Tacoma’s nonprofit hospitals have enjoyed full and partial breaks from paying city business and occupation taxes for decades, but such exemptions soon would vanish under a proposal that aims to help plug part of a gaping city budget hole.
As part of his 2013-14 budget plan, City Manager T.C. Broadnax has pitched the idea of restoring the city’s full B&O tax rate on Tacoma’s two largest health care nonprofits – the MultiCare and Franciscan health systems.
But while hospital officials contend that eliminating the tax breaks is the wrong approach to solving the city’s budget woes, the question for the City Council no longer seems to be whether it will happen, but for how long.
The council is set to debate competing positions about the health care tax exemption today, before a formal measure to eliminate it is introduced at tonight’s regular council meeting. A final vote is expected next week.
Neither stance would seek to thwart the city from fully collecting taxes from the hospitals for at least the next two years. But Councilman Joe Lonergan said Monday that he intends to float an amendment with a sunset provision that would reinstate at least part of the current health care tax break on Jan. 1, 2015 – after the next city budget cycle ends.
“We’ve lived without this money for a long, long time,” Lonergan said. “But we find ourselves in an unprecedented situation. As a result, we’re grabbing for money. My fear is that without some sort of forced re-examination, it will be too easy to make this the status quo.”
Lonergan’s amendment would restore the tax break beginning in 2015 to a 0.2 percent rate – double what the hospitals pay now, but half as much as the full tax rate. The plan also would give the city and hospitals time over the next two years to examine alternatives, such as “payment in lieu of taxes” programs that have worked in Boston and other cities, Lonergan said.
Councilman Marty Campbell, who supports Lonergan’s amendment, said the proposal extends an “olive branch” to hospitals in finding a cooperative – rather than punitive – solution.
“The focus shouldn’t be about finding some tax where can we nail someone,” Campbell said, “It should be, ‘Can we put a plan in place that works?’”
But Councilmen Ryan Mello and Anders Ibsen describe Lonergan’s amendment as reckless.
“It’s highly fiscally irresponsible to include a sunset provision when we don’t have any other revenue options,” Mello said.
Mello plans to float his own amendment that would simply call to review the issue before the next budget, rather than rolling back the health care tax.
Asked Monday about the council’s proposals, Franciscan spokesman Gale Robinette said: “We would welcome the opportunity to explore alternatives to paying higher B&O taxes. Yes, we’re pleased, too, that there is sunset provision that’s been proposed.”
MultiCare spokeswoman Marce Edwards added her organization has “encouraged the mayor and members of the City Council to explore alternatives and we are open to discussing those options with them.”
Ibsen said he’s ready to argue the health care exemption should be retired for good.
“It’s clear that MultiCare and Franciscan are very profitable organizations,” Ibsen said.
Tax records show Tacoma’s top hospital executives have regularly made seven-figure salaries in recent years.
Five MultiCare executives made more than $1 million in 2010, with MultiCare’s chief executive officer, Diane Cecchettini, earning $1.8 million, and Franciscan CEO Joe Wilczak making $1.1 million. MultiCare also posted $9.5 million in net profits in 2010, while Franciscan reported a combined net operating profit for its five hospitals – including four outside of Tacoma – at $147 million in 2011, records show.
“Despite this largesse, both Franciscan and MultiCare get $6 million every budget cycle from the City of Tacoma in B&O tax breaks,” Ibsen said. “A typical business owner pays four times the business tax rate as a billion-dollar hospital network.”
Tacoma’s health care exemption dates back to 1950, according to city records. Until this year, the city provided a 100 percent break to health care nonprofits on the applicable 0.4 percent city B&O tax rate.
In February, the council unanimously cut that exemption to 75 percent, imposing a 0.1 percent tax rate for nonprofits with annual gross income of $30 million or more.
The measure affected only MultiCare and Franciscan, while smaller health care nonprofits remained fully exempt. The partial repeal of the tax break sought to raise an estimated $538,000 to help fill part of a 2012 budget shortfall.
Broadnax revived the idea for his 2013-14 budget plan, this time seeking to eliminate the remaining break for MultiCare and Franciscan as a way to raise about $5.5 million over the next two years.
The strategy is one of two key city revenue generators proposed to help fill a $63 million budget gap projected for the city’s 2013-14 general fund. A planned $20 vehicle license tab fee that would raise about $3.8 million over two years is the other.
Beyond 2014, the city’s financial situation looks even worse, with a shortfall as high as $85 million projected for 2015-16.
Earlier this month, Cecchettini and Wilczek separately told the council how their organizations have contributed to Tacoma’s economy in other ways.
MultiCare employs 5,800 people in Tacoma and has created more than 750 construction jobs after investing millions in expansion projects in recent years, Cecchettini said.
Franciscan has hired 1,140 employees in Tacoma since 2007, plans to invest $30 million inside the city in the next three years and has provided $25 million in charity care for the poor, Wilczek added.
“As you finalize the city budget, I urge you to fully consider alternatives to address the city’s financial problems,” Cecchettini said. “We stand ready to work with you on a compromise approach that would be fair and reasonable for all concerned.”
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