Who pays property taxes to support services when the economy is dominated by nonprofits?
This is part three of a series examining the tax-exempt status of nonprofit hospitals in Northeast Ohio and how the loss of tax dollars impacts communities.
Fifty years ago when Clevelanders needed to fund schools, pay for parks or expand libraries they relied on booming tax revenue from large companies. General Motors, Republic Steel Corp. and Ford Motor Co. employed thousands of people and provided a tax base to fund services for the community.
But Cuyahoga County's economy has changed. As those industrial jobs dried up and many companies left the area, governments and local communities could no longer count on those tax dollars to support services.
And the Cleveland area can't fall back on property tax dollars from the industries that have replaced manufacturing companies.
The Cleveland Clinic and University Hospitals, both nonprofits, are among the largest employers in Cuyahoga County and together own billions of dollars of tax-exempt properties.
While they do pay income taxes, the nonprofit hospital systems do not pay property taxes on the vast majority of their real estate, said Zach Schiller of Policy Matters Ohio, a liberal non-profit research group.
"It used to be that the largest employers by and large ... were contributors to the tax base and in particular to the schools," Schiller said. "It puts the school districts, in particular, behind the eight ball when their largest employers don't pay taxes."
The Cleveland Clinic owned at least $2.4 billion in tax-exempt property countywide as of 2018 assessments, an Ideastream Public Media analysis of Cuyahoga County fiscal records shows. If that property was taxable, it would likely contribute about $84 million to government and school coffers annually. University Hospitals owns at least $797 million in property, the records show. Their property taxes could contribute about $28 million to county coffers each year.
The Clinic and UH officials declined to be interviewed specifically on the tax break issue, but said they do pay property taxes on for-profit operations in their systems, like food and retail. They also pointed to the billions of dollars they say they contribute to the community each year.
And both health systems are powerful economic drivers in the region.
"Our most recent Economic and Fiscal Impact Report, examining 2019 data, shows that more than 133,000 jobs in Ohio, generating approximately $8.8 billion in wages and earnings, were directly and indirectly attributed to Cleveland Clinic," a Clinic spokesperson wrote in an email.
Those thousands of employees also pay income taxes.
The Clinic says due to its economic activity in 2019, employees and vendors paid $2.3 billion in federal income taxes and $1.3 billion in total state and local taxes. Last year, "UH employment generated $48.5 million in income taxes to the state of Ohio and $34.7 million in income taxes to local cities," according to a hospital media release.
But Schiller takes issue with employers taking credit for taxes paid by their employees — calling it unfair.
"If we're looking at how do we finance public education in particular, but city services as well, we should look to major employers to be important sources of support," he said. "Not just out of some populous notion, but also because they're major recipients of public services [like police and fire protection], and so they should pay something for those public services."
UH said in a release that hospitals aren't always booming. Across the country, UH said, hospitals and health systems — including UH — are financially struggling to provide care.
"Many of the most prestigious institutions in the nation reported first quarter losses in the millions of dollars attributable to rising costs of labor and supplies, a workforce shortage, and in Northeast Ohio a surge in COVID-19 hospitalizations that again forced more suspensions of nonessential surgeries and procedures," the UH statement reads.
"UH is making difficult decisions to preserve access to care for our patients. We continue to believe that the noble goal of eliminating health care disparities is work that can only be achieved through nonprofit hospitals and health systems."
What do other cities do?
In some parts of the country, municipalities are encouraging nonprofits to make payments in lieu of taxes (PILOTs), rather than challenging property tax exemptions, said Greg LeRoy of Good Jobs First.
“Some cities are promoting payments … as a way of getting those nonprofit groups to acknowledge that they need to chip in to help support the public costs that they create by virtue of their size and their presence,” LeRoy said.
Boston, home to Harvard University, Boston College and Boston Medical Center, has had a voluntary PILOT program in place since the early 1960s.
In 2021, the city received more than $35 million in cash contributions and more than $55 million in community benefits through the program.
PILOT programs are also being touted in other parts of the Rust Belt. In May, Pittsburgh officials called for a PILOT program in their region, which is home to the University of Pittsburgh and Carnegie Mellon University, according to PublicSource.org.
This isn't just a city problem. Suburbs have been hit, too, as nonprofit hospitals expand.
The loss of property tax revenue is not just impacting cities like Cleveland. As hospital systems have expanded, buying up formerly private practices and facilities, suburbs are also increasingly affected, said attorney David Seed, who represents school districts.
Where do nonprofit hospitals own property around the Cleveland area? Hover over the map to see taxable and exempt land values, according to Cuyahoga County fiscal office records.
In 2014, the city of Beachwood lost a reported $8 million in tax revenue after the Cleveland Clinic purchased a private medical practice and created the Beachwood Family Health Center on Cedar Road, according to Cleveland.com.
The Beachwood City School district challenged the tax exemption, but the Ohio Tax Commissioner ultimately ruled that the facility should be tax-exempt because it was part of the hospital system, Seed said.
Beachwood schools isn't the only district that has been affected as hospital systems expand. In 2018, the Cleveland Clinic agreed to pay Strongsville City Schools $1.05 million after the schools agreed not to challenge the tax-exempt status of the Clinic's Strongsville Family Health & Surgery Center on State Route 82, in front of SouthPark Mall, the Associated Press reported.
“When you have a loss of revenue from the exemption, then the local government has to make a few choices,” Seed said. They either cut services or push the burden onto other taxpayers to make up for the loss of revenue.
"Those are its two choices," he said. "And they have to still provide the services.”
The Ideastream analysis of county fiscal office data shows that nonprofit hospitals, including the Cleveland Clinic and University Hospitals, own tax-exempt properties worth about $302 million in Beachwood, $163 million in Mayfield Heights, $39.5 million in Brecksville and $38.8 million in Independence, according to 2018 valuations.
Cuyahoga County leaders have considered payments in lieu of taxes from nonprofits before
In 2004, Jim Rokakis was the Cuyahoga County treasurer, and he was very excited because it appeared the county was on the verge of striking a PILOT deal with local nonprofit hospitals.
Back then, county officials were discussing the possibility of multi-million dollar annual payments from major nonprofit hospital systems, Rokakis said.
That was exciting for the former county treasurer because those nonprofit hospitals own a sizable amount of property in Cuyahoga County, but do not have to pay taxes on much of it.
Rokakis remembers that leaders at the Cleveland Clinic and UH seemed open to the possibility. The county was suggesting payments between $8 and $12 million annually, he said.
But negotiations were cut off abruptly, he said. Rokakis doesn’t know why negotiations didn’t bear fruit.
“You can do the math. It's been 17 years,” said Rokakis. “If you go with the 10 number, $170 million in payments in lieu of taxes that might have been paid to schools and other taxing subdivisions. But it never happened, obviously.”