Do Workers Profit from the Nonprofit Tax Exemption? The Impact of State Tax Exemption on the Nonprofit Wage Differential of Hospital Workers

Abstract

Previous studies on the impact of nonprofit status on employee compensation view nonprofit status as yielding a fixed benefit attributable to the legal prohibition against distributing profits. However, nonprofit status also exempts firms from many federal, state, and local taxes resulting in the size of economic rents varying by the jurisdiction. This study examines how differences in the implied subsidy of state and local tax exemption impact the nonprofit wage differential in the hospital industry. The study also takes advantage of the fact that a significant proportion of nonprofit hospitals are religiously affiliated to control for worker self-selection into the nonprofit sector. Results indicate that nonprofit hospital workers receive a wage premium; however, the wage premium decreases as state tax burden increases. This finding suggests that the nonprofit wage differential is not accentuated by a hospital’s tax-exempt status but is instead a byproduct of the nondistribution constraint.