Illinois Appellate Court Holds Hospital Tax Exemption Statute Unconstitutional

February 4, 2016

Recently, an Illinois Appellate Court found a statute exempting hospitals from property taxes to be unconstitutional under the Illinois Constitution. The statue in question, 35 ILCS 200/15-86, allows for hospitals to qualify for an exemption if the total dollar amount of “[s]ervices that address the health care needs of low-income or underserved individuals or relieve the burden of government with regard to health care services” equals or exceeds the estimated property tax liability.

In determining whether such an exemption was constitutional, the Court looked to Article IX, section 6, of the 1970 Illinois Constitution, which provides that:

“The General Assembly by law may exempt from taxation only the property of the State, units of local government and school districts and property used exclusively for agricultural and horticultural societies, and for school, religious, cemetery and charitable purposes. The General Assembly by law may grant homestead exemption or rent credits.”

The court first noted that the phrase “exclusively” has been interpreted to instead mean “primarily.” As such, a property not owned by the State, a unit of local government, or a school district, will only be exempt if it is primarily used for charitable purposes.

Furthermore, while the legislature may make a property tax exemption more restrictive, it may not “broaden or add to the exemptions that Section 6 of article IX allows.” Thus, the legislature may not enact a statute allowing hospitals to be exempt from taxation if they are not operated primarily for charitable purposes.

Consequently, the Court found Section 15-86 unconstitutional. In sum, the Court found that all a property owner needed for exemption was to show that the value of “charitable services” exceeded the estimated property tax liability. Such a standard circumvented the requirement that the property be primarily used for charitable purposes.

Unless the Illinois Supreme Court holds otherwise, hospitals not operating primarily for charitable purposes will likely be unable to claim an exemption pursuant to Section 15-86.