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The Tax Benefits of Not-for-Profit Hospitals

In: The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions

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  • William M. Gentry
  • John Penrod

Abstract

This paper investigates three special tax provisions for not-for-profit (NFP) hospitals. First taxes -- both income and property taxes. Second, they issue tax-exempt bonds so lenders do not pay income taxes on interest received. Third, donors deduct charitable contributions from their income tax bases. The rationale for these policies is that the NFP hospitals provide community benefits, the definition of which is often loosely-specified. The value of capital tax exemptions depends on the capital intensity of NFP hospitals, and for income taxes, the hospitals' profitability. For 1995, the aggregate value of the exemption from income taxes is $4.6 billion; the median hospital receives benefits of 1.8 percent of total assets. For the property tax exemption, we estimate an aggregate value of $1.7 billion. The value of the property tax exemption varies across hospitals depending on state and local tax policies and the hospital asset mix. Tax-exempt bonds and deductible contributions are concentrated among larger hospitals. Only 19.7 percent of NFP hospitals had outstanding tax-exempt debt in 1994. Almost half of existing bond debt could be replaced by using hospital endowments; we calculate an annual aggregate benefit of $354 million from using tax-exempt bonds. For charitable contributions, roughly four percent of hospitals receive 71 percent of the contributions. We estimate that the lost tax revenue from these contributions is $1.1 billion in 1994.

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This chapter was published in:

  • David M. Cutler, 2000. "The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions," NBER Books, National Bureau of Economic Research, Inc, number cutl00-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 6769.

    Handle: RePEc:nbr:nberch:6769

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    1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521319867.
    2. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 301-25, June.
    3. Gulley, O. David & Santerre, Rexford E., 1993. "The Effect of Tax Exemption on the Market Share of Nonprofit Hospitals," National Tax Journal, National Tax Association, vol. 46(4), pages 477-86, December.
    4. Timothy J. Goodspeed & Daphne A. Kenyon, 1993. "The Nonprofit Sector's Capital Constraint: Does It Provide a Rationale for the Tax Exemption Granted To Nonprofit Firms?," Public Finance Review, , , vol. 21(4), pages 415-433, October.
    5. Charles T. Clotfelter, 1985. "Federal Tax Policy and Charitable Giving," NBER Books, National Bureau of Economic Research, Inc, number clot85-1.
    6. Fama, Eugene F & Jensen, Michael C, 1983. "Agency Problems and Residual Claims," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 26(2), pages 327-49, June.
    7. Clotfelter, Charles T., 1985. "Federal Tax Policy and Charitable Giving," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226110486, 01-2013.
    8. Richard G. Frank & David S. Salkever, 1994. "Nonprofit Organizations in the Health Sector," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(4), pages 129-144, Fall.
    9. Randolph, William C, 1995. "Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(4), pages 709-38, August.
    10. Wedig, Gerard J & Hassan, Mahmud & Morrisey, Michael A, 1996. " Tax-Exempt Debt and the Capital Structure of Nonprofit Organizations: An Application to Hospitals," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1247-83, September.
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    Cited by:
    1. Clark, Andrew E. & Milcent, Carine, 2010. "Public Employment and Political Pressure: The Case of French Hospitals," IZA Discussion Papers 4994, Institute for the Study of Labor (IZA).
    2. Anup Malani & Tomas Philipson & Guy David, 2003. "Theories of Firm Behavior in the Nonprofit Sector. A Synthesis and Empirical Evaluation," NBER Chapters, in: The Governance of Not-for-Profit Organizations, pages 181-216 National Bureau of Economic Research, Inc.
    3. Horwitz, Jill R. & Nichols, Austin, 2009. "Hospital ownership and medical services: Market mix, spillover effects, and nonprofit objectives," Journal of Health Economics, Elsevier, Elsevier, vol. 28(5), pages 924-937, September.
    4. repec:hal:wpaper:halshs-00586792 is not listed on IDEAS
    5. Carroll, Kathleen & Ruseski, Jane, 2009. "Modeling Internal Decision Making Process: An Explanation of Conflicting Empirical Results on Behavior of Nonprofit and For-Profit Hospitals," Working Papers 2009-23, University of Alberta, Department of Economics.
    6. Jill R. Horwitz & Austin Nichols, 2007. "What Do Nonprofits Maximize? Nonprofit Hospital Service Provision and Market Ownership Mix," NBER Working Papers 13246, National Bureau of Economic Research, Inc.
    7. Andrew E. Clark & Carine Milcent, 2008. "Keynesian hospitals? Public employment and political pressure," PSE Working Papers halshs-00586792, HAL.
    8. Lien, Hsien-Ming & Chou, Shin-Yi & Liu, Jin-Tan, 2008. "Hospital ownership and performance: Evidence from stroke and cardiac treatment in Taiwan," Journal of Health Economics, Elsevier, Elsevier, vol. 27(5), pages 1208-1223, September.
    9. Marco Castaneda & Dino Falaschetti, 2008. "Does a Hospital’s Profit Status Affect its Operational Scope?," Review of Industrial Organization, Springer, Springer, vol. 33(2), pages 129-159, September.

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