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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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Suggested Citation

  • William M. Gentry & John Penrod, 2000. "The Tax Benefits of Not-for-Profit Hospitals," NBER Chapters,in: The Changing Hospital Industry: Comparing For-Profit and Not-for-Profit Institutions, pages 285-324 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:6769
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    References listed on IDEAS

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    Cited by:

    1. Andrew E. Clark & Carine Milcent, 2008. "Keynesian hospitals? Public employment and political pressure," Working Papers halshs-00586792, HAL.
    2. Clark, Andrew E. & Milcent, Carine, 2011. "Public employment and political pressure: The case of French hospitals," Journal of Health Economics, Elsevier, vol. 30(5), pages 1103-1112.
    3. Horwitz, Jill R. & Nichols, Austin, 2009. "Hospital ownership and medical services: Market mix, spillover effects, and nonprofit objectives," Journal of Health Economics, Elsevier, vol. 28(5), pages 924-937, September.
    4. Kathleen A. Carroll & Jane E. Ruseski, 2011. "Modeling Internal Decision Making Process: An Explanation Of Conflicting Empirical Results On Behavior Of Non‐Profit And For‐Profit Hospitals," Contemporary Economic Policy, Western Economic Association International, vol. 29(4), pages 510-523, October.
    5. Marco Castaneda & Dino Falaschetti, 2008. "Does a Hospital’s Profit Status Affect its Operational Scope?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(2), pages 129-159, September.
    6. 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, vol. 27(5), pages 1208-1223, September.
    7. 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.
    8. 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.
    9. Andrew E. Clark & Carine Milcent, 2008. "Keynesian hospitals? Public employment and political pressure," PSE Working Papers halshs-00586792, HAL.
    10. Fei, Fan & Hines, James R. & Horwitz, Jill R., 2016. "Are PILOTs property taxes for nonprofits?," Journal of Urban Economics, Elsevier, vol. 94(C), pages 109-123.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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