American Taxation Association

JATA abstracts - Fall 2005

JATA - Fall 2005

Volume 27, No. 2

An Empirical Examination of State and Local Revocations of Tax-Exempt Status for Nonprofit Hospitals
Ran Barniv, Kreag Danvers and Joanne P. Healy-Burress

"Secondary Evasion" and the Earned Income Tax Credit
Andrew P. Schmidt and Edward M. Werner

Disclosure of Managers' Forecasts in Interim Financial Statements: A Study of Effective Tax Rate Changes
Mark P. Bauman and Kenneth W. Shaw


An Empirical Examination of State and Local Revocations of Tax-Exempt Status for Nonprofit Hospitals

Ran Barniv, Kreag Danvers and Joanne P. Healy-Burress

Abstract

In recent years, many states and local authorities have revoked the tax exemptions for several nonprofit hospitals. In this study we examine whether hospitalspecific and governmental revenue-need characteristics, organized by four underlying constructs, affect state and local tax authorities' decisions to revoke nonprofit hospitals' tax-exempt status. Based on analyses of state and local tax laws, we distinguish three types of taxes paid by hospitals: Medicaid taxes; state revenue-based taxes; and local taxes. We separately examine the effects of these characteristics on the revocation of the tax-exempt status for each type. We use survivorship analysis and fit logistic regressions that employ panel data to study the risk of revocation for each type of tax. Our results suggest that the likelihood that state authorities assess Medicaid taxes increases with the size of the tax base (i.e., patient revenue) and ability to pay, but decreases with lower revenue needs. We find that the likelihood of revocation for hospitals paying state revenue-based tax increases with the size of the tax base (i.e., total operating revenue), but decreases with public health benefits provided (e.g., charity care) and lower revenue needs. Finally, we show that the size of the tax base (public health benefit provided) increases (decreases) the likelihood of revoking the tax-exempt status for hospitals that pay local tax.Implications for local tax authorities and hospital managers are briefly discussed.  Top


"Secondary Evasion" and the Earned Income Tax Credit

Andrew P. Schmidt and Edward M. Werner

Abstract

This paper documents that the earned income of taxpayers claiming the earned income tax credit (EITC) tends to cluster within $800 intervals surrounding the kink points of the EITC benefit distribution. This clustering is especially strong for head of household taxpayers around the kink point of the phase-in range and, to a lesser extent, for married filing joint taxpayers around the kink point of the phase-out range. The results from logit regression models estimated by filing status and kink point location indicate that "secondary evasion" with respect to the EITC is more associated with the characteristics of head of household taxpayers than those of married filing joint taxpayers.  Top


Disclosure of Managers' Forecasts in Interim Financial Statements: A Study of Effective Tax Rate Changes

Mark P. Bauman and Kenneth W. Shaw

Abstract

This study examines whether managerial forecasts of annual effective tax rates, disclosed in interim financial statements, are useful in predicting future quarterly earnings, are incorporated in financial analysts' forecasts of quarterly earnings, or are impounded in stock prices. The integral view of interim financial reporting requires managers to make their best estimate of the effective income tax rate (ETR) to be in effect for the full fiscal year. Thus, the ETR reflected in interim financial statements represents the disclosure of certain private information regarding management's expectations for forthcoming earnings. Auditors review the income tax provision in conjunction with the release of interim financial statements, arguably lending credibility to management's ETR forecast. Our empirical analyses show that interim effective tax rate disclosures are useful in predicting next-quarter earnings. However, financial analysts generally under-utilize this information when firms report large decreases in ETR. Surprisingly, small ETR increases are related to higher future earnings, and a zeroinvestment strategy based on small ETR increases yields significant abnormal returns. In sum, although interim ETRs are useful in predicting future earnings, both financial analysts and stock market investors fail to fully impound the earnings implications of interim effective tax rate changes in their decisions.  Top

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