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Part Two: Reconsidering Government Support of Nonprofits

Posted by Christopher Dann
Tuesday October 15, 2013
Categories: Fiscal Cliff, Fundraising, Politics
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In Part One we addressed the immediate concern about impact on the nonprofit sector of two aspects of the crisis over the Continuing Resolution and partial shut-down of the federal government, one being the direct impact on federal funding of nonprofit organizations and the other being the impact on consumer confidence of the politics of it all. While the former will have had varying impact by sub-sector, as demonstrated by a table showing varying percentages of government funding, the latter will continue to have negative impact on discretionary spending into the fall, including contributions to nonprofit organizations

Here we are going to take longer and broader views. Sensible thinking was restored to the situation on Capitol Hill when the strategy of holding the federal budget hostage to rescind or amend the Affordable Care Act was abandoned in favor of putting the budget itself back on the negotiating table. But Congressional attention will inevitably turn again to what governments call “tax expenditures” which include revenue foregone by virtue of both tax exemption and charitable tax deductions.

We know that in matters of legislation great mischief can be made by decisions based on poor information. In the case of the nonprofit sector, a major cause of the circulation of poor information — seemingly as much inside as outside the sector — is generalization. As we pointed out in the last blog, the nonprofit sector is as diverse in its financial models as retailing is, and we showed the variable percentages of revenue by sub-sector from government sources, private contributions, and fees.

Here again is the table from the prior blog.

blog 47

Here now is more evidence of the diversity the nonprofit sector presents to those wanting to make changes in the federal budget and the tax code.

First we’ll look at the distribution of reporting public charities by sub-sector, according to The Urban Institute’s The Nonprofit Almanac 2012.  Reporting public charities are those required to file form 990 with the IRS because they had (in 2010) at least $50,000 in revenue.

2010 Reporting Charities

In 2010 there were 618,062 reporting public charities, and the probability is that number has increased. This first perspective on the sector tells us, therefore, relative weights of sub-sectors. Those weights do not, however, translate into political influence. No one in Congress is going to take any of the benefits of exempt and publicly supported status away from religion-related 501(c)(3)s; yet international affairs is a relatively easy mark. The patrons of arts and cultural organizations, if not humanities, tend to be people of powerful political influence, although there is increasing sentiment that those very people least require or perhaps deserve tax deductibility for their philanthropy while the predominantly less well-off donors to human service charities should be rewarded for their more altruistic charity.

Next, the tables below show percentages of total revenue and total public support by sub-sector, the difference between the two being revenue generated by service and other fees, investment income, and government grants.

total revenue_public support

Bear in mind that one percentage point of public support is approximately $3 billion and that sales of nonprofit goods and services now amount to almost $1 trillion. These figures make consideration of what in the argot of our times we might say clawing back some of that forgone tax revenue very attractive indeed.

With the health sub-sector, as Peter Orszag recently pointed out in a Bloomberg  online article, there is increasing notice being paid to the lack of distinction between nonprofit healthcare and for profit, something he pointed out will also occur with education both as tuitions continue to escalate and for-profit education institutions grow through digitization. Now at Citigroup, Orszag was director of the Office of Management and Budget in the first Obama administration. His has an insider’s understanding of both the tax code and its politics.

But we’re well reminded again that neither legislators nor the IRS nor often the nonprofit sector itself tends to look at these major sub-sector distinctions. That and lobbying by the well-heeled are the reasons why, for example, the National Football League and the NCAA continue to luxuriate in the status of nonprofit organizations. So if the dominating shares of health and education affect the impression that similarities in revenue generating practices make the sector overall attractive for reducing tax expenditures, all sub-sectors are likely to be implicated.

The point is that a revenue-generating activity may then not be able to hide behind the program-related shield if it looks in any way like the taxable commerce of a tax paying enterprise.

Charitable Deductions

Posted by Christopher Dann
Monday December 10, 2012
Categories: Charitable Deductions, Fiscal Cliff, Fundraising
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In a blog last September (Tax Deductibility is Too Complex for Simple-Minded Position-Taking) we hypothesized about the relationship between the charitable deduction and the other three most commonly employed tax deductions, mortgage interest, property, and state and local income taxes.

As discussions continue in Washington — and they are likely to continue well into next year — another look at these deductibles is in order.

The reason is the nonprofit sector has far less influence on either the Administration or Congress than state and local governments or the banking and real estate industries do, and they will defend mightily their interests in keeping those deductions.

We just reviewed IRS deduction data for 2010, the latest year for which data are available. In 2010, 33% of returns itemized deductions. Of these 87% claimed real estate taxes, 82% charitable contributions. 78% mortgage interest, and 71% state and local income taxes.

Two kinds of deductions for which percentages of adjusted gross income (AGI) thresholds apply — casualty losses and medical expenses come in at far fewer percentages. We would expect that of casualty losses anyway (only 1.5%). But with either a threshold or cap being considered for charitable deductions, it’s worth noting that while 100% of tax filers presumably have medical expenses, only 22% got to claim deductions in 2010.

The total amount of itemized deductions came to $1.234 trillion. What the Administration and Congress will be focusing on will be revenue foregone by these deductions, or what in D.C. tax-speak is called “Tax Expenditures.”  State and local income taxes (20%) and real estate taxes (14%) combined for 34% of the value of itemized deductions. General sales taxes added another 1.5%. Mortgage interest accounted for 32%.

Charitable deductions accounted for 14% of the total value of itemized deductions in 2010.  Despite its lesser value than all other categories but real estate taxes, the charitable deduction presents a path of least resistance in Washington.  If a cap on total deductions prevails, the damage on charitable deductions will be more severe than if a limit representing a percentage of AGI is imposed specifically for charitable deductions.

We agree with those criticizing the White House for urging nonprofit organizations to focus attention on increasing taxes for the very rich. Whether or not that’s a good idea, it’s irrelevant to nonprofit organizations’ best interests. Nonprofits should be focusing their attention on keeping Washington from capping all deductions. Everyone has to pay those state and local taxes and everyone with a mortgage has to pay interest on their loans. No one has to make contributions.

Next Generation Fundraising and Drakes Bay Fundraising merged in the fall of 2013, bringing the longstanding professional acquaintances of their four principals – Tim Oleary, Carol Leister, Cindy Germain, and Christopher Dann – into a single company and combining the special resources and experiences of each to provide clients greater breadth and depth of service.

For more information about Next Generation Fundraising, click here.