Bill that could block citizens’ right to challenge tax exemptions of universities, hospitals and other nonprofits still awaits Assembly approval

Citizens in New Jersey would not be able to challenge the property tax exemptions enjoyed by large institutions like Princeton University under a bill that has been passed by the state Senate. The bill is still awaiting Assembly approval.

The bill would block lawsuits like the one filed in 2011 by Princeton residents arguing that some activities of Princeton University are essentially commercial and therefore those buildings should be properly assessed and taxes should be paid. The suit was settled in October 2016, just before a scheduled trial.

“This is a bill driven by the interest of two institutions and some hospitals, which, under law, can be commercial entities in New Jersey,” said Princeton-based lawyer Bruce Afran, who represented the plaintiffs who challenged the university.

As of May 2017, 41 towns in New Jersey have sued local nonprofit hospitals over their tax-exempt status. Most notably, a 2015 tax court ruling required Morristown Medical Center to pay the town $15.5 million in lieu of taxes.

The only institutions that would be affected by the bill are Stevens Tech, NJIT, Princeton University and several large hospitals, Afran said. 

“Those are the only schools that engage in any significant amount of patent licensing, which is commercial conduct,” Afran said. “No other college or university engages in any significant degree of commercial activity, including Rutgers, which has no significant patent licensing business.”

Recent lobbying disclosures found that the Association of Independent Colleges and Universities in New Jersey paid the lobbying firm Archer Public Affairs $119,241 to advocate for the passing of the Senate bill, S2212, just months before Princeton University settled the 2011 lawsuit.

The bill passed the Senate in May 2017 with a 24-9 vote. Meanwhile, the Assembly version of the bill, sponsored by Reed Gusciora (D-Trenton) and Nancy Pinkin (D-Edison) was referred to the Assembly Appropriations Committee in September of 2016. Nothing has happened to the Assembly bill since then.

Gusciora, who now lives in Trenton and previously represented Princeton as an assemblyman before redistricting, did not respond to phone and email requests over the last few weeks for this story His office said a statement would be issued about his support for the bill, but then never issued one. He also did not respond to a previous Planet Princeton story on the topic. 

Sen. Shirley Turner (D-Ewing) said she voted against the bill in May because she believed it would lead to  the abuse of taxpayers.

“I believe third-party tax appeals are an important check and balance procedure that needs to remain in place,” Turner said. “New Jersey has the highest property taxes in the country, and we need a mechanism for appealing questionable classifications that shift the property tax burden to taxpayers.”

Afran believes the current bill going through the state legislature is unconstitutional, and that although Princeton ended up being “a good partner” in the end in last year’s legal settlement, it would be wrong for the university to support the bill because it is “contrary to public interest.”

“It favors the interests of some exempt taxpayers and not others, and it interferes with the rights of citizens,” he said. “A large university could sign an agreement to the town to make a small annual payment of $3 million when it might owe $10 million. On the strength of that agreement, which may not even realistically meet what the university should owe, no one could challenge its exempt status. So what this bill would mean is that a large institution that should owe a lot of money, can buy peace by paying a pittance to the town through an agreement, thereby depriving people in that town the right to challenge it.”

The bills are unlikely to get through the Legislature by Dec. 31, Afran said.

“Similar bills have not passed before, and it seems unlikely it will pass this time,” Afran said. “The Assembly dies on December 31, as does the Senate, and we don’t know what the new governor’s views would be — Phil Murphy, being a former Goldman Sachs executive, could be very sympathetic to business interests, or he might be more populist and take a different approach.”

Meanwhile, at the federal level, Republicans in the House of Representatives are pushing legislation to tax the endowments of large, wealthy, private universities.The American Council on Education recently spoke out against the endowment proposal.

“Investment income from endowments is used every day to support nearly every aspect of an institution’s operations, including all the components vital to its mission and the delivery of a high-quality, affordable education, from financial aid to research and student retention and success programs,” council President Ted Mitchell wrote in a Nov. 6 letter to House leaders. “Under H.R. 1, potentially large amounts of endowment dollars would be redirected to the federal government, taking them away from providing scholarships to our students and supporting research and education. It also would effectively be a tax on donors’ contributions and shift money from the dedicated purpose for the donation.”

The federal bill would have a minimal effect on Princeton, Afran said.

“It’s a false bill,” he said. “It only taxes endowment that is not directly used for the educational mission — basically all of Princeton’s endowment does that. Nobody disputes that. Almost all the endowment money goes to running the school. It won’t result in any money being taxed to any significant degree. Universities aren’t opposing it that badly. They’re buying off public opinion without having to pay anything.”

Recently, news also broke that tax-exempt universities have been using offshore investments to make money while avoiding tax scrutiny in the U.S, according to leaked papers.

“Princeton has some investments overseas, but I don’t think they’re doing it for tax reasons,” Afran said. “They do it because they’ve gotten involved with consortiums abroad.”

Still, there should be more focus on finding a way to make wealthy non-profits pay their fair share of taxes, he said.

“The present system of unlimited exemption for universities encourages, in many cases, wasteful spending, because by being free of paying taxes, they can pour money into excess executive salaries and unnecessary employment positions like 20 people in the public relations department,” he said. “If they were forced to pay taxes, they’d have more slimmed-down operations, and frankly, they’d be able to charge less tuition. But it’s because they’re free of tax duties that they can create unnecessary administrative layers, and that drives up the cost of tuition.”

This story was changed to reflect that lawyer Bruce Afran said that Rutgers University has no significant patent business.