These are not the best of times for nonprofit organizations as they face multiple challenges from federal, state and local governments. First, the tax-exempt status of nonprofit organizations is being challenged by state and local governments as they seek alternative revenue streams to balance gaping budget deficits. Such actions include attempts to repeal property tax exemptions, charging nonprofits payments in lieu of taxes, and instituting user fees for services such as police and fire. The second is even more troubling since it is based on a simple proposal made by a former Labor Secretary that could revolutionize the tax treatment of charitable contributions if adopted by the federal government. The basic premise is that only charitable contributions made to institutions that help the poor would receive a full tax deduction. (Frank, 2007).
This is a more restrictive definition of charity than is currently found in the Internal Revenue Service (IRC) and discussed later in the paper. Gifts to institutions that do not benefit the poor would be deducted at reduced values. By reducing the tax deductibility of charitable contributions, the proposal would result in an increase in the tax revenue collected by the federal government.
With the nation's economy slowly recovering from a recession, the federal government is also exploring revenue sources that could plug its deficit without increasing the tax burden of the citizenry. This deficit was partially created through the passage of a $787 billion stimulus package intended to increase spending during the recent recession.
The Senate Finance Committee (SFC) has taken a leading role in identifying new revenue sources. It contacted the 136 wealthiest colleges and universities to obtain detailed information on how they raise tuition, provide financial aids and manage and spend their endowment. The committee is also interested in the endowment-related bonuses paid to college presidents and endowment managers (Arenson, 2008). In addition, the SFC is looking at nonprofit hospitals and could require them to maintain a minimum level of charitable activity as well as limit charges to the uninsured and indigent patients. Hospitals could be subject to an excise tax for failing to meet these requirements (Baucus, 2009)
A move to reduce the tax deductibility of charitable contributions is already gaining traction. In an attempt to identify new revenue sources, The White House is proposing a reduction in the tax deductibility of charitable contributions made by higher income families by up to 20% (Lacayo, 2009). The National Committee for Responsive Philanthropy is even suggesting that foundations spend half of their grant dollars to help poor neighborhoods and minorities. This suggestion is receiving support from a member of Congress and various charitable leaders (Wilhelm, 2009). Could the proposal to reduce the tax deductibility of charitable contributions made to organizations that do not benefit the poor be far behind?
These events raise some additional questions. For instance, what type of charitable organization helps the poor? Does a religious organization qualify as helping the poor? What about a college or university that provides free tuition to low income students? Does a disaster relief organization such as the American Red Cross benefit the poor? What about a hospital that provides free health care to the under privilege? Should the deductibility of charitable contributions made to these organizations be reduced? We will explore the answers to these questions in the paper by first discussing non-profit organizations in general, the current tax treatment of charitable contributions and the potential impact on individuals and non-profit organizations if restrictions are placed on contributions that do not benefit the poor.
NON PROFIT ORGANIZATIONS
Non-profit organizations (NPOs) generally receive a significant portion of their funding or operating budget from contributions* (*Other primary income sources are endowment income; grants from corporations and government; tuition; fees; and ticket sales.), and provide goods or services to the citizenry without a profit motive. NPOs represent a large and varied group of organizations including hospitals, colleges and universities, libraries, museums, religious organizations and trade associations. The trade off for providing such goods and services is that non profit organizations receive tax exemption under more than 25 classifications of the IRC.
The most common NPOs are charitable organizations which are exempt from taxation under IRC Section 501(c)(3). Private foundations and public charities are the two main types of charitable organizations included within the code's definition. The difference between the two organizations is that private foundations receive support from a small number of individuals or corporations and exist to provide grants to public charities. One well established private foundation is the Bill & Melinda Gates Foundation with approximately $27 billion in endowment assets as of April 1, 2009. Public charities are funded, operated, and monitored by the public at large rather than by a limited number of donors. Such well established organizations as the Boys Scouts of America, the American Red Cross and the Salvation Army, are all public charities.
The IRC considers the following types of organizations as public charities--charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The code further defines charitable to include relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.
The IRS reported 1,855,067 tax exempt organizations at the end of the September 2008 fiscal year. The vast majority (64%) represented religious, charitable and similar organizations (IRS, 2008; Williams, 2009). However, the number of people employed within the non-profit sector is not easily quantified but is clearly in the millions. As an example, the arts and culture sector employed approximately 5.7 million individuals as of December 31, 2008 (Spector, 2009a).
Non-profit organizations, except virtually all religious organizations, file annual reports with the IRS using Form 990 (for large tax exempt organizations, generally with gross receipts of $25,000 or more), or Form 990N (for small tax exempt organizations, generally with gross receipts of $25,000 or less). The Giving USA Foundation reported that Americans gave $307.7 billion in charitable donations and pledges in 2008 (Wasley, 2009). Organizations that provide services to the needy received approximately 9% of the total donations (Strom, 2008).
What effect would disallowing certain charitable donations have on nonprofit organizations whose mission does not include 'helping the poor'? To answer this question, we looked at the ten largest charities based on total revenue* (*Includes public, private and government support, plus other income such as endowment income(loss)) and the ten largest charities based on donations (both for fiscal year 2009) to determine if helping the poor (the proposed restrictive definition of charity) was included in their mission or comparable statements. This information is provided in Appendices 1 and 2 respectively. The top ten charities include organizations across a broad range of categories including health and medical, domestic and international needs, education, and youth.
Based on our review of the mission statements of the organizations listed in Appendices 1 and 2, only three organizations includes helping the poor as part of their mission statements. Therefore, charitable contributions made to these organizations (Food for the Poor, Feed the Children and World Vision) would continue to be fully deductible since their mission statements currently complies with the 'proposed' restrictive definition of charity. Many of the remaining organizations such as The Mayo Clinic and The American Cancer Society are well known and established institutions providing such services as medical and health care to all segments of society including the poor. However, since the organizations' mission statements do not include language such as helping the poor, charitable contributions made to them would no longer be fully deductible under a more restrictive definition of charity. In other words, only the 9% of the charitable contributions made in 2009 as noted above, would be fully deductible, assuming that providing services to the needy and poor are synonymous.
CURRENT TAX TREATMENT OF CHARITABLE CONTRIBUTIONS
Individual donors are the main funding source for non-profit organizations providing approximately 80% of charitable contributions; hence the tax treatment of their contributions is our primary focus. Individual taxpayers can receive a charitable contribution deduction by making a gift to a Sec 501(c)(3) organization (and certain other exempt organizations). As defined earlier, this generally means charitable, scientific, educational or literary organizations.
Deducted amounts include cash, property and out-of-pocket expenses incurred to perform volunteer work. The full value of these donations is generally deductible on Form 1040 Schedule A, subject to certain income limitations (the individual's adjusted gross income). Excess contributions are carried forward to five years. Other contributions such as gifts to political organizations, cost of tuition, country club memberships and gifts to chamber of commerce are not deductible.
DISALLOWED CHARITABLE CONTRIBUTIONS
Impact on Individual Donors
NPOs and governments have implicitly agreed that NPOs could avoid taxation in exchange for providing certain goods and services to society. These goods and services might be performed by all levels of governments if NPOs did not exist. However, the relationship between NPOs and government could change if gifts made to charitable organizations that do not support the poor are reduced. Full deduction of contributions would only be available for the 9% of charitable organizations that helps the needy.
We believe that any change in the current treatment of charitable contributions could have a negative impact on NPOs since most would no longer qualify as tax exempt under the new restrictive language. One immediate impact of the reduction of charity deductions is a corresponding reduction in contributions received from middle and high income donors since donations will no longer be fully deductible. According to the 2000 Social Capital Community Benchmark Survey, households with income below $20,000, already contribute the highest percentage of their income (4.6%) to charity than any other income group (Brooks, 2008). However, the largest donor group is the wealthiest 3% of Americans who supply approximately two-thirds of all household charity in the US (Farrell, 2008).
Clearly, the working poor as they are known do not currently benefit from the tax deductibility of charitable contributions since most are below the income level needed to qualify for itemization. Their income will not change under the "proposed' legislation so their charitable contributions would continue to be nondeductible. One reason for the working poor's loyalty is their motivation--they generally belong to religious organizations and believe they have a moral obligation to give to charity. We believe that middle income tax-payer's motivation is driven by the tax deductibility of the charitable contributions. Therefore, their contributions would fall if deductions are limited based on the mission of the receiving nonprofit organization.
Our position is that higher income taxpayers are motivated to give to charity because of the tax deductibility of their charitable contributions. In addition to motivation, high net worth individuals' charity contributions are impacted by economic factors and the current decline in the world's economic activity is having a negative impact on their generosity. A recent poll of 439 high net worth families noted that 73% of the respondents felt a significant adverse impact from the current economic environment (Farrell, 2008). Furthermore, economists estimate that a 10% income decline would cause a 4-8% drop in giving (Fisman, 2008).
However, Pogrebin (2008) cautions that affluent individuals donate more from assets than from income so their contributions are less vulnerable to an economic downturn. Therefore, while the donations may continue, the values of such donations might decrease if the assets have experienced a severe market decline. Consequently, we expect a decrease in the level of giving if the tax treatment of charitable contributions is limited based on the mission of the non-profit organizations.
Brooks (2006) noted that regardless of income levels, individuals might also be motivated to give based on two-key value system. The first is based on the role that government should play in citizen's lives. Individuals holding this view believe that the government should do more to reduce income differences between the rich and the poor. The second view is based on individual's family lifestyle. This view simply suggests that couples are more likely to give to charity than single individuals.
Impact on Nonprofit Organizations
Since NPOs receive a significant portion of their operating income from charitable contributions any reduction in donations could have a tremendous impact on operating budgets and the services provided to society. This is already happening to nonprofit organizations especially in the arts and cultural sector. Facing declining donations, orchestras, opera houses, theater troupes, and dance companies are cutting salaries, jobs and programs; or have simply collapsed (Lacayo, 2009). One estimate is that approximately 10% or 10,000 arts organizations are at risk of folding due to declining donations (Spector, 2009b).
A few examples will illustrate the current plight of arts and cultural organizations. The Baltimore Opera Company filed for Chapter 11 bankruptcy in December 2008 after 50 years of operations citing declining donations. The Connecticut Opera Company ceased operations in February 2009 after 67 season due to declining donations, while The Opera Orchestra of New York cancelled the remainder of its 2008-09 season also due to declining donations. Even the nation's largest and wealthiest art museum, The Metropolitan Museum, has reduced staff by 10% citing a shrinking income source from its endowment.
The above examples offer a glimpse into the potential impact on nonprofit organizations if the deductibility of charitable contributions is restricted based on the mission of the recipient organization. Clearly, NPOs will need to react if the movement to restrict the tax deductibility of charitable contributions to organizations whose mission do not benefit the poor gains traction. They might simply change their mission statement, reduce services, charge a fee for services rendered or cease operations.
A move to change mission statements will be an attractive option for some NPOs. NPOs could simply incorporate language into their mission statements suggesting that they are providing services to the poor and so, become compliant with the legislation. Other NPOs will respond to the reduction in their chief funding sources by reducing operating budgets which would require a reduction and/or elimination of services or the implementation of a fee for services provided, albeit at a reduced rate than the private sector. The public (especially the needy) will be impacted since it may no longer receive expected services or may have to pay for services that were previously provided without a charge.
An even more draconian measure is for NPOs to simply cease operations since they will not have the necessary funds to support their operations. As noted earlier, NPOs in the arts and cultural sector are already ceasing operations due to declining donations. The impact on the overall economy could be dramatic if the deductibility of charity contributions was restricted and NPOs experienced declining donations and ultimately ceased operations. For instance, 'defunct' NPOs means that less office space is required in buildings resulting in an increase in commercial real estate vacancy rates. As a result, the property owners' income will decrease if they are not able to lease the available spaces. A downsized or defunct NPO means that employees will be terminated resulting in an increase in the unemployment rate and a decrease in government revenues. Without this revenue, government will not be able to provide necessary services to its residents or may need to increase tax from other sources.
A downsized or dissolved NPO could also result in less environmental initiatives, no support for animal welfare, less support for places of worship, higher admissions fees at museums, higher tuition and fees at colleges and universities, just to name a few. This may have a ripple effect on governments since they might need to provide the services no longer offered by NPOs. Unfortunately, governments at all levels (local, state and federal) are facing their own budget challenges and may not be able to bridge the service gap created by the vanishing NPOs. The ultimate "victim" is society at large which will no longer be able to enjoy the cultural, educational, religious and literary services once provided by NPOs.
The Internal Revenue Service and the US Congress are always exploring new ways to generate revenue for the Treasury. One potential revenue stream is the tax generated by reducing the deductibility of charitable contributions made to organizations that do not benefit the poor. However, one challenge of such measure is determining which organizations actually help the poor, in which case, contributions made to such organizations would continue to be fully tax deductible. As noted in our review of the mission statements of the largest non-profit organizations only three included 'helping the poor' or similar language as part of their mission statements. Therefore, only charitable contributions made to these organizations would receive a favorable tax treatment under a more restrictive definition of charity. However, the other organizations are well known institutions that provide services to all segments of society, including the poor. Since their mission statements do not include language such a "helping the poor," charitable contributions made to them would no longer be fully deductible.
We understand the need for the government to explore alternative approaches in order to increase tax revenue. However, we discourage the US Congress from embracing any proposal that might reduce the tax deductibility of charitable contributions without fully analyzing the impact of any such tax change. We do not believe that the additional tax revenue raised would be spent on the needs provided by charitable organizations that would be deprived of charitable contributions. We believe that the cost to society of any change in the current treatment of charitable contributions will be greater than any derived benefit. This is especially important in our current economic climate in which non-profit organizations are experiencing higher demand for services as displaced workers turn to them for assistance with such basic services as food, clothing and shelter. Other nonprofit organizations are already ceasing operations due to declining revenue.
It might be tempting for Congress to reduce the deductibility of charitable donations to organizations whose missions do not include helping the poor as a revenue generating mechanism. However, we suggest that no change be made until the cost/benefit of any proposal is fully analyzed.
Appendix 1--Top Ten Charities based on Total Revenue in 2009 Organization Category Total Name Revenue * Lutheran Services in America Domestic needs $16.61b Mayo Clinic Medical $6.55b UPMC Group Medical $6.02b YMCA Youth $5.69b The United Way of America Domestic needs $3.87b Catholic Charities USA International needs $3.83b The ARC of the United States Health $3.60b Goodwill Industries Domestic needs $3.28b Cleveland Clinic Health $3.18b The American Red Cross Domestic needs $3.00b Organization Mission ** Name Lutheran Services in America To create opportunities with people in thousands of communities throughout the United States and the Caribbean ...and their over 300 health and human service organizations. Working neighbor to neighbor through services in health care, aging and disability supports, community development, housing, and child and family strengthening, these organizations together touch the lives of one in 50 Americans each year. Mayo Clinic To provide the best care to every patient every day through integrated clinical practice, education and research. UPMC Group To create a new economic future for western Pennsylvania -a future built on new ways of thinking about health care and sparked by leveraging the uniqueness of the integrated health enterprise. By exporting excellence nationally and internationally, and fueling the development of new businesses that emerge from UPMC's intellectual capital, core capabilities, and management expertise, UPMC will catalyze a regional economic renaissance. At the same time, UPMC will remain steadfastly committed to providing premier health care services to our region and contributing to this community. YMCA To put Christian principles into practice through programs that build healthy spirit, mind and body for all The United Way of America To improve lives by mobilizing the caring power of communities Catholic Charities USA To provide service to people in need, to advocate for justice in social structures, and to call the entire church and other people of good will to do the same. The ARC of the United States To promote and protect the human rights of people with intellectual and developmental disabilities and actively supports their full inclusion and participation in the community throughout their lifetimes. Goodwill Industries To help people who are looking for work or better jobs so they can better provide for their families. Cleveland Clinic To integrate world-class patient care with cutting edge research and physician education The American Red Cross To provide relief to victims of disaster and help people prevent, prepare for and respond to emergencies * Information on organization name and total revenue as noted by Barrett (2009) ** Obtained from each individual organization's website Appendix 2--Top Ten Charities based on Public Support (Donations) Received in 2009 Organization Name Category Donations Received * The United Way of America Domestic needs $4.03b Goodwill Industries Domestic needs $2.87b The Salvation Army Domestic needs $1.88b Food for the Poor International needs $1.49m Feed the Children Domestic needs $1.18b Brothers' Brother Foundation International needs $1.08b AmeriCares Foundation International needs $$1.011b American Cancer Society Health $1.008b YMCA Youth $935m World Vision International needs $834m Organization Name Mission ** The United Way of America To improve lives by mobilizing the caring power of communities Goodwill Industries See Appendix 1 The Salvation Army To preach the gospel of Jesus Christ and to meet human needs in His name without discrimination Food for the Poor To link the church of the First World with the church of the Third World in a manner that helps both the materially poor and the poor in spirit. Feed the Children A Christian, international, nonprofit relief organization that delivers food, medicine, clothing and other necessities to individuals, children and families who lack these essentials due to famine, war, poverty, or natural disaster. Brothers' Brother Foundation Connecting People's Resources with People's Needs AmeriCares Foundation To ensure that medicines, medical supplies and aid reaches individuals in need wherever they are, whenever they need it American Cancer Society A community-based voluntary health organization dedicated to eliminating cancer as a major health problem by preventing cancer, saving lives, and diminishing suffering from cancer, through research, education, advocacy, and service. YMCA See Appendix 1 World Vision To follow our Lord and Savior Jesus Christ in working with the poor and oppressed to promote human transformation, seek justice, and bear witness to the good news of the Kingdom of God. * Information on organization name and public support received as noted by Barrett (2009) ** Obtained from each individual organization's website
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Raymond J Elson, Valdosta State University
Leonard Weld, Valdosta State University…