Estimates of the Federal Revenue Forgone Due to the Tax Exemption of Non-profit Hospitals

EY was commissioned by the American Hospital Association to analyze the federal revenue forgone due to the tax exemption of non-profit hospitals as well as the community benefits they provide. This study presents estimates for 2016, the most recent year for which community benefit information is available for non-profit hospitals based on Medicare hospital cost reports for approximately 3,000 non-profit general hospitals. The analysis does not account for other non-profit specialty hospitals, such as psychiatric or long-term acute care.

In 2016, the estimated tax revenue forgone due to the tax exempt status of non-profit hospitals is $9.0 billion. In comparison, the benefit tax-exempt hospitals provided to their communities, as reported on the Form 990 Schedule H, is estimated to be $95 billion, 11 times greater than the value of tax revenue forgone.

The analysis does not include the deductibility of charitable contributions to non-profit hospitals. If deductions to non-profit hospitals were no longer deductible but charitable donation provisions were otherwise unchanged, donors would likely shift their donations to other tax-exempt entities, including both those affiliated and unaffiliated with hospitals, resulting in a negligible net federal revenue impact.

The analysis does incorporate an estimate of the current state and local revenue forgone due to tax exemption. If federal tax exemption were restricted, the assumption is that state and local tax exemptions would also be restricted, thereby increasing state and local taxes on non-profit hospitals. As a result, a hospital’s federal corporate taxable income would be reduced by an amount equal to the increase in state and local taxes.