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A Voice for Nonprofits

Brookings Institution

Chapter One

America loves nonprofits. They represent what is best about our country: generosity, compassion, vision, and the eternal optimism that we can resolve our most serious problems. Unlike the for-profit sector that employs most Americans, nonprofits have a higher calling, a more noble purpose. Each week millions of people volunteer their time to nonprofits, reading to the blind, raising money for the Cancer Society, mentoring adolescents from troubled backgrounds, or doing countless other good deeds. Nonprofits show loving kindness to the most vulnerable and the most wretched in society. Nonprofits keep homeless alcoholics from freezing to death on cold winter nights and make sure that people dying of AIDS can spend their last days in the familiar surroundings of their home. We love nonprofits because they embody the caring, charitable side of us.

Everyday we come across nonprofits that we admire, like New York's City Harvest, which donates food to pantries and shelters; or Chicago's Bottomless Closet, which provides professional clothing and interview training for women trying to escape welfare; or the Codman Square Health Center in the Dorchester section of Boston, which not only provides health care to the poor but also offers free computers to parents and their children who take a ten-week training course together; or the Genesis Women's Shelter in Dallas, where women and their children arrive in the middle of the night with just the clothes on their back; or Beyond Shelter in Los Angeles, which finds housing for the homeless and provides the social services that, it is hoped, will keep its clients from becoming homeless again; or the Transitional Work Corporation in Philadelphia, which takes the hard-core unemployed and gives them part-time work and support from a mentor while training them for something better; or Newark's New Community Corporation, which operates 3,000 units of low-income housing as well as day care centers, a nursing home, and a supermarket; or Movers, a faith-based nonprofit trying to combat AIDS in the poor Liberty City section of Miami; or Somerville-Cambridge Elder Services, which provides Meals-on-Wheels, homemaker assistance, personal care, and other services that enable frail elderly to remain in their apartments and out of nursing homes. These organizations are a mere handful of the hundreds of thousands of nonprofits that do similar work.

Besides these kinds of health care and social service providers are the nonprofits that enrich our lives with beauty and art. The Seattle Symphony, the San Francisco Ballet, and the Lyric Opera of Kansas City add to the vitality and appeal of those cities. The Friends of the Mill Valley Public Library, a tiny organization in a small California town, earns our gratitude too. Even in this day and age of the Internet, libraries are nothing less than the repositories of our civilization, and members are passionate about their town library. Many nonprofits, like the Friends of the Mill Valley Public Library, are rather small, run out of people's homes, and depend entirely on volunteers. Neighborhood-based nonprofits like parent-teacher associations (PTAs) build community within our communities. At the other end of the spectrum are nonprofit behemoths like the United Way, the Salvation Army, Catholic Charities, and the Red Cross. If these organizations did not exist, would the government step in and provide the same services? Maybe. Or perhaps the government would offer those services but not perform them as well. It is hard to answer the question because it is hard to imagine America without these public charities.

Americans' devotion to nonprofits is reflected in their generosity. In 1998, 109 million Americans volunteered for nonprofits, approximately 56 percent of the adult population. On average they volunteered 3.5 hours per week, representing an annual aggregate of $226 billion in donated time. In actual dollars contributed, Americans' commitment to nonprofits is equally impressive. Total giving from all sources in 2001 was $212 billion. Approximately 75 percent of the donated money came from individuals. Giving to nonprofits rose sharply through the 1990s, though the subsequent downturn in the stock market tempered the rate of increases.

As essential as nonprofits are today, current trends suggest that they are going to grow even more significant in the years to come. Increasingly, scholars and pundits have drawn our attention to the importance of civil society, community, and civic engagement in American life. When discussion turns to improvements, to ways of enhancing a sense of community, nonprofits are inevitably at the heart of visions of what the good society should look like. Building a better society means working together to solve problems. When we work with others in the community, we usually do so in organizations-nonprofit organizations. Whatever the problem, nonprofits seem to be part of the solution.

Government: Tough Love

America's love affair with nonprofits includes the affections of its government. Although not all nonprofits carry out functions of critical importance to government, a surprising number of them deliver services that ordinary Americans depend on. Indeed, the modern welfare state has largely been subcontracted to nonprofits. Appropriately, scholars emphasize the partnership between the agencies of government and nonprofits. In many ways it is an ideal relationship. Government provides a significant portion of the financial resources but by subcontracting the actual administration of programs to nonprofits, it is able to take advantage of the dedication, imagination, and private fund-raising capacity of these public-spirited organizations.

Consider, for example, the Idaho Youth Ranch. Begun in 1952 with a lease of four square miles of government land from President Harry Truman, the nonprofit has grown over time and now runs several residential facilities in the state. The initial site, located in southern Idaho, is a working ranch, and the troubled youth who are sent there not only go to school but also work with the staff raising thoroughbred horses. The young men and women at the Youth Ranch take part in all aspects of the horse program, including foaling, imprinting, and halter breaking. They take classes on breeding and horse care, show horses to prospective customers, and attend sales. Those youth sent by either corrections or welfare bureaucracies are paid for under a contract with the state.

Alternatively, the state of Idaho could run its own home for troubled youth. It is a virtual certainty that the state would not build and run a horse farm as a residential facility for children with serious behavioral problems. Most likely, the state government would construct something modest, in deference to taxpayers' concerns about the cost of government. The nonprofit Idaho Youth Ranch, with its tax-deductible status, raises a significant amount of private money to supplement the contractual payments it gets from government. Donors to the Youth Ranch give with the certain knowledge that they will get part of their charitable contributions back from the federal government when they file their tax returns. In contrast, a state facility for troubled youth would receive no private support, and taxpayers would have to fund 100 percent of its budget.

The financial incentive for contributions to nonprofits comes at a price to those organizations. In exchange for tax deductibility, nonprofits must accept a serious restriction on their right to lobby legislative bodies at the federal, state, and local levels. Under the tax law governing nonprofits, lobbying is considered an unsavory and suspect activity. Although legislative advocacy is not forbidden, almost all tax-deductible nonprofits fall under a regulatory standard that restricts them from doing any "substantial" amount of lobbying. The government may love nonprofits, but when it comes to political activity it is a case of tough love. Nonprofits must comply with government's restriction or risk losing the crown jewel of fund-raising: tax deductibility.

In the chapters that follow we argue that the consequence of this regulation is that it deters nonprofits' participation in public policymaking. This, in turn, harms the most vulnerable populations, who are denied effective representation in the political system. Although nonprofits serve a cross-section of all Americans, they are crucial elements in serving the hungry, sick, disabled, and frail. What nonprofits are not supposed to do is to represent their clients before legislators. Feed them, just don't lobby for better antihunger programs. Heal them, just don't try to lobby for changing the health care system. This is the essence of American law on nonprofits.

To measure the impact of tax law on political participation, a mail survey was conducted of a random sample of nonprofits from all over the United States. The survey was supplemented by interviews with the executive directors from nonprofits from around the country and by focus groups with executive directors and board members of nonprofit organizations. All the interviews and focus groups were done on a not-for-attribution basis and were conducted between the fall of 2000 and the spring of 2001. More detail on the survey and interview methods is offered in chapter 2, and the appendix offers a more complete review of the study's methodology.

This study's emphasis on nonprofits offering social services reflects their predominance in the population of all nonprofits. As figure 1-1 shows, approximately half of all nonprofits are involved in either health care (11 percent) or human services (37 percent). More accurately, these organizations are half of all charitable nonprofits, eligible to receive tax-deductible donations. "Nonprofit" is an inherently ambiguous term. Indeed, it is rather a misnomer because it is perfectly legal for a nonprofit to make a profit. There are restrictions on what a nonprofit can do with a profit, principally that it cannot distribute the profit to shareholders or employees, but profits are not prohibited.

"Nonprofit" is also a relatively elastic term as it covers an enormous range of organizations in America. Under section 501(c) of the IRS code, there are twenty-six different types of nonprofits. They include nonprofit cemetery companies [section 501(c)(13)]; labor unions [sec. 501(c)(5)]; and employee-funded pension trusts [sec. 501(c)(18)]. These diverse organizations have only one thing in common: they are tax exempt. That is, they pay no taxes on income related to their exempt purposes. But when we think of nonprofits we usually do not have in mind nonprofits like the AFL-CIO (a c5) or the American Petroleum Institute (a c6). Only one type of the 501(c) nonprofits can offer donors a tax deduction for their contributions. Section 501(c)(3) encompasses those nonprofits considered to be public charities, such as religious organizations and educational institutions. It is these organizations, the c3s, that we are usually referring to when we talk about nonprofits. The same is true of this study: unless otherwise indicated, a reference to nonprofits is a reference to only those that qualify under 501c3 and thus offer donors tax deductibility for contributions.

Distinguishing nonprofits is more than a bit of methodological housecleaning. The tax-deductible nonprofits, the 501c3s, have a different story to tell because their legal status as public charities gives them a unique financial structure. When in 1917 the federal government created the tax incentive for people to donate money to charities, there was little controversy because everyone is in favor of charity. Over time, however, the vast majority of organizations applying for 501c3 status from the Internal Revenue Service have not been charities in the colloquial sense of the term. They are public-spirited organizations to be sure and do work broadly supported by Americans. But the fact that half of tax-deductible nonprofits are now health or human service providers creates a public policy dilemma. The nonprofits envisioned in the original legislation creating the tax deduction-churches, charities, and educational institutions-were not seen as having much stake in public policy. That is not true of today's community health centers, multiservice centers, Community Development Corporations, job training facilities, housing collaboratives, and the like. They have an enormous stake in what government does and therein lies the problem.

Growth Sector

Economists offer a straightforward explanation of the rise of nonprofits in areas in which government itself directly offers services, such as health care, social services, and education. In their view, when government offers services it will aim to satisfy the demand of the median voter. (In plain English: government will offer what the typical consumer wants but nothing more extensive than that.) Economists also say that nonprofits will emerge in areas served by for-profit organizations when consumers have difficulty evaluating the quality of service and are worried that the for-profits will pursue greater earnings at the expense of quality service. For example, when a family must place a loved one in a nursing home and cannot monitor that nursing home closely because it is far away, the family might feel more comfortable utilizing a nonprofit facility. A 501c3 does not have the same profit incentive as a private sector nursing home and, presumably, there is little pressure on its managers to cut corners or keep services to a minimum. Finally, of course, economists point out that nonprofits are a response to market failure, where neither government nor business steps in to provide necessary services.

Political scientists offer a different perspective for examining the growth of nonprofits. They focus on the political process that leads to agenda change. In some cases, new social problems emerge and government feels a responsibility to address them. When AIDS became an issue Congress enacted the Ryan White Act and federal agencies responded with new initiatives too. For the most part, though, the nonprofit sector has grown because of increased attention to problems that have long existed, such as malnutrition, inadequate job skills, or family violence. Consequently, political scientists also look at the events and trends that raise our awareness of problems. In this vein they will emphasize the role that advocacy groups play in drawing our attention to various social problems and in lobbying legislatures, agencies, and executives to address them.

These differing perspectives are not mutually exclusive. Political advocacy can cause government to begin funding a service, but then support it only to the degree it satisfies the median voter.

Continues...

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Excerpted from A Voice for Nonprofits by Jeffrey M. Berry David F. Arons Copyright ©2003 by Brookings Institution . Excerpted by permission.
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