Tax changes good for area medical facilities, bad for governments

Just when local governments thought that the erosion of property tax valuations had bottomed out, a years-long legal and lobbying effort by the hospital industry is further shrinking taxable values in the South Sound and across the state.

Those changes have reduced taxes to zero on many major medical buildings, generated millions of dollars in refunds to health care providers in the South Sound and cut income to local governments.

Take MultiCare’s expansive Gig Harbor Medical Park building, for instance. Had the multi-story clinic remained on the tax rolls, the hospital would have paid about $161,000 in taxes this year on the building whose assessed valuation is $17.4 million. As a result of court decisions and new tax rules, MultiCare paid no property taxes on the structure.

Those tax reductions are good news for big health care conglomerates such as MultiCare and  its competitor, Franciscan Health System, themselves hit with funding cuts.

MultiCare estimates it will save $1.3 million annually that it used to pay in property taxes on medical buildings in Pierce and King counties. MultiCare owns Tacoma General, Mary Bridge, Allenmore and Good Samaritan hospitals and numerous clinics.

Franciscan says it is just now applying for tax exemptions on about 50 sites. Among those are such structures as the Franciscan Occupational Health Center on Port of Tacoma Road, the St. Francis Sleep Disorder Center and the Women’s Health and Breast Center in Federal Way. If the state approves, it should save about $300,000 annually in property taxes.

The tax savings are a fraction of increased expenses from higher charity care costs and lower reimbursements, said the health care providers. MultiCare expects to see a  $40 million two-year reduction  in state reimbursements for Medicaid patients. The health care concern said its charity-care costs also are rising steeply. Those costs were $24.4 million last year, compared with $10.2 million in 2008. At the same time, its overdue patient accounts are rising in the face of the difficult economy.

MultiCare has laid off 76 health care workers, eliminated 226 vacant positions and bid adieu to 222 other workers through voluntary separations this year in a bid to cut its expenses, said Multi­Care spokeswoman Marce Edwards.

At Franciscan, parent company of St. Joseph, St. Francis, St. Clare, St. Elizabeth and St. Anthony hospitals, state reimbursement reductions amount to $8 million this year alone, said Franciscan spokesman Gale Robinette.

“It’s not as if the hospitals got a free pass in the recession,” he said. “We’re subject to the same financial pressures as the rest of the population,” he said.

The tax roll changes stem from a dispute that began in 2007 when a Clark County hospital sought tax-exempt status for outpatient clinics and other health care structures owned by Legacy Salmon Creek Medical Center in Vancouver, said Harold Smith,  exemptions and deferrals manager for the State Department of Revenue. The exemption was denied. The hospital appealed to the State Board of Tax Appeals. That body sided with the hospital, saying the state had drawn its definition of exempt buildings too narrowly.

Under the old rule, only structures such as hospitals, where 24-hour care was provided, were exempt from taxation. The hospital argued that the practice of medicine had changed significantly over the years, with medical care that formerly was delivered only in hospitals being provided in a variety of locations, many of which were not hospitals in the strictest sense.

The state appealed the ruling to the Thurston County Superior Court, which also ruled in favor of Legacy.

Prompted by the court’s decision, the Department of Revenue redrew its rules on health care exemptions two years ago, broadening the definition of what qualifies as an exempt property.

That change caused a flood of applications from health care organizations for additional exemptions for major and minor buildings that had been on the tax rolls.

While Smith’s team has worked its way through many of those applications, the exemption process is still a work in progress with more buildings to be measured against the new standards, Smith said.

Nineteen major health care organizations statewide have already seen their taxes reduced because of the new definitions.

The losses to local government funding, however, extend even further. The hospitals successfully argued that the tax exemptions should cover not just present and future tax bills, but tax bills back to 2007, when the first appeals were filed.

The state said it agreed, anticipating that the hospitals would win their point in court if they filed a lawsuit.

That meant the health care corporations could seek refunds of taxes already paid. In MultiCare’s case, that meant a $3.8 million refund. Those refunds came both in small and large amounts, depending on the size of building and its value.

Consider the case of Multi­Care’s Safe & Sound Building at 1112 South Fifth Street on MultiCare’s main Tacoma campus. This single-story building, relatively modest as medical structures go, houses the Center for Childhood Safety and MultiCare’s Child Abuse Intervention Department.

The health care company received some $81,900 in tax refunds for that building alone.

At Franciscan, which is still preparing its exemption request, the health care provider said it expects a $900,000 refund if the state agrees that the 50 buildings it is submitting are all eligible for retroactive exempt status.

Gary Robinson, Pierce County’s budget and finance director, said the county still is sorting out the numbers and their effects on the property tax revenues individual government taxing districts receive.

In ordinary years,  each taxing district’s take from the property tax collections pot is adjusted up or down slightly by the effects of appeals of tax bills filed by property owners. Those amounts aren’t of the magnitude of the changes caused by the large scale exemptions won by the hospitals.

Calculating the total effects is difficult because each property is affected by a specific mix of taxes based on its location within certain taxing districts.

Nine taxing entities ranging from Pierce County to Pierce County Fire District 5 would have split the $161,000 in property taxes that MultiCare’s Gig Harbor Medical Park Building would have paid had it not been made exempt from taxes.

Tacoma School District spokesman Dan Voelpel said he’s unaware of what the effect of the hospital building’s removal from the tax rolls will have on the district’s property tax revenues. He said the district’s levy is for a fixed amount of money, not for a specific tax rate per thousand dollars of taxable valuation. The tax rate is adjusted automatically as the valuation rises or falls to yield a set amount of money.

At the Port of Tacoma, on the other hand, the property tax model works differently. The Port of Tacoma Commission sets a levy rate, the amount of tax per thousands of dollars of taxable property value, and the income rises or falls in concert with the taxable valuation.

At the port,  because its tax rate is fairly low, the negative effect of the exemptions is fairly low, said spokeswoman Tara Mattina. The decline of housing market values throughout the county, she said, has had a far larger effect on the port’s tax collections.

At Pierce County, whose slice of the property tax pie is far larger, financial officials are still assessing the effect. They won’t know fully how much their revenues will be diminished until all of the exemption requests are processed.

Pierce County Executive Pat McCarthy said she is keeping a watchful eye on those changes because the county is carefully watching its pennies these days.

“Every dollar counts,” she said.

John Gillie: 253-597-8663

john.gillie@thenewstribune.com