COMMENTARY Not-for-Profit Tax-Exempt Hospitals: Is it Time to Start Paying Taxes?

Abstract

Using IRS data from the Centers for Medicare and Medicaid Services (CMS), it has been estimated that the value of the tax benefits received by not-for-profit tax-exempt hospitals increased from $12.6 billion in 2002 to $24.6 billion in 2011.  This jump can be attributed to forgone taxes, public contributions, and the value of tax-exempt bond financing.  $7 billion of this is gained from federal and state corporate income tax benefits, $3 billion from the benefit received from tax-exempt bonds, and $10 billion is attributed to state and local sales and property tax exemptions. By allowing people to reduce their tax liability by donating to tax-exempt organizations, this also benefitted tax-exempt hospitals to the tune of more than $10.5 billion in donations. Not-for-profit organizations that meet the requirements of Internal Revenue Code 501(c)(3) receive substantial advantages that are not given to for-profit corporations and organizations, the most significant being the favorable treatment under the tax code.  Qualified not-for-profit organizations will be exempt from federal income tax, state and local taxes as well as property, income and sales tax. Donations that they receive are tax-deductible to the donor and these organizations also qualify for tax-exempt bond issues.  Hence, the tax-exemption reduces the cost of capital for not-for-profit organizations compared to similar for-profits.  The questions that immediately spring to mind are: do not-for-profit hospitals truly need or deserve these tax breaks, what net benefit do we as a society receive from non-profit tax-exempt hospitals and, could this forgone money, if collected, be better spent in our communities?