Non-profit health care organizations in Tacoma, namely MultiCare and Franciscan health systems, began paying a business and occupation tax for the first time in 60 years when the nonprofit hospital tax exemption was removed following a unanimous City Council vote. It is not likely to go away even if a proposed “sunset” clause is added to the current proposal as a tactic to prompt discussions about “payment in lieu of taxation” with the hospitals. At issue within the City Council is not the fact that hospitals should pay something to support the city the hospitals call home but over tactics to widen the city’s tax base to cover other non-profit operations in the years to come. Such is politics in Tacoma when it comes to taxing the city’s largest employers; no one is backing down. The current tax on the large nonprofit hospitals is based on 75 percent of their incomes and brings in about $538,000 to city coffers this year. The plan now is to ditch the exemption altogether. Killing the exemption outright would mean $6 million a year to the cash-strapped city, which is battling not only the current $63 million projected shortfall in the 2013-14 biennial budget, but “structural deficits” that have lingered for years that were caused by using one-time revenues from new construction dollars and grants to cover on-going expenses. The last projection for the 2015-2016 budget shortfall suggests the city faces a $20 million gap during those years, for example, although the current cuts and tax hikes are likely to dramatically cut into that deficit forecast.
Championing the effort to kill the non-profit hospital taxation exemption outright is Councilmember Anders Ibsen, who has taken out a Facebook page to rally community support to counter the lobbying efforts by the hospitals and the Tacoma/Pierce County Chamber of Commerce to keep the exemption alive with statements that medical centers will cut outreach programs, charitable giving and even look elsewhere to locate their growing facilities if the tax plan becomes law. “The idea that they need a tax break because they are hurting is farcical,” he said. “They aren’t hurting. It is everyone else who is hurting.” Ibsen points to Internal Revenue Service and city tax documents filed by MultiCare and Franciscan to illustrate his argument. MultiCare’s 2010 financial statement, for example, shows “operating income” was $9.5 million. Franciscan posted similar figures. “Despite this largesse, both Franciscan and MultiCare get $6 million every budget cycle from the City of Tacoma in B&O tax breaks,” Ibsen wrote on the Facebook page. “A typical business owner pays four times the business tax rate (0.4%) as a billion dollar hospital network (0.1%)! We need to permanently repeal this tax break in order to fund core city services like public safety, human services and street repair.”
Group Health, by the way, would not have to pay the tax either way since it falls under the state’s health cooperative classification and not under the nonprofit statute. Changing that would require a legislative change, and yes, those talks are underway. Most cities with a B&O tax do not have a nonprofit hospital exemption. Neither does the state, which collects 1.5 percent of operating income from them each year. Ending the tax exemption for the hospitals would bring in about $5.5 million each budget cycle. The notion of ending the full tax exemption but including a sunset clause was first proposed by Councilmember Joe Lonergan that would end the tax in 2015. This is not likely an effort to actually end the flow of money from the hospitals, as it is a way to prompt further negotiations. It has gained some council discussion about negotiation tactics. “What it does is put a deadline on us,” Councilmember Marty Campbell said of the sunset option. “It is a show of trust.” Having a sunset on the tax would, theoretically, show the hospitals that the city is willing to negotiate some sort of “payment in lieu of taxation,” he said, instead of strongarming for more money up front. A negotiated payment option would also provide a template for other nonprofits to follow or face similar taxes.
A full 50 percent of downtown properties, Campbell points out, pay no property tax because they are governmental or nonprofits. University of Puget Sound, Port of Tacoma and other large tax-exempt operations might find themselves part of the taxation discussion as the issue plays out. “This is something that is going to take some time and discussion,” Campbell said. This is not a new topic for city staff to ponder. Former City Manager Eric Anderson gathered a panel of nonprofit officials in 2006 to look into the city charging “service fees” to nonprofits as a way to fund city services without a formal tax. That idea later died on the vine. In the left corner of this political boxing match, MultiCare, Franciscan and chamber officials oppose the tax altogether and fear the $5.5 million cut to the budget of the hospitals would mean cuts in programs and services. “As I’ve shared with the council, I am very concerned about the effects that the new $1.5 million B&O tax would have on Franciscan,” said Franciscan Health System CEO Joe Wilczek. “We believe the city should pursue alternatives to this new tax in part because every year we provide millions of dollars in free care and community services to city residents. As well, health care has been one of the area’s few economic engines during the current recession. With our new facilities at St. Joseph Medical Center, for example, we’ve created hundreds of family-wage jobs and generated significant taxes and fees for the city. We would welcome the opportunity to explore alternatives to a higher B&O tax with the mayor and other council members.”
Franciscan’s fact sheet on the issue, for example, line items out its current tax bill and charitable giving that totaled $24 million in charity care, $83 million in uncompensated care, $90 million on community programs, $210,000 in charitable donations, $147 million in uncollected medical bill write offs and $65 million in state, federal and local taxes. “We serve everyone regardless of their ability to pay,” Franciscan spokesman Gale Robinette said. “That makes us unique. You can’t go into a tire store and get free tires because you don’t have the money.” Franciscan officials predict the tax would mean it would have to cut $1.5 million in programs and services a year out of its budget but the details of which line items would be removed is still under discussion. “We just know the figure, and the figure is significant,” Robinette said. MultiCare posted similar community impact numbers and estimates the B&O tax would cost its operations about $2.5 million a year. “We have encouraged members of the City Council to explore alternatives, and we are always willing to discuss options with them,” MultiCare spokeswoman Marce Edwards Olson stated. “We look forward to those conversations.” The City Council was set to ponder the issue on Nov. 27, which was after Tacoma Weekly’s early deadline because of the Thanksgiving holiday. The final budget is set for approval on Dec. 4.