The charity “deal” in the United States goes something like this: Nonprofit organizations are established and approved because they perform a service that’s thought to be good for society, often relieving government from performing those same functions. In return for their contribution to the “public good,” they’re deemed tax-exempt organizations, which means they usually don’t pay income tax, sales tax or property tax to local, state and federal governments. Also, donations to support those organizations are sometimes tax-deductible, resulting in the loss of additional tax revenue.
At the federal level, the effect is huge, impacting funding for programs ranging from military defense to environmental protection. The tax exemption at the local and state levels means that nonprofit organizations don’t help pay for essential public services such as police and fire protection, public education, roads and more. For example, in New York state in 2015, $26 billion of religious organizations’ property was bypassed for taxation due to the exemption.
Lack of Definition
There are nearly 1.6 million tax-exempt, nonprofit charitable organizations in the United States. Most of us who participate in philanthropy presume that the vast majority of these are doing public good. But there’s no accepted definition of the term “public good.” Without a clear, shared understanding of what it means, it’s often difficult to understand how the charity “deal” is working. Below are a few examples in which the lack of a definition raises serious questions.
Nonprofit potbellied pig rescue organizations exist across the country. I have nothing against potbellied pigs and understand that they may need to be rescued like any other animal. The question is: Does rescuing potbellied pigs create the type of public good that warrants significant tax advantages and loss of government revenue? When the pigs’ rescue barn catches on fire, the nonprofit will call the fire department—even though it’s been exempted from paying property taxes to support that critical public service.
Likewise, what about the nonprofit status of the dozens of hate groups across America? Repugnant as their speech may be, hate speech is protected under the First Amendment, and they’re allowed, by law, to exist. Though legal, do these organizations fit into any definition of “public good”? What effect does it have on the moral fabric of our society to subsidize nonprofit hate groups with an exemption from taxes?
When those hate groups advocate violence or insurrection, as some have recently done, their otherwise protected speech crosses the line of what’s permissible. Do such organizations warrant the enormous tax advantages of nonprofit status with the corresponding loss of government revenue? Is this how the charity “deal” is supposed to work?
Another example is the nonprofit status of televangelists. Religious organizations, as a group, are tax-exempt, nonprofit charities. Many televangelists have developed enormous businesses, amassing millions of dollars in untaxed revenue not only from charitable donations but also from music, publishing and other associated ventures resulting in luxury homes and compounds, private jets and undisclosed salaries. These “charities” raise serious questions about the purpose of the charity “deal” and whether they warrant such generous tax advantages.
Burden to Taxpayers
A year into the pandemic, governments at all levels are struggling to make ends meet and to provide the essential public services on which our society depends. Government budgets are being cut, and many of the services that depend on tax revenues are being curtailed or eliminated.
We all pay more for the essential services provided by local, state and federal governments because tax revenue is lost by the special tax treatment afforded nonprofits. It’s time for the charity “deal” to be reexamined by asking some very important and difficult questions, beginning with:
- How does society define the “public good” in a way that prioritizes those nonprofit programs needed by our country and whose missions actually advance our shared values?
- Does the cost/benefit of the charity exemption and donation deductibility make good economic and policy sense for 21st century society?
This reexamination will involve the honest commitment of policy and tax experts, economists, elected officials and the nonprofit sector itself to ensure that the charity “deal” actually works to improve our lives in ways that make the most sense for the times in which we live. Without such a commitment, the nonprofit sector will continue to be a free-for-all.
Bruce DeBoskey, J.D., is a philanthropic strategist working across the United States with The DeBoskey Group to help families, businesses, foundations and family offices design and implement thoughtful philanthropic strategies and actionable plans. He is a frequent keynote speaker at conferences and workshops on philanthropy. Visit deboskeygroup.com or @BDeBo