Tax preferences for nonprofits: from per se exemption to pay-for-performance

Abstract

Defenders of tax preferences for nonprofit hospitals and health plans, including Mark Schlesinger and Brad Gray, contend that nonprofits deserve government support because they provide greater "community benefit" than their for-profit counterparts. This argument is unconvincing. There is some evidence that nonprofits deliver marginally more "community benefit" but no evidence that tax exemption is the cause. Absent proof that tax expenditures, including exemption, "buy" social benefits that are worth the cost to taxpayers, these expenditures are unjustified. The better course would be to pay nonprofits for performance, by tying tax benefits to accomplishments (beyond current achievements) in health promotion, quality, and care for the needy.