CRFB: Reform or Repeal Hospital Tax Exemption

An outfit called the Committee for a Responsible Federal Budget is out with a new report -- a literature review, actually --  that makes the surprising and counterintuitive conclusion that for-profit hospitals provide more charity care than nonprofit hospitals.  Not just in absolute numbers but as a percentage of operating expenses.  The nearly 50-year-old organization concludes that lawmakers should reform or repeal tax exemption for hospitals.  There are excerpts from the easy to read and well-footnoted report below.  Maybe it is too easy to read though.  Teaching hospitals, for example, probably fare poorly by comparison because they charge most patients to fund very expensive medical research and training on very rare diseases.  The report sure makes it seem that repealing hospital tax exemption is an easy call.

Both studies also found that nonprofit hospitals generally provide less charity care than their for-profit counterparts, likely because for-profit hospitals can deduct charity care costs from taxes and have a vested interest in building their reputations in local communities, particularly in areas where they directly compete with nonprofit hospitals.

The Cost of the Nonprofit Hospital Tax Benefit

The cost to the federal government from allowing hospitals to claim nonprofit status, in the form of lost tax revenue, is substantial. There is an abundance of evidence that the tax benefits to those hospitals exceed tangible community benefits that are supposed to be tied to nonprofit status.  

By our rough estimate, the existence of nonprofit hospital status will cost the federal government $260 billion over a decade in lost revenue. This includes forgone corporate tax revenue, the benefit associated with being able to issue tax-exempt bonds, and lost individual income tax revenue related to the deductible charitable contributions from donors.

Importantly, this estimate is rough and comes with a high degree of uncertainty. Challenges arise from the limited availability of comprehensive data on hospital income, tax rates, and the scope of revenue implications, spanning federal, state, and local levels. Our estimate is derived from two calculations by KFF of the cost of the federal tax breaks in 2020. They estimated the cost at $14.4 billion using their own methodology and $18 billion using the methodology of the Johns Hopkins Bloomberg School of Public Health.

Notably, our estimate is based on current tax rates and deducted charitable contributions and thus effectively assumes full extension of the expiring parts of the 2017 Tax Cuts and Jobs Act (TCJA). The cost would likely be higher under current law and could differ in other ways depending on the tax reforms and modifications enacted as part of a possible 2025 tax bill.

Conclusion

Given its large cost and questionable value, policymakers should work to reform or repeal the tax advantages for nonprofit hospitals and should also improve the regulatory regime to ensure transparency, accountability, and provision of community benefits.

darryll k. jones