Why Shouldn’t the Tax Foundation Pay Taxes?

August 21, 2013

In an essay in yesterday’s Wall Street Journal, James Piereson and Naomi Schaefer Riley sent shivers through America’s universities by asking the simple question: “Why Shouldn’t Princeton Pay Taxes?”

The question arises from a lawsuit launched by a group of Princeton’s neighbors who feel they are shouldering a disproportionate share of the local tax burden because of the University’s tax-exempt status. As Piereson and Riley sum up the plaintiff’s case:

“Princeton University, which boasts the largest endowment per student in the country, should no longer be entitled to its tax-exempt status because the school makes money—from its scientific patents, ticketed concerts, on-campus eateries and more. The Ivy League school is operating like a business, the plaintiffs say, so the tax code should treat it like one.”

As someone who actually runs a non-profit, I think this is a question that should be asked of all tax-exempt organizations, especially the largest ones that are acting more and more like businesses these days. While the common perception of a non-profit organization is an underfunded soup kitchen or local charity, the reality that is many are wealthy institutions and the inequality among non-profits is even more stark than in the population as a whole.

There are seven different distinctions of non-profit organizations under the 501(c) section of the IRS code. The most common are 501(c) 3 organizations – of which the Tax Foundation is a member. According to the IRS’s stats page on charities, these organizations run the gamut, including:

"Religious, educational, charitable, scientific, or literary organizations; testing for public safety organizations. Also, organizations preventing cruelty to children or animals, or fostering national or international amateur sports competition."

The data on their financing is particularly illuminating. According to the latest IRS data for 2010, there were more than 186,000 501(c)3 organizations, and they had total revenues of nearly $1.6 trillion and total assets of more than $2.9 trillion.

However, as we can see in the table below, most of that income and assets is in the hands of the biggest institutions. Just 3 percent (or 6,508) of all non-profits have assets of $50 million or more. However, these organizations took in 73 percent of all non-profit revenues and commanded 81 percent of all assets held by non-profits.

While the debate over tax reform has put the charitable tax deduction in the crosshairs, the fact is contributions comprise just 21 percent ($340 billion) of all revenues to non-profits. By contrast, program service revenues comprised 72 percent, or $1.145 trillion, of all revenues. In other words, most non-profits are providing services to people and charging them for those services in the form of tuition, ticket fees, and television rights.

The IRS data also shows, that between 2000 and 2010, total non-profit revenues increased by $864 billion, or 84 percent. However, roughly two-thirds of that gain ($564 billion) accrued to the largest institutions – those with more than $50 million in assets. Indeed, their incomes increased by 104 percent during the period. By contrast, the incomes of smaller organizations (say those with assets between $100,000 and $500,000), grew by just 15 percent.

As lawmakers look to overhaul the income tax code, they should take an equally hard look at the "non-taxed" code because the non-profit world has become big business. And if you are going to act like one, you should be taxed like one.

Item

Total

501c3 Organizations by Asset Size Tax Year 2010

Under $100,000 [1]

$100,000 under $500,000

$500,000 under $1,000,000

$1,000,000 under $10,000,000

$10,000,000 under $50,000,000

$50,000,000 or more

Number of returns

186,417

29,995

45,833

28,148

61,536

14,396

6,508

Percentage of all 501c3s

16%

25%

15%

33%

8%

3%

Total assets

$2,939,212,356

$1,235,087

$11,702,735

$20,575,739

$203,269,850

$309,171,500

$2,393,257,444

Percentage of all assets

0.04%

0.4%

1%

7%

11%

81%

Total revenue

$1,585,785,036

$12,008,030

$23,897,361

$21,487,748

$175,409,469

$202,403,718

$1,150,578,709

Percentage of total revenue

1%

2%

1%

11%

13%

73%

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