Does Reported Policy Activity Reduce Contributions to Nonprofit Service Providers?

Nicholson-Crotty, Jill, Policy Studies Journal

It is widely recognized that the third sector has become a crucial player in the delivery of public goods and services in the United States (see Salamon, 2002). Scholars have spent a great deal of time investigating the degree to which receipt of government contracts by nonprofits influences private donations, which make up 30 percent of the average organization's revenue (see, for example, Brooks, 2000a; Payne, 1998; Schiff, 1985). It is important to remember, however, that service delivery contracts are only one of the ways in which nonprofit organizations (NPOs) engage the policy process. Scholars of the third sector have, in recent years, also emphasized the important role that NPOs play in the formulation of policy (see, for example, Berry, 2003; Nicholson-Crotty, 2007; Wolch, 1990). While they are prohibited by the federal tax code from endorsing candidates or parties, 501(c) (3) organizations are permitted to spend a portion of revenues lobbying lawmakers (Hopkins, 1992). Many organizations avail themselves of this opportunity to represent clients by advocating for policy change in legislatures and executive offices in Washington and in state capitals around the country.

Research has not, to date, systematically explored the impact of engaging in the policy formulation process on private giving to nonprofit service providers. It is a relationship worthy of investigation for a variety of reasons. First, there is reason to believe that nonprofit involvement with government via the policy process may influence donations for similar reasons that scholars suggest the receipt of government funds does so-namely because it changes the donor's perceived "price" of purchasing a service or the perceived legitimacy of the organization delivering it. The relationship is also important to understand because the positive contribution of nonprofits to public policy outputs (DiMaggio & Anheier, 1990) and the representation they provide to underrepresented clientele (Boris & Krehely, 2002) may be jeopardized if executive directors are concerned about a negative impact on private giving (Worth, 2008).

This article develops the argument that policy-related activities should be positively correlated with donations because organizations view these activities as crucial to effective service delivery and advertise them as such to donors. These activities test for the relationship between reported lobbying activities and private giving in analyses of 501 (c) (3) organizations that filed Internal Revenue Service (IRS) form 990s in fiscal years 2000 and 2001. The results indicate that lobbying activities are consistently associated with higher donations, though the effects do differ across classifications of organization within the third sector.

The remainder of the article proceeds in six sections. The first describes the legal foundations, scope, and import of nonprofit policy activity. The second reviews the literature on the organizational determinants of private donations to 501 (c) (3) organizations, which offers the best context in which to understand the potential impact of reported lobbying expenditures. The next section offers and justifies the expectation that money spent to influence policy should increase the donations received by NPOs. The fourth section describes the data, variables, and methods used to test that expectation. Finally, the last two sections detail the findings from those analyses and draw some conclusions from them.

Policy Activity by Nonprofit Service Providers

There is a common misperception that 501 (c) (3) organizations--service providers or charities to which donations are tax deductible--are not allowed to engage in political activity. These organizations are barred from endorsing specific candidates or parties, but the federal tax code explicitly allows them to spend a nontrivial portion of their total revenue on policy-related activities. There are two approaches that organizations wishing to engage policymakers can take. First, they can take the h-election on the Form 5678, filed with the IRS, which declares "an intention to influence policy." H-electors can spend up to 20 percent of total revenue on lobbying activities up to $500,000, with a sliding scale of allowable expenditures after that amount has been reached. These expenditures are reported on the Form 990. All of that can be spent on direct lobbying, or the contacting of lawmakers, while only 20 percent can be used for grassroots activities, or advocacy targeted at changing policy through public opinion (Hopkins, 1992). Second, NPOs can spend money on lobbying without taking the h-election, so long as the level of expenditures does not become "substantial." While this added discretion may seem appealing, it also brings regulatory uncertainty that most organizations wish to avoid (Berry, 2003). In fiscal year 2000, only 2 percent of organizations reported lobbying expenditures without taking the h-election.

Recent decades have seen tremendous growth in scholarship on the causes, consequences, and characteristics of policy activity by 501(c) (3) organizations (see, for example, Boris & Krehely, 2002; Kramer, 1994; Nicholson-Crotty, 2007; Petrescu, 2002; Salamon, 1995a; Smith & Lipsky, 1993; Sosin, 1986; Wolch, 1990). The growing scholarly interest in 501(c) (3) lobbying is largely the result of a recognition that these organizations often provide the only access to the political process for traditionally disenfranchised groups and have a substantive impact on the policy debate. NPOs fill the widening gap between the needs of citizens and the resources available from government and the private sector (Salamon, 1999), but they also play another key role in democratic societies.

When charities become involved in the political process, they are representing a set of constituents that are among the most economically vulnerable and politically inefficacious groups in society (Berry, 2003). These groups do not usually have the sophistication to understand their political options or the power to influence lawmakers directly. Additionally, they are not citizens who are typically mobilized by traditional membership organizations (Boris & Krehely, 2002). DiMaggio and Anheier (1990) suggest that NPOs increase pluralism by serving as organizations of influence outside of the state, which are able to provide vehicles through which disenfranchised groups may organize. These scholars also note the importance of NPOs in politically sensitive policy arenas.

Prior research suggests that politically active NPOs provide substantive as well as symbolic policy benefits to clients. In other words, when charities advocate, they not only give a political voice to traditionally disenfranchised groups, but also influence the policy debate in meaningful ways. Studies of both national and state legislatures indicate that aggressive and well-funded 501(c) (3) organizations can command the attention of lawmakers (Berry, 2003; Petrescu, 2002). More importantly, the policy record indicates that the preferences of these groups (and their clients) are reflected in policy outputs. To name but a few examples, 501(c)(3) organizations were instrumental in getting the price of cigarettes increased in numerous states, compelled state lawmakers to change policies about the dissemination of reproductive health services in conservative states, and had a significant impact on local policies regarding violence against women and the battle against AIDS/HIV (American Cancer Society, 2004; Mink off, 2002; Planned Parenthood Federation of America, 1991). Finally, research also suggests that 501(c) (3) organizations can have a meaningful impact on public policy when they partner with more traditional public and corporate interest groups (see, for example, Gifford, 1986; West, 2000).

Like most charitable organizations, Knops that engage the policy process depend to some degree on private donations for their survival. Some argue that government funding may correlate negatively with lobbying activity and, though the empirical evidence for this assertion is mixed, it does raise the possibility that politically active organizations depend even more heavily than most on private giving. As such it is important to understand if engaging the policy process jeopardizes or enhances that funding. This research focuses on 501(c) (3) organizations rather than 501(c) (4)s (traditional interest groups), 501(c) (6)s (foundations), or other types of nonprofits both because they are the most common …

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Publication information: Article title: Does Reported Policy Activity Reduce Contributions to Nonprofit Service Providers?. Contributors: Nicholson-Crotty, Jill - Author. Journal title: Policy Studies Journal. Volume: 39. Issue: 4 Publication date: November 2011. Page number: 591+. © 1999 Policy Studies Organization. COPYRIGHT 2011 Gale Group.

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