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What should be an allowable non-profit?
In a ruling last December that sent tremors through the not-for-profit world, the Minnesota Supreme Court said a small nonprofit day care agency here had to pay propery taxes because, in essence, it gave nothing away.
...Almost 88 percent of overall nonprofit revenues in 2005, the most recent year for which figures are available, came from fees for services, sales and sources other than charitable contributions...Nonprofit health care providers, day care centers and retirement homes, among others, are often difficult to distinguish from their tax-paying competitors.
...the Mall of America, a major tourist attraction, was seeking tax exemptions as part of its plans to expand, arguing that it aids the state economy by drawing visitors.
Here is the full story, interesting throughout. I would say the Mall of America no, hospitals no (any subsidy to care should be more selective), the AAA club no, universities yes (ideas are public goods), and charities yes. And here are important new developments in the world of Harvard philanthropy.
Posted by Tyler Cowen on May 26, 2008 at 08:25 AM in Law | Permalink
Comments
shouldn't subsidies to ideas also be more selective as well?
Posted by: AO at May 26, 2008 8:43:46 AM
Should all public goods be subsidized then? What about the news media? Television? Movies? If a paper by an academic about Buffy the Vampire Slayer is a public good, then surely Buffy the Vampire Slayer the TV show is also a public good. Why subsidize one and not the other?
Posted by: Hei Lun Chan at May 26, 2008 8:50:48 AM
" universities yes (ideas are public goods), .." ???
Please unlock jstor then.
Posted by: Matt at May 26, 2008 9:18:17 AM
I'd say NO to everyone. Selective tax exemptions just lead to gaming (Mall of America? WTF?!?)
Charities and universities can have special "property tax bakes sales" to meet their obligations. (Harvard's would be pretty low, with a basis from the 17th century.)
It's the same stupidity as we see with corporate taxes.
My idea (since a long time) is to tax property alone, but I have been advised by wiser heads that we need to keep a balance between property, income and consumption taxes. Fine -- but the only exemption should be for the first $x, $x and $unprocessed food, respectively.
Posted by: David Zetland at May 26, 2008 9:20:48 AM
The whole system of tax-exempt status for non-profit organizations and/or causes inevitably leads to this kind of political wrangling. Plus, it puts the government in a position of creating inappropriate incentives that distort how people choose to allocate their money/resources in a fashion that is biased towards someone's political agenda.
A few weeks ago, Yaron Brook wrote a great column in Forbes.com on the perils of tax-exempt status and "social engineering" at:
"Life and Taxes"
http://www.forbes.com/opinions/2008/04/16/yaron-taxes-campaign-oped-cx_ybr_0417yaron.html
Posted by: Paul Hsieh at May 26, 2008 9:36:31 AM
I generally agree with all of these comments. They reflect the general problem of democracy as highly motivated interests get special payments or tax exemptions.
Posted by: John Bailey at May 26, 2008 9:59:28 AM
Tyler,
I think everyone should be exempt from property taxes. That would solve the problem.
Best,
David
Posted by: David R. Henderson at May 26, 2008 10:56:11 AM
I found your feed as a recommendation from Google Reader just a few days ago.
I work for a non-profit, and I think that your list (and what it suggests) of what should be allowed to operate as a non-profit is far too slim. If ideas are public domain, so should be health, and 'charities' is too limiting a word for what the non-profit community is made of.
The organization I work for exists as a non-profit to provide tech support, web development and other IT services to other non-profits. We're part of a community, and being a non-profit ourselves means we understand the budgeting constraints at our client organizations far better than a for-profit IT company AND it also allows us to set rates that are not "competitive" - allow sliding fees, etc, which would be contradictory to the "rules" of for-profit business.
For the amount of money that gets spent in businesses across the board, either for-profit or non-profit, there's a miniscule amount of grant funding out there for IT work - and yet, in this day and age, it's critical. And there's even less funding available for organizations that exist in a support capacity - supporting other organizations instead of supporting issues like homelessness, teen parents, HIV patients, civil rights, etc, directly. So in order to maintain ourselves as a non-profit, most of our income does come from services that we "sell". But we could not do it in the way that serves our community as a for-profit business.
Posted by: Photopoppy at May 26, 2008 11:13:38 AM
In Europe they have a wealth tax. Maybe we should adopt this. Then people won't be putting so much money into nonproductive assets like real estate. Be careful what you wish for...
What about credit unions? Do they pay property taxes?
Posted by: jorod at May 26, 2008 11:40:18 AM
In Europe they have a wealth tax. Maybe we should adopt this. Then people won't be putting so much money into nonproductive assets like real estate. Be careful what you wish for...
What about credit unions? Do they pay property taxes?
Posted by: jorod at May 26, 2008 11:40:45 AM
So all the non-profits should be taxed, except for the one you work for ... nice. I absolutely think universities should not be exempt. It's obvious that univerisities are revenuing maxmizing. The only difference is that universities do not have equity investors, so they distribute the profits to their employees. Imagine if Harvard was for profit. Instead of sinking all their extra money into ridiculous luxury, they would open up a dozen branches and education ten times the number of students. Non-profits are usually the last type of business you want to subsidize with the tax structure, since they are the most ineffcient and least scalable business structure.
Posted by: Patrick Fitzsimmons at May 26, 2008 11:59:15 AM
Non profits that "give nothing away" are still very different from for profit institutions. Think nonprofit food coops vs whole foods.
Posted by: matt at May 26, 2008 12:41:57 PM
Non profits that "give nothing away" are still very different from for profit institutions. Think nonprofit food coops vs whole foods.
Aren't most food cooperatives for-profit but owned by the consumers? The consumers prefer making a small profit generally, but they do sometimes send out checks, just like mutual insurance companies.
Posted by: John Thacker at May 26, 2008 1:51:25 PM
Not hospitals? How much more selective do you want to get? Dollarwise most subsidies to healthcare (Medicare,Medicaid) increase demand, worsening the problem of healthcare inflation. The only problem with subsidizing supply through tax exemptions for nonprofit hospitals is that the tax exemption isn't big enough to offset the huge amount we throw into increasing demand.
Posted by: Tom Hanna at May 26, 2008 1:56:15 PM
I agree with David Henderson; there is no objectively correct answer on this. Whenever government gets involved, you can't be "fair" since it's not fair to take people's money at gunpoint (i.e. taxman).
I think the objections to Tyler's position are good ones. What about bookstores? What about creative writing seminars? What about music lessons, so long as the students agree to keep any new songs in the public domain?
And the person who gives tech support to non-profits: I'm not disagreeing with your principle, but notice that then the McDonald's down the street from the hospital could also claim at least partial exemption, since it "provides food to the non-profit sector" when the hospital employees eat there. And then GM when it sells a car to a pastor shouldn't be taxed on those revenues...
Posted by: Bob Murphy at May 26, 2008 1:59:30 PM
The idea of not taxing non-profit firms is quite simple. Since they don't make an accounting profit, there is no profit to tax. A for-profit firm that makes no taxable profit also is untaxed. Clearly, non-profits make economic profits which they distribute to their employees in various ways. However, if a for-profit firm spent all of its profit on employees, it would not be subject to corporate income tax either.
All of the compensation that is given to employees is taxed the same way that compensation is taxed for employees of for-profit firms, so I see no need for adjustment here.
Endowments are different, however, because the "income" from the endowment is not taxed. I think endowment taxation is a separate discussion that should focus on the long-term needs and value of non-profit charity work, especially in hard economic times.
As a society, we can decide which types of organizations are taxed and which are not; however, the implications can be striking. I recall studies that show that for-profit hospitals have worse patient outcomes (e.g., higher mortality), especially in locations where there is limited competition. Life and death may not be a public good, but they are an important part of most "true" charities' missions.
Posted by: Michael Kelly at May 26, 2008 2:06:19 PM
See that is where you are incorrect. Non Profits do make accounting profits or else they would have no need for non profit status. Non-profit status just means they do not pay Taxes on the profits unlike the rest of companies who have to pay taxes on profits AND oftentimes revenue.
"The idea of not taxing non-profit firms is quite simple. Since they don't make an accounting profit, there is no profit to tax. A for-profit firm that makes no taxable profit also is untaxed."
Posted by: azer at May 26, 2008 2:44:46 PM
I don't know the specifics of the hospital case you are talking about, but I can give you an example how a for-profits and non-profits can still be profit maximizing entities.
Lets say you have Hospital 1 & 2. 1 is non profit, 2 is for profit. They both expect a 10% net profit = 10M a year
#1 Rev = 100M - 0% Prop tax, 0% Corp tax, 0% State tax = 90M for Operating
#2 Rev = 100M - 3% Prop tax, 35% Corp tax, 2% State tax = about 80M or so
So a non profit could have similar revenues & profits, yet have the ability to spend more on operating costs. Might explain why for-profit hospitals can have worse paitent outcomes. Not to mention they probably have lower debt costs due to subsidies.
Posted by: azer at May 26, 2008 3:00:48 PM
Patrick Fitzsimmons: "The only difference is that universities do not have equity investors, so they distribute the profits to their employees."
Yes, with one qualification: a lot of their "profits" (from their fund-raising activities) are just added to their endowments, which keep growing. A for-profit corporation can't do that, partly for tax reasons and partly because there are residual claimants who wouldn't stand for it. Universities are piling up billions in assets that will never be spent for any educational purpose--the endowments will just grow forever or until the government can no longer resist the urge to take some. Why people give them money is a mystery; there are lots of truly deserving, and poor, charities around.
Posted by: Alan Gunn at May 26, 2008 6:16:21 PM
hospitals -- no. HAH. Increase paper work in Hospitals further by making sure contributions can only be spent in X way. I.e. institutions that provide care for people with no insurance, should be taxed. Many of which are already financially in the red.
Universities -- such as harvard, which many have noted is operated more like a hedge fund, with an adjunct university -- should be tax exempt. Perfect sense! No self-interest there, Professor.
Posted by: Jor at May 26, 2008 6:39:47 PM
azer, you are completely correct; however, I think that I have a point to make. Let's find out if I do and see what words appropriately describe it.
The way I look at a non-profit operating "properly" is that even if they make money in one period, they will tend to make investments so that they lose that money in another period. For instance, suppose a non-profit hospital makes money from a transaction. That money is then used to buy a piece of equipment (an MRI machine). A non-profit that should be getting a tax holiday is one where that the services of that machine will be priced so that the internal rate of return from that investment is less than or equal to zero.
Let me give you another example that is closer to my experience. Suppose a non-profit raises money to preserve a historic site. The fund-raising can be thought of as a positive accounting profit event; however, the money goes into an investment that has an internal rate of return of zero. (The buy and preserve the site and building, perhaps renting the building out to a local arts group, but the endeavor merely meets operating costs.) I think most people would agree that no "profits" are made here, or, perhaps, that no "profits" are made here that "should" be taxed. All of the "profits" are tied up in the zero IRR historic site, not in a pile of cash or securities at the bank.
The problem in my mind comes about when the non-profit starts to price its products such that it has money left over and winds up with an endowment. (I believe that very few non-profits [on a percentage basis] have endowments, but, as we've seen in education, they can get quite large.) In this case, the non-profit has positive internal rate of return projects that dwarf any zero or negative IRR projects. Ultimately, money is being funneled primarily into market return securities and we can question whether that is worthwhile for society.
So, in my mind, Harvard is a hedge fund that has a relatively small, money-losing education business on the side. I can see a justification for an endowment in a world of uncertainty when there are "bankruptcy costs" associated with the failure of a non-profit. However, large endowments are disturbing and are possibly evidence that a non-profit has not followed a zero or negative IRR strategy.
I don't think we should penalize the charities that truly funnel their "profits" into zero and negative internal rate of return projects that help the public good.
azer, is there anything reasonable in the above statements?
Posted by: Michael Kelly at May 26, 2008 7:01:24 PM
tks to universitires youare reading this blog.
Internet was born in
Stanford.The Pentagon hired someone in Stanford to made it.Stanford is the center of Silicon Valley because Hp, and Xerox invested ther tks to tax exemptions
Mosaic, open source,free, is the basis of your browser, no matter wich one are you using, was developed in The Illinois University.
The blog authors are tenured professors that are giving you for free their knowledge.
The Large scale integrated circuit was invented by a graduated student.Then he tutored the founder of the inventor of microproccesor wich allows you to have a computer at home.
The first computer was developed at Harvard, Eniac.
You have the best system of Universities of the WORLD, 77 OVER 100 ranked universities are american and the Massachusset Legislature wants to ruin the first one.
And seem that most commentes want the same
Posted by: karl at May 26, 2008 8:57:01 PM
The article is talking about tax exemption for the purposes of property taxes. Property taxes do not depend on whether the entity is making a profit or not. In other words, hospital A that makes 0 profit has to pay more property taxes than "non-profit" hospital B that makes $1m profit which is added to the endowment.
I say get rid of exemptions on profits while keeping the charitable deduction for donors. Why should Harvard be tax-exempt on the dividends it receives from Microsoft or IBM stock, when everyone else is taxed on that dividend?
Posted by: LZ at May 26, 2008 9:54:21 PM
OK, I'll be rude and add churches to the list of debatable tax-exempt organizations. For instance, Benny Hinn received a lot of publicity a while ago for asking for donations to purchase a Gulfstream private jet. And, of course, the Church of Scientology deserves some note in this regard as well.
Posted by: Ricardo at May 26, 2008 10:17:52 PM
I disagree with Azer's statement that for profit hospitals have worse outcomes. In fact scientific studies failed to show such is the case. By the way, all hospitals in the US regardless of profit status are required by federal law to care for everyone that is admitted whether they have insurance or not (and whether they are legal residents of the US or not).
The community not for profit hospital I work at charges the same fees as any for profit hospital and goes after defaulters as aggressively as any other entity using collection agencies and such. Not for profit entities just like religious entities want to be treated as sacred cows (- no critical look at their executive salary structure, equipment purchases and hiring practices, etc). The community is actually a net loser with not for profit hospital because of loss of huge property tax revenue and income tax. Just because there is no stock holder dividend does not make not-for-profit entities efficient or better at delivery of health care services. Often these entities have religious affiliations and indeed I suspect have a subtle bias in hiring and caring. In some places not for profits are magnates to hire family and friends of the administrators and board members. Actually, for profits are under greater scrutiny because of the stock holders.
What we need is a free market in health care with government getting out of provision of health care and letting customers choose the best and most affordable service they can find. I would also think the providers should be able to compete on fees based on their knowledge, skill, customer service metrics (and the market value of their service).
Posted by: GIdoc at May 26, 2008 10:40:49 PM
