Property Tax Exemption

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January 12. 2012

OBJECTIVE

Preserve the property tax exemption to ensure nonprofit hospitals can continue to provide needed health services in their communities.

BACKGROUND

Nonprofit hospitals in Washington State have been exempt from the property tax since 1886.  Under federal law, the promotion of health for the benefit of the community is considered a charitable purpose.  Other exempt nonprofit organizations in this category include schools, churches, social service agencies, and artistic organizations.  Nonprofit organizations by their nature are able to provide the mix of services to best meet the needs of their communities without having to provide an additional return for owners or stockholders.  Due to budget cuts, hospitals are increasingly providing and absorbing the costs of services and programs that were provided in the past by public agencies.

A 2007 Board of Tax Appeals ruling and subsequent court cases determined that due to an incorrect and overly restrictive definition of “hospital,” nonprofit hospitals were improperly taxed on some of their property.  Under the earlier definition, only the building used to house inpatient services was exempt from the tax.  In early 2010, the Washington State Department of Revenue corrected the definition to include buildings and portions of buildings that are licensed as part of the hospital and provide services that are part of an integrated, interrelated unit exclusively used for hospital purposes.  The revised definition corrected the base on which taxes are assessed; it did not create a new tax preference.  Unfortunately, this correction has created budget issues for some counties and other jurisdictions that budgeted and collected taxes based on the tax base used under the prior definition.

Some legislators may be interested in restricting the exemption for nonprofit hospitals.  For example, some have discussed tying the exemption to a quantifiable amount of community benefits.  The benefit of a nonprofit, however, goes beyond the amount of quantifiable charity care and other services by allowing the hospital to provide health care that best meets community needs.  It would be counterproductive and unfair to subject hospitals to different criteria and requirements than other nonprofit exempt organizations.  Efforts to remove or restrict the tax exemption would hinder the ability of hospitals to provide needed services.  With property tax collections a local issue, changing the exemption would not affect state revenues, nor would it help the state resolve its budget issues.

WSHA POSITION

The property tax exemption for nonprofit hospitals benefits local communities by enabling hospitals to provide the needed types and mix of services.  Cutting back on the exemption will impact the ability of hospitals to serve local community needs.