c. 2003 Religion News Service

JERUSALEM _ Christian medical and educational organizations based in Jerusalem, and serving a desperately poor West Bank Palestinian population, could be forced to scale back on their operations and even pay millions of dollars in back taxes, under a new Israeli tax policy.

The Lutheran World Federation, and its U.S. affiliate, the Evangelical Lutheran Church of America, are appealing to the Bush Administration to intervene in an Israeli move to alter the tax-exempt status of church-affiliated institutions, including Jerusalem’s Augusta Victoria Hospital, which recently was hit with a huge tax bill.

The hospital, one of the few modern medical service centers for West Bank Palestinians, would be forced to pay an extra $350,000 annually in an “employers tax” and up to $700,000 in back taxes under a recent court decision.

“We as a church in the United States are planning to appeal to the U.S. government to intervene with the government of Israel so that the tax case basically is dropped,” said the Rev. Mark Brown, the ELCA’s governmental affairs official in Washington. Brown said that the Rev. Mark Hanson, the ELCA’s presiding bishop, had raised the issue recently with senior officials in Congress, State Department and the White House.

“The Bush administration knows that alleviation of human suffering is a key part of the success of the road map,” Brown said. “So for an institution like Augusta Victoria Hospital to be faced with the possibility of reducing services or even closing at this time would definitely undermine Palestinian confidence in the peace process.”

In December 2002, a Jerusalem district court ruled that Lutheran institutions in the city, including the hospital and a vocational training center, must pay an “employers tax” of 12.5 percent on the salaries of more than 200 employees. The ruling effectively revoked a previous tax exemption the hospital had enjoyed since it began operating under Jordanian rule in 1948.

The Augusta Victoria tax case, now being appealed by the Lutheran World Federation to the Israeli Supreme Court, is viewed by other church bodies and by the Israeli government as a test. Its final outcome may determine the tax status of many other church-run institutions in Jerusalem, including more politically sensitive Catholic and Orthodox operations.

“We are going through this for the first time and the other organizations are watching anxiously,” Brown said. “It is assumed how it goes for us will also go for them.”

“It’s not a matter just of the hospital. This has to do with the entire fabric of our Christian institutions,” said Bishop Munib Younan, the Lutheran bishop of Jerusalem. “We give a service regardless of religion or political affiliation. And if we don’t give the service, who will give it?”

The Lutheran World Federation rests its legal case, in part, on a letter signed by the Israeli Foreign Ministry in 1978, shortly after Israel first instituted the employers’ tax. The letter explicitly reaffirmed the special tax status of five Jerusalem-based church organizations operating in the city _ the Lutheran World Federation’s Augusta Victoria Hospital, Catholic Relief Services, the Mennonite Center, Swedish Organization for Individual Relief, and the International Christian Committee.

In effect the letter preserved the tax status of the church institutions which had existed since Jordan ruled east Jerusalem prior to 1967.

In the late 1990s, however, Israeli tax authorities began actively seeking ways to collect the employer’s tax, claiming the exemption was no longer valid. In June 2000, the Israeli government filed a court case against Augusta Victoria hospital, demanding the estimated $350,000 annually in employers tax be paid, along with years of back taxes.

A December 2002 Jerusalem District Court ruling held that the Foreign Ministry commitment on the tax exempt status of the church-run institutions was not legally binding on the government since tax exemptions must be approved by Knesset legislation and not merely by a ministerial decree.

In addition, the Court said the Foreign Ministry commitment related only to church institutions operating in areas under Israeli military control while Israel had formally annexed east Jerusalem. The Israeli annexation is not internationally recognized.

“The Ministry of Foreign Affairs said the agreements signed with the Jordanian authorities would be honored in military territories. But Israel has extended her sovereignty to Jerusalem,” said Eli Yitzhaki, head of the Jerusalem Income Tax office. “And inside Israel, nongovernmental organizations do pay this tax. So we can’t have a situation where some pay and some don’t.”

It is clear the tax authorities, as well as the churches themselves, regard the case against the LWF hospital as a potential precedent that could be cited in the politically sensitive Israeli negotiations with the Vatican over the tax status of local Catholic institutions.

In their 1993 agreement establishing diplomatic relations, both Israel and the Vatican agreed to negotiate similar tax status questions, involving Catholic Church institutions. But over the last 10 years, the negotiations have not yielded agreement.

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Beyond the technicalities of tax law, however, church leaders say a number of broader social and diplomatic principles are at stake in the dispute.

Jerusalem church institutions like Augusta Victoria receive almost no Israeli government support, unlike hospitals or schools operating inside pre-1967 Israel. At the same time, such institutions fill a vital social role among Palestinians who have little or no access to Israeli government hospitals and educational institutions or to the kinds of steady jobs the hospital provides.

About 65 percent of Augusta Victoria’s patients come from refugee camps in the West Bank and Gaza. And the hospital offers more sophisticated medical treatment than is available in more outlying West Bank hospitals.

“Restoring the exemption is in the best interest of Israel,” said Brown. “It will ensure that this hospital continues to provide the humanitarian services that can help reduce tensions in the Palestinian Territories. Some have also made the argument that if this hospital goes under, groups that Israel considers its extremist enemies, but which also provide humanitarian services to Palestinians, will fill the vacuum.”

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