The Political Challenges Facing Charities and Foundations

By Leslie Lenkowsky

Although the Congressional debate over changing the tax laws affecting philanthropy is likely to continue for several months, it is already pretty clear who will win and who will lose. On balance, the nonprofit world is not doing badly protecting items it considers important, but it is in worse shape politically than it was when public scrutiny of its activities intensified several years ago.

Lawmakers started considering new laws when they became concerned that grant makers, whose number and assets had increased rapidly during the economic boom of the 1990s, were not doing enough to support charities.

Some members of Congress were responding to complaints that despite their increased wealth, foundations were giving away no more than the law required — and substantially less in some cases because foundations were spending a lot on staff salaries and other administrative costs.

Another set of complaints focused on examples of philanthropies that seemed to provide sizable benefits to their donors, trustees, and staffs, making them suspect in an environment colored by conflict-of-interest scandals at companies such as Enron and WorldCom.

And some lawmakers felt the management practices at nonprofit groups warranted attention, especially at groups that were paying high fees to fund raisers or middlemen, such as used-car dealers who sold automobiles donated to charities.

How high those concerns were on the Congressional agenda was never clear. But where lawmakers are headed can be seen by looking at the recommendations of Congress’s Joint Committee on Taxation. What is striking about the proposals to regulate tax-exempt organizations that the committee issued in January is how little any of them had to do with any of those concerns. Increasing how much foundations are required to distribute to charities, or curtailing their spending on administration, is not even mentioned. Nor are new limits on salaries.

To prevent conflicts of interest, the Joint Committee proposals would increase financial penalties already on the books, instead of establishing the kinds of procedural safeguards (such as independent audit or compensation committees) that lawmakers imposed on businesses after the corporate scandals erupted.

As for nonprofit-management problems, the Joint Committee advocated limiting and changing the way donors figure out how much they can write off for gifts of land, art, and other noncash donations — changes that would take much of the “profit” out of them for donors but hardly touch the issue of excessive spending on fund raising by charities. The committee also favored five-year reviews of a charity’s tax status, a make-work provision for lawyers and accountants that even the most ardent proponents of charity reform doubt is practical.

It will be particularly interesting to see what elected officials will do when the Salvation Army, Goodwill Industries, and other popular charities complain about the new limits on donations of used clothing, furniture, and other items they depend on. Nevertheless, the charity-reform effort that was roaring like a lion as late as last summer is purring like a kitten as it gets closer to the statute books.

That is what generally happens to all legislative initiatives in American government, but to anyone who remembers the nearly decade-long struggle of the 1960s, and the proposals considered then to limit the lifetimes of foundations, prohibit foundations from making gifts to individuals, and require foundation donors to sell their assets, what is now on the table pales in comparison.

An extensive lobbying effort by nonprofit leaders has probably had something to do with this, especially by reminding lawmakers of the role charities play in their communities. So too has the complexity of the proposed legislative changes. Most of the proposals for change not only are hard to understand, but also affect different parts of the nonprofit world differently, making building consensus more difficult. The reservoir of public trust in charities — which is still greater than that for Congress and the news media — has helped as well.

Yet, that reservoir is not bottomless.

Ironically for those who once bemoaned the lack of news-media coverage of philanthropy, the charges leveled against nonprofit groups in recent years have prompted a spate of investigative reports that is not likely to subside soon.

Far from giving short shrift to tax-exempt organizations, the Internal Revenue Service is now becoming more aggressive in auditing them, which will surely uncover more evidence of the misuse of charities that will, in due course, be aired before a Congressional committee.

Independent Sector and other groups that represent charities and foundations have lent their support to this effort at heightened enforcement, as well as produced their own lists of problems that need correcting. Though meant as a well-intentioned response to Congressional concerns, these actions also send the message that those most familiar with philanthropy acknowledge it has serious ethical and legal shortcomings.

The politics of the federal budget also place nonprofit organizations in a tough position. The ideas the Joint Tax Committee put forward to stiffen regulation of charities and foundations would raise nearly $6-billion for federal coffers. As Congress — often at the urging of charities — looks for ways to spend more on social programs or add new incentives to encourage donors to step up their giving, that revenue has considerable appeal, especially when it can be obtained by curtailing “wrongdoing” in the name of charity.

On the other hand, enacting more tax breaks to stimulate giving, such as adding a deduction for gifts made by people who do not itemize on their taxes, is likely to garner less support if government officials believe that existing charitable deductions are being abused.

As challenging as the political environment has been for philanthropy in the past few years, what happens next will be at least as difficult. Even though the most controversial measures may have been sidetracked, nonprofit organizations have been badly tarnished by the attention they have received.

To avoid legislation that might be less welcome, nonprofit groups will have to not only do what they can to prevent additional scandals, but, more important, also strengthen their reputation for being charitable.

Leslie Lenkowsky is a professor of public affairs and philanthropic studies at the Center on Philanthropy at Indiana University and a regular contributor to these pages. His e-mail is llenkows@iupui.edu.