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The Cost of Taxing Nonprofits

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It's no secret that nonprofits provide important services that improve the lives of individuals, families, and communities. From large social service and cultural organizations to small community health centers and food pantries, we occupy a unique position in our economy and society at large. As a result, the sector was designed, by its nature, to be a tax exempt sector, allowing organizations to maximize their impact.

That status, however, is in jeopardy as state governments--including New York--consider eliminating the tax exemption for nonprofits.

The national trends are alarming. Recent tax proposals that will significantly impact nonprofits include:

• Two dozen mayors in Pennsylvania recently lobbied the state legislature for authority to extract new revenue from nonprofits through sales taxes, and reimbursements for tax exempt properties.
• In Kansas, lawmakers are trying to raise approximately $182 million by making nonprofits subject to the state's 5.3 percent sales tax.
• In Minneapolis last year, lawmakers adopted a "streetlight fee" on roughly 1,600 nonprofits.
• Boston and some other municipalities have reached "voluntary" agreements with nonprofits, who "donate" funds to cover municipal services.
• City officials in Honolulu are considering proposals to close budget shortfalls by imposing property taxes on nonprofits.

By imposing new taxes on nonprofits, I fear that policy-makers have forgotten why the tax exemption was put in place: nonprofits provide a service that relieves some burden that would otherwise fall to federal, state, or local government. Put differently, the government relies on nonprofits to serve community needs that the government cannot, or chooses not to, address on its own. These services are even more important during tough economic times, as government funding is reduced and demand for services increase. Over the past two years, we've seen the nonprofit sector step up time and time again to provide essential services. Now is not the time to add additional pressures to the fragile fiscal state that many nonprofits are in.

Do we need to find a way to draw down our national and state debt levels? Absolutely. But taxing nonprofits is not the answer. Every dollar reallocated to pay a tax burden is one dollar less that a nonprofit will have to provide much needed programmatic services. If you think about it, the current trend is fewer charitable dollars and an exponential increase in the need for services. Taxing nonprofits would just exacerbate this phenomenon.

The donation-based income structure used by many nonprofits would also be complicated by taxation as well, since a portion of any donation would be going straight to government coffers. When people donate to a nonprofit, they do so with the intention of funding a hospital or supporting a local opera house, not financing the government. Consequently, donors may be less likely to give knowing that part of their donation will not be going directly to a cause.

Nationally, 14 million people work for nonprofits - that's seven percent of all jobs in the U.S. Here in New York City, 15% of employable residents work in the sector. I don't care to find out how many jobs would be lost as a result of new taxes. One has to consider whether increased tax revenue is more beneficial than the economic stimulation provided by a higher employment rate. Not to be forgotten, nonprofits already pay billions in ordinary payroll taxes.

We've already seen that imposing any new taxes on the nonprofit sector is a slippery slope. Consider the Metropolitan Transit Authority (MTA) payroll tax here in New York that was established last year to supplement the MTA budget applies to nonprofits. As a result of the new payroll tax, for example, the local YMCA currently owes $200,000. Just think of the services that could be provided with that $200,000.

To tax nonprofits is to play with fire. The sector has been hit hard by the recession as we've grappled with increased demand and decreased revenue. Many well-run organizations have had to close their doors because of economic hardship. On top of the 0.34 percent MTA payroll tax, the New York state legislature has considered additional changes and other governments continue to explore and contemplate taxes on nonprofits. For a sector that provides vital services that the government does not, state legislatures would do well by taking a hard look at the consequences of such action.