How much do property tax breaks matter?

By Melanie Evans
Hospitals benefit more from property tax breaks than any other tax exemption by far, according to research on the value of those tax breaks and how hospitals earn them. No wonder then, after Illinois denied property tax exemptions for three hospitals this week, the state hospital association stridently decried the outcome.

Property tax breaks are one of the subsidies awarded by local, state and federal governments to not-for-profit hospitals. Others include exemption from state sales taxes, state income taxes, federal income taxes and eligibility for tax-exempt debt for construction and other capital projects. Hospitals receive these tax breaks in exchange for the benefits they provide local communities, such as free and subsidized medical care.

But the Illinois Department of Revenue said operations at Edward Hospital in Naperville, Northwestern Memorial's Prentice Women's Hospital in Chicago, and Decatur (Ill.) Memorial Hospital did not qualify as charitable enough to earn property tax breaks. The decision is a rebuke after years of debate over whether not-for-profits do enough to merit the financial and competitive advantage of tax exemption. More hospitals are under review, as my colleague Ashok Selvam reported this week.

So how much do property tax breaks matter?

Hospitals in Cook County, where Chicago is located, received property tax breaks worth an estimated $238 million to $241 million, the county's assessor said in 2007. The Center for Tax and Budget Accountability, a Chicago-based not-for-profit policy group funded primarily by labor, estimated in an April 2009 report (PDF) that property taxes made up 57% of the $498 million in local, state and federal tax breaks awarded to 47 hospitals in and around Chicago.

In another analysis of roughly 500 U.S. hospitals, property tax breaks accounted for 43% of the subsidies not-for-profit hospitals receive from exemptions, not including tax-exempt borrowing.

Federal income tax breaks accounted for 27% of the total; state sales taxes, 23%; and state income taxes, 6%, according to the research, published in 2000 by Milbank Quarterly.

Nancy Kane, a Harvard University professor of management, and William Wubbenhorst, coordinator of the FaithService Forum with consultant ICF Macro, conducted the extensive analysis of 507 hospitals using data from 1994 and 1995.

Three out of four hospitals in the study earned more in tax breaks than they spent on free and discounted medical care, also called “charity care.” Researchers then added to charity-care expenses half of hospitals' losses for “bad debt,” or unpaid medical bills sent to patients who hospitals believed could pay for care.

Tax breaks for more than half (55%) the hospitals totaled $658 million more than the combined charity care and bad debt costs reported by hospitals, the researchers said.

One final note:

Researchers Kane and Wubbenhorst readily acknowledged that the report excluded losses hospitals incur for services that benefit communities broadly and locally. Researchers could not quantify amounts based on data available at the time.

New disclosures include losses on community health programs, physician training, research, unprofitable services and some donations toward hospitals' overall contribution to communities. A Modern Healthcare analysis of reporting by 20 large health systems found, on average, such additional contributions totaled 2.5% of all hospital expenses. Free and discounted care made up another 2.5% of expenses, on average.