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ABSTRACT The federal government encourages public support for charitable activities by allowing people to deduct donations to tax-exempt organizations on their income tax returns. Tax-exempt hospitals are major beneficiaries of this policy because it encourages donations to the hospitals while shielding them from federal and state tax liability. In exchange, these hospitals must engage in community benefit activities, such as providing care to indigent patients and participating in Medicaid. The congressional Joint Committee on Taxation estimated the value of the nonprofit hospital tax exemption at $12.6 billion in 2002-a number that included forgone taxes, public contributions, and the value of tax-exempt bond financing. In this article we estimate that the size of the exemption reached $24.6 billion in 2011. The Affordable Care Act (ACA) brings a new focus on community benefit activities by requiring tax-exempt hospitals to engage in communitywide planning efforts to improve community health. The magnitude of the tax exemption, coupled with ACA reforms, underscores the public's interest not only in community benefit spending generally but also in the extent to which nonprofit hospitals allocate funds for community benefit expenditures that improve the overall health of their communities.
For almost as long as there has been a federal income tax, the US government has encouraged public support for charitable activities by permitting people to reduce their tax liability by making donations to tax-exempt organizations. State tax law has generally followed suit. Charitable giving by the public to tax-exempt organizations totaled more than $248 billion in 2011.1
Tax-exempt organizations are established and operated solely for charitable, religious, educational, scientific, or other nonprofit purposes. Because of their perceived benefit to society, these organizations are relieved of liability for paying federal and state corporate income taxes and, typically, state and local sales taxes and local property taxes.2 Since the 1950s the Internal Revenue Service (IRS) has recognized nonprofit hospitals as qualified to be charitable taxexempt organizations.3
Like tax-exempt organizations generally, taxexempt hospitals must undertake activities that benefit their communities. But the concept of community benefit in a hospital context has evolved over the decades. It originally meant that hospitals had to provide charity care to patients unable to pay. In 1969 the IRS broadened the definition of community benefit in response to the enactment of...