Thursday, January 29, 2015

Universities and Hospitals: Time for American States to Tax Nonprofits?

The 2015 budget that Gov. Paul LePage proposed to the Maine legislature takes aim at the “sacred cow” of property-tax exemption for nonprofit organizations. Colleges and hospitals, for example, would be levied a property tax, with places of worship and government-owned entities remaining exempt. The rationale is that of fairness to home-owners, who must bear a disproportionate weight particularly in New England, where colleges and hospitals in particular are ubiquitous. However, I submit that a second justification exists—one based squarely on the colleges and hospitals themselves.

Not to be left undefended, non-profits in Maine claimed that their “special status is needed because they provide vital programs that governments often don’t.”[1] Universities, for example, provide knowledge and training, while hospitals provide health-care. The latter is arguably more vital than the former; a person can do without a higher education but one’s life is essential to oneself. This distinction can be the leading edge of a slippery slope stretching across the corporate world. Apple, for example, provides computers, which facilitate a person’s higher education. GE provides equipment that is used in hospitals to diagnose patients. In short, nonprofits can be viewed as part of a larger spectrum that is characterized by the provision of goods and services, rather than as separate and sacrosanct.

Indeed, corporate charters are the means by which governments essentially delegate important tasks to private companies. To say that only nonprofits perform functions needed by governments for society ignores the fact that governments charter companies. Which functions are vital seems too subjective for us to be able to rest on the conviction that only what nonprofit organizations provide is crucial in a society. In general, providing a product or service that is valued by consumers in a society is to perform a societally-worthy task; to claim that only nonprofit organizations provide vital products and services is dogmatic in the sense of being artificial or contrived.

As for profitability, executives at universities and hospitals are not unconcerned with maximizing revenue. As Gov. Jerry Brown was preparing his 2015 budget proposal, the University of California was demanding an increase of $100 million. Just because university administrations are bad at cutting spending does not mean that they are oblivious to capturing as much surplus as possible. To justify upcoming tuition hikes to students, the head of UC-Davis sent out an email insisting that the tuition increases would be necessary to keep education accessible and affordable. Maybe the Aggie cows have an opportunity, careerwise, in the university's administration (I'm afraid grass wouldn't cut it to cover tuition though).

The same underlying breed of greed can be said to characterize hospital administrations, though competition forces them to be more assertive in keeping spending in line. Were hospital administrators truly most interested in providing a vital service, they would not lie to the uninsured and turn them away. My point is that a realistic look inside nonprofits undoubtedly reveals an orientation chiefly to money (i.e., profit). Universities and hospitals are more like corporations than property-tax law in the States might suggest.

[1] Jennifer Levitz, “Maine Proposal Would Tax Property of Big Nonprofits,” The Wall Street Journal, January 24-25, 2015.