Correction of 35-year-old Law Could Cost State Hospitals $1M

AUGUSTA — Correcting a law that’s been misinterpreted since the day it was enacted 35 years ago would cost hospitals across Maine an estimated $1 million, though opponents say that the law is so entrenched that changing it now would be unfair.

Sen. Lawrence Bliss (D-Cumberland County) said the error surfaced when a tax assessor from South Portland decided to research a provision that exempted part of a warehouse leased by Mercy Hospital in Portland from property taxes.

What she found in the legislative record from 1974, according to Bliss, was no mention of a property tax exemption at all. Instead, the bill sought to exempt hospitals from paying personal property taxes on medical equipment. Bliss said it’s likely that the mistake was inserted during the bill’s drafting process.

“The Legislature passed this law specifically to exempt personal property leased by hospitals,” said Bliss. “Somehow when the law got put into statute, the wording said ‘real and personal property.’ That was never part of the discussion in the Legislature.”

As a result, hospitals for 35 years have been the only entities in the state whose leased properties are exempt from property taxes. As a practical matter, the law affects landlords who own the buildings, but Mary Mayhew of the Maine Hospital Association warned that reversing the law now would pass the cost through hospitals to patients.

“Leasing provides a great opportunity for hospitals to meet their needs without committing to the much greater expense of purchasing or building a building,” said Mayhew. “I’m troubled that where hospitals have entered into to these arrangements, they have made business decisions based on this law. To now change the rules of the game is unfortunate and will affect the cost of health care.”

Bliss said he understands those concerns, but argued that correcting the tax code is “eminently fair” for everyone in the state.

“This is not about ‘let’s get the hospitals,’” said Bliss. “This is about ‘let’s correct the legislative record.’”

Geoff Herman, director of state and federal relations for the Maine Municipal Association, agreed.

“It’s one of the age-old provisions of tax policy: exemption is not available by extension,” said Herman. “It doesn’t matter who you are. You can’t pass your exemption on to another entity. Tax policy should be uniform and blind to particular entities.”

Herman said current law also runs against another requirement that any exempt organization must use 100 percent of its facility for the exempt purpose. A nonprofit nursing home, for example, can’t house a for-profit operation such as a pharmacy or it loses its tax exemption, said Herman.

“It’s not the money, it’s the policy that’s driving this,” he said. “Consistency is everything.”

Bliss said his bill protects the integrity of the legislative process.

“Nobody in the Legislature now is going to want to learn 35 years from now that the intent of their bill has been changed,” he said. “Legislators understand that bills that were passed 35 years ago ought to have the same integrity.”

The Taxation Committee voted to table the bill Tuesday while it develops an amendment to protect leases already in place. Rep. Thom Watson (D-Bath), the committee’s House chairman, said the committee also wants to delay implementation of the law until April of 2010 or 2011 so hospitals can adjust and perhaps come forward with a bill to reclaim the exemption.

“We don’t want to interfere with current, ongoing business plans,” said Watson. “We’re doing this because after reading the legislative debate and record, it’s very clear that real property was not even part of the discussion. That was in fact a mistake.”

Nicole Ouellette

Nicole Ouellette

When Nicole isn't giving advice she's completely unqualified to give, she runs an Internet marketing company in Bar Harbor, where she lives with her husband Derrick and their short dog Gidget. She loves young adult novels, cooking and talking French to anyone who'll talk back. [email protected]