Should only the poor get tax exemptions?

What’s a charity and what’s just a tax writeoff? Why should donations to fabulously wealthy organizations be tax deductible? Should Congress be taking more interest in who gets tax-exempt donation status? Diana Aviv, president and CEO of Independent Sector, an advocacy group representing approximately 600 non-profit organizations, stopped by the editorial board Monday to discuss these and related questions. Some highlights:

Diana Aviv: To what extent does 501(c)(3) tax-exempt status limit organizations? It’s true that 501(c)(3) organizations certainly are limited in the political arena. No question about it. That they can’t engage in partisan political activity; if they do they do so at their peril. There are other limitations as well: what kind of for-profit ventures they can do. But not such great limits; they just have to pay taxes on the for-profit ventures they engage in. But Congress is looking at non-profits and one of the big questions they’re asking — Xavier Bacerra just last week asked these particular questions, wanting to know... let me just get my specific notes on what he said so I can tell it to you properly: “Interested to know whether certain non-profit organizations should get different tax-exempt opportunities that are greater than others.” His concern being that organizations that serve poor people and people with um, at higher risk in our society maybe need to have more resources than are currently available. And right now in our system as long as you give money to a tax-exempt organization you can take a deduction, and it doesn’t matter whether you give to the World Wildlife Fund or to a museum, or the symphony, the local symphony, or you give it to low income; you get the same deduction. One of these questions is should they be engaged in the business of social engineering that prefers some organizations over others, so that the donor could care less where they get their money; they want to give. And they get greater deductions for giving to organizations that serve poor people. Wouldn’t that be a greater thing to do?

So the question of how non-profits are able to operate is being looked at. There are lawmakers on Capitol Hill, particularly on the Senate side, who are looking at the way we spend our endowments. And of concern to them in particular are endowments of major universities, and the fact that in those private universities, the fees for students continue to rise even as those endowments seem to get richer, or better endowed. So one of the questions that lawmakers have is — like foundations that are required to make an annual payout of 5% each year — should endowments over a certain percentage be required to make a payout. And that’s a very complicated question, because unlike a foundation, where the funding is one source of funding and it’s money in hand, in the case of an endowment, if I decide to give money to my alma mater, and I want it to go to the, whatever, the school of social work or the school of nursing, and it’s my money that I earned and I can put a stipulation that they can only give it to that. So my alma mater’s Columbia Universtity, so Columbia University can have many thousands of gifts that are given, ten-thousand, fifty-thousand-dollar gifts, may add up to billion dollars in the end, but there are all kinds of constraints on them. Requiring a payout may result in my not giving a gift because I want my money to go to the school of whatnot.

Jon Healey: Also it seems it would be more harmful to small institutions that are trying to grow their endowments. I mean, you need to have, endowments aren’t very useful until they’re a certain size. To have to pay out an amount that would slow down your growth...

Diana: Right. In addition to which say for example you went in to buy a building or you wanted to build a unit to a hospital or something like that. And you can’t do it until you’ve got a commitment for a certain amount of money. And you hope to raise the money within a year, but it could take you eight or nine years to raise it. Then the question is what’s the amount of time that you need to raise that money in part. And it’s true, it generates interest, but that just helps you toward your goal of raising money for your endowment.

So it’s a complicated question. On the other hand, Congress is right to take a look at these issues, and see when institutions have a large amount of money and are not using it, and they’re appealing to the government to supplement the services they’re providing. There is a public interest in that, given that these are tax deductible. So one of the questions is: What is the public interest? How do we define it in a way that is most responsible on all counts. And everybody’s going to be a little unhappy, but what would be the most responsible thing to do?

Lisa Richardson: What is the non-profit reaction to Mr. Becerra’s scrutiny?

Diana: I think all organizations that provide support to low-income groups would be thrilled, and everybody else would be livid. And I think the reason that others will be unhappy is because it becomes a slippery slope. If we’re saying that the charitable sector has higher levels of worthiness than others, it creates a whole set of unevenness. I guess it’s the same question as the entitlement discussion. We certainly think when you have a universal approach, you generate giving. And if we look at countries around the world, there is no country anywhere in the world that has as generous a giving populace as the United States. In my personal view that’s not because we’re more generous than anybody else at all. It’s because we have a fabulous system of tax incentives for charitable giving. And you have a bargain.

Robert Greene: But it begs the question of, a point you raised earlier: If you’re going to differentiate between the type of service that’s provided, or is intended, don’t you also want to differentiate between the effectiveness, so that an organization that is in name only doing social service work but isn’t very effective with those dollars, should they get the same kind of tax benefit? And should the donors get the same kind of tax benefit?

Diana: And who is measuring the effectiveness? And how do you measure it? What about organizations whose goal is over 20 years, to take kids from very disadvantaged environments, whether from nursery school, the whole business. And the judgment is, let’s see how many of them go to college. That’s 20 years later. What are you doing in the intervening years, and what do you do if 20 years later you say, Oops, sorry, the lawmakers who were there — so there’s that. We have a task force looking at effectiveness. It’s got a whole range of very thoughtful leaders on effectiveness. And it’s interesting that we’ve gotten off on that direction. Because we started off having a big debate among ourselves, I would say close to a heated argument about what’s the definition of effectiveness. There are some who would argue that Muhammad Atta was highly effective in his mission.

Jon: Mm, yes he was.

Diana: And there are others who will say that when it comes to the charitable sector, you have to take into context what the goal is, and that absent that goal, it doesn’t matter; you have to take account of what the mission is, and if your mission is not a laudable mission that’s serving the common good, then you’re not being a factor. So that’s number one. Number two was about the fact that many institutions are not able to achieve effectiveness because they don’t have capital funds with which to invest. What about a business that spends a lot of its funds on testing, ideas, and so on. In the charitable sector there’s virtually no funding for that, for capital improvements etc. So if we’re going to be measured on outcomes when you don’t have the wherewithal on the input side to produce said outcomes, it’s a much more complicated issue. There are also those who would argue — I wouldn’t but I’ll just say it because there are some who do argue this — that the problem with using effectiveness as a criterion is that it moves people in the direction of bean counting. So that an organization like mine: How would you measure the effectiveness? Is it the number of members we have? Is it the number of press contacts that I have? Is it the range of legislation we get passed? Is it the amount of money that I bring in? Is it the — what are the criteria? So when you have public interest groups that are trying to effect legislation it’s a problem. In the case of nursing homes is it the people in the nursing home? Is it the quality of the nursing home experience that they have? How do you measure quality? So you’re right, but that’s the reason why it’s always a discussion and never translated into a policy outcome.