Back in May, Stephanie Strom at the New York Times wrote an article about increasing challenges to the tax-exempt status of nonprofits. I think there’s plenty of rational positions to take on issues like whether universities should be required to pay out a certain percentage of their endowment, whether nonprofit hospitals deserve full tax exempt status and if nonprofits who serve wealthy clientèle (such as the opera) should be given a tax exemption. But there was another theme to the article that I want to explore.
Strom writes about how last year the Minnesota Supreme Court denied a property tax exemption to a nonprofit day care agency because (in Strom’s words) “it gave nothing away.” Audrey Alvarado, executive director of the National Council of Nonprofit Associations agreed with Strom’s interpretation of the court decision saying that the court, “is saying, ‘wait a minute, charities are supposed to give things away for free.'”
I think this is such a disturbing concept. Recently I’ve been writing about how philanthropy is not defined by making the gift of money, it is the impact that the gift achieves. The idea that “free” equals maximum impact is asinine. Nonprofits are not supposed to “give things away”, they are suppose to provide public goods and services (goods and services that benefit society as a whole). The government also has the role of providing public goods and services. But imagine the outrage if the government made it policy to only give things away for free. No more toll bridges, museums all free, welfare checks and college tuition aid given without any expectations of the recipient.
Doing good is not the same as giving something away for free. Let’s set aside the intellectual argument for a minute and just look at how nonprofits actually work. According to the Urban Institute, in 2005 nonprofits collected $1.6 TRILLION in revenue.
The Minnesota Supreme court ruling is so damaging because it reinforces the idea that running a nonprofit is easy (jeez, you’re just giving stuff away, how hard can that be?) and it validates the idea that nonprofits should keep operating expenses very low (if you’re just giving things away, why would you need a complex infrastructure and highly talented employees?).
Giving something away is easy. Doing good social sector work is hard because it has nothing to do with giving things away for free.
Not to mention that people (mistakenly) believe that if you give something away for free it must not have any value.
Great post Sean. Here’s my take. I think that it is worth taking another look at the Minnesota case. It seems that the court got to the “they are not giving anything away for free” line of analysis when it couldn’t find any other way to distinguish the nonprofit\charity day care provider from the other for-profit (read: “tax paying”) providers. According to the NY Times report, the fee structures were indistinguishable. They ask “where’s the difference” between a for-profit and a nonprofit provider. Or rather “where is the charity” in this work? Giving things away for free is a simple(istic) proxy for measuring the difference. From the government’s perspective, they are “giving away” tax revenue. They want to know what they are getting in return. Finding “no difference” in the Minnesota case, the government is looking to collect some tax revenue. This is clearly worth following as the Minnesota legislature defines or redefines “charity.”
That’s a good point Dan. If we don’t know how to measure impact, then if a charity gives something away for free, at least we know they aren’t over charging. But if we know how to demonstrate impact, than we can compare the “price” with the “value”.
My beef with the court decision is that it confuses price with value. But in the end, that’s probably the fault of the social sector for not being able to figure out how to demonstrate impact well.
Excellent point Sean.
My concern about the court case is that this is part of trend where government (at all levels) are looking to nonprofits for tax dollars to fill budget short falls. The analysis turns on the public benefit v. the tax benefit to the organization.
Your advice that nonprofits focus on measuring and communicating value is spot on in terms of how best to respond to this disturbing trend.
I agree with this view as well. There are many other ways that donors can make an impact as well as ways that non profits can make an impact without giving away money. Some non-profits just provide information, or support and are quite good at it (better then some for profits).
just my view.
Thanks for the comment David.