Profit Making Non-Profits
Tyler Cowen points to a piece in today’s NYT about the backlash against institutions enjoying non-profit tax status that seem to much in common with profit-making, tax-paying businesses.
Authorities from the local tax assessor to members of Congress are increasingly challenging the tax-exempt status of nonprofit institutions — ranging from small group homes to wealthy universities — questioning whether they deserve special treatment. One issue is the growing confusion over what constitutes a charity at a time when nonprofit groups look more like businesses, charging fees and selling products and services to raise money, and state and local governments are under financial pressure because of lower tax revenues.
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Congress has threatened to impose a requirement that wealthy universities make minimum payouts from their endowments and raised questions about whether nonprofit hospitals are really all that different from their for-profit — and tax-paying — competitors. And, concerned about the way some churches are spending money, the Senate Finance Committee has asked for detailed financial information from six evangelical ministries asking them to justify their tax exemptions.
Others are questioning whether some tax-exempt nonprofits, primarily universities and hospitals, have accumulated so much wealth that they should no longer be considered charities. In Massachusetts, where Harvard’s endowment has reached $35 billion in assets, legislators are weighing whether to impose a 2.5 percent annual assessment on universities with endowments of more than $1 billion.
It’s an interesting question and not one to which I have any answers. I work for a non-profit think tank and am not particularly objective on the question, a situation I share with Professor Cowen. Indeed, his solution was rather amusing in that regard: “I would say the Mall of America no, hospitals no (any subsidy to care should be more selective), the AAA club no, universities yes (ideas are public goods), and charities yes.” He would say that, no? And, as commenter Matt retorts, “Please unlock jstor then.” (A line which is admittedly much funnier to those in academic circles.)
Now, I tend to agree that Harvard’s endowment should be tax exempt since its proceeds to go legitimate educational endeavors and are not “profit” pocketed by stakeholders. But I’m not sure the lines are particularly bright. What makes a “charity” a charity, for example? And at what point does “education” become “lobbying” or “activism” and thus no longer tax exempt?
In interesting question indeed. It seems though that an organization’s status is not, and should not be, necessarily dependent on its profitability, but rather on the benefactors’ willingness to donate with no expectation of a monetary return. From a lay-person’s perspective, which is where I reside, it seems that this is the key distinction: donations or investments. I suppose when people become willing to donate to Wal-Mart with no expectation of a return, then we can debate their tax-exempt status. I just don’t see that happening.
I think the measure of whether a particular institution is not for profit or not in a practical sense rather than a legal one is not what service it nominally provides but how much of its revenue is paid out in salaries and how much those salaries are. Any organization that pays salaries in excess of three standard deviations over the mean is for profit regardless of what it’s doing.
PBS/NPR