Washington Law Review


This Article examines the growing controversy over the multi-billion dollar charitable tax exemption enjoyed by nonprofit hospitals. It begins by articulating four criteria for evaluating a rationale of the charitable exemption: deservedness, incorporating the elements of worth and need; proportionality; universality; and historical consistency. The Article then employs these criteria to refute three conventional explanations of why nonprofit hospitals are exempt: because health care is a per se charitable activity; because the treatment of indigent patients relieves a government burden; and because nonprofit hospitals provide community benefits. The Article also uses these criteria to refute two academic theories: Boris Bittker's income measurement rationale and Henry Hansmann's capital subsidy theory. This Article proposes a "donative theory" as an alternative rationale for the charitable exemption. The donative theory posits that "charity" describes an entity capable of attracting a substantial level of philanthropic support from the public at large. Donations exist where there is a combined failure of private markets and direct public funding to supply a shared public benefit at the optimally desired level. Donative institutions deserve a tax subsidy because the public's support signals their worth, and the free-rider tendency that affects all giving assures the need for an additional, shadow subsidy. The Article further demonstrates that the donative theory comports with the statutory scheme and the four centuries of legal history that shape the legal concept of charity. In particular, the donative theory provides the only explanation of the tax law's otherwise unjustifiable reliance on the law of charitable trusts.

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