Urban-Brookings Tax Policy Center looks at the state of trust in nonprofits, the bargain underlying tax-exemption, and whether the policies structuring nonprofitdom still make sense.
The Urban-Brookings Tax Policy Center’s “Trust, Tax Policy, and the Future of the Nonprofit Sector,” event at the Urban Institute in Washington, D.C., last week explored some of the many major questions facing the sector about its role, responsibilities, and relationship to government, including in the context of tax policy.
The opening panel featured Greg Berman, author of The Nonprofit Crisis: Leadership Through the Culture Wars and co-editor of Vital City; Scott Hodge of Arnold Ventures, who writes at The Exempt Class on Substack and is a Giving Review senior fellow; Benjamin Soskis of the Urban Institute’s Center on Nonprofits and Philanthropy and co-editor of HistPhil; and Dean Zerbe, who served for many years as a top Senate Finance Committee staff member and one of the nation’s leading experts on law and regulation regarding tax-exemption.
It was moderated by Michael E. Hartmann, co-editor of The Giving Review.
Pressures and politics, sledgehammer and scalpel
Drawing on his experience running the Center for Court Innovation, Berman describes a change beginning roughly a decade ago. Earlier in his career, simply telling people that he worked for a nonprofit produced a favorable reaction. By around 2014 or 2015, people began asking what kind of nonprofit it was and who funded it. The sector’s old “halo effect” had begun to diminish, he felt.
Berman sees a parallel development inside nonprofit organizations. He recounts inviting a senior New York Police Department (NYPD) official to speak to his staff after Mayor Bill de Blasio’s election. He regarded the event as a success. Some of his younger employees, however, regarded the invitation itself as objectionable and the organization as complicit in NYPD wrongdoing.
Talking with other nonprofit executives convinced him that the problem was broader. Leaders privately complained about pressure from two directions—junior staff making ideological demands and funders doing much the same. They “had this sense of being caught in a kind of pincer movement,” he says.
Berman stresses that The Nonprofit Crisis is fundamentally sympathetic to nonprofits. He regards the sector as an American strength. Self-examination, he argues, can help maintain that strength. Some criticisms, moreover, from different places on the ideological spectrum, can have merit.
The current political context, he acknowledges, presents a challenge. Nonprofit leaders tell him that self-criticism is inappropriate while the administration is attacking the sector. He rejects the choice between defending nonprofits externally and reforming them internally. The sector, he says, must “walk and chew gum at the same time.” Otherwise, the conditions giving rise to the crisis will continue.
Later in the conversation, after some fellow panelists had floated certain policy reforms, Berman—who also co-authored 2023’s Gradual: The Case for Incremental Change in a Radical Age—said any reform should be surgical rather than indiscriminate. Listening to some of the offered solutions, says, “my hackles get up” because policymakers risk taking “a sledgehammer when we really should be taking a scalpel.”
History, pluralism, and fiscalization
“The idea that politics is now being imposed on a kind of pristine realm of civil society that had always been allowed to run its course is ahistorical,” according to Soskis. Early charitable institutions received charters from government to pursue specified public purposes—a bargain in which legal privileges were exchanged for public service. Governments had restrictions on which institutions could be eligible for them.
Over time, incorporation expanded from a granted privilege toward something more like a right. That weakened the original quid pro quo and raises the question of what exactly society receives in exchange for nonprofit privilege?
Soskis offers two answers. First, nonprofits perform useful services government cannot or will not provide. Second, pluralism. Instead of government deciding which organizations deserve existence, society allows thousands of institutions pursuing different visions of the good to flourish, trusting that the resulting pluralism itself serves the public. “By letting a thousand flowers bloom and, you know, 10,000 nonprofits spring up, somehow through the alchemy of pluralism, the public good would be served,” he says. “I still find that a very powerful idea.”
Asking whether “the nonprofit sector” is trusted risks fiscalizing the issue by invoking tax law and public subsidy. Asking people whether they trust their local school, hospital, or charity may produce a different answer.
Soskis later notes that the phrase “nonprofit industrial complex” originated as a radical or left-wing critique, but has increasingly been adopted by critics on the right. They seem to share a suspicion that some nonprofits have become a closed system whose benefits accrue to the institutions themselves rather than the public. The underlying question of whether nonprofits can convincingly connect their privileges to public benefit, he says, is unlikely to disappear anytime soon.
Commerciality and competition
According to Hodge, “there are too many commercial businesses, large successful commercial businesses, masquerading as nonprofits.” The Unrelated Business Income Tax (UBIT)—the federal tax that can apply when a tax-exempt organization earns income from business activity that is not substantially related to its exempt purpose—ultimately failed at meaningfully distinguishing a genuinely charitable group from a commercial enterprise, he says.
He applies that critique to hospitals, universities, college athletics, credit unions, insurance and financial institutions, among others. If an exempt nonprofit raises most of its revenue commercially, competes with taxed businesses, compensates its executives quite handsomely, and behaves operationally like a corporation, what continues to justify different tax treatment?
“It’s time to replace UBIT with a new set of rules that taxes all the commercial income of nonprofits,” while “protecting their charitable donations,” Hodge says. “In a free-enterprise system such as ours, we can no longer have successful tax-exempt businesses competing directly with for-profit, taxpaying businesses.”
He is attracted to approaches that use donative support as evidence that the public itself regards an institution as charitable—by design, drawing a narrower boundary around tax-favored nonprofit activity.
Policy engagement and better outcomes, confidence and comfort
From the perspective of congressional tax policymaking, Zerbe offers practical advice: the sector should assume that scrutiny is real and engage with it. Debt and deficit pressures, he notes, make tax-exempts a particular object of policy attention.
He points to earlier episodes in which charitable groups worked with congressional reformers rather than simply opposing them, arguing that this engagement produced better outcomes. “You may not like this person,” he says. “You need to move past that and engage and talk to and understand what folks are thinking. There’s legitimate concerns that are out there.”
Zerbe repeatedly urges nonprofits to develop their own proposals and distinguish defensible organizations from abusive ones. Fiscal sponsorship, government grants, and nonprofit hospitals are among those areas he identifies as vulnerable to scrutiny. Transparency should be considered especially important, he adds. From Congress’ standpoint, it created the relevant tax privileges and expects accountability for them.
“The more there’s confidence” in the sector on the part of citizens, “the more they feel, ‘Hey, I have trust and confidence in the charitable sector. My money is going to good causes, to good help in my community,’ that I think does so much to get people feeling comfortable that they can give,” he says.
Mechanics of the movement of money
The second panel, moderated by TPC’s Joseph Rosenberg of the Urban Institute, moved from broad questions about the nonprofit sector’s legitimacy and public trust to the mechanics of how tax policy shapes charitable giving and nonprofit behavior. The Treasury Department’s Stephanie Karol shared research showing how much less of major charitable giving comes directly from individuals than is generally thought. Foundations, donor-advised funds (DAFs), corporations, and other intermediaries account for a surprisingly large share.
University of Maryland Ph.D. student Adam Tucker explored the incentives facing wealthy donors—not just how much they give, but when they give, what kinds of assets they give, and whether the money makes its way relatively quickly to an operating charity or sits for a while in a foundation or DAF.
TPC co-director Elena Patel of Brookings focused on nonprofit hospitals and the basic question of what taxpayers are actually getting for the exemption. She asks, “[W]hat does the exemption buy?” And Lowenstein Sandler’s Elinor Ramey talked about how policymakers turn to the tax code and the Internal Revenue Service to regulate institutions and deal with social problems that they may not be particularly well-equipped to address.
The event was supported by Arnold Ventures.
