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States Put Charitable Exemptions Under Scrutiny

2 min readBy: Joseph Bishop-Henchman

From the New York Times:

Faced with steep declines in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue, an increasing number of states and localities are considering eliminating various tax exemptions for nonprofit groups.[…]

In most cases, churches would be exempt from the tax measures, but all other nonprofit groups, including private schools and colleges, would be affected.

City and state officials say they have no choice.[…]

Nonprofit groups say the moves to wring revenue out of them are shortsighted and will produce cutbacks in critical services that governments rely on them to provide, like mental health and emergency foster care services.

The article is extensive and thorough, interviewing various people and listing a number of proposals, including to impose a 1% tax on charities in Hawaii, subjecting purchases to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , removing the nonprofit property tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , and pressuring for increased payments in lieu of taxes/”voluntary” payments from property-owning charitable organizations.

As the article notes, churches seem to be off-limits from this expansion, although conducting for-profit activities on church land can sometimes bring part of the land under the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. .

There’s broad consensus that whatever the merits of most of the exemptions and deductions in the tax code, charitable activities are something above reproach. Tax law was changed in a couple days to allow deductions made in 2010 for Haiti relief to count against 2009 taxes. But that support for charities’ favorable tax treatment doesn’t preclude discussion about the proper role of the charitable contribution income tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. and charitable activities exemptions and scrutiny about who should qualify for them.

As we noted in our 2005 paper Charities and Public Goods: The Case for Reforming the Federal Income Tax Deduction for Charitable Gifts, “beneath this consensus lies sharp disagreement over what groups should qualify as charitable organizations, and why.” Many organizations that qualify for tax-exempt status are charitable in name only or little different than advertising:, neither relying on altruistic gifts nor providing public goods:

Ms. magazine, Harper’s, Mother Jones and many other publications are subsidized as “charitable providers of educational materials.” The National Geographic Society sells videos and maps in direct competition with for-profit companies. The YMCA operates fee-for-service gyms. It’s hard to see how these groups deserve a subsidy at taxpayer expense.

My favorite is the ability to deduct the costs of big-game hunting trips so long as you donate the mounted heads to qualified charitable organizations.

Disclaimer: The Tax Foundation is 501(c)(3) non-profit organization. Contributions to the Tax Foundation are tax deductible and purchases made by the Tax Foundation are exempt from local sales tax. Whether we provide public goods or not, I leave to the reader to decide.