BELLINGHAM - A four-vote majority of City Council appears ready to impose an annual $1.2 million tax bill on PeaceHealth St. Joseph Medical Center beginning Jan. 1, 2015, ending the health care facility's decades-long exemption from the city's business and occupations tax.
The contentious taxation measure had been listed on the council's Monday, June 9, afternoon committee agenda as a "work session" item, which usually means a discussion without a formal vote. But after a short afternoon discussion, council member Terry Bornemann moved for a vote approving the taxation measure, and Michael Lilliquist, Jack Weiss and Pinky Vargas joined him. Gene Knutson, Cathy Lehman and Roxanne Murphy were opposed.
Council members said they intended to take a formal vote on the matter during their Monday night session, but the item was scheduled at the end of a long agenda, and that vote appeared unlikely before publication deadline.
The issue last came before the council on May 19, when hospital executives and employees, along with other supporters, packed the council chambers to express opposition to a measure that would remove PeaceHealth's existing exemption to the city's business and occupation tax - an exemption now limited to "religious" health organizations. PeaceHealth is affiliated with the Catholic Church.
PeaceHealth executives had said they understood the need to end the religious exemption, but they urged the council to adopt an alternative taxing plan that would reduce non-profit PeaceHealth's tax bill. According to that plan, supported by Mayor Kelli Linville, PeaceHealth revenue from both St. Joseph hospital and PeaceHealth outpatient clinics would be taxed. But they proposed to reduce the impact by lowering the tax rate. The rate would be set to recover the $350,000 per year in tax revenue the city lost when PeaceHealth took over Madrona Medical in 2007 and North Cascade Cardiology in 2011.
Bornemann said he didn't think adjusting the tax rate in that way was fair to other taxpayers.
"It's about putting things on an equitable footing," Bornemann said.
Bornemann observed that during the public hearing, PeaceHealth supporters talked of the community services such as mental health that might have to be cut to cover the big tax bill but did not mention the high salaries that PeaceHealth executives command. He also contended that PeaceHealth's costs for providing medical care to uninsured patients are already being reduced as more lower-income people get coverage through the Affordable Care Act.
Knutson replied that the proposal to tax the hospital would not have arisen were it not for the revenue lost when PeaceHealth bought out the for-profit medical outfits in recent years. He saw no reason to go beyond recovering that $350,000 in imposing taxation on PeaceHealth now, and executive salaries were not relevant to that discussion.
"$1.2 million is a lot of money," Knutson said. "We can quote a lot of CEOs in this country that make a lot of money. I don't think it's our business."
Lilliquist, supporting full taxation, noted that 70 percent of PeaceHealth revenue will be exempt from the business tax under state law, because it comes from federal Medicare and Medicaid payments for patients enrolled in those programs. He argued that it seemed fair to tax PeaceHealth the full rate on the remaining 30 percent representing revenue from individuals and private insurers; that is enough to generate the $1.2 million in new annual revenue for the city.
In recent years, council members have struggled to close city budget deficits with revenue sources that are only now rebounding to their pre-recession levels. Council member Vargas alluded to that in explaining her vote in favor of full taxation for PeaceHealth.
"We are all struggling with getting things done, whether it's programs or road improvements or police enforcement," Vargas said, adding that it appeared to her that PeaceHealth could afford to pay the tax based on financial statements she has seen.
At the May 19 meeting, hospital officials acknowledged an annual margin of about $41 million on operations, but they said that money is needed to pay for upgrades to costly hospital equipment.
Council member Murphy said she preferred a compromise measure, and the sudden imposition of a new $1.2 million tax bill on PeaceHealth seemed too extreme.
Council President Cathy Lehman was briefly overcome by emotion as she lauded the hospital's quality of care.
"We've all had family members ..." she said, her voice trailing off.
She also expressed doubt that the city will put the money to better use.
"I don't really believe in my heart that a dollar spent by government is better than a dollar spent by business," Lehman said. "I also understand that PeaceHealth is not just a money-making machine. ... "It has to stay in the black to continue to provide that service."
Council member Weiss was last to speak. He said the decision was a difficult one, but he agreed with those who said that taxing PeaceHealth at the full rate was the fairest approach to all taxpayers.
After the meeting, PeaceHealth Community Affairs Director Chris Phillips said the health organization had not budgeted for such a tax increase.
"We're obviously disappointed," Phillips said. "The major disappointment is that the city seems to be questioning its own involvement in the health care safety net."