Wednesday, March 24, 2010

Taxing Nonprofits?

With Tax Day only three weeks away, this article about the move by cash-strapped states and cities to revoke the tax exemptions of nonprofits takes on greater importance. There is no doubt that the recession is crippling state budgets, which are not permitted to run deficits (unlike the federal government). But the pain that states and cities have been feeling is only going to get worse in the next year or two.

The federal funding going to states through the stimulus bill is going to run out because the stimulus was too small (especially when compared to the bank bailouts). In many cases the stimulus is what made it possible for states to close budget gaps in FY2009. Some state officials are already looking ahead to the end of the stimulus funding and calling it a “cliff effect.”

So with the cliff approaching, it’s completely reasonable for states to look in every crack and corner for revenues, but taking from one commons to boost another is short-sighted.

The response by nonprofits in the article is appropriately measured. The last thing we should do is contribute in any way to the anti-tax, anti-government chorus of the tea partiers. However, it seems that there is a need to be able to distinguish between the struggling nonprofits that are not in a financial position to both meet the social service and budgetary gaps of state and local government, and the huge institutions that are nonprofits-in-name-only.

It is hard to provide a reason for Harvard to not contribute to the city’s budget in exchange for the water and sewer services it uses. But the small nonprofits giving food, shelter and other services to the millions of people who have lost their jobs in this recession need to be able to devote their resources to their primary mission.

The proposal by the Pennsylvania State Senator to impose an “essential services fee” according to the amount of property owned by nonprofits seems like a fair and reasonable way to distinguish between the small struggling nonprofits that most of us think of, and the huge universities, hospitals, and corporatized charities that are in much better financial positions to be called on to contribute to balancing the budgets of cities and states. This is especially true if such nonprofits are really operating as real estate moguls, as the State Senator claims in the article.

As states and cities try to figure out how to balance their budgets, the principle should be to call on those most able to pay to step up. Obviously, that principle should lead states to close the corporate tax loopholes, breaks and abatements enjoyed by the banks and corporations that have been the first to experience the economic recovery that everyone else is waiting to see trickle down to the ground. And similarly, there are some nonprofits-in-name-only that should be contributing to the commons-project of shoring up state’s dire financial straits.

But just as small businesses don’t want to get lumped in with huge multinationals, struggling nonprofits should continue to be exempted from any temporary taxes or fees applied to the huge hospitals and other institutions. Most small nonprofits are already contributing to the commons by virtue of the work they do and the services they provide.

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