The voices of Tax Policy Center's researchers and staff
Last month, two developments in the nonprofit world offered more reasons to wonder whether the benefits of tax-exemption are worth all the trouble they can cause. The first has to do with an organization’s desire to become a certain type of 501(c) organization. The second relates to the ability of government to monitor tax-exempt nonprofits.
At first glance, the developments seem to be about free speech: Should the federal government prevent a tax-exempt nonprofit organization from advocating a policy position? Should a state government collect information on who donates to tax-exempt nonprofit organizations?
But look closer. They’re really about money, transparency, and oversight.
Money: Is 501(c)(3) tax-exempt status simply a way to raise money from rich donors?
Back in 2019, an organization called Christians Engaged organized as a nonprofit corporation “formed exclusively for charitable, religious, educational, or scientific purposes.” It seeks to encourage Christians to pray, vote, and engage in political education or activism. For example, Bunni Pounds, president of the self-described nonpartisan ministry, writes that people should “see if their beliefs align with the Bible and your Biblical values” when choosing to vote.
The group says the Bible explicitly opposes same sex marriage, immigration, and abortion. In June of this year, the IRS denied its request for 501(c)(3) tax exempt status because its “Bible teachings are typically affiliated with the [Republican] party and candidates,” and amount to prohibited political campaign intervention.
Public outcry from Republican elected officials was swift. Their argument: The IRS was assaulting free speech and freedom of religion in its persecution of Christians.
Of course, the IRS wasn’t abridging the group’s ability to express its political views. It was saying it could not both express explicitly political views and enjoy certain privileges afforded to 501(c)(3) organizations.
First Liberty Institute, on behalf of Christians Engaged, formally challenged the IRS decision, arguing that tax-exempt organizations are not required to maintain neutrality on policy issues. First Liberty wrote, “if exempt organizations may only articulate public policy positions on issues as to which no political party or candidate has an opinion, then the regulations recognizing that exempt organizations may advocate positions on public policy issues have no meaning.”
The IRS reversed its denial, and granted Christians Engaged tax-exempt 501(c)(3) status.
But if free speech is so important to Christians Engaged, why was it so interested becoming a 501(c)(3), since that designation allows very limited political activity? It could have gone for 501(c)(4) status as a social welfare organization, which would empower it to explicitly endorse political candidates.
Maybe it’s because donations to 501(c)(4) organizations are not tax-deductible. And indeed, as soon as the IRS reversed itself, Christians Engaged updated its website to announce that donors could claim a charitable deduction for every gift since July 2019.
The problem: Except for a small “above-the-line” deduction in 2020 and 2021, only about 10 percent of households currently itemize and therefore can claim a deduction for charitable contributions. Nearly all itemizers have high incomes. Who donates to Christians Engaged, or similar politically-oriented non-profits? The public doesn’t know.
And since the Trump Administration changed the rules in 2020, nor does the IRS, at least for many non-profits. The 2020 rules require only that 501(c)(3) tax-exempts report gifts of more than $5,000 to the agency. Other groups, such as political advocacy 501(c)(4)s, no longer need to disclose any donor information to the IRS. Yet, knowing who gives is central to the government’s ability to monitor tax-exempt nonprofits and prevent fraud and abuse.
Transparency: Are donor disclosure rules on their way out?
This year, at least 10 states considered legislation to exempt nonprofits from reporting to states the names of donors they already report to the IRS on Schedule B.
And on July 1, the US Supreme Court ruled in Americans for Prosperity v. Bonta. The case challenged a California regulation that required tax-exempt nonprofit organizations to report high-dollar donors to the state attorney general as well as the IRS. The plaintiff argued that the regulation violated the First Amendment to the US Constitution.
In a 6-3 decision, the high court ruled that disclosure laws must be “narrowly tailored” to advance the government’s interest in requiring disclosure. In other words, a state cannot easily require charitable organizations to disclose the names of their major donors.
Oversight: Can the public good be served without any?
Catholic University Law professor Roger Colinvaux, writing in The Chronicle of Philanthropy, argues that Americans for Prosperity v. Bonta could lead to future opinions that could gut all reporting requirements aimed at ensuring charities operate in the interest of the public and not their donors or other private actors.
Said Colinvaux, "In terms of driving activity into darkness, this case could be the forerunner to a Citizens United for charities… [casting] doubt on key federal laws that ensure the transparency of all the nation’s nonprofits. Most immediately, the identical federal requirement to report major donor information to the IRS will be called into question.”
Writing for Vox, Ian Millhiser concludes that the decision is, “a disaster for anyone hoping to know how wealthy donors influence American politics.” Millhiser noted what Justice Antonin Scalia wrote in a 2010 opinion: “I do not look forward to a society which, thanks to the Supreme Court, campaigns anonymously… hidden from public scrutiny and protected from the accountability of criticism.”
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
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