Monday, June 16, 2008

Taxes for Nonprofits?

In New York City, in the turbulent sixties, “hippies” and other anti-establishment folks sometimes wore buttons proclaiming “Tax the Churches.” Today, a new generation, less flamboyant and less hirsute, asserts we should tax all nonprofit organizations.

Should nonprofit organizations pay taxes? You might say no, but what if you knew that the National Football League is a nonprofit organization, or that some nonprofit CEOs earn more than many local business executives? A recent, front page article in the New York Times, citing a new Minnesota court ruling, described the increasing number of challenges across the nation regarding the tax exempt status of nonprofits, and it raised the issue of how to define “nonprofit”.

Currently, nonprofit status is given to organizations that range from health care and educational institutions with billion dollar budgets to small mom and pop operations, with no paid staff, operated out of the living rooms of their volunteer executive directors.

Unlike for-profit businesses, most “tax-exempt”, nonprofit organizations do not pay property taxes, Federal income taxes, or sales taxes– as long as the income of the nonprofit relates to its mission. The rationale for this exemption includes: the desire to provide an incentive for organizations to do charitable work; the fact that nonprofits pick up much of the work that government cannot do; and separation of church and state (in the case of religious organizations). Note that employees of nonprofits do pay income taxes; nonprofits do pay the employer’s share of Social Security tax for their employees.

So, why does the National Football League qualify as a nonprofit? Why does the NCAA have nonprofit status? These organizations do not receive all the tax breaks that charitable nonprofits receive, but they do receive some. Reasonable people have begun to ask why. These kinds of organizations do not match the image that many of us have of nonprofits – offering free or reduced-cost service to needy individuals and families, provided by volunteers or modestly paid staff.

In the Minnesota case cited in the Times, a child care organization in Red Wing offered its services at the same price to all parents, regardless of their income and ability to pay. The Minnesota Supreme Court ruled that the organization “had to pay property taxes because, in essence, it gave nothing away.” The Times reported, “The court concluded that because the center charged all families the same amount, regardless of their ability to pay, and because its rates were not lower than those of its competitors, it was not an institution of “purely public charity” under the law and thus was subject to thousands of dollars in property taxes — $16,000 in 2006 and in 2007.” Nationwide, the article says, the tax-exempt status of charities costs local governments $8 billion to $13 billion annually, according to various rough estimates.

Some good arguments exist for taxing nonprofits – not necessarily at the same level as for-profits, but at some scale based on a specific nonprofit’s ability to pay.

Nonprofits benefit from the services of government. Their clients travel to them using roads paved and maintained by government, for example; the organizations themselves receive police and fire protection; and their employees can take advantage of some government services and amenities. Nonprofit organizations enjoy many other protections of the law.

Some nonprofits have millions or billions of dollars in their endowments. The Boston Globe reported in January that Harvard’s endowment had topped $34 billion and that 76 universities have endowments of more than $1 billion. Many nonprofits, especially large ones, pay their top staff salaries equaling or exceeding what for-profit and government organizations pay. None of these organizations would suffer from paying a small amount of tax.

But strong arguments also exist for retaining tax exemptions for nonprofit organizations. Here, briefly, are four.

Notably, many nonprofit organizations provide services which no other organization will. How many for-profit soup kitchens and homeless shelters have you seen? Nonprofit organizations deal with issues that the private sector and government avoid; they tackle problems and meet needs that families, neighborhoods, and communities are unwilling or unable to address.

Nonprofit organizations have demonstrated new approaches to critical social and community issues. The first schools were nonprofit endeavors; health care came to many communities in the United States under nonprofit auspices; initiatives to stimulate business development in aging cities and rural areas have begun as nonprofit enterprises; preservation of history and art has occurred largely because of nonprofit organizations. Nonprofits do creative, pioneering work.

Taxation would drive some nonprofit organizations out of business. Many of these organizations operate on a shoe string, made up of volunteer staff working at their kitchen tables. These organizations could not sustain a tax payment, even if someone could figure out how to compute such a tax. Taxation would cause even some larger nonprofit organizations to reduce in size or go out of business. This would lessen the innovation, intellectual and ideological diversity, and compassion that these organizations bring to our communities.

Finally, many nonprofit organizations – serving individuals or entire communities – rely heavily on government sources. What sense does it make to put a tax on government support?

The Council on Foundations sums up these and other reasons: “generous exemptions recognize the important principle that organizations that act voluntarily to further the public good should be freed from the obligation to support government through payment of taxes. Exemption maximizes the ability of charities to help others.”

Nonprofit organizations contribute greatly to the economy. The Minnesota Council of Nonprofits reports that the nonprofit sector in Minnesota employs more than a quarter of a million people. The 2008 Nonprofit Almanac, published by the Urban Institute Press, reports that, for the United States as a whole, “nonprofits employed 12.9 million people in 2005, or about one in 10 U.S. jobs, and paid wages totaling $489.4 billion, accounting for 8.1 percent of all wages in the U.S.”

You may feel that many of these organizations can and should pay taxes; you may feel that some nonprofit organizations should pay some taxes, even if at a reduced rate; you may feel that nonprofit organizations should remain tax exempt. I can respect any opinion, if you form it on the basis of an objective understanding of what nonprofits do and how they contribute to our society. Just don’t be swayed by the rhetoric either pro or con. Look at the facts, and I think you will conclude that nonprofit organizations with a truly charitable mission create a return on investment that is worthy of support.

3 comments:

Anonymous said...

Yes, Paul. Your wise words, as always!

Anonymous said...

While a tax-exempt organization may not pay property taxes, some do pay significant “assessments” that basically contribute toward the public services being used by the organization.

In its most recent session the Minnesota legislature passed a moratorium on counties relating to the enforcement of the rules at issue in the Under the Rainbow case mentioned in the Times. County assessors are not permitted to change the way they implement the property tax standards, nor are they permitted to revoke property tax exemption for any organization unless the change is made as a result of a change in ownership, occupancy or use of the facility, or to correct an error, until the legislature has completed a study of the issue. The report is due in 2009

Gerald S, NYC said...

The NY Times stated is position 2 years ago in an editorial - "The House Ways and Means Committee sent shock waves through college sports when it asked the NCAA to justify its federal tax exemption by explaining how cash-consuming, win-at-all-costs athletic departments serve educational purposes. The short answer is that they don't. Indeed, they often undermine the mission of higher education by recruiting athletes who aren't prepared, then encouraging grade-padding and preferential treatment to keep them eligible for sports."