In her recent New York Times article, the paper’s philanthropy reporter wrote an article which carried the sensational headline, “Charities Rise, Costing U.S. Billions in Tax Breaks.” In her article, Stephanie Strom claims that as the number of registered charities has risen by 60 percent, to 1.1 million nationally, tax-deductible contributions of more than $300 billion annually cost the IRS more than $50 billion in revenue.

In her article, Ms. Strom quotes a number of experts who are critical of the ease with which new nonprofit organizations can gain tax exempt status, stating that only about .5 percent of applications are turned down and few are subject to careful scrutiny. The dangers that these critics perceive is that there is a duplication of services and that unworthy organizations may be certified. The latter concern is reflected in three organizations chosen by Ms. Strom to mention—a “Woohoo Sistahs” group that raises money for cancer-related causes through luncheons, a “Save Your Ass” donkey and mule rescue group, and a “Red Nose Society” that sends clown noses to soldiers overseas. She also mentions a group of cross-dressing nuns who raise money for AIDS research.

The article reflects worries expressed by others both inside and outside of government concerning the non-profit sector—that it is wasteful, filled with unsavory practices, features outrageous salaries, and competes unfairly with private enterprise. My concern is that these complaints are in many cases capricious and, even when accurate, apply to a tiny percentage of the non-profit sector.

Five areas of concern offer themselves in contemplating the implications of Ms. Strom’s article:

• She conflates the increase in nonprofit organizations with a rise in charitable giving and tax deductions. In fact, charitable giving has remained steady as a percentage of the Gross Domestic Product (GDP) for the past 50 years or more, at about 1.9 percent. As the economy has grown, more money has gone to more organizations, but most still goes to large organizations. Unfortunately, a 60 percent rise in the number of organizations has not resulted in a 60 percent rise in giving.
• Implicit in the article is the assumption that people give to nonprofits because of the tax-deductibility of their contributions. Research indicates that for more than 80 percent of donors, the cause they are supporting determines who they give to and how much. Of the major reasons for donating, the tax deduction falls at or near the bottom in every survey of giving behavior.
• Strom suggests that a significant number of the organizations formed are not worthy of nonprofit status. Citing a few examples, she then turns to a number of experts who imply that there has been a proliferation of organizations that serve little if any social function. From the perspective of someone who has worked with more than 400 organizations, many of them start-up nonprofits, this is false and hurtful. The growth in nonprofits in the Northwest has reflected responses to needs that government ceases to meet and that no other nonprofit wishes to undertake. Over the past two decades, there has been a consistent devolution of responsibility by all levels of government. Direct results of this decision to cast off fiscal responsibility have included the formation of community college and public school foundations; organizations that attempt to address homelessness and help the mentally ill who were formerly institutionalized; youth groups to address the increase in latch-key kids, gangs, and other problems; arts organizations to address the continued failure of government to provide arts education and opportunities; and conservation and land trust organizations that are needed to redress the ongoing degradation of our natural resources. There is the additional issue that increasingly, charitable people want to focus locally, rather than sending money to national organizations that might not address local needs.
• She allows the misconception that money not paid in taxes is money lost to the government and the economy. In fact, if there were no charitable giving, and if government has to pay for nonprofit schools, universities, hospitals, museums, animal welfare associations, theaters, symphony orchestras, social welfare organizations, childcare and homeless shelters run by churches, and other sectors of the economy supported by tax-deductible contributions, either those services would disappear or the government would have to pay for them. Therefore, the real headline is that nonprofit organizations use the $300 billion they raise annually to provide services that replace what government might otherwise be required to provide. Subtracting the tax deductions donors give, the total benefit to the government approaches $250 billion. As government funding to arts, higher education, various types of scientific research, and social and humane services has decreased, private giving has picked up the slack—to the benefit of us all.
• The article expresses concerns about wastefulness by nonprofits. In fact, nonprofits are held to higher standards of efficiency than the private sector or government. A variety of rating agencies, a requirement for transparency, and pressure to keep non-service costs low result in a lean sector that minimizes overhead. Despite occasional outrage at nonprofit CEOs who are paid generously (but a fraction of what they could make in the private sector), nonprofit salaries are generally well below market levels for similar jobs. Private school teachers are paid less than public school teachers; physicians working for HMOs are paid far less than their counterparts in private practices and at for-profit hospitals; actors in major nonprofit theater companies earn a fraction of what their compatriots in television and movies earn. This has resulted in an assumption that working at a nonprofit means that an individual must make sacrifices, thereby limiting the pool of potential employees.

No sector of the American economy is without flaws. I would wager, however, that the nonprofit sector is more dedicated to the public benefit and less concerned about personal profit and aggrandizement than any other segment of the American economy. If the 1.1 million registered nonprofit organizations attract $300 billion, it’s a good sign that Americans, in good times and bad, perceive their value. Nonprofit organizations create jobs, perform irreplaceable functions within our society, and do so efficiently and effectively. The real news in Ms. Strom’s article is that as other sectors increasingly fail to meet local and regional needs, the astonishing vitality of the nonprofit sector responds to ensure that those needs are met.

Filed under: Reviews by Stuart Grover on December 8, 2009