Bellingham scrutinizes tax exemptions for PeaceHealth, St. Joseph hospital


PeaceHealth St. Joseph Medical Center

PeaceHealth St. Joseph Medical Center is located at 2901 Squalicum Parkway in Bellingham.


BELLINGHAM - PeaceHealth St. Joseph Medical Center is willing to consider making payments totaling hundreds of thousands of dollars per year to the city, but the hospital hopes to keep its longstanding business and occupation tax exemption intact.

At a Monday, Jan. 27, City Council committee meeting, PeaceHealth Community Affairs Director Chris Phillips acknowledged that the city lost significant amounts of B&O tax revenue when the nonprofit, Catholic-affiliated PeaceHealth took over Madrona Medical and North Cascade Cardiology in recent years. The city's current B&O tax ordinance exempts "religious" nonprofit health care organizations from paying the tax.

The city estimates it would be collecting an additional $330,000 a year in B&O tax revenue if Madrona and North Cascade Cardiology were operating as private, for-profit entities.

Phillips told the council that PeaceHealth supports an amendment to the ordinance that would eliminate the "religious" exemption, but that exemption should be replaced, in his view, with an exemption for nonprofit hospitals. PeaceHealth's St. Joseph hospital is the only hospital in Bellingham and Whatcom County.

Phillips did not spell out exactly how much PeaceHealth would be willing to pay, but he indicated the amount would be comparable to what the city would get from a B&O tax on gross revenues from PeaceHealth's outpatient clinics, if those clinics were operated for profit.

As Phillips explained it, PeaceHealth's proposal seems to amount to a tradeoff:

-- PeaceHealth would agree to provide the city with a "payment in lieu of taxes" that would be equivalent to what the city would have received in B&O tax revenues if PeaceHealth's outpatient clinics were operating as for-profit entities. Phillips said that payment would be more than the city would get by simply imposing its existing B&O tax on PeaceHealth outpatient clinics, because under state law, PeaceHealth is not required to pay B&O taxes on revenue from Medicare and Medicaid patients, and that is more than a third of outpatient revenue.

-- The city would agree to keep the tax exemption in place for the hospital itself, foregoing tax revenue it has a legal option to collect on revenue from patients who pay with their own money or private insurance.

The potential tax revenue from the hospital itself would amount to hundreds of thousands of dollars.

In a report to council, interim City Finance Director Brian Henshaw said he had no precise estimate of potential tax collections from the hospital, but hospital officials had estimated that their total tax liability for both hospital and outpatient services would be about $1.2 million if all those operations paid the applicable city tax rate of 0.44 percent, or less than one-half of 1 percent, on gross revenue.

Phillips said most other cities in Washington state provide some public subsidy to their nonprofit hospitals, in the form of either tax exemptions or hospital taxing districts that collect tax revenue provided to the hospitals.

"As you make these changes, we would ask that you preserve the longstanding relationship between the city and its community hospital," Phillips said.

PeaceHealth's willingness to make substantial payments to the city is in contrast to what happened in 2002, when then-Mayor Mark Asmundson suggested that the city take a look at the PeaceHealth tax exemption. That was years before PeaceHealth acquired other major health care service organizations such as Madrona and North Cascade Cardiology, and at that time the exemption mainly affected the hospital.

"PeaceHealth has a lot of friends, and this council chambers was absolutely jammed," council member Gene Knutson remembered.

After the 2002 show of community sentiment, any thought of taxing the hospital quickly evaporated and was forgotten until 2013, when the council agreed to give the matter renewed scrutiny - partly because the city attorney's office questioned the appropriateness of a religious exemption.

The council voted unanimously to direct Henshaw to report back with more information on the financial impact of PeaceHealth's proposal and get a precise idea of what PeaceHealth is willing to pay, compared to other alternatives. Council members also made it clear that they expect, eventually, to hold a public hearing on an ordinance that would make significant changes to the B&O tax exemptions that PeaceHealth now receives.

Reach John Stark at 360-715-2274 or . Read the Politics Blog at or get updates on Twitter at @bhampolitics.

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