The Magazine

Non-Profits Without Honor

Senator Grassley tackles the trillion-dollar tax-exempt sector.

Dec 10, 2007, Vol. 13, No. 13 • By JOHN J. DILULIO JR.
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Jesus, they preach, not only wants you to love the poor--Jesus wants you to get rich, or at least to live debt free! "They" are the Christian televangelists atop the multimillion-dollar media ministries being scrutinized by Senator Charles Grassley. The Iowa Republican has given them until December 6 to answer questions concerning their salaries, perks, and finances.

Senator Grassley is not just investigating nonprofit smoke where there's hellfire. In 2006, he held hearings exposing how some nonprofit hospital executives favor themselves with lavish travel and country club dues. "Not only," he scolded, "is there very little difference between for-profit and nonprofit hospitals when it comes to serving the community, but also .  .  . very little difference on executive compensation." In recent years, he has proposed myriad reforms to help ensure that nonprofit organizations put charitable good works before outsized perks.

The trouble with America's trillion-dollar (yes, trillion) tax-exempt sector, though, goes deeper than greedy executives or corrupt practices. The fundamental problem is that government routinely confers diverse public subsidies on nonprofit organizations that follow the law's letter while doing only incidental things to benefit their communities or the public at large.

Nonprofit organizations are exempt from taxes on property and investments; receive contributions of cash or property that are tax-deductible for the citizens or corporations making the contributions; receive government funds in the form of grants, loans, or vouchers to members; and are free to compete for certain government grants or contracts.

Take your favorite private college or university. It occupies land and buildings that generate zero local property tax revenue. Nonprofit-owned property costs local governments billions of dollars each year in foregone taxes. In my hometown of Philadelphia, the loss is about $90 million a year. In 2005, for a married couple earning $125,000 on their joint tax return, the net cost of a dollar donation to their alma mater was just 72 cents; for a more prosperous duo making $319,000 a year or more, it was just 65 cents. Many low-income or special-needs students' tuition payments originate as government grants or loans, and many faculty and staff receive government research grants--more in government money each year, in many cases, than the school receives in alumni contributions.

To qualify and stay qualified for these myriad public subsidies, the school need not give Uncle Sam its firstborn, nobody needs to work for free, and students are not restricted to studying nursing or other subjects that most citizens would consider socially useful. Instead, a nonprofit institution needs only to avoid enriching board members or other principals as such, and use any "excess revenues" to advance its publicly (and often nebulously) stated educational, charitable, or other public-spirited purposes.

Thus, a private college or university can pay its president $500,000 a year or more (scores of private colleges and universities do so, with ever more topping $1 million in total annual compensation). It can hoard a huge endowment and hire high-end talent to manage it (Harvard, with an endowment of $35 billion, just did). On its annual Internal Revenue Service 990 reporting form, it can list community service initiatives that also benefit student-members, need-sensitive but not need-blind admissions policies, and the like as proof that it is producing public benefits for people other than its own full-paying customers, salary-drawing denizens, and wined-and-dined donors--never mind if the do-good-for-others items don't sum to even a penny of each dollar that the institution expends annually.

The IRS recognizes over two dozen categories of organizations that can be exempt from federal income taxes, ranging from country clubs to labor unions, business associations to grant-making foundations. But religious organizations dominate the sector in numbers and finances. "Churches" is a term that the IRS uses officially and generically to encompass local houses of worship and congregations (churches, synagogues, mosques, and others), plus what the IRS terms "integrated auxiliaries" (for example, church members who do church-supported work but under a separate name).

Churches need not apply for IRS recognition or file the 990 form in order to enjoy tax-exempt status and receive tax-deductible donations. Why? The IRS tax guide for churches opens by noting that "Congress has enacted special tax laws applicable to churches, religious organizations and ministers in recognition of their unique status in American society and of their rights guaranteed by the First Amendment."