Should the US Tax Code that regulates nonprofits (501 (c) organizations be rewritten? According to a recent report from the Tax Foundation (a nonprofit), a resounding yes! The conclusions of the report identifies that the Tax Code is not current with reality, particularly, 501 (c) income sources. The report also heavily emphasizes that the current Code gives nonprofits a super lift in unfair competition (this being an ongoing argument likely since the creation of tax exempts). But the data used as the basis for the case that the Code needs revision makes good common sense. And really, good common sense is the only best sense for decisions, in my opinion.
Here's some of the learnings:
Key Findings
- For over a century, lawmakers have exempted politically favored organizations and industries from the tax code. As a result, the tax-exempt nonprofit economy now comprises 15 percent of GDP, spans more than 1.8 million organizations, and manages over $8 trillion in assets. In 2019, it pocketed more than $238 billion in net income.
- The tax-exempt sector is overdue for review and reform. The U.S. needs a principled, rules-based approach to 1) distinguish between benevolent organizations and tax-exempt businesses, and 2) level the playing field between the business activities of nonprofit and for-profit entities.
- Many industries exempted from the income tax were designated as such in the Wilson-Gorman Tariff Act of 1894 and the Tax Act of 1909, but they reflect the social norms of the 19th century, not our 21st century economy.
- The majority of tax-exempt organizations today are business-like in form and function, including credit unions, hospitals, utilities, insurance companies, universities, professional athletic associations, golf clubs, and consulting firms, to name a few.
- Business-like income has been the fastest growing source of income for 501(c)(3) tax-exempt organizations over the past 30 years, now accounting for 71 percent of their income. Charitable donations make up just 12 percent of nonprofit income.
- More than half (55 percent) of all the income generated by 501(c)(3) organizations comes from tax-exempt hospitals and health-care plans. The largest nonprofit in America is Kaiser Permanente. Kaiser’s health plan, hospitals, and state health plans generated over $110 billion in revenues in 2019.
- In 2019, there were 325 501(c)(3) nonprofits with more than $1 billion in revenues—nearly all of which are hospitals and universities.
- The unrelated business income tax (UBIT) rules that were intended to rein in tax-exempt businesses have become toothless and have allowed the growth of large nonprofit businesses.
- A reasonable rewriting of the tax-exempt rules should include narrowing the definition of “public charity” and subjecting all non-charitable income to the corporate tax rate of 21 percent. Doing so could raise nearly $40 billion annually in new tax revenues.