Kansas Hospitals Could Lose Sales Tax Exemption

Kansas hospitals were surprised by a plan that surfaced late last week to solve the state budget crisis by ending a sales tax exemption for some nonprofit organizations.

The Senate voted down the plan 30-9 after several hours of debate. But with the state facing a budget gap of nearly $800 million and the Legislature looking for $400 million in new taxes, there’s a chance lawmakers could take another look at it.

Chad Austin, vice president of government relations for the Kansas Hospital Association, said 118 of the state’s 127 hospitals are nonprofits.

Removing the sales tax exemption would have wide-reaching effects, he said.

“This would be devastating to hospitals as far as sustaining their operations, as well as getting financing down the road,” Austin said.

The Legislature moved into Day 102 of its traditional 90-day session Monday with Republican supermajorities too fractured to pass a tax plan to close the deficit.

Sunday night’s debate on the sales tax exemptions revealed yet more divisions. Republicans from border areas who don’t want to raise sales tax rates that already are higher than those in neighboring states pushed instead to “broaden the base” by dropping the state sales tax from 6.15 percent to 5.95 percent and paying for the reduction and the budget deficit by ending a slew of sales tax exemptions.

The exemption for nonprofits garnered the most attention in the Senate debate, with nonprofit hospitals a specific source of consternation.

“I have concerns about how this will affect our hospitals, and I think everyone in this chamber should share those concerns,” Senate Minority Leader Anthony Hensley said.

Sen. Steve Abrams, a Republican from Arkansas City who proposed the repeal of sales tax exemptions, said the plan was based on recommendations made in a 2010 Legislative Post Audit report.

The rationale, Abrams said, was to remove exemptions for nonprofits that compete with similar for-profit entities that don’t enjoy the same tax privileges.

Sen. Vicki Schmidt said legislators had given nonprofit hospitals the tax exemption for a reason.

“I would guess it’s because nonprofit hospitals have a charity mission and for-profit hospitals often don’t share that mission,” said Schmidt, a Republican from Topeka. “And we treat charities differently in our law.”

Abrams said the distinction was not as large as it once was, because all hospitals are now required under federal law to provide treatment to those who come to their emergency rooms.

For-profit hospitals, Abrams said, provide uncompensated care just like nonprofits.

“It may not be called charity, but it certainly ends up like that,” he said.

Other senators who supported repealing the tax exemptions were more critical of nonprofits.

Sen. Jeff Melcher, a Republican from Leawood, said Abrams’ proposal was about “ending special favors for those who don’t really deserve it.”

Melcher said nonprofit hospitals are nonprofit in name only because they pay their administrators “enormous salaries.”

“This is just a ruse to get around paying taxes,” he said.

Melcher said the sales tax exemption amounts to a government handout.

“That’s what it is, it’s just pork,” he said.

Several senators who voted against Abrams’ amendment said it should have been reviewed in committee after letting interested parties weigh in, rather than introduced as a floor amendment on a Sunday night late in the session.

Austin said he was compiling data on CEO pay at the state’s nonprofit hospitals and his organization would welcome the chance to weigh in.

“Our members would be more than willing to come to Topeka to talk about the regulations associated with nonprofit status and the reasons they get sales tax exemptions,” he said.

The repeal of sales tax exemptions for nonprofits was not part of a proposal unveiled over the weekend by Gov. Sam Brownback. Revising the revenue-raising proposal he introduced at the start of the session, Brownback called for increasing the sales tax to 6.65%from 6.15% and raising the cigarette tax to $1.29 a pack from 79 cents.

The governor also proposed eliminating income taxes for more than 275,000 low-income Kansas as a way to soften the impact of the tax increases. His proposal would eliminate income taxes for individuals earning up to $10,250 a year, single parents earning up to $17,250 and couples earning up to $24,500 a year.

Brownback outlined his proposal Saturday at a Statehouse news conference.

“I’m a big believer that you need to let the legislative process be the legislative process,” Brownback said when asked why he didn’t act earlier. “The executive branch has a role to play, but mostly this is a legislative process.”

However, when Sen. Les Donovan, the Wichita Republican who chairs the Senate tax committee, was asked whether the governor should have weighed in sooner, he paused for several seconds and said, “Any more questions?”

The governor’s proposal would raise an estimated $428 million to fund government operations in the fiscal year that begins July 1. He and Republican legislative leaders say the remainder of the budget gap is addressed in a tentative budget agreement that calls for transfers from the state highway fund and increases fees on the managed care companies that operate the state’s Medicaid program.

Brownback’s latest proposal calls for only a small change in the 2012 law that cut individual income tax rates and allowed 280,000 business owners and more than 50,000 farmers to avoid income taxes on their profits.

Democrats and several moderate Republicans have demanded the repeal of the 2012 cuts, which have dramatically reduced state revenue collections. However, aides to the governor say he will veto any legislation that makes more substantial changes than he has proposed. 

The KHI News Service is an editorially independent initiative of the Kansas Health Institute.