States review nonprofit hospitals' tax exemptions

More legislators ask if nonprofit facilities should pay property taxes, especially if evidence shows they are acting like for-profit companies.

By Dave Hansen — Posted Sept. 10, 2007

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Nonprofit hospitals increasingly find their property tax exemptions under fire.

These facilities are not in imminent danger of suddenly having to pay millions of dollars in property taxes, but cash-strapped state governments are taking a harder look at whether nonprofit hospitals are acting in the public interest by providing charity care and other services, or whether it's in the greater public interest to have them contribute to government coffers and mitigate the tax burden on citizens.

In Washington, a state government committee recently recommended reviewing the tax-exempt status of nonprofit hospitals after finding that they provided less charity care than for-profit facilities.

Washington's nonprofit hospitals enjoyed a collective $47 million state tax break in 2006-07, according to the state's Joint Legislative and Audit Review Committee. It is reviewing more than 500 tax preferences, of which hospitals represent the largest monetary amount, on order of a bill passed last year. The committee of state senators and representatives has eight Democrats and eight Republicans.

Hospitals will reap an extra $50 million to $58 million for each of the next three years, the committee estimates. But for-profit hospitals receive a higher percentage of their revenue from Medicaid patients, it found.

There were no data on whether nonprofits provided more community-based services, such as educational seminars or medical screening programs.

The state Legislature should make nonprofits meet a threshold of charity or low-income care, the report recommended. The Legislature could also require nonprofits to provide an inventory of its community services or clarify which services are eligible for the tax exemption.

The report, issued July 31, won't be finalized until it is reviewed by other legislators over the next few months. But hospitals are quick to defend their property tax break. Taxing nonprofit hospitals would force them to cut charity care, community benefits, and staffing as well as raise the price of medical services, according to Cassie Sauer, a spokeswoman for the Washington State Hospital Assn.

The committee did not know about community activities of local hospitals because there is no state law requiring disclosure. The hospital association collects statistics from its members on charitable activities such as free mammograms and reaching out to migrant farmers, she says.

The Washington report noted that other property owners could see their tax rate cut if nonprofit hospitals' exemption was lifted.

In Indiana, which recently underwent a reassessment that doubled or tripled property taxes for some homeowners, tax relief is the major driver behind efforts to eliminate such tax exemptions for hospitals and others.

The definition of charitable should be reexamined in an era in which hospitals lease their buildings to McDonald's, nursing homes and doctors' offices, said state Rep. Thomas Saunders. He says he is talking with other legislators to gauge support for a bill that would lift exemptions for nonprofit hospitals, at least those with high-paid executives and large bottom lines. "If they end up at the end of the year with no profit, I think they're not for profit," he says.

Indiana's Legislature reconvenes in January 2008, which is when Maine's Legislature is scheduled to consider two bills limiting the tax-exempt status of nonprofit hospitals.

The first would levy property taxes on hospitals with assets greater than $10 million, says Brenda Peluso, director of public policy for the Maine Assn. of Nonprofits. There is a strong anti-tax movement in the state, and taxing nonprofit hospitals would spread the burden, she said. The Legislature is also considering a bill that would tax nonprofit corporations if they pay executives more than $250,000 a year, she said. It is unclear if the measures would pass.

Meanwhile, the Illinois Dept. of Revenue is still considering whether to appeal a state appellate court ruling that overturned its decision to lift the property tax exemption for Provena Covenant Medical Center in Urbana, Ill.

The revenue department said Provena did not provide enough charitable care to receive an exemption. The hospital paid almost $5 million in property taxes before the appellate court reinstated its nonprofit status and ordered the state to refund the payments.

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