Proposed New Taxes Stir Arts Alliance Fears

Ever hungry for a few more bucks, Capitol Hill tax law writers are considering proposals to put the bite on museum gift shops, ads in theater programs, royalties from symphony recordings and other so-called “unrelated business income” of nonprofit groups. If enacted, those proposals could place the strapped nonprofit arts world even more “at risk” than it already is, says the nation’s leading arts advocacy organization.

At issue are suggestions to increase taxes on such nonprofit organizations as museums, theater companies, orchestras, opera organizations, dance companies, hospitals, colleges and others. Some other proposals involve taxing income on off-premise sales--catalogue, mail and phone orders--and the elimination of deductions for indirect expenses on any outside rental of an arts facility.

While these items are at present only “discussion options” released March 31 by a congressional subcommittee, the issue of increased taxation on earned income began shortly after the passage of the 1986 Tax Reform Act. The issue has aroused sufficient concern within the American Arts Alliance to provoke a special white-paper report entitled “Public Policy and the Arts: The American Renaissance at Risk.”

On Monday, Peter Marzio, director of the Museum of Fine Arts in Houston, told a House Ways and Means oversight subcommittee hearing that proposals to expand the so-called unrelated business income tax “strike at the very heart of the (tax) exempt mission of arts institutions.”

Marzio and the alliance say one of the options could even be interpreted as allowing taxation of phone- and mail-order ticket sales.

And on Tuesday, the alliance, which represents more than 350 nonprofit performing and exhibiting arts institutions, released the report at a luncheon for the leaders of the Congressional Arts Caucus as well as the members of the House and Senate tax-writing committees. Actress Kelly McGillis, currently playing Portia in a production of “The Merchant of Venice” in Washington, delivered the introductions.

“Two of the three sources of financing for the arts--private-sector contributions and direct federal funding--are already at risk as a result of recently enacted legislation to reform the tax system and reduce the federal deficit,” the report asserted. “Faced with rising costs, art institutions must depend more than ever on the income they earn both from ticket sales and other revenue-producing activities to help sustain their viability and accessibility.

“Yet the Congress is now considering increasing taxes on the earnings of nonprofit organizations. . . “ the report went on. “Further changes in the federal tax code as it affects nonprofit institutions, particularly any increase in the unrelated business income tax, will have a severe impact on the financial stability of the arts.”

A House Ways and Means Committee aide said the subcommittee is “proceeding very cautiously and they intend to give every consideration to any changes. To take the position that the tax law is working just fine is unrealistic.”

According to the alliance’s report, costs have “dramatically risen” for nonprofits in the past few years:

--From 1982 to 1986, there was a 49.6% increase in symphony orchestra expenses. The American Symphony Orchestra League, the paper added, reports that two out of three major orchestras posted deficits in the 1985-’86 season.

--In the last four years, dance companies experienced an average increase of 10% in operating costs.

--Between 1985 and 1986, art museums “suffered steep rises in a number of crucial areas, including a 44% increase in curatorial and exhibition expenses and a startling 52% increase in acquisition costs.”

--Theater operating expenses during the 1986-’87 season increased 5.6% over the previous season.

--In opera there was a 7.2% increase in operating costs between the 1984-’85 and 1985-’86 seasons. Altogether 45 opera companies, an “unprecedented” 54% of Opera America’s membership, reported deficits at the end of fiscal year 1986, the alliance report added.

“Because the arts are labor intensive,” the report said, deficits can’t be reduced by cutbacks. “An orchestra cannot reduce its number of musicians and still present Beethoven’s ‘Fifth Symphony,’ just as three singers cannot perform ‘Porgy and Bess. . . . ‘ To make ticket prices less affordable or to cut back on such offerings as performances, exhibitions, tours and outreach and education programs would be contrary to the very purpose of arts institutions.”

According to the alliance’s numbers, a ticket to a nonprofit theater performance is sold at less than half its real value; 57% of the real costs of an opera ticket are not covered by the admission price, and it costs $16.25 to serve one art museum visitor even though “most museums charge no admission fee.”

“It is the lack of private financial gain that distinguishes the nonprofit arts from commercial enterprises,” the report noted, citing as an example the “substantial difference” between commercial and nonprofit theater.

“Commercial producers seek to produce a play that will appeal to a very broad audience and thereby realize a financial profit for investors,” the report explained. “Nonprofit theaters, in contrast, produce an entire repertory of work that advances the art form of theater in the same way that symphony orchestras perform a body of work for their artistic community.

“If a particular nonprofit production achieves financial success,” the report added, “the earnings are not returned to investors but rather reinvested in the theater itself, just as they are in opera, symphony and dance companies.”

One of the most troubling aspects to the Arts Alliance in the subcommittee proposals is to change the standard of tax exemption of unrelated business income from activities or items that are “substantially related” to the arts organization’s mission to a “directly related” test.

As yet there are no specific guidelines, only guesses, as to what such a test might include. The alliance’s leadership is worried that such a test might mean, for example, that earned income from the Los Angeles County Museum of Art’s “Helga” catalogues would be tax-exempted, because that Andrew Wyeth exhibition is currently on view, but that income from the sale of David Hockney catalogues would not be exempt because the retrospective is no longer on the museum’s premises.

Moreover, while the subcommittee has said that “on-premise sales of low-cost mementos” in gift shops and bookstores would continue to be exempted, no one has yet defined low-cost.

“The move away from the ‘substantially related’ standard has tremendous implications for art museum and performing arts institution shop sales,” Marzio testified Monday.

The museum director argued that gift shop sales are “intrinsically linked” to the educational mission of arts organizations. Requiring items to relate directly to the “organization visited,” he said, would restrict the “educational mission” of that organization.

“A ‘directly related’ test, for instance, might bar a museum from selling a book on the general history of art that is as important to understanding a particular exhibit as a catalogue devoted exclusively to the exhibit,” Marzio added. “Similarly it could prevent an opera company from selling a book on the development of opera which can shed as much light on a given event’s production as a more specific libretto.”

The alliance adds it is “just as important for orchestras to sell recordings by other orchestras as for museums to sell reproductions not necessarily in their collections.”

Current law provides that sales of clearly unrelated items and business activities that are regularly carried on must be taxed. As alliance director Anne Murphy noted as an example, earnings from computers sold in a museum gift shop would be taxed.

Geoffrey Platt, director of government affairs for the American Assn. of Museums, whose 2,300 institutional members range from art museums to zoos, said he couldn’t cite any museums that have taxable items. “For the sake of clean administration, they don’t stock anything that’s going to be taxable,” he added.

Sherri Geldin, associate director of the Museum of Contemporary Art, said the gift shop accounts for less than 2% of the museum’s earned income. But she worries that eventually tax law writers would get their hands into much more than bookstore activities.

“The real concern is not the unrelated business income tax by itself, but the context of it,” Murphy noted. “First you’ve got a drop-off in federal dollars in real (inflation-related) terms to the National Endowment for the Arts. Now the NEA budget is $167.7 million, while it was $158.8 million at the end of the Carter Administration. But in actual dollars we would have to be at $200 million to break even. Changes in the tax (reform) law serve as disincentives to giving. You have to connect the dots to get the big picture.”

Both Earl A. Powell, director of the County Museum of Art, and Esther Wachtell, president-elect of the Music Center, spoke about the “negative” impact of the proposed tax changes.

While Powell did not have gift-shop statistics immediately at hand, he did echo Murphy’s concerns about the overall picture. He said that because of changes in the 1986 tax law subjecting gifts of appreciated property to an alternative minimum tax, gifts of works of art to the museum, which were somewhere between $5- and $7-million in 1986, decreased 50% in 1987.

Wachtell said flatly that “if for some reason we had a particular piece of merchandise unrelated in any way to the Music Center, and it was profitable enough, we would make the decision to keep the merchandise and pay the tax.” But she noted that any changes in the present law would be “very painful.”

On the matter of royalties, Marzio noted that art institutions earn royalties from opera, dance and art museum videos, symphony recordings and theatrical productions.

“These products,” he said, “relate directly to the arts groups’ mission and are important to efforts to make the arts broadly available to many audiences. Arts groups must be involved in the development of the product to insure its quality.”

As for net advertising income, Marzio said that “the ability of arts groups to continue offering the programs and other publications they use to inform and educate audiences will be limited if advertising income cannot be offset by the costs of the entire publication.”

Meanwhile, in a related tax issue involving individual visual artists, Rep. Tom Downey (D-N.Y.) has introduced a bill exempting from stringent capitalization requirements writers, photographers, a whole range of visual artists--those who create “a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design or original print edition”--and film makers whose costs during a given taxable year do not exceed $75,000.

That issue is expected to come up before the House Ways and Means Committee after the Memorial Day recess.