Many readers likely noticed the New York Times piece on May 26 by Stephanie Strom titled "Exemptions for Charities Face New Challenges." Strom notes that "[a]uthorities from the local tax asseessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions--ranging from small group homes to wealthy universities--questioning whether they deserve special treatment.
Charities face problems because of the difficulty in knowing when a charity is a charity. Here are a few of the key problems.
- Many charities have related profit-making businesses. If the business income is "unrelated" to the charity's purpose, it is subject to taxation under federal law as unrelated business taxable income (or UBTI, to tax nerds); but if it is related to the charity's mission, it is exempt. So museums that qualify under federal law can run gift shops that sell items that are reproductions of museum pieces or otherwise related to the educational mission of the museum without having UBTI. Yet competing for-profit stores sell similar artwork and reproductions, and must pay property tax. Is the subsidy to the museum appropriate?
- Other charities provide services to targeted constituencies such as day care or medical care for underserved populations. Sometimes those services are provided at cost, without any profit. Other times services are provided on a sliding scale, charging those who can afford more a rate that helps to subsidize the service for those who cannot. Sometimes there is a single price that applies to all service recipients, that is subsidized by government grants intended to help cover the price for the poor. In that case, those who can afford more may be partially subsidized by the aid intended to benefit the poorer clients.
- The article explores the case of a day care agency but tax-exempt hospitals have been in the news recently quite a bit.
- Provena Hospital in Champaign-Urbana Illinois garnered attention for sending private bill collectors after people who were unable to pay the fees charged. See this 2004 article. It turned out that the hospital's billing and services were not much different from a for-profit hospital. In fact, it wasn't clear what the difference was. The hospital asserted that activities like community clinics, medical research, and unreimbursed preventive health services satisfied its charitable mission requirement. However, many for-profit hospitals engage in similar activities. In spite of an administrative law judge's recommendation that the hospital be granted an exemption, the Illinois Department of Revenue revoked the state exemption for the hospital, which required that the entity's "primary purpose" be its charitable mission. The decision is linked here. Among other facts noted in the Department's decision were that the Hospital had revenues of $110 million in 2002, but spent only $831,000 carrying out its charitable mission, yet the property tax exemption that year was worth $1.1 million. Almost all the services were provided through contracts with for-profit parties--ER, pharmacy, laboratory, etc. As a result of the revocation, the hospital paid about $5 million in property taxes between 2003 and 2006. See this description at the hospital's website. In August 2007, however, Sangamon County Circuit Court overturned the revocation, though the Illinois attorney general indicated that the state would appeal the decision. See BNA Health Law Report, Dec. 6, 2007; Hospital's brief; Bruce Japsen, Despite Taxes, Provena Hospital Healthy, Chicagotribune.com, Nov. 1, 2007. In March 2008, Champaign County refunded the property taxes paid to it (only about $47,000 of the total).
- Other charitable institutions--private universities like Harvard and Yale--have enormous endowments that participate in the markets in the same way as other investment vehicles, even though the institutions charge tuition and receive considerable government funding through grants and other mechanisms. Unlike private foundations, educational institutions face no federal requirements to pay out a certain percentage of their funds each year.
What's the appropriate role here? Clearly, any changes to the tax-exempt world would require consideration of transitional issues. Not for profit hospitals provide much of the health care across the country, and their patients, as well as the third-party for-profit providers that they contract to do much of the work, would face a different situation if property tax exemptions were consistently revoked, or even if the federal exemption were in jeopardy. Similar stories apply for day care, nursing homes, and many other services.
The concerns about adequate charitable care remain, however, when these organizations raise most of their funds from revenues for services in the same way as their unsubsidized competitors. Wouldn't it make more sense for states to provide direct grants to those needing the services, rather than subsidizing one service over another when third-party for-profit providers are providing most of the services in either case? If only a tiny amount of activity engaged in by a tax-exempt organization is actually providing services for free (or at least below cost by the amount of any state subsidy) to needy individuals, wouldn't the state, and the needy individuals, be better off removing the subsidy and instead creating new programs to provide care at state expense?
Some of the examples are no-brainers. The New York Times article notes that Mall of America has applied for a propety tax exemption, claiming it provides a public service by drawing tourists and aiding the state economy. Surely that is off the list of what should receive state subsidies.
And as long as Harvard has that multi-billion dollar endowment, alumni should consider giving to the foundations of much poorer public institutions that serve underrepresented populations at a tiny fraction of the cost of running an institution like Harvard.
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