Shocked, shocked that there might be businesses masquerading as charities!

The Nonprofiteer knows she’s supposed to be horrified by the spate of rulings (described in yesterday’s New York Times) revoking the exempt status of various nonprofits. But–though the lawyer in her itches to point out all the inconsistencies in courts’ and legislatures’ handling of charities–she really thinks that challenges to the status of certain charities are long overdue.

Admittedly, the Times article doesn’t contribute to the quality of the conversation when it notes that 88% of charitable revenue comes from fees, with only 12% from donations; this is a pointless pair of statistics as long as charities serve as government contractors, receiving what is almost always insufficient compensation for providing state-mandated services to poor people. It’s not the fact of getting paid in and of itself that renders a transaction un-charitable–it’s the fact of getting paid market rate. Very few social service agencies have much to fear from a test articulated that way.

And what if they did? Wouldn’t that mean we’d have to have a long-overdue discussion about who’s actually supposed to be providing health care and services for veterans and the developmentally disabled and the homeless and the hungry and everybody else we’ve been pretending can be served by private charity? If in fact nonprofits are doing nothing but taking government payments and providing services–and if in fact there are for-profit businesses doing exactly the same thing but paying taxes for it–then the nonprofits should be deprived of their tax-favored status, whereupon they’ll go out of business, whereupon we’ll finally have to require the government to do what’s really been its job all along. And, frankly, the only way for governments to do that is precisely to raise taxes–for instance, on businesses masquerading as charities.

The only problem with this scenario is that charities are less a good source of tax money than a badly-defended source of tax money: most are too unsophisticated and too focused on mission to lobby. But they’re also too poor to be worth very much, so it shouldn’t take too long (under a Democratic administration) for legislators to figure out that, as Willie Sutton said, it’s better to go where the money is.

NB that this “threat” to the sanctity of nonprofits is less sudden than it purports to be: 15 years ago, while serving on the board of her local YMCA, the Nonprofiteer was introduced to the question of what distinguished the Y from for-profit health clubs, such that the Y paid no property taxes and got water free from the city. As long as the Y was also a single-room occupancy hotel, providing housing for people who would otherwise be sleeping on the streets, and as long as it was providing full scholarships to poor kids to go to summer camp, its exempt status was safe. But it was clear that as soon as it stopped doing either of those things, it would have to answer to the city, state and nation why one fee-paying health club was any different from another. And that’s as it should be.

The fact that–as someone in the Times article says–decisions about nonprofit taxability are “rife with unintended consequences” is merely a description of being alive. That doesn’t mean those who are responsible for operating an equitable tax system shouldn’t make those decisions.

The answer to “Why are we a nonprofit?” can’t be “Because we couldn’t afford to operate if we weren’t.” If that’s the case, it just means you’re a badly-organized business.


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