Recommendations for President Bush: Two Views From Nonprofit Leaders

Capital Research Center, a Washington think tank, has compiled

Mandate for Charity, a list of suggestions for the Bush administration and Congress. Following are excerpts from the executive summary, which was published in the January issue of the center’s newsletter,

Alternatives in Philanthropy, as well as on the center’s Web site, http://www.capitalresearch.org.Tax Policy

* The single best reform to produce more and better charity in America is for the Bush administration and Congress to substantially lower federal taxes and simplify the Internal Revenue Code. A substantially lower and flatter tax that allows individuals to keep more of their income will promote higher levels of charitable giving. In addition, the elimination of the current charitable tax deduction, if it is coupled with lower and fewer graduated tax rates, will lead to more giving to effective charities.

Short of overhauling the tax code, Congress should retain the existing charitable tax deduction for contributions to 501(c)(3) nonprofit charities.

But it should enact a charitable tax credit that is specifically directed toward contributions to charities that provide direct services to the needy. This would allow taxpayers to subtract the full amount from taxes owed, or a portion of the amount, given to qualifying direct-service charities. In other words, instead of paying taxes that support bureaucratic federal programs, taxpayers would give the amount of the credit directly to groups that help the needy. A tax policy that recognizes and rewards nonprofits that provide services to those in need would offer an incentive to direct charitable resources where they are most needed.

There are several other tax-related changes that Congress and the Bush administration can make to promote donor choice and help direct-service charities:

• Individuals should pay no taxes on funds they withdraw from individual retirement accounts to contribute to charity.
• All taxpayers should be allowed to claim a charitable tax deduction.
• Congress should raise the limit for undocumented “out of pocket” cash contributions.
• Congress and the Bush administration should develop methods to attach a cash value to volunteer community service so that tax deductions and credits apply to it just as they apply to cash and in-kind gifts.

Charitable Choice

Charitable choice is a public policy that requires that government agencies treat faith-based organizations no differently than their secular counterparts when awarding grants and contracts. First enacted at the federal level in the landmark 1996 Welfare Reform Law, it seeks to remove welfare agencies institutional bias against social-service providers motivated and guided by religious faith.

* Congress and the Bush administration should extend charitable choice to all federally funded programs. Additionally, the president should establish a top position in the White House to oversee this policy in order to ensure that all federal agencies treat faith-based organizations fairly.

Certain priorities should govern the Bush administration and Congress. Their first commitment should be to lower and flatten taxes and enact a charitable tax credit. These policies will be of great benefit to the organizations that charitable choice protects. But there is a “second best” option:

* The administration should introduce vouchers whenever government agencies are assigned to provide food, housing, training, and education. Instead of giving grants and contracts to nonprofit organizations, Congress and the president should give vouchers for goods and services to individual recipients. They would then redeem them at any qualifying organization, including faith-based providers. Vouchers would give beneficiaries more choices and motivate providers to be more responsive.

* The first step is to end the current ban on proselytizing. The charitable choice provisions in the 1996 Welfare Reform Law prohibited proselytizing by recipient organizations. This must be changed because it forces religious charities to forsake the offer of their most precious gift.

Federal law must be clear: It is unconstitutional to provide government funding to faith-based social-service organizations that engage in proselytizing only if the clients of these organizations have no secular alternative.

* The federal government should also take pains to distribute formula grants rather than discretionary grants whenever it provides funds. This is a minimal and easy-to-accomplish reform. Formula grants are those that the federal government awards automatically to qualifying organizations. They are based on set criteria, without prejudice to a recipient organization’s religious mission. Discretionary grants, on the other hand, by definition let federal bureaucrats and politicians decide who will receive tax dollars.

If charitable choice enables faith-based organizations to compete for grants on equal footing, formula grants will give government officials much less opportunity to discriminate against them.

* Finally, federal grants, whether discretionary or formula-based, should contain no funding for nonprofit recipients overhead and core functions. Nonprofits will lose the incentive to demonstrate their competency to private donors if federal grant applications include a line item for overhead, thereby encouraging them to rely on taxpayers to fund their general operations.

Federal Involvement with Nonprofits

By altering its own behavior, the federal government could go a long way toward de-politicizing charities, ensuring accountability, helping direct-services charities, and encouraging civic engagement.

* Congress and the Bush administration should enact a strict ban on lobbying by federal grantees. Currently, thousands of nonprofits, including many that receive taxpayer support, seek to influence the legislative process at all levels of government. The U.S. Constitution guarantees a right to free speech and to petition government, but it does not guarantee a right to publicly funded lobbying.

* The administration should demand that its political appointees in all departments and agencies review the nonprofits they fund to determine the extent of political advocacy and take steps to end it. At the very least, the administration should understand that lobbying and political advocacy expenses are often included in the portion of nonprofit grants categorized as “overhead,” and it should restrict or deny “overhead” costs in federal grants.

* The president should end the practice of ceding federal executive authority to nonprofit “partners.” The Clinton administration has been adept at empowering favored activist groups with delegated authority, often by convening sham “advisory” panels at the White House and other federal agencies. These practices blur the distinction between appointive positions and nonprofit groups.

“Mandate for Charity” singles out two federally chartered agencies that should be phased out. They receive earmarked appropriations from Congress and distribute large numbers of grants to advocacy organizations.

They are:

• Legal Services Corporation
• Corporation for National Service (AmeriCorps)

Each has been embroiled in controversy over allegations of waste and fraud, and each could better fulfill its mission if it were a private organization.

Four years after the initial surge in popular use of the Internet, the federal government still lacks a central Web site that reports on its interactions with nonprofits. Therefore:

* Congress and the Bush administration should produce an online system that discloses federal dealings with nonprofits. Internet users should be able to search all government grants in a centralized online database.

* Congress and the president should direct federal agencies and departments to relax licensing requirements that prevent government-funded social-service nonprofits from hiring “non-professionals.” The over-credentialing of social workers and others in the counseling professions raises the bar to entry in a field that cries out for loving and compassionate caregivers.

Federal agencies should turn over more unneeded surplus facilities, land, equipment, and supplies to direct-services charities. One-time, in-kind donations of this sort are generally free of the corrupting effects that accompany renewable monetary grants.

Congress and the Bush administration should consider requiring neighborhoods to incorporate residential community associations as a condition for the receipt of federal mortgage insurance. Government interventions in housing policy have often disrupted community bonds. Encouraging recipients of this federal aid to establish a neighborhood association would counteract this trend.

Foundation Law

The new leadership in Washington must reexamine a range of federal laws and regulations that govern foundation grant makers. In 1969, Congress passed laws to ensure that foundations acted in the public interest and stayed out of politics. But too many foundations today act as puppet masters for advocacy groups in the thick of politics. Too many only comply with the federal law’s minimal requirements concerning grant making, public disclosure, and recognition of donor intent.

Foundations that were once very careful to avoid political activities are increasingly involved in supporting and even creating nonprofit organizations dedicated to “issue advocacy” in specific areas (e.g., “gun violence,” tobacco control, and campaign finance reform). Foundations also have funded policy advocates working within government agencies. Without infringing on foundations’ rights to select and support its grantees, Congress and the Bush administration should develop policies that enable citizens to understand the extent of foundation attempts to influence public affairs.

By providing for verifiable, electronic disclosure of vital foundation data, the Bush administration can make a good foundation disclosure regime even better. Currently, foundations must file 990-PF forms with the I.R.S. every year that detail their grants, assets, and board members. The forms are available upon request from foundations and the I.R.S. However, it is often difficult for outsiders to obtain and decipher these forms. To ensure accountability, 990-PF forms should be filed electronically and made searchable on the Internet.

* Congress and the Bush administration should prohibit foundations from funding government agencies in efforts to affect public policy. Quite simply, it undermines public accountability. Exceptions should be made in cases where the funding is truly charitable, as in Target corporation’s recent financing of scaffolding to repair the Washington Monument.

Foundations are currently required to pay out at least 5 percent of their assets each year. Unfortunately, many foundations treat the payout requirement as a ceiling rather than a floor. Foundation assets are tax-sheltered only because it is expected that they will fund charitable activities. College and university endowments, which perform similar functions, are not subject to a payout rule.

* Congress and the Bush administration should require the same payout rules for all nonprofit grant makers, and they should start to examine ways to encourage higher payouts of foundation assets.

Corporate Law

Reforming corporate law in the interest of more and better charity poses unique challenges. Publicly traded companies, owned by shareholders, are not charitable institutions, and philanthropy is not their mission. But perverse incentives have caused many major corporations to fund political advocacy groups that work against the interests of free markets.

* Congress and the Bush administration should amend the laws and regulations governing corporations to give shareholders more control over corporate giving. Every publicly traded company should be required to disclose to its shareholders those charitable donations made directly out of corporate accounts. (Grants made by company-sponsored foundations are already public record.) Moreover, direct corporate grants should be searchable on the Internet for the benefit of shareholders. Finally, Congress and the Bush administration should encourage firms to allow more shareholder participation in corporate-giving decisions.

* Federal laws regulating business activity should be amended to reduce the incentives to use corporate giving for political purposes. Currently, two federal regulatory regimes — the Community Reinvestment Act, administered by the Federal Reserve, and merger/acquisition rules administered by the Federal Communications Commission — give activist groups enormous power over financial institutions and telecommunications companies. They can hold up the regulatory approval of mergers and acquisitions by presenting petitions that allege illegal loan-making discrimination. Since Americans can use civil rights laws to seek redress for racial discrimination, these economic regulations are unnecessary and destructive and should be abolished. At the very least, Congress and the Bush administration should prohibit corporations from making contributions to nonprofits in exchange for their agreement to drop a regulatory petition.

* More corporations need to involve their employees in their philanthropy. Gift matching, which allows employees to direct some company giving, is already a staple of many corporate-giving programs. The new political leadership in Washington should encourage companies to allow employees more time for community service and voluntarism. This win-win policy burnishes a company’s reputation, improves worker morale, and benefits charities. Congress and the Bush administration should also enact corporate tax breaks to encourage employee community service on the clock. And labor law should be amended so that employees can use flex-time to volunteer.

Changing corporate tax law can also encourage more and better corporate giving:

• The most simple change is to raise or abolish the cap on corporate charitable tax deductions, now at 10 percent of profits.
• Federal tax law should encourage corporate in-kind gifts. These already go disproportionately to direct-services charities and help dispose of excess inventories of furniture, foodstuffs, clothing, household goods, and computer equipment. Corporations may currently claim the mean value between the cost of manufacturing a product and its fair market value, with an upper limit of twice the cost. Congress and the Bush administration should study easing this restriction and allow more companies to take full advantage of this tax deduction for in-kind donations.
• Additionally, federal law should offer civil liability protection for in-kind donations.

Nonprofit Law

The explosion of nonprofit advocacy groups over the last 30 years has created the most obvious distortions of charity. Some of these organizations favor limited government and free markets, but most do not. These groups in effect compete with traditional charities for the philanthropy dollar.

Nonprofit groups are guaranteed freedom of speech and freedom of association by the First Amendment of the U.S. Constitution. However, because the tax code offers considerable financial advantages to them and those who support them, their tax status places restrictions on advocacy and lobbying.

Unfortunately, the tax code has also encouraged political-minded groups to file under tax categories never intended for them. The tax code’s perverse incentives should be reversed without violating the constitutional rights of nonprofit organizations.

* Because lobbying public officials and electioneering is not charity, Congress and the Bush administration should amend the tax code to prohibit 501(c)(3) nonprofits from lobbying with tax-sheltered funds.

* 501(c)(3)s and lobbying groups filing under section 501(c)(4) should be barred from campaigning in state and local ballot initiatives.

* The I.R.S. should do a better job of fully enforcing the distinction between 501(c) member-mobilization by 501(c) nonprofits and their express advocacy in candidate elections. Political parties, campaign committees, and political action committees (PACs) are the best vehicles for such advocacy in candidate elections. Charities should be discouraged from mixing political jockeying with genuine service.

Recent election law changes require that policymakers pay special attention to organizations filing under section 527 of the tax code. This designation exists primarily for political party committees and candidate committees whose activities are mostly regulated by the Federal Election Commission. However, in recent years the 527 category has become a popular vehicle for independent organizations interested in influencing elections without scrutiny from the I.R.S. or F.E.C..

In August 2000, a new law imposed contributor-disclosure requirements on 527s not already required to do so by the F.E.C. as party-candidate committees. The new law is unfair. At best, it exposes only a fraction of the independent groups seeking to influence elections, and at worst it threatens constitutionally guaranteed rights to free and anonymous association.

* Congress and the Bush administration should enact one of two sensible alternatives to the new 527 law. They should limit the 527 designation to political parties and political campaigns, or they should extend contributor-disclosure requirements to 501(c)(5)s (labor unions) and (c)(6)s (trade associations) that engage in the same kinds of activity as 527s.

* More public disclosure will help nonprofits filing under the 501(c) section to become more accountable to citizens. The 990 form that most nonprofits file with the I.R.S., and which is publicly available, already provides considerable data on filing organizations. But the forms are not as accessible as they could be. Recently enacted tax law changes allow taxpayers to obtain these forms directly from nonprofit groups for a fee, but most groups have not implemented procedures to make it easy to obtain their forms. Under a two-year federal partnership with the Urban Institute and GuideStar, there are now Internet postings of thousands of 990 forms. But the data is often two or more years old and is not available in an easily downloadable format.

* The technology exists to allow for electronic filing of 990 forms and instant disclosure, and it should be used.

* When 501(c) groups make pass-through grants to other nonprofits, these should be Internet searchable.

* Congress and the Bush administration should require instant disclosure of all 501(c) lobbying and public testimony, including time, place, and cost.

Taxpayers have a right to know how tax-exempt organizations seek to influence the political process.

* Congress and the Bush administration should limit the tort liability of members of nonprofit boards of trustees. They should also raise the level of contributions that nonprofit trustees can donate to their own organizations.

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Four organizations in Washington have jointly sent a list of recommendations to President Bush outlining their vision of a “nonprofit agenda.” The organizations are the Advocacy Institute, which trains charities to lobby; the National Committee for Responsive Philanthropy, a watchdog group; OMB Watch, an organization that monitors federal spending policies; and the Union Institute Office for Social Responsibility. Their proposals are based, in part, on the roughly 1,000 responses the organizations received to an online survey of nonprofit groups conducted last fall (The Chronicle, November 2). A copy of the recommendations soon will be on OMB Watch’s Web site, http://ombwatch.org.

Following is the organizations’ summary of their recommendations:

Campaign Finance

I. Reduce the corrosive influence of money on politics

Nonprofits ranked this by far the most important issue for the president to address. Respondents noted two ways in which the current campaign finance system hurts nonprofits and the people they serve. First, the disproportionate influence of money negates the democratic principle of one-person-one-vote. Second, and more practically, it creates imbalance in public policy debates, since wealthy campaign donors influence campaign outcomes and therefore have a greater influence over public policy.

We encourage the new president to consider the following approaches to restoring principled democracy and leveling the playing field in public policy:

A. Discourage purchase of access to representatives of government through campaign spending:

* Promote public financing of all federal elections.

* Provide free or reduced cost air time for federal candidates on all broadcast media.

* Limit soft money contributions.

* Involve community-based organizations in debates around campaign finance reform, so that new laws are not written by self-interested stakeholders.

B. Encourage citizens and citizen groups to participate in elections and public policy debates.

Support and under no circumstances limit the First Amendment rights of citizens and nonprofit organizations to speak freely on public policy issues.

Help for the Needy

II. Invest in the people served by nonprofits

This ranked as the second most important issue for the president to address. Leaders commented on how important it is for the federal government to invest in programs and policies that can build sustainable communities and broad, long-term economic prosperity. It is time to think big. In a time of economic prosperity and budget surplus, the country should put resources into program areas that have been neglected and under-funded.

The nation should also begin to address gaps in the service delivery infrastructure — even if this means creating new national programs. Priority areas should include universal pre-school, universal health care, low- and moderate-income housing, livable wages, and income supports for those that cannot obtain jobs. Specifically, the president should undertake the following:

A. Use a significant portion of the surplus to invest in people. If estimates of the surplus decline, other resources should be devoted to public investments.

B. Target tax relief to those most in need. Across-the-board tax cuts that primarily benefit the wealthy are the wrong approach to investing in our future. Precise tax cuts — such as expanding the Earned Income Tax Credit or a new universal unified, refundable child tax credit — are more efficient, and a better approach to any tax reduction program.

C. Consult with community leaders. Community-based nonprofits have unparalleled insight into community needs and can help the president and administration develop investment priorities.

Public Policy

III. Strengthen nonprofit participation in public policy

An essential role of nonprofit organizations is to advocate for the people and causes they serve. The federal government can play a critical role in strengthening nonprofit public policy participation:

A. Protect and appreciate advocacy participation.

The president should take steps that acknowledge the crucial role nonprofits play in formation of public policy and enhance their ability to provide a vehicle for citizen input into the actions of government.

Rules and regulations that govern the ability of nonprofits to speak on behalf of those they serve should be simplified and, where not justified, eliminated. For example, the tax code should be modified to eliminate the confusing distinction between direct and indirect (grassroots) lobbying, including all charity lobbying under one expenditure ceiling, which should be indexed to the rate of inflation. Additionally, the I.R.S. should provide guidance to private foundations that they can fund charitable activities tht involve public-policy participation.

B. Promote participation in federal agency policy and program activities.

Federal departments and agencies should be encouraged to consult with nonprofit organizations to expand public engagement in policy decisions by commenting on rules, regulations, and programs. This improved relationship needs to exist at the national, regional, and local office level of all federal agencies and departments, so that nonprofits can have meaningful input to the process. The president should strengthen the Nonprofit Liaison program and charge them with leading the efforts described herein. The president should also strengthen the use of technology to promote nonprofit interaction and disseminate information.

Encourage Giving

IV. Promote increased giving, volunteering, and nonprofit careers

There are a number of ways the president can expand resources — money, staff, and volunteers — to help nonprofits, particularly charities, carry out their missions:

A. Permit nonitemizer tax deductions.

Allow taxpayers who do not itemize on tax returns to fully deduct charitable contributions. The nonitemizer deduction should take effect immediately upon passage instead of being gradually phased in. The deduction threshold should be high enough to encourage giving but low enough — e.g., $100.00 — to allow broad participation.

B. Permit selected retirement account rollovers to charities.

Allow taxpayers to donate money tax-free from individual retirement accounts. Current legislative proposals would permit I.R.A. rollovers for donors age 70 ½ or older. The president should encourage broader giving by lowering the eligible age to 65 and by allowing the rollover of Social Security benefits as well.

C. Maintain the estate tax.

Repealing the estate tax would increase concentrations of wealth inconsistent with a democratic society. Repeal would impact the nonprofit sector, abrogating current tax incentives and substantially decreasing charitable gifts. Revisions that protect family farms, small businesses, and environmental conservation are possible without eliminating the tax.

D. Create a student-loan forgiveness program for those in nonprofit careers.

Support careers in public service by helping public agencies and nonprofits recruit and retain top-notch talent. Nonprofit and government agency employees with outstanding student loans should be eligible for loan-forgiveness programs based on length of service if their salaries are below the private sector level. This program can follow the model the Public Health Service uses to recruit health-care professionals for low income and rural areas.

E. Strengthen volunteering — particularly for advocacy.

Promote increased civic participation by helping nonprofits recruit volunteers and making procedures for AmeriCorps simpler to help small grassroots nonprofits participate in the program. Eliminate advocacy restrictions in AmeriCorps and under the Points of Light program and provide information on volunteer opportunities.

F. Targeted charitable tax credits should be nondiscriminatory.

Do not limit tax credits for charities to any particular types of nonprofit or any particular types of service or exclude charities that engage in advocacy from the benefit of tax credits. Ensure that tax credits for charities supplement, rather than decrease, overall government funding for programs and services.

Federal Aid

V. Simplify the federal grant-making process

Roughly one-third of charities’ revenue comes from government grants and contracts, underscoring the close partnership nonprofits have with government. Yet these financial interactions are often burdensome, particularly for smaller groups. The president can make the following six improvements:

A. Adjust payment reimbursement procedures for small nonprofits.

Institute simpler and faster payment technology and procedures for federal grantees. This would help thousands of small nonprofits that cannot advance funds or wait long periods of time before they are reimbursed.

B. Involve charities in streamlining grant application and reporting requirements.

Insist on full and timely implementation of the Federal Financial Assistance Management Improvement Act, which mandates uniform application forms and reporting systems and calls for a streamlined federal grants process. The White House Office of Management and Budget should work with a team of nonprofit representatives, including small grant recipients and grants management experts, to develop its implementation plan.

C. Simplify and unify nonprofit financial reporting requirements.

Stop redundant and burdensome reporting requirements among federal, state, and local governments. These levels of government often require nonprofits to report the same financial information but in different formats and time frames. The president should implement the recommendations in Unified Financial Reporting for Not-For-Profit Organizations (Jossey-Bass, 2000) to improve accuracy of information, simplify the multitude of reporting formats, and strengthen nonprofit accountability.

D. Initiate outreach to make nonprofits more aware of federal grant programs.

Federal agencies should conduct outreach programs to make more nonprofits aware of federal grant opportunities. Develop the Federal Commons as a one-stop Web resource and incorporate it into the U.S. Nonprofit Gateway and FirstGov.

E. Expand technical assistance on the grant application process.

All federal agencies should provide training and technical assistance for nonprofits that wish to apply for federal grants.

F. Protect freedom of religion.

Conform federal grant making to the constitutional principles of separation of church and state. Religious congregations should be eligible for government grants to administer programs only when they can show that program services are kept separate from religious worship activities.

No government funds should be used to operate programs where religious activity and proselytizing are indistinguishable from program services or incorporated into them. Federal funds should not be used to discriminate in hiring practices based on religious belief or affiliation. Given the controversy surrounding charitable choice, the president should wait for a court review of its constitutionality before expanding it.

Strengthening Charities

VI. Increase support for strengthening the capacity of community-based organizations

Many of the above recommendations will strengthen the capacity of smaller nonprofit organizations. Three additional recommendations include:

A. Support community technology centers and nonprofit technology support.

Provide grant support to create or enhance Community Technology Centers (C.T.C.’s) so that there is at least one C.T.C. in every congressional district. C.T.C.’s help residents with technology issues, from job training, to computer literacy training, to community service. In large districts — particularly in rural, low-income, and minority areas — there should be more than one C.T.C.. Over all, resources should be targeted to rural, low-income, and minority communities. Government should also help small nonprofits select and use information technologies.

B. Provide federal funding for community-based organizations.

Create a continuing national grant program based on the National Endowment programs to help them with general support needs and to improve quality of life in our communities.

C. Increase philanthropic support of grassroots initiatives.

The president should use his “bully pulpit” to promote increased philanthropic support for community-based organizations. He should also consult with charities, foundations, corporations, and other donors to build support for grassroots activities — particularly those dealing with social justice.

Accountability

VII. Strengthen nonprofit accountability

Support efforts to improve the public’s understanding of nonprofits’ work, and strengthen tools to hold organizations accountable for their actions:

A. Require greater disclosure of nonprofit activities.

Improve the quality of information requested in I.R.S. Form 990 so that data collected is more meaningful for accountability purposes. Make this information more accessible to the public through use of the Internet.

B. Improve access to information about nonprofit services.

The federal Web portal, FirstGov, should be linked with state and local governments and with nonprofits providing government contracted services. The public can learn about services provided by government and nonprofit partners no matter where they live or where they travel.

C. Improve I.R.S. enforcement of tax laws and regulations.

Strengthen enforcement of tax-exempt rules to help build public trust in the nonprofit sector. Ensure that enforcement does not threaten, limit, or chill nonprofit advocacy and robust public debate.