August 15, 2011 | Read Time: 6 minutes
Editor’s note: This article was written for The Chronicle’s August 25 print issue just days before the author, a veteran nonprofit executive and longtime contributor to The Chronicle, died of a heart attack. You can read his first opinion article for the newspaper and read more about his life.
It happens with every economic downturn: Government officials at every level ask tough questions about the sanctity of charitable tax privileges and exemptions.
What is different this time, however, is that nonprofit institutions, many of which face their own fiscal challenges, do not seem to be fighting new intrusions to tax privileges with the same ferocity as in the past, and certainly not with the same success.
The downturn has been more severe; government deficits, particularly the federal debt, are more pronounced. In addition, more big nonprofit institutions like hospitals and colleges face challenges to their own public popularity or goodwill and are less able to rally supporters to fend off attacks on their government subsidies.
Under those circumstances, nonprofit tax privileges and exemptions look like easier prey for ravenous tax collectors.
But the movement toward emasculating nonprofit tax privileges may have an inadvertent consequence. It could prompt a sizable number of organizations to decide it’s not worth it to put up with the burdens of tax exemption, and that, in turn, could deprive many cities and towns of a precious and important component of community life.
From the vantage point of government officials, there are lots of reasons to keep going after nonprofits, especially as revenue dries up.
In some instances, especially in some localities, municipal governments will be particular financial beneficiaries as nonprofits lose exemptions for property taxes or pay hefty user fees or agree to voluntary payments in lieu of taxes.
At the federal level, Congress can potentially get a little revenue for the treasury by limiting charitable deductions, but the real value will primarily be symbolic.
Lawmakers who reduce the charitable deduction can show their skepticism about whether wealthy donors are more interested in getting a tax break than supporting good causes—and question whether nonprofits that receive tax-deductible gifts are doing enough good.
The historic motivating reason for extending tax privileges to charitable organizations was to help them to raise money to serve charitable purposes and to subsidize the costs of providing them.
The challenges to the tax exemption are thus a very bitter pill for us to swallow at two levels: First, as a matter of philosophy and values, proposed changes in tax exemption seem to reflect a declining public appreciation for our values, our value, and our purpose.
Second, and more pragmatic, limits on the value of tax exemption put added financial stress on nonprofit organizations and those they serve.
And at a time when jobs are scarce for many Americans, nonprofits, which now pay 9 percent of all wages and salaries in the U.S., may be forced to shed more workers than they already did during the dark days of the recession.
Eroding tax subsidies could mean that some nonprofits would have to reduce services drastically or even close—and that would deprive many communities of a set of institutions that make vital positive contributions to communities.
The tax privileges that nonprofits have enjoyed for the better part of the 20th century and the beginning of this century have enabled extraordinary and extraordinarily diverse contributions to the quality of community life and individual well-being. These wide-ranging services provided by nonprofits represent a safety net within communities that we have come to expect and that we often perhaps take for granted.
And that may be the real problem: As policy makers take for granted the idea that they can keep reducing the privileges of tax exemption, they have not thought about the fact that many organizations might decide it’s not worthwhile to be a nonprofit.
Given the limitations that already come with tax exemption, it might not seem like such a fair deal to continue to operate under even more onerous circumstances. So let’s keep in mind what nonprofits already give up.
First and foremost, by culture and by law, the ways in which tax-exempt organizations think about, use, and distribute “profits” is fundamentally different from the business world. As tax-exempt organizations, we do not have shareholders or proprietary owners. We do not distribute profits to shareholders through dividends. All revenue earnings that exceed expenses must be driven back into the organization to serve the charitable purpose.
For the most part, that has been a fair and worthwhile trade-off. Tax privileges and exemptions require nonprofits to raise capital and use it in ways that are different from corporate America.
But at some point, as tax subsidies are limited, it might be easier to attract private capital, more like private companies do, than to seek charitable donations as nonprofits have done for centuries.
Limits on executive compensation are another handcuff placed on charities when they accept tax-exempt status. Because charities are publicly subsidized through tax exemption, the public believes it has the right to set expectations on the salaries paid to nonprofit leaders.
But those limits sometimes make attracting talent a challenge, and it might not be worth giving up great workers as tax exemptions becomes less valuable.
Tax exemption is also accompanied by a legitimate expectation of transparency. Nonprofits are required to disclose information about their spending and their service to society in annual reports to the Internal Revenue Service. Why should organizations spend so much time informing the public if they don’t get public subsidies in return?
Beyond those limits, the one that is perhaps most frustrating in this time of critical public-policy choices is the limit nonprofits face on our ability to lobby. Nonprofits accept these limits on influencing public policy reluctantly. Many nonprofit leaders think these limitations are wrong and unfair. But to preserve our tax status, we comply. Why should we continue to give up our voice in the halls of government on choices critical to our country’s future as government takes away our benefits?
How we raise capital, how we compensate our employees, how we comply with a variety of government reporting requirements, and how we conduct our public-policy efforts could all change if we weren’t tax-exempt. And we won’t face the obligations, morally or legally, to provide vital services to our communities.
Government might see changes in charitable tax exemptions as a small pot of gold at the end of the nonprofit rainbow, but it is equally possible is that this could also unintentionally be the first step toward ending America’s longstanding tradition of encouraging private organizations to serve the public good.
