That is one of the problems with this proposal. It asks no sacrifice of our elected leaders. They do not have to come up with any spending cuts to help distressed cities. They don't have to make hard choices to restructure the state's tax system. By enacting this proposal, they would simply shift the burden to the nonprofits. Would it mean reduced property taxes in the cities? Maybe. It is more likely that the newfound wealth would disappear in increased municipal spending.
What might comprehensive tax reform look like?
Perhaps the state could impose a partial property tax on hospitals and universities. They have changed, becoming large corporations and opening up satellite offices that consume previously taxable property. Most can afford to pay some.
PILOT funding could be boosted significantly, not only to make up for revenues lost due to hospitals and colleges, but due to un-taxable public housing and government buildings.
The state should fully fund special education, a massive burden on local communities.
Where could the state revenue come from to pay for special education and increased PILOT? The state could take over collecting the car tax and tie it to municipal aid for the cities, then place caps on growth in municipal spending in return for increased aid.
During the coming campaign we expect candidates to offer ideas and will apply our endorsements accordingly.
Long term, Connecticut and its cities will benefit by making the tough choices rather than accepting the easy fix.