In California, about 10% of hospitals are for-profit while over two-thirds are non-profit entities.
Non-profit hospitals, like other non-profits, pay no property tax and no corporate income and they even get a special deal on unemployment insurance taxes. For-profit, private hospitals pay property taxes, corporate income taxes, unemployment insurance taxes, the Employment Training Tax and other taxes just like any other business. Yet, in the words of Bill Leonard, a conservative Republican member of the Board of Equalization, “when I drive past a hospital, I can’t tell the difference” between a non-profit hospital and a for-profit hospital.
Last week the Board of Equalization met and considered a proposal by Board Member Betty Yee to obtain information from non-profit hospitals regarding what in tax lingo is called the “welfare exemption”, meaning their non-profit tax status. Ms. Yee has been working on this for some time: last year she proposed requiring non-profit hospitals to spend 5% of revenue on charity care in return for their non-profit tax status. That proposal was not favorably received by the Board. Last week, Ms. Yee had a better day.
The California Hospital Association challenged the authority of the Board to collect the desired information and CHA also said that some of the information was duplicative and some information was impossible to provide.
The attorney for the Board and all five members of the Board of Equalization, including the representative of State Controller John Chiang, were unequivocal in asserting their right to collect the information they deemed necessary in order to determine whether any entity, including a hospital, could be a non-profit in the eyes of the State of California.
The Board decided to embark on a stakeholder process to refine the proposal to collect the information.
The information desired by Ms. Yee (available online at www.boe.ca.gov) includes such basic information as how much charity care hospitals provide as well as whether liens on primary residences are levied on consumers.
In addition, Ms. Yee wanted to know whether non-profit hospitals had revenues in excess of expenditures (otherwise known as profits) of more than 10% and if so, what the hospitals spent the money on. There is existing case law in California (the Rideout case) that allows hospitals to have excess profits and still be non-profit so long as they put the money back into the hospital, rather than taking it out in profits.
We know that when Senators Baucus (D-Montana) and Grassley (R-Iowa) investigated hospitals, a bipartisan effort that has spanned the change in control of the US Senate, they were dismayed to discover excessive CEO compensation, overcharging of the uninsured, and various other bad behavior by hospitals benefitting from not paying taxes.
Given the bipartisan support in Congress for efforts that have resulted in the IRS revising the reporting for non-profit hospitals, perhaps we should not have been surprised that the California Board of Equalization voted unanimously on a bipartisan vote to support the concept of collecting the information by May 2009. But I certainly was. Bill Leonard said plainly that if a non-profit hospital is acting like a for-profit, it should lose its non-profit tax status.
For those of you who are wondering what in the blazes the Board of Equalization is, you should know that you have the opportunity to elect its members every four years. Among those who currently serve on the Board of Equalization is Judy Chu, former Chair of Assembly Appropriations, as well as Betty Yee, State Controller John Chiang, Bill Leonard, and Michelle Steel (verify). The Board of Equalization is a key tax agency responsible for determining the equity of taxes across counties as well as whether entities are worthy of non-profit tax status. Its hearing room was as crowded as any legislative hearing for that reason.