Options to Reform the Tax Treatment of Exempt Hospitals

TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.-exempt hospitals provide a substantial share of medical care in the United States. Of the 6,100 hospitals operating in the country in 2026, nearly half are nongovernment, tax-exempt community hospitals. As hospitals consolidate into larger systems and their revenues rise, the value of their tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. and the cost of forgone revenue grow.

Not-for-profit hospitals are tax-exempt. They do not usually pay federal income taxes, state income taxes, or local property taxes. They may also use tax-exempt bond financing and benefit from tax-deductible charitable donations.

A variety of studies have attempted to measure the value of these tax exemptions. Recent estimates covering 2018 through 2022 put the value of the federal corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. exemption for hospitals at $8.3 billion to $11.5 billion per year. Several studies have also compared the value of hospitals’ tax exemptions with the benefits they provide for their communities.

Lawmakers in both parties have scrutinized the hospital tax exemption in recent years, questioning whether the community benefits provided by tax-exempt hospitals justify the value of their tax exemptions. Some have debated requiring hospitals to report more information on the community benefits they provide or even limiting tax exemptions for the largest hospital systems.

Below, Tax Foundation models and analyzes several options to reform the tax treatment of exempt hospitals.

We estimate that applying the 21 percent corporate income tax to large hospital systems would raise $147.6 billion in federal revenue over ten years. More targeted reforms, like applying taxes on investment income or recapturing tax benefits in excess of community benefits, would raise less revenue. If policymakers choose to reform the tax treatment of tax-exempt hospitals, they face complex choices along the way, such as how many hospitals would be covered, how community benefits would be defined, and which tax benefit to prioritize within a reform effort.

A Brief History of Hospital Tax Exemptions

A tax-exempt organization is one that is generally exempt from federal income tax on income related to its exempt purpose. The first corporate income tax exemption came in 1894, with the imposition of a temporary corporate income tax that was subsequently struck down by the Supreme Court the next year. Congress again exempted charitable organizations from an excise tax on corporations in 1909, and that exemption carried through to the modern income tax first levied in 1913.

Hospitals were not included in the 1909 or 1913 laws by name, but in practice received tax exemptions as nonprofits “affiliated with either religious groups or philanthropic foundations.” A 1956 revenue ruling from the Internal Revenue Service established the “charity care” standard by which hospitals could earn and retain their federal tax exemption. The IRS replaced the 1956 ruling with a broader “community benefit” standard in 1969, which is still in place today.

Hospital systems today are much larger and more sophisticated than they were a century ago. In 2024, 2,271 hospital filers collectively reported:

• $1.4 trillion in revenue
• $1.3 trillion in expenses
• $1.8 trillion in assets
• 6 million employees

These figures heavily reflect the influence of the top 100 tax-exempt health filers ranked by tax year 2024 revenue, as demonstrated in the chart below:

In all, hospital filers reported a combined $87.9 billion in net income in 2024. If the hospital tax exemption did not exist, much of that net income would be subject to the 21 percent US corporate income tax rate. Hospitals would also be subject to state corporate income taxes, local property taxes, and federal unemployment taxes.

Table 1 below summarizes several studies that measured the value of hospital tax exemptions between 2011 and 2022. The estimates are not directly comparable with Tax Foundation estimates as they use different years, methods, and definitions of tax benefits.

Table 1. Value of Hospital Tax Exemptions Across Several Studies, Measurement Years 2011-2022

Source: Ernst & Young, “Estimates of the value of federal tax exemptions and community benefits provided by U.S. nonprofit hospitals, 2022,” November 2025, https://www.aha.org/system/files/media/file/2025/11/Estimates-of-the-Value-of-Federal-Tax-Exemptions-and-Community-Benefits-Provided-by-US-Nonprofit-Hospitals-2022.pdf; Lown Institute, “Making the hospital tax exemption work for communities,” April 2025, https://lownhospitalsindex.org/wp-content/uploads/2025/04/fair-share-2025-national-report-20250409.pdf; Elizabeth Plummer, Mariana P. Socal, and Ge Bai, “Estimation of Tax Benefit of US Nonprofit Hospitals,” JAMA 332:20 (September 2024): 1732-1740, https://pmc.ncbi.nlm.nih.gov/articles/PMC11428023/; Jamie Godwin, Zachary Levinson, and Scott Hulver, “The Estimated Value of Tax Exemption for Nonprofit Hospitals Was About $28 Billion in 2020,” Kaiser Family Foundation, March 14, 2023, https://www.kff.org/health-costs/the-estimated-value-of-tax-exemption-for-nonprofit-hospitals-was-about-28-billion-in-2020/; Nathan Born and Adam Looney, “How Much Do Tax-Exempt Organizations Benefit From Tax Exemption?” Tax Policy Center, July 2022, https://taxpolicycenter.org/sites/default/files/publication/164057/how_much_do_tax-exempt_organizations_benefit_from_tax_exemption.pdf; Sara Rosenbaum, David A. Kindig, Jie Bao, Maureen K. Byrnes, and Colin O’Laughlin, “The Value Of The Nonprofit Hospital Tax Exemption Was $24.6 Billion In 2011,” Health Affairs 34:7 (June 2015): 1225-1233, https://pmc.ncbi.nlm.nih.gov/articles/PMC7153767/.

Reform Options

We estimate the conventional revenue effects of five different ways to reform the tax treatment of large hospital systems, along with several variants. Each reform option is imposed on hospital systems with $1 billion in average total revenue over the three preceding years (indexed for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin for future years). The $1 billion threshold would cover 287 systems in 2027, making up about 85 to 89 percent of the sector revenue, income, assets, bonds, and gifts.

• Impose a 21 percent corporate income tax on large hospital taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. Taxable income differs from—and is less than—gross income.  , with either associated tax depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco and net operating loss rules in effect or on book incomeBook income is the amount of income corporations publicly report on their financial statements to shareholders. It provides a picture of a firm’s financial performance and follows Generally Accepted Accounting Practices (GAAP). While it is a useful measure for assessing financial performance, it is not useful for assessing tax liability.
• Levy a flat excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on large hospital net investment income, modeled after the excise tax currently imposed on certain universities
• End tax-exempt bond financing for covered systems
• Deny charitable deductions for those who give to covered systems
• Recapture tax benefits above the community benefits provided by covered systems

Table 2. Conventional Revenue Estimates of Proposals to Change the Tax Treatment of Large Tax-Exempt Hospitals, 2027-2036 (Billions of Dollars)

Note: Each option is modeled separately and combined estimates may be different from a sum of the options above. See “Modeling Notes” for details on tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and revenue estimate methodology.
Source: Tax Foundation General Equilibrium Model, October 2026.

Design Considerations

The options above are illustrative, and policymakers reforming the tax treatment of exempt hospitals might choose different parameters.

Congress could levy a 21 percent income tax on large systems based on book (financial statement) income rather than taxable income. A 21 percent book income tax on large hospital systems would increase revenue by $224.7 billion on a conventional basis, compared to $147.6 billion if levied on taxable income. About half of the difference in these two measures is 100 percent bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. for machinery and equipment, with the other half being regular MACRS depreciation deductions faster than deductions allowed under financial rules.

Lawmakers could also levy the 21 percent income tax on individual hospitals surpassing the $1 billion threshold rather than on consolidated hospital systems. A tax on individual hospitals would raise less revenue, as fewer entities would meet the threshold.

The 4 and 8 percent excise tax rates mirror the top two rates of the existing university endowment tax as it was restructured in 2025, while the 21 percent rate would match the corporate income tax. Policymakers could also decide whether to apply a graduated rate structure, although higher marginal rates could increase incentives for tax avoidance.

The charitable deduction could be restricted incrementally, rather than a full denial of charitable deductions for covered systems.

Policymakers could apply limits on hospital tax-exempt bond financing for existing bonds or only for bonds issued moving forward. Our option only applies prospectively, so existing bond and bond refundings are not included in the tax base. The revenue effect therefore starts small and grows slowly over time as the share of bonds issued since the options took effect rises.

Congress could measure tax benefits or community benefits in different ways. A narrower definition of community benefits, such as charity care alone, would produce more revenue than a broader definition.

Policymakers, academics, and hospital representatives have fiercely debated how to measure community benefits. The hospital sector takes a broad view, including charity care as well as research, education, Medicaid shortfalls, Medicare shortfalls, and bad debt. The IRS takes a narrower view in its Schedule H reporting requirements for hospitals. The IRS includes free care, unreimbursed Medicaid, community health programs, and community building activities but excludes items like bad debt and Medicare shortfalls.

The nonpartisan health think tank Lown Institute produces a widely cited annual report, the Lown Hospitals Index, with a narrower measure still of “meaningful” community investment: financial assistance, subsidized health services, community health improvement services, cash and in-kind contributions, and community-building activities. The Lown Index notably excludes Medicaid shortfalls, as well as education and research funding.

For the recapture option, we model two definitions of community benefits: charity care alone and the broader community-investment measure developed by the Lown Institute. The broader the measure of community benefits, the fewer hospital systems who have tax benefits greater than community benefits, resulting in less revenue from recapture.

Our estimates do not include certain behavioral effects for hospitals. For example, hospital systems would reasonably change their behavior in response to any of these options, especially for systems near the $1 billion threshold we chose for the tax.

Some systems may sell or spin off affiliated hospitals to avoid the tax. We used a threshold based on gross revenue, but thresholds using a net income measure could encourage profitable hospitals to acquire revenue-losing hospitals so that their consolidated entity falls under the threshold. Other hospitals may even shift to for-profit status or seek acquisition by a for-profit entity. We exclude such behavioral responses from our revenue estimates.

Other options incorporate limited behavioral effects; for example, when restricting the charitable deduction for donations to large hospital systems, we assume that overall giving will decline in response to the higher, after-tax cost of charitable giving but we do not assume any shift in the composition of giving (i.e., from donors shifting their giving from covered systems to other charities).

While each option would raise federal revenue and increase horizontal equity between hospitals and similar private sector health care providers, they would involve tradeoffs. Each option would need to be designed to minimize possible impacts on capital investment. Preserving full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. within the corporate income tax base would be an important feature of an income tax design, for example.

Tax Principles

From a principles perspective, each of these options would move the tax code toward greater neutrality between similarly situated taxpayers in the health sector. Applying tax rules already in place for most other taxpayers earning similar forms of income is the most defensible approach, especially if it was done in concert with other changes in the tax code.

For example, more broadly limiting tax-exempt bond issuance, imposing stricter rules on nonprofit tax-exempt earnings, and limiting the scope of all charitable deductions would move in the same direction as these sector-specific options. If policymakers wish to keep some tax benefit for hospital operations, tailoring them to the specific societal benefit (such as charity care or other operations) would be an improvement over the status quo.

Our estimates suggest that incremental options focused on the top of the sector would raise revenue and only focus on the largest hospital systems. Reforming the treatment of tax-exempt hospitals is also an opportunity to improve the horizontal treatment of health providers in the tax code. Policymakers have a range of reform options to consider, but the design details matter to ensure we benefit from the neutrality improvements while minimizing unintended consequences on the sector and patients.

Modeling Notes

To construct our estimates, we used IRS Statistics of Income (SOI) Exempt Organization study files from tax years 2019 to 2022 and IRS Form 990 e-file returns from tax years 2022 to 2024 to construct a model of hospital filers. We omitted the pandemic years 2020 and 2021 to avoid pandemic-era noise in the data.

We used Centers for Medicare & Medicaid Services ownership data to group filers into systems under common control from control trees on Schedule R, resulting in 2,452 total hospital filers in 1,771 total systems from tax year 2019 to tax year 2024 (2,271 filers and 1,045 systems in tax year 2024). Systems exclude gifts between members and exclude university hospitals, which tend to file returns with their affiliated universities. As a check, we cross referenced our estimates of the 25 largest systems with their audited consolidated revenue, and the median value came within 4 percent of the audited figures.

SOI and CMS cost report data provide information on financials, Schedule K bonds, Schedule H community benefits, and itemized sources of revenue. Our growth paths for each modeled item follow CMS projections of national hospital spending through 2034, and from there Congressional Budget Office’s February 2026 baseline for nominal GDP, the 10-year Treasury rate, and CPI-U where applicable.

A system is covered under each option if its total average revenue over the three preceding years exceeded $1 billion as of 2027, indexed to CPI-U after that and rounded down to $10 million, reaching a threshold of $1.2 billion in 2036. In 2027, 287 systems would be covered, holding between 85 percent and 89 percent of sector revenue, income, assets, bonds, and gifts.

We use the Tax Foundation General Equilibrium Model to capture interactions with individual and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. revenue, charitable deductions, and depreciation allowances.

The 21 percent corporate tax swaps book depreciation for tax depreciation for investment prospectively using BEA hospital asset mix data. Bonus depreciation for eligible investment is assumed to be taken up 80 percent of the time when profitable and 45 percent in loss years.

The 4 percent investment excise tax includes net investment income as under IRC Section 4940: interest, dividends, royalties, and investment income booked as “other revenue.” Realized securities gains are also included.

The option ending tax-exempt bond financing uses Schedule K data to derive new money bonds net of refundings (refundings of pre-2027 bonds are exempt). Coupons are estimated at the CBO 10-year Treasury rate plus 1.9 points (the average gap between A-rated corporate bond yields and 10-year Treasury yields from 2010 to 2025). Holders of the taxable bonds follow Federal Reserve figures for ownership of corporate bonds.

We use data on gifts to covered systems split by donor type using Giving USA shares for individual, corporation, and foundation and/or donor advised fund giving, with individual gifts run through the Tax Foundation General Equilibrium Model to capture existing charitable giving. Corporate gifts are counted above the existing 1 percent floor at 21 percent. We assume foundation and donor advised fund giving is included in the denial of deduction base, though this is a policy design choice and an avoidance mechanism that could lower the estimate under certain designs.

Federal benefit recapture uses the method established by the Lown Institute, defining community benefit as charity care, community health, cash and in kind-contributions, subsidized services, and community building. Federal benefits are defined as taxable income under a corporate tax base at 21 percent plus bond financing savings. The proposal recaptures 100 percent of benefits above the community benefit per system, tested each year for each system with no carryforward. We exclude state and local tax benefits in our estimates.

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