So, you think nonprofits should be taxed

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[Image description: A stack of nine shiny gold coins on grey background. Image obtained from Pixabay.com. Wait, on second look, these might actually be chocolate coins!]

Every once a while, I encounter people who think nonprofits are getting it easy and should be paying taxes. “Rabble rabble,” they rabble, “why should only businesses pay taxes! Especially when most charities are scams, with the majority of their money going to their fat-cat CEOs’ pockets. Rabble!”

Here’s a comment someone made on one of my posts: “If nonprofit is an industry sector, then it is time to start taxing it.” (They also added, in response for my call for the sector to pay our people better: “If you own your own company, and you control the finances, go ahead, pay people more just because. On the other hand in the real world, you sound like a fool on this point.”)

From the tiresome memes and ignorant, bizsplainy blog posts and comments out there, I think some members of the public have this image of nonprofit folks as mustache-twirling con artists sitting at our desks counting piles of gold coins while starving children with trembling eyes beg us in fear for more gruel. “Mooooore?!! Only 2 cents of every dollar is available to purchase gruel, and we’ve spent it all this month!”

On a tangential note, can someone—maybe a trendy food truck—reinvent gruel? It feels like gruel has been given a bad rap. Maybe if we add some hemp hearts and goji berries…

The people calling for nonprofits to be taxed usually have no experience or understanding of the nonprofit sector. Or government. Or tax structures. Or irony. There are not many of them, thank goodness, but they seem to be increasing in numbers lately, so I maybe we nonprofits need to do a better job preparing counter-arguments. Heavens knows what sort of destructive ideas will catch on fire next in this political climate. Next time someone makes this irritating and clueless declaration about how we scammy nonprofits need to be taxed, bring up these points:

Oh really? What should we be taxed on? How about to be fair, we get taxed the way for-profits are taxed? Our tax laws are complicated, but to simplify things, most for-profits are taxed on their net profits; that is, the amount they make after expenses are deducted. Well, nonprofits usually spend most of their revenues to run programs. According to this report by Urban Institute, in 2012 the entire nonprofit sector got about $2.26 trillion dollars in revenues, and spent $2.10 trillion in expenses. So what exactly are you taxing us on, when we are spending almost all our money to provide housing to people experiencing homelessness, counseling to veterans, food for hungry kids, etc., and anything we have after expenses just carries over to pay for services in the next fiscal year? Sure, there are a few rare nonprofits, especially larger institutions like hospitals, as a colleague pointed out, that seem to be making a ton of revenues, and we might need to look at regulations and laws to incentivize those larger orgs to spend those revenues to benefit the community. (And, as other colleagues mentioned, foundations–which are also nonprofits–need to increase their annual payout beyond 5%, but this needs its own separate post for the future). Still, the vast majority of us are barely breaking even while doing critical work.

Nonprofits already pay all sorts of taxes: We pay a bunch in payroll taxes just like for-profits. And most of us pay sales taxes for all the supplies and stuff we use to do our work. Says a colleague: “There often is a misperception that we don’t pay sales tax when we purchase all the supplies and equipment that we need to operate our organizations, but we do and I have the sales receipts to prove it.” Yes, nonprofit organizations in some states can get a sales tax exemption, but these states are rare, so overall, we still pay a lot of taxes already.

Being taxed would reduce critical services: It would reduce the amount of money nonprofits have to spend on services, meaning there will be fewer people who will be helped, less food for hungry families, fewer beds at homeless shelters, fewer arts programs, less advocacy to change inequitable laws, etc. These things all require money. And the more money you take away from nonprofits, the less stuff we can do. And if you think only the poor and unfortunate benefit from our services, you are wrong. You benefit from the work nonprofits do, in ways you don’t even realize. If you want a strong, safe, vibrant community, you want to make sure nonprofits are strong and doing their jobs.

Being taxed would cause instability: If nonprofits know they’re going to be taxed on their left-over funds, we’ll likely just spend all of it before the year is over in order to enhance programs and services and avoid paying taxes. Think of a food pantry. If it has money left and knows it’ll be taxed, it will likely spend it on purchasing food to give out the next year. An after-school program may preemptively spend on supplies, etc. This, however, will have grave consequences, since nonprofits need that leftover money to serve as a flexible cushion to ensure programs continue without interruption. If they have zero funds to start with each year, it greatly jeopardizes the quality and continuity of desperately needed programs and services.

We are doing the work the government should be doing: OK, so let’s say for some reason a nonprofit decides not to spend all its leftover funds in order to avoid paying taxes. So it pays taxes. What happens with this money? It would go to the government, which would be ironic, since so much of the work of the nonprofit sector is in response to the failures of government and market forces to effectively address societal issues. We are filling in gaps that the government especially sucks at doing. And sometimes the government provides us funding in the form of grants and contract to do this work, though it is never enough to cover all the expenses. To then ask us to pay money back in taxes is bonkers. Imagine if your friend has a car that broke down. They try everything to fix it, but they still can’t. So they call you, and they give you $8, which is 10% of what you need to actually buy the parts and fix the car, so you have to go ask other people for the rest of the money. Then, when you fix the car, your friend says, “Uh, since you collected all that money from other people to fix my car, you owe me $12 in taxes.” That’s what taxing most nonprofits would be like.

Honestly, many of us would love it if the government were more efficient and effective in taking care of its people, and then we’d be put out of business. In fact, many of us would loooooooove to be put out of business. Imagine if our government took great care of our veterans, providing them with housing and mental health services, etc. And it solves education inequity. And it tackles environmental degradation. Wouldn’t that be awesome? All of us would be able to do other things we are good at, like wedding photography, or beatboxing, or making adorable little stuffed animals out of felt to sell at a farmer’s market or crafts fair.

For these and other reasons, taxing nonprofits for the most part makes no sense. We are not for-profits. We are doing critical work that other sectors can’t or won’t do, while dealing with ridiculous barriers like restricted funding. The work is hard enough. The least society could do is give us a break on taxes so we can have money to do our work! Gah!!! This topic makes me and colleagues wonder at some other underlying issues that we need to tackle as a sector:

The public has a skewed image of nonprofits: Most nonprofits are not anywhere near the scale of hospitals and universities. 66.4% of nonprofits are less than $500,000 in budget size, according to the report by Urban Institute. But for some reason, there’s this perception among the vocal detractors that we’re all large and greedy. It’s like basing the perception of small businesses on the corruption of Enron. It seems we have a lot to do to inform the public about what we actually do. Because if people are not informed, they’ll vote for inane and destructive laws designed to regulate the orgs they think are representative of our sector, but what will end up happening is punishing the rest of us and screwing over the people we serve.

The designation of “nonprofit” being too loose: Says a colleague, “Keep in mind that the NFL was a nonprofit until 2015. And faith-based groups that own tons of property that isn’t used for faith-based purposes. The real issue is whether we need to crack down on requirements to be a tax-exempt nonprofit. (This also gets into Trump’s desire to allow churches to endorse political candidates, in violation of the Johnson Amendment.)” We need to be more vocal and protective as a sector on who gets nonprofit status. “Please, sir, may I have nonprofit status?” “Nonprofit status?! You want nonprofit status?!”

We need tax reform: This is for a future post, but seriously, we should talk about increasing taxes in general and having the government take care of societal issues. We do amazing work, but we cannot keep handling so much of the burden that our government and society should be shouldering. Read this article for thoughts on this important topic from the legendary Kim Klein.

So, there you go. If you encounter anyone who says that nonprofits should be taxed, just forward them this post. Who the heck knows, maybe this is not an issue at all, and I just wasted an entire post rambling about this instead of more important stuff, such as a sequel to this post on nonprofit cocktail recipes. But if I hear another person say something like “The nonprofit industry should be taxed like any other industry” or “nonprofits need to act more like for-profits,” I will roll my eyes so hard they might go into warp speed and enter a parallel universe where people understand and value nonprofits, instead of trying to make our work harder so that some of us end up daydreaming about quitting our work and opening an organic, artisanal gruel shop called “Cool Gruel.” (I’ve been stocking up on dried goji berries, just in case).

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