One of the things of which Americans can be most proud is our history of creating non-profit organizations to help the less fortunate. Alexis de Tocqueville wrote with admiration about the “associations” that our forefathers formed. As eloquently stated by Larry Kennedy in Quality Management in the Nonprofit World, “An organization that attains tax-exempt status is the beneficiary of a profound opportunity to apply entrepreneurship, compassion, and practicality in fulfilling social motivations while remaining exempt from any responsibility to underwrite the nation’s infrastructure through taxes. We are exempt from these burdens because we operate under the public perception that what we do is important to society and that we are managing a business that provides services for reasons other than personal financial gain.”
In 1939 the House Ways and Means Committee noted, “The exemption from taxation of money or property devoted to charitable and other purposes is based upon the theory that the government is compensated for the loss of revenue by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare.” As stated by the US district court in Washington, DC in the 1972 case of McGlotten v. Connally, by granting tax-exempt status “the Government relieves itself of the burden of meeting public needs which in the absence of charitable activity would fall on the shoulders of the government.”
Tax exempt status, therefore, is granted to enable a spirit of entrepreneurship to blossom in areas serving the public good, by saving the government the burden of funding programming that charities are able to provide for the benefit of society, and not for the benefit of any individual.
In the September 2005 issue of Inc., Norm Brodsky wrote about how he likes competition. Well Norm, I have great news for you. In order to help non-profit organizations I am going to start my own non-profit document shredding company. The hospitals, nursing homes, universities, colleges are all coming to me. I’ll provide the same services as you, but for a fraction of the price because I’ll be paying no taxes while your paying whatever it is that you pay. And not to fear, the IRS almost never denies a request by a minimum of three adults to form a non-profit. Hurwitz Non-profit Document Shredding is moving to Brooklyn!
Don’t worry. Just kidding. But it’s not all that ridiculous. Let’s take, for example, a non-profit geriatric facility in the Bronx with total budgets of over $40 million. They provide excellent services, including a community based services organization and a nursing home. For all intents and purposes, either the local, state or federal governments fund all programs. They provide no free services to anyone. They are on a tight budget of government funding. Yet, they are tax exempt. And their CEO earns well in excess of half a million dollars.
While in past centuries the reason for tax exemption was to release the government from financial burdens allowing social entrepreneurs to take the lead in providing services for the public good, today the government in many cases provides both tax-exempt status and 100% funding for these very organizations. That gives these non-profits an unfair advantage over for-profit competitors. In fact, they would be better described as government subcontractors.
If non-profits are to enjoy the benefits of tax-exempt status, they must provide services to the community for which they are not reimbursed by the government to make up for their share of the tax pool. If not, they should lose their tax exempt status and have to play on an even playing field with for-profits. By all means let them continue to be non-profits issuing deductions for donations, but lets not have the government and government subcontractors disguised as tax-exempt non-profits joining forces againg for-profits. That's as sill as my going into the document shredding business.