Are nonprofits in danger of losing their tax exemption?

by Robert Maynard 

That is the question being raised in the wake of a bill coming out of the House. H.761, An act relating to tax expenditures for nonprofits, charitable organizations, and miscellaneous tax expenditures, as presented in the tax expenditure budget for 2012, passed the House on April 11th. The purpose of the bill as stated:  “This bill proposes to review tax expenditures relating to nonprofits and charitable organizations and covering miscellaneous expenditures as presented in the governor’s budget report, and where appropriate to provide for the amendment or repeal of such tax expenditures.”

For the purpose of this bill, “tax expenditures” are defined as: “… forgone revenue attributable to various exclusions, exemptions, deductions, credits, deferrals, and preferential rates in the tax code.” Many in the state are wondering whether our state government is stepping on the toes of nonprofits and charitable organizations in their ongoing search for new revenue. The potential pitfalls go beyond the possible loss of tax deductions, exemptions, etc., and extend to the possibility of more state control over how a nonprofit, or charitable organization, defines its mission. In section “A6. INFORMATION INCLUDED FOR EACH TAX EXPENDITURE”, it lists the information that has to be included to justify each expenditure. One such disclosure is “The statutory authority for the tax expenditure.” The potential for the state to dictate how nonprofit organizations define their missions will considerable if nonprofits have to justify their existence before the state in order to maintain their nonprofit status. This sets up the possibility of state favored nonprofits thriving, while those not so favored struggle for funds.

Another problem with having more state control over defining the mission of a nonprofit is that it skews the relationship between the state and civil society that has historically been the norm in American society. Nonprofits and charitable organizations have historically carried much of the burden of addressing social concerns and their tax status have been one way that the state acknowledged and supported that role. One example of this is in the section of the Vermont Constitution entitled “Laws to encourage virtue and prevent vice; schools; religious activities”:

Laws for the encouragement of virtue and prevention of vice and immorality ought to be constantly kept in force, and duly executed; and a competent number of schools ought to be maintained in each town unless the general assembly permits other provisions for the convenient instruction of youth. All religious societies, or bodies of people that may be united or incorporated for the advancement of religion and learning, or for other pious and charitable purposes, shall be encouraged and protected in the enjoyment of the privileges, immunities, and estates, which they in justice ought to enjoy, under such regulations as the general assembly of this state shall direct.

Notice “religious societies, or bodies of people” are to be incorporated to address such social concerns, while it is the role of the state to encourage and protect them “in the enjoyment of the privileges, immunities, and estates, which they in justice ought to enjoy, …” Of course the general assembly is to regulate such associations, but the very act of being awarded nonprofit status already involves justifying one’s mission. Furthermore, such regulations are better confined to ensuring that nonprofits are not engaged in activities that are counter to the law. These type of regulations are already in affect. Given the historical context in which our constitution was written, it is unlikely that there was any intention to have the state dictate the mission of nonprofits beyond ensuring that it did not conflict with the rule of law. Here is how Alexis de Tocqueville in his classic Democracy in America, characterized the American approach to voluntary associations in contrast to the European approach:

Americans of all ages, all stations of life, and all types of disposition are forever forming associations. There are not only commercial and industrial associations in which all take part, but others of a thousand different types — religious, moral, serious, futile, very general and very limited, immensely large and very minute. Americans combine to give fetes, found seminaries, build churches, distribute books, and send missionaries to antipodes. Hospitals, prisons, and schools take shape that way. Finally, if they want to proclaim a truth or propagate some feeling by the encouragement of a great example, they form an association. In every case, at the head of any new undertaking, where in France you would find the government or in England some territorial magnate, in the United States you are sure to find an association.

In other words, the people forming these associations largely determined what constitutes a social mission. Our approach to this dynamic is becoming more like Europe’s, where the state makes such determinations.


One thought on “Are nonprofits in danger of losing their tax exemption?

  1. Seems to me there are two major attacks that are possible. The first would involve the removal of charitable deductions from the individual and/or business income tax. The second. much more serious, area is the tax exemption of church and charitable organizations.
    You might say this second scenario is impossible (in much the same way as, forty years ago, everyone knew what marriage meant and that killing babies would always be illegal).
    I would disagree. The Liberal hatred of religion could easily result in the attempted destruction of organized religion via economic statute.

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