The Congressional Budget Office has examined not-for-profit hospitals’ use of tax-exempt bonds to earn “arbitrage points on their investments” and the advantages they incur in issuing tax-exempt bonds. The analysis was performed at the request of Bill Thomas, chairman of the House Committee on Ways and Means. For its analysis, the CBO broadened the definition of tax arbitrage to include earnings from assets not currently considered bond replacement proceeds but that still contribute to securing bonds. This broader definition would reduce the amount of tax-exempt debt that not-for-profits would issue and “improve the federal government’s net fiscal condition,” writes the CBO.
“Hospitals would have to reduce their new issues of tax-exempt bonds (either reducing investment in operating assets or switching to taxable debt) by 28% (or by 9% if the policy accommodated precautionary savings). For example, if tax-exempt bonds provide $1.8 billion in annual tax benefits to nonprofit hospitals, as estimated for 2002, over time the broadened definition of tax arbitrage would save $504 million per year (or $162 million if allowance was made for precautionary savings).”
