An excellent article by Stephanie Strom in today's New York Times covers what appears to be a growing controversy about the degree to which non-profit organizations should or should not be permitted to be tax exempt under federal and state rules. This is a legitimate area for public debate, and the article sets out a number of examples and points of view.
I do not know much of the history of tax-exempt status, but I am guessing it was given by Congress and state legislatures to certain categories of non-profits in light of their public service obligations and activities. I am personally involved on the boards of several tax-exempt non-profits, including BIDMC, an academic medical center devoted to clinical care, research, education, and community service; MIT, a university; ISO-New England, the organization that supervises the reliability and pricing of the regional electricity transmission system; and the Celebrity Series of Boston, an organization that acts as an impresario to bring concerts to the Boston community and also education programs to children in that region. Previously, I have been on the boards of other tax-exempt non-profits, ranging from the Newton Girls Soccer League and Boston Area Youth Soccer to the Silent Spring Institute, which conducts research about breast cancer. As this list alone indicates, the range of services provided by tax-exempt non-profits is very wide.
Now, if we think about it, any one of these lines of services could be provided by for-profit corporations. Taking my current affiliations in order, there are for-profit hospitals and for-profit colleges; the transmission system used to be run by for-profit utilities; and there are obviously for-profit entertainment impresarios. What does society get out of granting tax-exempt status to these institutions? The most obvious thing is that none of the gains (i.e., "profits") of non-profits are distributed to private investors. They are all recycled into the mission and services of the organization.
Society also gets these services delivered at lower cost. Why? Because the non-profits do not have to pay property tax, sales tax, or income tax and because they can finance their capital needs using tax-exempt debt instead of a higher cost mixture of equity (i.e., stock) and tax debt. Also, they are more likely to receive philanthropic donations to help pay for the services offered. Thus, the underlying cost structure of non-profits to end-users and/or society, everything else being equal, should be lower. (I say should be lower because some people have argued that non-profits are less businesslike and less efficient that for-profit firms in the same lines of business and therefore actually deliver services at a higher cost. Truthfully, I haven't seen much evidence of that, but that is not my argument for today.)
So, here's the big policy question. What would people hope to achieve by actually taking away the tax-exempt status of current non-profits? Putting aside the self-interest of people in for-profits who are in competition with non-profits, this desired outcome has to be driven by the conclusion that society would be better overall by having certain services provided only by taxable organizations, whether non-profit or for-profit. In essence, the goal would mainly be an attempt to create tax revenues at the federal, state, or local level.
But, I think the actual question is more interesting and subtle: What do people hope to achieve by threatening to take away the tax-exempt status of current non-profits? If their goal is not actually to take away the tax exemption, then they are seeking to have these organizations do more of what they feel is appropriate in the way of public service. (I set aside, for today, other purposes for such activity that are designed to achieve results altogether different.)
Currently, the determination of whether an organization deserves tax-exemption is left to the IRS and states' Attorneys General or tax departments. (The Minnesota court case cited in the Times article represents what I believe to be an unusual judicial foray into this determination, but I might be wrong on that front.) The IRS and the others use broad categories of eligibility, as directed by their respective legislatures. When questions are raised, these governmental bodies have the authority to examine programs and records and take away an organization's tax-exempt status.
So, the question I pose for you is this. Are you content with the existing form of rules and regulations covering the applicability of tax-exempt status to non-profits? Does your answer depend on whether you are talking about hospitals, schools, social service agencies, athletic organizations, research institutes, or other categories? (Let's leave religious institutions out of the discussion for today!) If you want changes, what are you hoping would be accomplished? How would you measure success?