July 22, 2011 | Read Time: 5 minutes
A tsunami is rolling in and about to hit the nonprofit world. Few people at charities and foundations recognize its source; even fewer see the danger.
That’s the nature of tsunamis. Their destructive power builds as they move from deep to shallow water. That is why ships rarely report seismic sea waves before tsunamis—and why people on shore fail to seek safety before it’s too late. Forces now swirling in a confluence threaten to alter the charitable world as we know it. Among them:
- A staggering national debt.
- The exponential cost increases of providing retirement benefits and health care to the baby boomers that can’t be sustained unless we change policies or generate new revenue.
- A hesitant economic recovery that has left nearly 14 million people out of work and an unemployment rate trending up since last month.
Reconciling this grim financial picture will require at the least raising taxes and cutting spending—two unpopular options that may further polarize parties as election season heats up.
As these forces gather momentum, President Obama and lawmakers on both sides of the aisle have been calling for a comprehensive tax overhaul.
Their reasons differ. Some seek to change the tax code as a way to generate trillions of dollars in new revenue. Others want to simplify it as well as make it more equitable and fair. Still others seek to encourage businesses to stay in the United States and spur job growth.
As lawmakers examine ways to create new revenue streams, the tax dollars that facilitate the work of nonprofits are expected to be on the table. Lawmakers will surely ask whether:
- Federal, state, and local governments can afford to relinquish such revenue at a time when school days have been shortened, garbage pickup occurs less frequently, and police officers have been laid off.
- Benefits that nonprofits deliver to society are worth the tax money lost by offering them tax-exempt status.
- All tax-exempt organizations should continue to be entitled to their protected tax status. Can they really justify that their missions and programs are serving the common good?
Added to those questions are the ones that have already been raised by the Obama administration and some public-policy experts about whether it is worth the cost to the federal treasury to give people a tax incentive to support charitable causes. If tax deductions for charitable giving are wiped out entirely, we can expect charitable giving to decrease by 25 to 36 percent annually, according to an analysis by several economists.
A less drastic option, proposed by the White House, would limit how much high-end income earners can deduct for their charitable contributions. This option would hinder—not help—nonprofits as they struggle to meet increased demands for their services.
Equally important is the fact that the charitable incentive is an extremely efficient way for the government to spur investment in communities. When an individual in the highest tax bracket donates $1,000 to charity, the government forgoes $350 in tax revenue—but communities benefit from the entire $1,000 gift. The federal government is unlikely to find another approach that can attract private spending for community services at a nearly 3 to 1 ratio.
Some lawmakers have also shown interest in the potential capital that could be generated by encouraging the growth of “hybrid” organizations that blend attributes of for-profits and nonprofits.
Such entities seek maximum profit for shareholders while simultaneously striving to serve the public good—two opposing purposes that may be fundamentally irreconcilable.
We would be well advised to study this emerging category of organizations before proceeding. This is to ensure that policies that create incentives through tax shelters and protections do not attract bad actors, whose only purposes are to reap the benefit of tax deductions or exemptions while merely claiming to serve charitable interests.
Federal lawmakers often watch what happens at the state and local levels—and there is plenty to see.
Beyond Capitol Hill, officials have been imposing fees on nonprofits and cutting certain deductions for some time. Since 2000, 117 cities and 18 states have asked nonprofits to make voluntary payments to make up for exemptions from property and other taxes, according to the Lincoln Institute of Land Policy, and this trend will probably intensify as budget pressures mount in states and cities everywhere.
As my colleagues at Independent Sector and other nonprofits have been doing the rounds on Capitol Hill with new and veteran lawmakers alike, we have seen great support for the charity world. However, few lawmakers know much about our work. Few recognize that nonprofits are small businesses that employ approximately 10 percent of their constituents.
This lack of understanding could be critical as lawmakers hear ideas from their peers about restricting the government assistance, direct and indirect, that flows to nonprofits or if they are asked to consider measures that would change how nonprofits operate.
Unless government officials understand the value these organizations add to their communities; what it takes to run a high-performing nonprofit; and what damage such changes in government aid and regulation would wreak on organizations in their states and districts as they search for new revenue, they may harm the very groups that they laud.
In every meeting with public officials, it is worth underscoring that the bedrock of America’s vibrant charitable sector is a tax system that has for nearly a century strongly encouraged Americans to give to a good cause; that supports those who organize voluntarily when they see a need in their community that neither business nor government has filled; that enhances our daily lives in a thousand ways.
We need not become victims of a storm surge. But to succeed, we must work together to share the immense value of the nonprofit world with the people who represent us in Washington.
