The conundrum of charitability: reassessing tax exemption for hospitals

Abstract

Tax exemption is an ancient, honorable and expensive tradition. Tax exemption for hospitals is all of these three, but it also places in sharp focus a fundamental problem with tax exemption in general. Organizations can retain their tax exemption while changing circumstances or expectations undermine the rationale that led to the exemption in the first place. Hospitals are perhaps the best example of this problem. The dramatic changes in the health care environment have eliminated most of the characteristics of a hospital that originally persuaded the citizenry to grant it an exemption. Hospitals have entered into competition with tax-paying businesses, and have increasingly behaved like competitive actors. Such conduct may well be beneficial, but it does not follow that tax exemption is appropriate. Rather than an undifferentiated subsidy, a shift to focused goals will provide charitable hospitals with the opportunity and incentive to "do the right thing."