New taxes to hit hospitals as a result of the budget reconciliation bill (updated)

This article has been updated July 8 as noted to reflect changes made to the bill between the version passed by the House and the final legislation.

As congressional Republicans continue their discussions on the budget reconciliation bill, not-for-profit (NFP) hospital leaders should be aware of items that have gotten less attention than the retrenchment of Medicaid and Affordable Care Act coverage.

The version passed by the House on May 22 includes new or expanded taxes that could affect NFP hospitals. The Senate is considering the bill, also known as the One Big Beautiful Bill Act, with some committees already having released their proposals and others set to do so in the coming days. After that, the two chambers will work to merge their respective drafts.

The bill that passed in the House expands a 21% excise tax on executive compensation exceeding $1 million. To date, that tax has applied only to the five highest-compensated employees at an organization in a given year, plus anyone else who has been on the list from a prior year.

Per the new legislation, the tax would cover all employees whose compensation package surpasses $1 million. An exemption would remain for direct compensation of medical services.

“The reach and financial consequences of the expanded excise tax could be significant for nonprofit hospitals and health systems that compete with privately held or publicly traded organizations for executive or administrative talent,” industry experts with McDermott wrote in an analysis.

Update: The tax on executive compensation remains in the final legislation, effective with the 2026 tax year, but appears to exclude former employees who were with the organization prior to 2017.

The political climate

Congress first enacted the excise tax in 2017 as a pay-for in President Donald Trump’s original tax-cut bill, said Travis Jackson, a partner at McDermott and a co-author of the analysis. The tax was implemented during a time of criticism about compensation levels for hospital executives.

Now the tax would pertain to all executives with compensation packages above the threshold.

“When you’re looking at particularly your larger organizations, they may have 15 to 20 executives of various levels who earn a million dollars or more,” Jackson said. “That’s probably not unheard of, and I don’t think it’s appropriate to say that’s excessive, because these organizations have to compete with complex publicly traded entities and other businesses for that talent pool in order to run these systems.”

In addition to impacting revenue, the expanded tax could cast affected organizations in an unfavorable light. Executive compensation in healthcare has remained a talking point in the years since the tax was implemented, especially in some of the sentiment that was widely expressed online after the fatal shooting of UnitedHealthcare CEO Brian Thompson last December.

Jackson took note that the excise-tax provision as written by the House Ways and Means Committee was included in a section titled “Working Families Over Elites.”

The provision “does reflect sort of the tenor of the times, that somehow, if you are receiving this compensation, you are automatically ‘elite’ — as a disparaging comment without any consideration of what the job actually involves,” he said.

Taxing an employee perk

Another part of the bill that would affect hospital finances is a tax on employee parking and other transportation fringe benefits. Hospitals would need to treat the benefit as unrelated business income in their federal filings.

The tax was instituted in 2017 but repealed in 2019 amid criticism about the complexities of taxing a business expense as income, the McDermott authors wrote. At least for now, it’s set to return.

However, the prior negative feedback may mean the tax will not stick in the final version of the bill, Jackson said.

“It required a lot of effort and a lot of expense by charitable organizations — particularly hospitals and health systems and large universities that might own parking structures — to go out and get fair-market-value opinions so that they could actually value this expense and then prepare to pay essentially [a] corporate income tax on the amount of the expense,” Jackson said. “It was so problematic to administer that the IRS even had difficulty writing regulations on it.”

If the tax is reinstituted, it will be a sign that Congress is looking for every mechanism it can find to try to reduce the bill’s projected impact on the federal deficit.

“My concern is if they’re looking for ways to pay for this or to have the bill not increase the deficit as much as it does [according to Congressional Budget Office projections], there aren’t a lot of areas where they can turn to other than maybe more changes that affect charitable organizations,” Jackson said.

Update: The tax was left out of the final bill, giving NFP hospitals one less thing to worry about regarding the legislation.

Surcharges affecting AMCs

The reconciliation bill as passed by the House could create greater financial concerns for academic medical centers (AMCs) by substantially raising the tax on net investments of colleges and universities while incorporating certain forms of passive income such as patents and royalties.

“In the context of a research-oriented college or university that is part of an academic medical center, that only magnifies the potential scope of that tax, which could also put more strain on the hospital side to fill the void that’s left by the payment of those taxes or [would] mean that the hospital or health system is going to lose more support from the academic side than what it previously enjoyed,” Jackson said.

The additional tax would have implications for revenue at a time when AMCs already face increasing constraints on grant funding from the National Institutes of Health. U.S. medical schools and hospitals have lost nearly $2 billion since NIH began terminating biomedical research grants this year, according to the Association of American Medical Colleges, which published an analysis that focused on the funding impact for research training and career development.

Update: The final bill maintains the new tax on endowments starting in 2026 but shrinks the rates significantly, maxing out at 8% for adjusted endowments of $2 million or more per student. In the House bill, the corresponding rate was 21%. In addition, schools with fewer than 3,000 students are exempted.

Another issue to track

Another clause in the reconciliation bill would increase a tax on private foundations, and that could have implications for hospitals’ philanthropic proceeds.

“The bill could hurt the ability of hospitals and health systems to raise charitable funds in the same manner that they did because there just will be less funding available, and you could see private foundations and others choosing to put their dollars elsewhere,” Jackson said.

The numerous relevant provisions illustrate why there’s so much for hospitals and health systems to digest about the bill.

Hospital leaders “are having a lot thrown at them through this bill, and it is difficult to plan in this environment,” Jackson said.

Update: The final bill left out the proposed excise tax on private foundations. It contains minor updates to language in the House bill and maintains the proposed floor of 1% of taxable income for corporations. If total contributions do not exceed that threshold, no tax deduction is allowed. For individuals, the floor is 0.5% of adjusted gross income.