Hartford — New London would be able to tax Lawrence + Memorial Hospital $5.65 million and Norwich would be able to tax The William W. Backus Hospital $3.85 million under a proposal by Gov. Dannel P. Malloy that would remove the longstanding municipal property tax exemption for nonprofit hospitals.

The new tax, which would apply to hospital buildings and land but not equipment and machinery, represents a major shift in how cities and towns are compensated for hosting nonprofit hospitals. Currently the state provides municipalities with payment in lieu of taxes, or PILOT, funds equaling about 75 percent of the assessed value of the hospital property.

Under Malloy’s budget proposal, released Wednesday, the state’s total PILOT payments, which also compensate towns for hosting colleges, state parks and other state properties, would be reduced from the current level of $114.95 million to $59 million in each year of the biennial 2018-19 budget. The funds towns now could collect from hospitals largely would make up the difference, according to Benjamin Barnes, secretary of the state Office of Policy and Management.

He said cities and towns that host hospitals and some hospital satellite facilities would collect a total of $212 million in property taxes annually.

Locally, four communities would be able to levy taxes on hospitals: New London and Norwich, which host L+M and Backus, respectively, stand to collect the highest taxes. Groton, which host’s L+M’s Pequot Health Center, would be able to collect $122,000 annually in 2018 and 2019, and Waterford, which hosts the L+M Cancer Center as well as properties owned by Backus, could collect $463,620 annually, according to the governor’s budget plan.

Barnes said the hospital payments would be more than offset by $250 million in supplemental payments the state would make to hospitals. Those payments would be used by the state to leverage about $162.7 million in additional federal Medicaid reimbursements to the state, Barnes said.

Despite assurances from Barnes that hospitals actually would come out ahead, hospital officials were unequivocal in their opposition to the plan.

Vincent Petrini, spokesman for Yale New Haven Health, the network that includes L+M, said the plan would open the door for a new tax on hospitals without a guarantee that it would be offset permanently by the state payments.

“We’re greatly concerned about this,” he said. “We’ve already got a lot of uncertainty with what’s going to happen to the ACA (Affordable Care Act) and Medicaid cuts. Tax rates could go up. This is not something we can support.”

He and other hospital officials noted that hospitals already pay a state tax on revenues that was supposed to be offset with Medicaid payments, but that plan was discontinued.

“Twice before, the state has promised us adequate funding from Medicaid services through the federal hospital tax program,” Elliot Joseph, chief executive officer of Hartford HealthCare, the network that includes Backus, said in a statement. “Twice before, that promise was broken.”

He said the governor’s proposal would add more than $52 million of new costs annually to the Hartford HealthCare network, on top of the state taxes it already pays.

“In addition to being patently unfair, this would raise the cost of health care for all our state’s residents and businesses,” Joseph said.

Petrini said the entire Yale New Haven system already pays about $200 million annually in state taxes, including about $18 million paid by L+M.

At $200 million, the Yale New Haven system is “the state’s single largest taxpayer,” Petrini noted. “And we are a nonprofit organization. Levying property taxes on nonprofit hospitals is a dangerous precedent that we cannot support.”

The Connecticut Hospital Association, which represents all the state’s nonprofit hospitals, called the plan another “budget gimmick” that will further increase costs for patients, cause the loss of health care jobs, extended wait times and reduce access to care.

“We will vigorously fight any new attempt to tax hospitals,” Jennifer Jackson, chief executive officer of the hospital association, said in a statement.

New London Mayor Michael Passero said the net increase to the city would be $3.8 million, after the reduction in PILOT funds the city receives is factored in.

He called it, “a very creative proposal that looks at first blush to be a win, win, win for the city, the hospital and the state,” because the plan includes payments to hospitals to offset the local tax payments and new Medicaid income to the state.

He added, however, that “the devil’s going to be in the details. You don’t want to see an important partner in the city like the hospital get hurt. But it looks like they may be able to hold the hospitals harmless by leveraging more federal Medicaid funds.”

Norwich Mayor Deberey Hinchey and City Manager John Salomone said they will take a close look at the proposed hospital tax and its effect.

While Norwich would see a revenue boost, the tax also potentially could hurt the city's biggest employer, they said. Backus Hospital employs about 1,200 people, Salomone said. City officials cited the hospital and its employment numbers in a recent presentation to bond rating agencies in seeking a strong city bond rating. Hinchey said city officials plan to testify on the proposed hospital tax when the issue comes to a public hearing in the legislature.

“That's a delicate balance,” Hinchey said. “The hospitals are big employers here.” 

Waterford First Selectman Daniel Steward expressed more reservations about the plan, especially if it would force hospitals to raise rates.

“I’m not sure it’s the right thing to do,” he said.

State Sens. Heather Somers, R-Groton, and Paul Formica, R-East Lyme, both responded with caution to the proposal.

“We’re a little concerned about the new philosophy of allowing cities and towns to collect real estate property taxes on hospitals,” Formica said.

State Rep. Chris Soto, D-New London, said the plan deserves careful consideration.

“It looks like the proposal gives hospitals a way to make up for some of what they'd be paying, but we'll have to look at the details,” he said.

Day staff writer Claire Bessette contributed to this report.

j.benson@theday.com