Business tax on Bellingham hospital could mean $1.2 million a year for city

THE BELLINGHAM HERALDApril 22, 2014 

BELLINGHAM - City Council is moving toward imposing the city's business and occupation tax on PeaceHealth St. Joseph Medical Center, a move that would shift $1.2 million in annual revenue from PeaceHealth to the city.

While that dramatic move is far from certain, council members did vote 6-1 to draw up an ordinance and to schedule a public hearing to that end, during a Monday, April 21, committee session.

Gene Knutson cast the no vote. He said he wanted the council to consider an alternative option at the hearing when it is held. That alternative would be PeaceHealth's proposal to begin paying the current B&O tax on revenue from its outpatient clinics, but not the hospital itself.

The tax rate is .44 percent, or a bit less than one-half of 1 percent, on gross revenues calculated before expenses are deducted.

For decades, Catholic-affiliated PeaceHealth has operated under an exemption from the B&O tax as a "religious-affiliated" nonprofit health care organization. The exemption has come under scrutiny recently, partly because the city attorney's office questioned the appropriateness of an exemption based on religion.

Another factor was PeaceHealth's acquisition of Madrona Medical and North Cascade Cardiology in recent years, taking both of those entities off the B&O tax rolls and costing the city an estimated $350,000 a year in tax revenue.

Under state law, nonprofit health care organizations pay the B&O tax only on their revenue from private customers and insurers, and not on the payments they get for Medicare or Medicaid patients.

Mayor Kelli Linville and Finance Director Brian Henshaw had proposed a compromise taxation proposal that was worked out during discussions with PeaceHealth officials, but the compromise plan was quickly brushed aside by council members.

Under the compromise proposal, PeaceHealth revenue from both the hospital and the outpatient clinics would be taxed, but the rate would be lowered to ease the tax hit on the hospital while recovering the $350,000 per year in lost city tax revenue resulting from the PeaceHealth takeover of Madrona and North Cascade Cardiology.

That proposal would also have the side effect of reducing the tax bill for two other nonprofit medical providers: SeaMar Community Health Center and Interfaith Community Health Center, which are now taxed at the .44 percent rate.

At the outset of Monday's discussion, council member Michael Lilliquist said he was uncomfortable with a plan that would peg the tax rate at a level designed to recover a specific amount of revenue. He said he favored the simple approach of applying the existing tax rate to all PeaceHealth operations, hospital included.

Council member Terry Bornemann also favored that approach. Hospital officials and others in the community would be free to argue for other options once a hearing is scheduled, he said.

PeaceHealth Community Affairs Director Chris Phillips was surprised to see the council moving toward taxation for the hospital and other PeaceHealth operations at the current rate. Phillips said he expected the council to give more weight to the compromise proposal worked out between the hospital and the mayor's office.

He added that hitting PeaceHealth and its hospital with a $1.2 million annual tax increase was a serious matter.

"That has consequences in programs and jobs" at the hospital, Phillips said.

PeaceHealth's St. Joseph hospital is the only hospital in Whatcom County.

Linville said she had opposed the hospital's original proposal to tax the clinics but not the hospital, partly because distinguishing between the two revenue sources would not be simple. While imposing the current tax rate on all PeaceHealth operations might seem like a financially attractive option for the city, she questioned its wisdom.

"I thought there was a compromise where we could regain the revenue that we had before ... and not necessarily have a negative impact on health care in the community," she said.

Reach John Stark at 360-715-2274 or john.stark@bellinghamherald.com . Read the Politics Blog at bellinghamherald.com/politics-blog or get updates on Twitter at @bhampolitics.

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