Supreme Court Has Often Slapped Down State Efforts to Regulate Charity Spending

If Oregon passes a law to deny state tax deductions for gifts to charities with high fund-raising and administrative costs, legal and nonprofit experts will be watching closely to see if it has been crafted in a way to survive a court challenge.

The U.S. Supreme Court has issued a string of rulings over the past few decades that have forced Oregon and other states to repeal laws that dictated how much nonprofits or professional fund raisers should channel to charitable programs or that have required them to disclose their fund-raising costs to potential donors.

In the first, Village of Schaumburg v. Citizens for a Better Environment, the court ruled in 1980 that an Illinois town could not require nonprofits that raised money door to door to use at least 75 percent of their funds for “charitable purposes.”

It said such restrictions violated First Amendment free-speech protections, noting that fund-raising appeals are generally “intertwined with informative and perhaps persuasive speech” and that high administrative costs do not demonstrate fraud.

The high court issued three subsequent rulings, two in the 1980s and one in 2003, that slapped down laws in Maryland, North Carolina, and Illinois that also tried to regulate high fund-raising costs.

A New Approach

But Oregon’s attorney general, John Kroger—who drafted a bill that the Oregon State Senate passed this month—is relying on a different Supreme Court opinion to bolster his efforts: Regan v. Taxation With Representation of Washington. That 1983 case upheld tax laws that restrict the amount of lobbying that charities can do, saying that governments are not required to subsidize activities just because they are protected by the Constitution.

“This legislation doesn’t prevent anyone from soliciting,” says Elizabeth Grant, head of the attorney general’s charitable-activities section in Oregon. “People can make calls just as they have been,” she says. “I don’t think government is required to subsidize all activities.”

“It’s an approach that to my knowledge hasn’t been tried before, and it’s significantly different than prior statutes and local ordinances that have been struck down by the court,” says Ross Laybourn, a board member of the Nonprofit Association of Oregon, which supports the legislation.

Mr. Laybourn headed the state’s charity-regulation office for almost 20 years before he retired about three years ago and recalls how his office had to “go back to the drawing board” to respond to the Supreme Court decisions on fund-raising costs. For example, he says, after a 1988 ruling, it had to repeal a law that required professional fund raisers to identify themselves and say how much of the money they raised would go to charity.

Possible Legal Challenge

But critics are not so sure the high court would bless Oregon’s approach. The Direct Marketing Association’s Nonprofit Federation, for example, says it violates free-speech protections by requiring organizations to tell donors they cannot receive tax-deductible gifts. The legislation also “unconstitutionally vests broad discretion in the attorney general,” it wrote in a letter to the Oregon State Senate, noting that the bill allows the state’s top legal official to grant exemptions based on “mitigating circumstances.”

Dan Moore, a vice president at GuideStar, a nonprofit research organization, and a former charity regulator in New Mexico, says he suspects Mr. Kroger’s office anticipates it could face a legal challenge. But, he adds, “I think this is a fight they’d like to have.”