Throughout the nearly 20 years of writing this column I have chronicled the drip-by-drip deterioration of the respect and legislative deference traditionally given to charities and other non-profit organizations. It was not my purpose, but who could ignore the many high-profile shenanigans over the years at United Way of America, American University, the Smithsonian, the Red Cross and others, involving tacky, greedy, sleazy and illegal conduct? I couldn't, and neither could Congress.
For the first time in my memory, we now have a major congressional figure publicly questioning the very premise of granting tax exemptions to some charities. Sen. Charles Grassley, R-Iowa, an influential overseer of the tax-exempt sector, has asked why fee-for-service charities such as hospitals and universities deserve a government subsidy when there is "no known discernible difference" between them and for-profit businesses providing the same services. It is a very good question, but it would never even have been asked years ago. And it gets worse.
Grassley has also asked how much charitable tax exemptions are costing the government in lost revenue and whether they ought to be regarded as tax expenditures. His idea is that the ongoing budget and tax-reform process should have the charity tax exemption on the table. This move should send shock waves throughout the tax-exempt community.
First, charities tend to be offended at the very idea that their tax exemption is the same as a subsidy. They feed the hungry, house the homeless and heal the sick, and they spend all their income on those missions. But not all of them (especially the fee-for-service entities) spend all of their income on their missions. Generous salaries and benefits, sumptuous offices, high-end travel and similar for-profit-like characteristics have steadily undermined the "not a subsidy" argument.
Second, when the government begins to think of the charitable tax exemption as an outright grant of funds (i.e., a tax expenditure), it is easier to throw the issue into the messy and unpredictable annual budget process. Instead of being seen as a sacrosanct and off-budget issue, the exemption becomes a potential source of badly needed revenue.
Third, the lifeblood of the charitable sector, the personal income tax deduction for donations to charity (also a tax expenditure) is now on the table, too. If donors don't get a tax break or if they get less of one for their contributions, donations will plummet.
Given the huge national debt and the influx of members of Congress determined to cut spending, the charitable sector has something to worry about. The so-called fee-for-service charities seem the most vulnerable. Unless there is a huge spike in unrelated business income tax payments from such charities, the pressure on them will remain. But there won't be such a spike because the basis of their current exemption is that their revenue-producing activities are deemed inherently charitable by law. Thus, if a hospital tripled its revenues, it would pay not a cent more in unrelated business income tax. Therein lies the problem if you are trying to raise revenue.
The same problem arises with the tax imposed a few years ago when Congress became outraged at huge compensation packages given to charity executives. You can't rely on the so-called excess benefit transaction tax for more revenue because it was designed to punish bad behavior, not to raise revenue.
Congress is looking for money, and the tax-exempt sector has plenty. I like to think that had we all been on our best behavior these past 20 years, Sen. Grassley might never have questioned the sanctity of the charitable exemption. Maybe I'm wrong about that, but it's a nice thought anyway.