Tax Reform Bills Pinch Nonprofit Hospitals

Although each chamber's bill would impose new restrictions on tax-exempt bonds, the House version would be stricter.

Nonprofit hospitals came up for air last month as the House passed its version of the tax reform bill.

One provision, in particular, pertaining to tax-exempt bonds threatened to drive up the cost of debt for capital improvement projects slated to update aging infrastructure across the country.

Scripps Health in San Diego had just announced $2.6 billion in projects planned for the next decade. About a third of those expenditures were to be financed with bonds, Scripps Corporate Vice President and Treasurer Richard McKeown told the Los Angeles Times.

The House’s plan to do away with tax exemption for private activity bonds (PABs) would make it harder to pay for such expensive undertakings.

"It'll be painful, but it won't be catastrophic for larger, financially strong organizations," McKeown told the Times. "Small community hospitals that may not be doing OK financially, the additional burden of a higher cost of debt will make it more challenging."

Chris Van Gorder, Scripps president and CEO, advocated for changes to the House’s plan during a TV interview.

“If it goes through, as of January 2018, we will no longer be allowed to sell tax-exempt bonds, so that could mean that just a half-a-percent point increase on a billion-dollar project is another $150 million in costs,” Van Gorder told KUSI. “So we’re hoping that that gets rectified before it goes forward.”

A spokesperson for Scripps told HealthLeaders Media on Wednesday that the health system would prefer the Senate’s tax reform bill—which passed early Saturday with a 51-49 vote—insofar as it preserves PABs for nonprofits. Congress is currently working to reconcile the two versions of the tax reform bill before it can be signed into law, so it remains unclear precisely which provisions will make it into the final version.

Even if the Senate’s language on tax-exempt bonds prevails through the reconciliation process, however, nonprofit organizations will have new restrictions on their bond financing options in 2018. Both versions of the bill would do away with advanced refunding of tax-exempt bonds—a tactic used to refinance debt at a lower interest rate.

Scripps has voiced its concerns to federal officials via the American Hospital Association, the California Hospital Association, and the San Diego congressional delegation, the system spokesperson said. The AHA, in turn, co-signed a letter sent Wednesday to majority and minority leaders in both houses.

“By eliminating or reducing PABs, the federal government will undermine vital projects in numerous public service sectors including housing, hospitals, local water systems, airports, seaports, non-profit educational facilities including universities and charter schools, and other projects, many of which are ready for or under construction,” the AHA wrote with 34 other national organizations.

The letter calls upon lawmakers to preserve the current income tax treatment of PABs and to hold off, until the end of 2018, on prohibiting advanced refunding of tax-exempt bonds.

“This would be of immense help for planning and budgeting purposes for the local communities you represent, and the constituents we all put first,” the organizations wrote.