What Role Should the Government Play in Regulating Charities?

To the Editor:

Pablo Eisenberg’s characterization of the recent Independent Sector statement on public disclosure (“Why Charities Think They Can Regulate Themselves,” May 4) wrongly interprets the Independent Sector position and ignores a 20-year track record of Independent Sector action.

As Independent Sector states clearly in the paper, we think there is a critical role for government regulation and oversight of the sector. In fact, Independent Sector has a long and distinguished record in promoting such regulation, including our efforts to push through intermediate sanctions, our support for increased disclosure of I.R.S. Forms 990 and 990-PF, and our support for increased funding for the Internal Revenue Service’s oversight of charities.

What is at issue here is not whether the government has a role in regulation, but how much and what kind of a role it should have.

Mr. Eisenberg attributes to us a view that the obligation of charities to publicly disclose information “is not tied…to the federal government’s duty to assure the public that charitable funds are accountable and spent for lawful purposes.”

Not only did we never make any such statement, but we, like Mr. Eisenberg, believe that the federal government does have precisely such a duty and that charities have such an obligation.

We affirm in our statement that “[c]harities were recognized as separate entities with legal rights and responsibilities long before there was a federal tax code. [Emphasis added.]” We also affirm that “charities’ public-disclosure obligations derive from charities’ fundamental nature as voluntary associations formed by private citizens to advance the public good… .” It is the responsibility of both government through the law and charities through self-regulation to make sure such disclosure occurs.

Independent Sector does challenge the notion that the tax deduction afforded to individual donors to charitable non-profit organizations is a subsidy and therefore gives the government carte blanche to disclose any and all information about the non-profit.

Charitable contributions, in our view, are legitimately deducted from individual income for tax purposes because they are not available for the individual’s current or future (through savings) consumption. This is not a subsidy to the non-profit organization, but rather an appropriate exclusion from the taxable income of an individual. The tax deduction clearly has an incentive effect on giving to charitable organizations, but the difference between a subsidy to a non-profit and a deduction to an individual taxpayer is a critical one.

We recognize, however, that there are two sides to the “tax-deduction-as-subsidy” debate, and thus we go on to state that, even if one views some aspects of the tax treatment of non-profit organizations as a subsidy, that still does not justify the imposition of blanket disclosure requirements or limitations on free speech.

Think about it a different way: Does the fact that you have a home mortgage and receive a tax deduction (which, by the way, clearly is a subsidy since you do “consume” your home) give the government the right to disclose your tax returns to the public? Does the fact that you receive this tax deduction allow the government to tell you that there are limits on how much you can speak out on a certain issue? Of course not. Similarly, the existence of the charitable deduction should not be thought of as the functional equivalent of direct government funding to non-profit organizations, wherein the government does have the right to impose conditions on the use of those funds.

The subsidy logic, however, applied to charitable non-profit organizations, is the basis the Supreme Court used in upholding limits on the lobbying activities of non-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. (The Supreme Court also referenced the fact that Section 501(c)(3) organizations had recourse to setting up Section 501(c)(4) organizations for lobbying purposes and that donors to the (c)(4) organizations are ineligible to receive deductions for their contributions.)

Clearly, this is not just a fine legal point but rather one that has critical implications for the free-speech rights of charitable organizations.

In our view, the charitable deduction should not be thought of as a subsidy and the tax treatment of non-profit organizations is fundamentally different from the provision of direct funding, via grants and contracts, where the government has a perfectly legitimate right to impose certain restrictions as a condition of providing the funding.

However, as Mr. Eisenberg should have understood, rejecting one conceptual basis for government’s role in regulating the sector does not equate with rejecting any basis whatsoever for an appropriate government role.

Independent Sector not only has acknowledged but has actively championed “the role of both government and non-profit organizations in assuring that charities and foundations remain accountable,” to use Mr. Eisenberg’s own words. In fact, perhaps the best way to make that happen would be to increase the funding for the Exempt Organizations office of the I.R.S., so that it would actually have the capacity to monitor and regulate the sector effectively.

As noted above, Independent Sector along with the Council on Foundations have jointly lobbied the Congress on that very point. All the laws and regulations in the world will be meaningless unless the I.R.S. and state regulators have the resources to ensure compliance.

Accountability and public trust are among the most important currencies in which non-profit organizations trade.

Independent Sector has worked and will continue to work with Congress and the executive branch to promote an appropriate regulatory framework for the charitable non-profit sector and to secure the required resources to make compliance meaningful. We will continue to work with the media to make sure that their coverage of the sector is informed, as they, too, play a critical role in ensuring accountability. We will continue to devote research resources to a better understanding of public attitudes and non-profit practice that will promote accountability. And, we will continue our efforts to promote voluntary and rigorous accountability standards by non-profit organizations themselves.

Peter Shiras
Senior Vice President for Programs
Independent Sector
Washington