Tax-exempt status prevents nonprofits from being able to contribute legally to political campaigns. Is this a fair cost in exchange for the tax-exempt benefit or is it an unduly burden on ordinary organizational operations?
Writing a pair of articles for Forbes and the New York Daily News, Howard Husock recently highlighted the scandal facing the Metropolitan Council on Jewish Poverty in New York. (For background, the council describes itself as a human service agency, focusing on the issue of Jewish poverty.) The former head of the council, William Rapfogel, was recently indicted on a number of corruption charges; Husock points out that the charges include recycling nonprofit funds as campaign contributions. Husock mentions that given that the council received $96.9 million in government grants, it seems logical for the nonprofit to return the favor (or merely express gratitude) in the form of campaign contributions.
In the Daily News, Husock points out, "At all levels of government, public funding of what was once called the ‘independent sector’ of private groups providing help to those in need has exploded over the last 40 years.” Ironically, the independent sector has become increasingly dependent on government support.
Reiterating this theme in Forbes, Husock summarizes his argument:
[L]ike so many religious charities once independent of government, the Met Council has received millions of dollars in state contracts . . . –but it is prohibited by law, as a non-profit, from making campaign contributions. In other words, the Council—and non-profits all across the country—have great incentive to curry favor with elected officials but no legal means to do so. Thus, we should not be surprised that when an illegal means of doing so comes to light.
Essentially, the issue Husock raises is that the government provides nonprofit status to certain organizations, and, as an effect, these organizations are thereby precluded from contributing to political candidates or organizations. However, this model is being challenged in this particular case (a case which Husock implies is not especially uncommon or unreasonable) given that the group benefits greatly from government contracts. Whereas the model was designed to keep philanthropy separate from government, the recently increased blending of these sectors has obfuscated the distinction.
It appears there are three potential ways of responding to this supposed issue.
First, the status quo could remain. It is entirely reasonable that since the government is providing tax-exempt status, government should continue to forward rules and regulations in the name of ethics. Despite great amounts of contracts, the “no political contribution” rule should remain so as to not bias the overall contracting process.
Second, the law could be changed to allow nonprofit organizations to retain their tax-exempt status yet permitted to provide political contributions. This change would reflect the will of many of those with nonprofit contracts – for example, the Metropolitan Council.
Third, tax-exempt status could simply be revoked, thereby reducing government regulation. Though not a popular solution within the nonprofit community (given, well, taxes), it would open up numerous possibilities for nonprofit organizations, including allowing political contributions. Additionally, it would take the government out of the role of deciding which organizations qualify for this status, during a time when the IRS has been under heavy criticism.
However, revisiting the debate over whether nonprofits should be able to provide political contributions (which Husock importantly introduces to this case) seems to be like handing a bucket to a person in a leaky canoe. While helpful, perhaps the discussion should be expanded to include a challenge to the overgrowth of government contracts, grants, and subsidies.
In the Metropolitan Council case, Rapfogel was indicted for allegedly donating $13,000 in contributions to the NY Assembly Speaker. What did he get in return? A million dollars in grants to the Metropolitan Council (as reported by the NY Daily News). According to Met Council, “[Our] main philanthropic source is UJA-Federation, and we are funded by many federal, state and local grants as well as other foundations and individual contributions.” Perhaps this private philanthropic organization should focus on the private sources mentioned in this statement, rather than constantly attempting to score political patronage while in the curious position as a tax-exempt organization.
The Met Council case undoubtedly challenges the nuances within the tax-exempt arrangement; however, critics need to step back even further to put the system in its fuller context. Husock is spot on when he notes: “In fact, the revenue which religious organizations receive from government often exceed their philanthropic donations—raising questions about the extent to which their purposes are truly their independent of the state.”