Non-Profits and Tax Policy: Not a One-Sided Equation

By Linda M. Czipo

Recently, the Star-Ledger ran an opinion column by a prominent Rutgers University faculty member regarding the changing tax policy landscape for tax-exempt organizations and calling for a variety of reforms to address the problems identified by the author.

Presumably, a major impetus (but not the only one) behind this piece is the recent debate surrounding the property tax exemptions of New Jersey’s largest hospitals and universities.

Perhaps I might have been less dismayed by the article had it focused more specifically on the pros and cons of tax exemption for these mega-institutions (or, for that matter, of providing tax incentives to large for-profit corporations for locating within particular municipalities). But as written, the column contains a number of sweeping generalities and misleading and inaccurate statements regarding the entire non-profit community that cannot go unanswered.

Following are just a few examples:

  • “Ground is shifting under local, state and federal tax exemption policy and practice prompted by excesses, abuses and, simply, in the case of property tax exemptions, by the inequitable impact on municipalities that provide costly services that are, essentially, free for the tax-exempt (but paid for by taxpayers).”

The implication that non-profits are receiving free services at others’ expense while providing nothing in exchange does a grave disservice to thousands of charities across the state. For the moment, let’s put aside the fact that non-profits employ nearly 10% of New Jersey’s private work force (more than many major for-profit industries) and themselves pay payroll taxes and patronize local merchants and businesses.

Far from a one-sided consumption of massive amounts of government dollars and services, non-profits actually save the government countless dollars by providing job training, health services, food, shelter, counseling and preventive care; and by leveraging human and financial resources with private donations and volunteers. Whether providing disaster relief, education, advocacy, foreclosure assistance, artistic and cultural enrichment, or preserving our natural resources, non-profits fulfill a vital public function that would leave a gaping void were they not present. To make matters worse, as surveys in New Jersey and across the country consistently document, demand for non-profit services continues to rise while resources from government and elsewhere fail to keep pace.

Without question, governments at all levels are scrambling for cash to balance their budgets. Our state’s overdependence on property taxes to fund education and a wide array of critical functions, combined with property tax caps and other policies that limit municipal options, mean that it shouldn’t be surprising that non-profits have become a target. But it isn’t because non-profits aren’t pulling their own weight and more.

  • “Shouldn’t those who benefit from services be responsible for some portion of their cost whether they are obligated to pay taxes or they aren’t?”

Again, this over-generalization ignores the significant contributions that non-profits bring to the communities and regions where they are located. Imagine for a moment how Lawrenceville would be able to address the social service and housing needs of its residents if HomeFront didn’t exist. In Red Bank, organizations like Count Basie Theatre and Two River Theater were a big part of Red Bank’s selection by Smithsonian Magazine as #3 of its 20 Best Small Towns in America in 2012.

As it is, according to property tax data maintained by the New Jersey Department of Community Affairs, exempt property of charities and churches accounts for only 12% of all exempt property and only 1.3% of all real property values in the state. A far larger percentage is owned by government itself in the form of schools and other facilities.

If one wants to look at correcting inequities, then a good place to start is by looking beyond individual municipalities with a regional lens. The surrounding towns that benefit from the services that many non-profits provide, particularly in the case of larger institutions, don’t share the impact of foregone revenue from the tax-exempt property located in a neighboring municipality. Addressing disparities on a regional or statewide basis would be one way to attack the revenue problem.

  • “And then there is the political world. The interpretation of the Citizens United (v. Federal elections [sic] Commission) case, for example, perverts the concept of charitable purpose by protecting political action committees, PACs, as tax-exempt “social welfare” entities and by allowing unlimited funds to be donated to them…. Adding insult to injury, by allowing tax-deductible contributions to these committees, indirectly, citizens wind up underwriting them.”

Citizens United has certainly had a far-reaching and destructive impact on many levels to our electoral system. But there is a huge difference between 501(c)(3)s and (c)(4)s, PACs and other entities. A social welfare organization, which is classified under 501(c)(4) of the Internal Revenue Code, is not a charity, and while it is exempt from paying corporate income taxes (like other exempt organizations such as trade associations, social clubs, unions, and charities, to name a few), contributions to (c)(4)s are not tax deductible. In fact, 501(c)(3) organizations are legally prohibited from engaging in partisan political activity or from attempting to influence the outcome of an election for public office– a ban they take very seriously, since they can jeopardize their tax exemptions for doing so.

The “insult to injury” in this section is that by conflating charitable organizations with non-charitable political entities, it perpetuates one of the most vexing misconceptions about charities and politics being perpetrated in the media. It’s one thing to suggest reforms of the current problems plaguing our electoral system. But such issues should be examined based on an accurate depiction of the legal framework that currently exists so that we can avoid harming charitable organizations in the process. [Update 12/8/2015: following requests from the Center and others, the original Star-Ledger column has since been edited to remove the inaccurate reference to 501(c)(4)s and tax-deductible contributions.]

 

To be sure, the column highlights a number of critical questions that policy makers and non-profit leaders have been grappling with – in some cases, for decades – as we confront a changing economic and social landscape. But sound public policy demands that we tackle these issues with a cooperative spirit and full knowledge of the facts. Anything less will at best be a job half done, and at worst will result in change that hurts our communities more than it helps.

Linda M. Czipo is executive director of the Center for Non-Profits, New Jersey’s statewide umbrella organization for the charitable community.  Through advocacy, public education, technical assistance and cost-saving member services, the Center works to build the power of New Jersey’s non-profit community to improve the quality of life for the people of our state. 

2015 NJ Non-Profit Conference December 3, 2015

 

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2 Comments

  1. I see the following, in this column, as an invitation to dialogue and welcome it:

    “If one wants to look at correcting inequities, then a good place to start is by looking beyond individual municipalities with a regional lens. The surrounding towns that benefit from the services that many non-profits provide, particularly in the case of larger institutions, don’t share the impact of foregone revenue from the tax-exempt property located in a neighboring municipality. Addressing disparities on a regional or statewide basis would be one way to attack the revenue problem.”

    Indeed, our late Bloustein School colleague, Don Krueckberg, developed this concept and supported it with significant evidence and analysis but the idea has never gained traction. It may well be time to consider it again.

    By the way, my colleague and I are hardly enemies of not-for-profits. Not only have we worked in them but on their behalf for most of our lives, and, in fact, with the Fund for New Jersey, helped to create the very institution that the column’s author, Linda Czipo, has the privilege of heading.

    1. Linda,

      Thanks for taking the time to comment.

      I have a great deal of respect for your distinguished career in public service, which is precisely why I found the tone, assertions and inaccuracies in the column so surprising and in need of rebuttal.

      I do remember Don Krueckberg’s report, commissioned, I believe, by New Jersey Policy Perspective (Jon Shure, then head of NJPP, served on the Center for Non-Profits’ board for four years). I was supportive of the concept of regional or statewide solutions at the time and believe that it is still worthy of discussion now.

      Generally speaking, I will say that if non-profit input were sought before sweeping public statements or policy proposals were issued based on assumptions that non-profits do little but drain the resources from our communities, it might be easier to advance the dialogue and create stronger public policies acceptable to all. Regarding property taxes specifically, the power of home rule and political inertia have made comprehensive change a challenge, but reserving a place at the table for organizations instead of denigrating them in their absence is a good place to start.

      It has indeed been the highest privilege to be involved with the Center for Non-Profits (for 28 years and counting, including the last 15 as executive director) and especially to highlight what non-profits contribute to our society in order to help advance their missions for the public good.

      Looking forward to keeping the conversations going.

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