Skepticism surrounds Malloy hospital tax plan

While the legislature should not dismiss it out of hand, Gov. Dannel P. Malloy’s proposal to allow towns and cities to levy a property tax on the land and buildings of nonprofit hospitals in the state must be viewed with skepticism.

The proposal goes hand-in-hand with other Malloy initiatives aimed at improving the financial standing of the state’s struggling cities. These include creating a state education funding formula that prioritizes helping poor communities and removes the political maneuvers that keep the state funds flowing to wealthier communities as well. Overall, Malloy wants to provide more help for cities by reducing state aid to municipalities with healthy tax bases and budgetary surpluses.

His goal is to drive down tax rates, making the state’s cities more attractive to developers and businesses. By allowing cities to tax hospitals, and that is where most are located, the Malloy administration expects to generate $212 million for these urban centers.

By combining these ideas with another proposal, the creation of Municipal Accountability Review Board intended to make sure cities use increased revenues to balance budgets and drive down tax rates, not squander it in gift contracts to labor and special interests, Connecticut could place its cities on a healthier path.

Because of its small, costly and often economically depressed cities, Connecticut is finding it difficult to compete for jobs in a time when high-tech business and young professionals are trending toward vibrant urban centers.

Given current assessed values, New London would be able to tax Lawrence + Memorial Hospital $5.65 million and Norwich would be able to tax The William W. Backus Hospital $3.85 million under the Malloy hospital tax proposal.

The hospitals Malloy proposes taxing are not the small, independent operations that served Connecticut for much of the past century. They are massive operations which, while nonprofit by law, are very corporate in their organization and management.

The Yale New Haven Health System, which recently added Lawrence + Memorial Hospital to its network, includes four nonprofit hospitals. The William W. Backus Hospital in Norwich is part of the Hartford HealthCare network, which includes five nonprofit hospitals. These large operations will not wilt if forced to pay property taxes.

Which doesn’t necessarily make it a good idea.

Hospitals will pass along any added costs associated with paying property taxes. Since Medicaid and Medicare rates are controlled, expect increased fees for procedures covered by private insurance, putting more stress on an insurance system already under pressure and facing uncertainty over the future of the Affordable Care Act.

If these hospital networks are going to be paying property taxes, expect them to cut back on community services they now underwrite. Yale-New Haven has promised to invest $300 million in improved health services in the region as part of its affiliation with L+M. During 2015, Yale-New Haven invested $494 million in financial aid and in-kind contributions in communities it serves.

A better model could be providing incentives for these hospitals to boost such local investment, perhaps to close the gap between what the state now provides under PILOT — payments in lieu of taxes — and what these hospitals would pay under a traditional property tax assessment. PILOT covers about 75 percent of the full taxable value.

However, Malloy is looking to cut spending. By allowing local taxation of hospitals, he would reduce PILOT payments.

The heftiest skepticism surrounds the administration’s contention that it will make the hospitals fiscally whole. Malloy is promising to give hospitals $250 million in the form of supplemental Medicaid payments, a result of the state capturing more federal matching dollars.

As Connecticut Hospital Association CEO Jennifer Jackson noted, “We’ve been down that road before.”

In Malloy’s first term, his administration persuaded the legislature to assess a state tax on hospitals, with the promise it would capture more federal dollars and the state would compensate the hospitals. In the years since, the state has increased the tax it collects from the hospitals and reduced the amount it returns. This year, hospitals will pay about $556 million in taxes, but get only around $117 million back, very different from the “break even” situation Malloy described at the onset of that tax.

If the state allows cities to tax their hospitals, the assumption should be they won’t be getting anything back, Malloy’s assurances notwithstanding. The administration has a tough case to make that this is the best path forward to help cities.

The editorial board is composed of the publisher and four journalists of varied editing and reporting backgrounds. The board's discussions and information gained from its meetings with political, civic, and business leaders drive the institutional voice of The Day, as expressed in its editorials. The editorial department operates separately from the newsroom.

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