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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.

More On and Moron Tax Expenditures

Posted by Christopher Dann
Monday December 3, 2012
Categories: Fundraising, Politics
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As the federal government continues pursuit of balance among acceptable targets of revenue, expense, and deficit, we should do more than hope that our representatives understand how their decisions have widely varying impact. The nonprofit sector presents a wide diversity of business models, and this is well documented by varying dependencies on diverse sources of income.

Another useful look at the sector offered by the Urban Institute’s The Nonprofit Almanac 2012 is summarized in the table below. It shows percentages of income from multiple sources that affect different profiles across nonprofit sub-sectors.

The first thing our federal representatives need to understand as they address both taxing and spending is the interdependence of government and the nonprofit sector. It was blindness to that interdependence that resulted in the Reagan Administration’s wreaking havoc on the nonprofit sector in the ’80s.

The second thing they need to understand is how changing the deductibility of charitable giving variously impacts nonprofit sub-sectors. Multiple factors affect variability of business and therefore revenue models:

  • domestic policy emphases — what are the federal government’s current priorities?
  • individual and institutional donor market disposition — the varied charitable and philanthropic preferences of these private sources of money
  • a nonprofit sub-sector’s program capacity for retailing (or collecting fees) for services — and the consequent variable balance between discretionary and non-discretionary funding

Clearly, the situation is far too complicated for resolution through legislation (although the enormity of the Tax Code suggests complexity has never been a challenge Congress couldn’t deal with!). So the watchword for changing the balance between taxing and spending so far as the nonprofit sector is concerned is transition. And as much as another term evokes partisan bickering, transition should include provision of a safety net for those sub-sectors — particularly health and human services — where transition to the new government/nonprofit sector paradigm may take much longer than the target timetable for deficit reduction provides.

There is, meanwhile, something much simpler our representatives can do to find net improvement in the tax and expenditure balance. Their policy mandate should be to reconsider the proper roles of government and the nonprofit sector with respect to what nonprofit enterprises deserve government support through the tax expenditures of federal tax exemption.

On November 14, David Evans of Bloomberg Businessweek¹ previewed a December Bloomberg Markets report on a class of highly profitable nonprofit organizations distinctive from those the term normally connotes. While the Urban Institute classifies those we normally envisage as “Nonprofit Institutions Serving Households” or NPISH, those about which Mr. Evans wrote we might classify as NPINO or Nonprofits In Name Only.

These NPINOs include the article’s featured American Bureau of Shipping who “paid no income tax from 2004 to 2011 on just less than $600 billion in profits.”  Also cited were United States Polo Association (which spent only 13% of the $9.9 million it earned from royalties and investments in 2010 on polo program services), the National Football League (earning $27.9 billion in television contracts over 9 years, paid its commissioner $11.6 million in fiscal 2011), and the National Hockey League. Mr. Evans didn’t cite, but well could have, the NCAA, which Joe Nocera of the New York Times has shown to be in the profitable service of both media and big-name universities albeit frequently at the expense of college athletes.

Write your Congressman!


¹http://www.businessweek.com/news/2102-11-14/tax-exempt-firm-gets-600-million-profit-flying-first-class

The Ecology of Tax Deductions

Posted by Christopher Dann
Tuesday May 8, 2012
Categories: Fundraising, Politics
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…is explained well in columnist Bruce Bartlett’s book, The Benefit and Burden of Tax Reform – What It Will Take and Why We Need It.

Mortgage interest is the most important deduction because of its aggregate enormity and because of the proportion of the population it embraces. While it is the most inequitable of deductions because it favors one population of domiciled Americans (home owners) over another (renters), it is the least likely to be subjected to reform.

Because it is the first and foremost among tax deductions, the mortgage interest deduction allows taxpayers to take deductions they might otherwise be unable to take, most especially deductions for state and local taxes and for charitable contributions.

State and local governments have and will continue to lobby for federal mortgage interest deductions, Bartlett asserts, because it gives them cover under which to increase tax rates and revenue.

So, ironically, while it has the least value to the federal government as a tax expense, the charitable deduction stands alone as the most vulnerable tax deduction. It has a sort of symbiotic relationship with the mortgage interest deduction that pilot fish have with whales. If pilot fish were given to lobbying, they’d mass in the cause of saving whales.

Reflections on the Revolution

Posted by Christopher Dann
Wednesday March 16, 2011
Categories: Politics
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The shallow substance of much legislator debate these days about the nonprofit sector carries strong echoes of Edmund Burke.  In Reflections on the Revolution in France, he warned of dire consequences if it brought down the country’s intelligentsia and the church, which it effectively did.

In America today, there are socio-economic forces at work strong enough to damage nonprofits, especially those in figuratively low-lying areas and those not well anchored to their foundations.

Let’s look at the two roles of nonprofit organizations in society. The first is that organizations are granted tax-exemption because they can do more efficiently what government would otherwise be obliged to do. The second is that nonprofits provide services or supplement the costs of services that consumers of those services can’t or can’t fully afford.  In either case, for legislators to classify all government funding of nonprofits as inappropriate use of taxpayer money is stupid and irresponsible.

Fortunately, only a few legislators are being that extreme. Less fortunately, all legislators will have to make distinctions between nonprofit sectors as they carve away the discretionary government spending. Their decisions will be based on conventional perspectives, but they will surely add varying interpretations of what government is obliged to do and what services are worthy of having their costs supplemented.

It seems the worst thing that could happen to sensible deliberations has happened, and that is that a political prism has been introduced by wiki attack on Planned Parenthood and now the NPR imbroglio. Such a political prism fractures the light of reason and tempts people to substitute an attractively colored element for the whole.

 

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.