Sunday, March 21, 2010

Some U.S. States Considering Taxing Nonprofits to Make Up For Empty Coffers

From The New York Times... Stephanie Strom wrote States Move to Revoke Charities' Tax Exemption, published February 27, describing how now cash poor U.S. states and cities are or are considering charging taxes to the nonprofits within their jurisdictions. Nonprofits, of course, have been granted the benefit of tax free dollars, by the IRS and U.S. states, in reciprocity for the services and programs that nonprofits provide to U.S. communities at no or low costs to the nonprofits' beneficiaries (anyone or anything that benefits from any given nonprofit's work).

This is gravely concerning.

So far, the following cities or states are already taxing their nonprofits or are considering taxing nonprofits within their jurisdictions: Hawaii; communities within Kansas, Pennsylvania, Minneapolis, Minnesota, Indiana; and the Cities of Cambridge, Honolulu, Pittsburgh, and most recently, New York. If I have missed any U.S. cities or states taxing or considering taxing their nonprofits, please Comment with the information, below (thank you).

I wonder if these cities or states that are proposing these taxes have properly researched the cost/benefit analysis, over a year, over three years, over five years, etc. (the cost vs. benefit to their communities) if they tax these organizations.

See most recently Nonprofit Sector Among Few Growth Engines of Michigan Economy, Report Finds, of which the linked article states, "The report, Michigan Nonprofit Employment (24 pages, PDF), found that the sector employs nearly one of every ten workers in the state — eleven times that of the auto industry — and that in 2009 the state's 374,537 nonprofit employees, more than two-thirds of whom work in the health services field, earned nearly $14.5 billion in wages, which generated an estimated $90 million of income tax revenue for state and local governments. The report also found that nonprofit employment in the state grew 17.4 percent between 2001 and 2007, partially offsetting the massive job losses that were taking place in the private business sector, and grew an average of 1.3 percent annually between the second quarter of 2007 and the second quarter of 2009.".

Or, the National Committee for Responsive Philanthropy's 2009 study, "Strengthening Democracy, Increasing Opportunities" that found "Research on nearly 70 nonprofits from New Mexico, North Carolina, Minnesota and Los Angeles County over a five year period showed that these groups combined generated nearly $14 billion worth of benefits for their diverse communities, and many other non-monetary gains. The return for every dollar invested in these groups ranged from $89 to a staggering $157." If nonprofits, or even those people or entities that donate to nonprofits, pay for a tax burden, all of that money is money that could have been spent on programs that will not be provided, and in turn, the services, programs, and products that all of the nonprofits within these taxing jurisdictions will have, in effect, raised very expensive tax dollars, indeed.

As Strom asserts, what about the critical services that nonprofits provide to our communities, especially to those people or other beneficiaries (i.e. anything else that nonprofits exist to enable, protect, better, etc.) with no or little resources? The potential harm of losing or lessening these organizations' services to society, if these taxes come to pass, is frightening and frankly will likely ripple out, over time, in a negative effect beyond the nonprofit sector or anyone or anything that it assists.

How can this kind of financial impact cause a negative ripple effecting within taxing cities or states? If, for instance, a hypothetical nonprofit enables single parents and their children who have survived escaping abusive spousal relations in their previous home; but funding is cut at the nonprofit that is enabling them to survive, grow, and live better/safer lives: the single survivor parent may only be able to receive part of the program that the organization previously (successfully) provided because the agency can no longer afford to provide the entire program (due to the tax burden it now owes). Nonprofits only have the benefit of their successes to point to when showing their communities why it's worth while to support them (whether the community member is considering volunteering with that organization, donating to it, or supporting it in another way). Meanwhile, the ripple goes further. What if the surviving spouse receives counseling to cope with the abuse and learn from their experience in order to avoid it in the future, but can not receive vocational training that would have (in the past, before the organization was taxed) enabled the now surviving single parent to return (successfully) to the work force? The survivor parent's situation is better (for their not having to endure abuse nor fear for their children) but the organization's effort's results are not as effective (for the survivor parent; the organization, itself; or for society which may have to support this family via welfare programs instead of this family being able to support itself through the survivor parent's new vocational education, ultimately enabling them to work and support their family, themselves (avoiding welfare programs)). The ripple furthers, still, if the children do not receive the counseling and new skills that they would have, and perhaps they become wards of the county or state, etc. if they do not learn how to survive their traumas. How can I assert this ripple effect is truly possible?

Won't these states, in effect, push the nonprofit organizations taxed by their cities or states out of these taxing jurisdictions, over time, and into other states' communities (that do not tax nonprofits)? Won't a migration of nonprofits leaving taxing jurisdictions eventually form 'welfare deserts' within these taxing cities states (which by virtue of their lack of money in their state coffers have communities residing within them, in particular, that probably need nonprofits' services more than non-taxing cities or states)?

As Strom indicates in her article, U.S. cities and states looking to fund their slow economies by taxing nonprofits is astounding, as most nonprofits can little afford their own operating costs, in this economy. How will nonprofit organizations (some of the leanest efficiently operating business models that exist) afford or raise money to pay these taxes? Most donors prefer to give to nonprofits that are funding their programs and services (per the organization's mission statement). It is a commonly accepted professional standard, in the U.S., that professional (ethical, well operated, well managed) nonprofits spend at least 80% of each dollar raised on its programs and services. If, though, a nonprofit must eat into its 80% of each dollar to programs and services, in some cities or states (but not others), effectively reducing what they can spend on their programs or services in order to pay tax burdens, how will they maintain their excellent (efficient) spending records (that often makes or breaks whether a donor gives to a specific nonprofit or not)? How do nonprofits that pay taxes, then, demonstrate to past and potential donors that their donation contributions will go in professionally accepted ratio (overhead costs vs. spending on the services of the mission statement) to improve communities, especially when similar organizations residing within other U.S. cities or states that do not tax their nonprofits do not need to pay taxes (or increase how much is spent on their programs to offset how much they are now paying in local or state taxes)? Some nonprofits will not receive support because other similar ones, elsewhere, will be able to maintain that 80% or greater ratio of spending on programs.

This proposal is frightening as anyone who already volunteers with or donates to a nonprofit may become disillusioned upon discovering that some of their contributions could go to pay an organization's tax bill. People and other types of donors give to nonprofits to effect change in their communities, based on an organization's success rate, capabilities, and reputation because they are concerned about the issue or cause that the nonprofit serves. Nonprofits already have a lot of responsibility upon them to run efficiently in order to be sure that, at a minimum, 80% of each dollar they raise goes to providing the programs and services necessary to deliver their mission statement well. Now some percentage of each dollar raised may also have to be allocated to some states' tax bases, too, in addition. Again, how will nonprofits make up the difference to maintain the 80% or greater amount of each dollar going to programs?

If, you live in a city or a state that is considering taxing its nonprofits, and you are in any way (donating, volunteering, etc.), supporting a nonprofit that you believe to be invaluable to its community, and you believe that it should remain a tax free organization (as its status from the state and federal government has been, prior to the economic downturn) from the city or state that it operates within; contact your local city or state senators or City Counsel-people and also your governors' office and make your concerns known to those local or state representatives. Use some of the points made, here, to inform your comments to those representatives, if you wish.

[I posted this to Seeking Grant Money Today, a week or so ago, but because now additional U.S. states and cities are considering taxing their nonprofit organizations to deal with their empty coffers, I thought it was important to update this, re-write it, re-format it, and re-post it. For instance, on 3/20/2010 New York renewed a previously killed proposition to tax its nonprofits. See:]

April 7, 2010: Update: Boston decides to tax the formerly tax exempt organizations in town to help with the coffers:

Need some compelling examples (perhaps to argue to an entity about to tax your region's nonprofits) of what happens to those the nonprofits assist when nonprofits are taxed by municipalities or states or to see how valuable, in fact, the nonprofit sector is to at least two different U.S. states?  See below...

2010: Montana Nonprofit Association's Montana Nonprofit Sector Report

2011: The Nonprofit Association of Oregon's Oregon Nonprofit Sector Report

January 19, 2012: And then there is this "Pennsylvania Demands "Voluntary" Payments From Pittsburgh Nonprofits" 

 July 10, 2012: City Cutbacks For Nonprofits Leave Poor In Lurch 

October 4, 2012: Nonprofit organization warily eying Scranton's feud  with tax-exempt institutions

April, 2013: Oregon legislature proposes bill to end charitable tax deduction 

April, 2013: In response to the Oregon proposal to end the charitable deduction read a Letter to the Editor (The Bulletin, Bend, Oregon) written by executive directors of two Oregon nonprofits - Don't weaken charitable giving by changing the tax code

July, 2013: Communities lose if donations decrease: Opinion

December 2013: Struggling for revenue, local governments look to nonprofits 

January 2014: Nonprofits turn out to oppose bill to extend business tax to them


Ronnie Ann said...

Thank you so much for posting this, Arlene. I hadn't heard about it. What a topsy-turvy time we're in when the very services that government can't afford to supply or handle as efficiently may be threatened by this grand revenue-generating scheme. A two-for-one idea for sure - lost jobs plus decreased services! I hope everyone in the states involved and otherwise raise a real ruckus. All I can say is...sheesh!

Arlene M. Spencer said...

Ronnie Ann,
You are welcome and I'm with you. This is terribly concerning. Thanks for reading. Arlene