Tax exemption for health-care providers too generous - expert

By Shannon Vicic

The current tax code exempting many nonprofit hospitals and healthcare
providers from paying income taxes is "far too generous," a UI tax expert
says.

The tax exemption for nonprofit hospitals costs Americans as much as $8
billion annually, while tax-deductible donations to exempt agencies are
expected to cost the United States $19 billion this year, said John
Colombo, UI law professor and a co-author of the book "The Charitable Tax
Exemption" (published in May 1995 by Westview Press).

Colombo believes that many exempt health-care institutions "could operate
just as easily in a taxable environment," citing as evidence studies that
suggest tax-paying hospitals operate more efficiently than their exempt
counterparts yet provide equally good patient care. Besides bringing in
additional tax revenues, a tax code revision might have a beneficial side
effect of reducing health-care costs for consumers, he said.

According to Colombo, the defining characteristic of a nonprofit
organization isn't a lack of profit, as the term might imply. Tax-exempt
hospitals, for example, reported profits of nearly $10 billion for 1991,
according to Internal Revenue Service data. In fact, charitable
organizations as a whole reported revenues in excess of expenses by some
$32 billion that year.

The sole difference between a taxable business and an exempt organization
is that nonprofit agencies aren't allowed to distribute their earnings to
individual shareholders. All earnings are cycled back to the organization,
so they can be used to raise salaries, purchase equipment - or even finance
congressional lobbying for health-care legislation, Colombo said.

"There is a fundamental question about why some organizations are tax
exempt. If a hospital runs like a business and makes a profit like a
business, then it should be taxed like any other business. We need to ask
ourselves why we're being so generous," he said.

Rather than providing a tax exemption to nonprofit organizations,
legislators should implement a system of providing direct subsidies to
institutions, Colombo said. Under the current system, taxpayers "don't have
any idea how much tax money goes toward supporting these organizations," he
said. Subsidizing these organizations would allow taxpayers to have a say
in determining which organizations receive money and how much they receive.

In October, Colombo presented his views at the "Colloquium on Legal Issues
Related to Tax Exemption and Community Benefit" in Washington, D.C. The
colloquium, sponsored by the National Health Lawyers Association, included
a panel discussion on tax exemption for nonprofit health-care agencies.