New Ore. Law Will Penalize Charities That Spend Less Than 30% on Programs

Oregon’s governor signed into law last month a measure designed to penalize charities that spend the vast majority of their donations on fundraising and administrative expenses. The first measure of its kind, it denies state income-tax deductions for gifts to charities that devote less than 30 percent of their spending to programs.

The law is a victory for the attorney general’s office, which has been pushing for the measure since 2007 to expose what it calls “rogue charities.” The effort was strongly backed by the Nonprofit Association of Oregon, a state coalition of charities.

But like other states that have tried to rein in charities with high overhead costs, Oregon is likely to face a legal challenge—and it will have to show that the law does not violate U.S. Supreme Court rulings that have offered free-speech protection for fundraising activities.

“The Oregon law is so blatantly unconstitutional,” says Geoff Peters, a lawyer for the American Charities for Reasonable Fundraising Regulation, a coalition of nonprofits and trade associations for fundraising. “It’s not gray, it’s black and white.”

He says the coalition, a volunteer group that files lawsuits against fundraising regulations it considers excessive, hopes to challenge the law on the grounds that it discriminates against certain charities, while “the cost of fundraising has repeatedly been held by the Supreme Court as not a basis for rational discrimination.”

Mr. Peters says the group, which pays for its activities mostly from legal fees that are reimbursed when it wins cases, will challenge the measure when it has enough money to proceed. The group, he notes, is now involved in a long-running case against Utah for requiring out-of-state fundraising consultants to register in the state.

Careful Wording

Oregon’s charity regulators have always maintained that they crafted the bill to withstand a court challenge. Unlike the law passed by an Illinois town that was struck down in a key 1980 Supreme Court decision, “this legislation does not prevent any charity from soliciting in Oregon, but only affects the tax benefits that such charities receive,” says Elizabeth Grant, head of the charitable-activities section of the attorney general’s office.

She and her colleagues are relying on a 1983 Supreme Court ruling that said governments are not required to subsidize activities just because they are protected by the Constitution.

The attorney general’s office estimates that the new law, which is aimed largely at groups that spend most of the money they raise on commercial solicitors, will affect fewer than 100 charities out of the 18,000 registered in Oregon. They will be required to disclose their status to potential donors or face civil penalties of up to $25,000 per violation under the Unlawful Trade Practices Act.

The state will calculate program spending based on a three-year average of expenses reported on Form 990 tax filings. The law does not apply to charities that are less than four years old or are so small they do not have to file the full 990 form.

Groups can be granted exceptions under certain circumstances; for example, if fundraising costs spike because a capital campaign is underway.

The law also denies property-tax exemptions to disqualified charities, but Ms. Grant says the impact of that provision will be limited since most groups likely to be affected are based out of state.

Oregon’s efforts elicited praise from William Josephson, a lawyer who is former head of the New York State Charities Bureau. He has drafted a proposed federal law that would limit the charitable deduction to the portion of any donation that is kept by a tax-exempt organization, excluding fees that are paid to for-profit fundraisers.

He says Oregon’s approach is in the same spirit, an effort to use the tax code where other attempts to regulate charities that spend little on their missions have failed. “I’m still trying, I’m glad Oregon is trying too,” he says. “More states should follow.”